Lawyers to the projects industry projects bulletin Summer 2003 contents Not for profit organisations 1 The way forward for projects? What is meant by 2 not for profit organisations? Why use NFPs? 2 Companies limited 5 by guarantee Limited companies 5 Industrial and 6 provident societies Foundation hospitals 6 Community interest 7 companies Not for profit organisations The way forward for projects? At present there is a good deal of � what is meant by not for profit interest in "not for profit organisations (because it is often organisations" being used in PFI not entirely clear what is meant by projects. They are seen as potentially the term); offering improvements to traditional PFI structures. � some of the advantages and disadvantages of not for profit Nicholson Graham & Jones specialises organisations; and If you would like further in projects work - it is one of our core information on this area, or on practice areas. We have devised a � some examples of not for profit projects more generally, please number of innovative solutions for PFI organisations. This is against a contact the projects team at and PPP projects and we are familiar background of the government Nicholson Graham & Jones. with the key issues concerning not for encouraging some diversity in the Details are set out at the end profit organisations. The purposes of models being used. of this bulletin. this memorandum are to set out: www.ngj.co.uk
projects bulletin What is meant by not for profit organisations? Not for profit organisations (or as dividends to shareholders; and subject to the right structure being "NFPs") are also known as "non-share used, can bring advantageous off- capital organisations", "public interest � as well as investors, other balance sheet accounting treatment for companies", "not-for-dividend interested "stakeholders" (such as the procuring authority. companies" and "social enterprises". service recipients) may have a say in They have been used in PFI projects in how they are run. Secondly, however, NFPs are sometimes a number of areas, particularly in viewed as a potentially more politically health-care services. Although there is Therefore, NFPs are to be distinguished acceptable model for the delivery of a resurgent interest in them in the from standard profit-driven UK public services than typical equity- context of PFI, a number of them have companies (as incorporated under the backed PFI project vehicles. Where an been available for many years in the Companies Act 1985). Such NFP is used, there is the advantage that arena of public and community companies are characterised by having what are widely considered and services. For example, housing limited liability and by the fact that understood to be public services are associations, which are NFPs, are they are operated in order to generate being shown to be delivered for their numerous and have been used for profits for the benefit of their own sake, rather than as a means of many years. NFPs have a number of shareholders. Risk capital is inherent making a profit. The argument, which characteristics: in these vehicles to the extent to can be highly politically charged, which the shareholders have made, or continues that any profits generated in � they are organisations which deliver are liable to make, capital NFPs are not available to shareholders public services; contributions for their shares. These and therefore NFPs are desirable. companies (and other limited liability � they are legally independent from companies incorporated under The argument for NFPs may in fact be government; previous legislation) are, and long have strongest where procuring authorities been, the standard legal vehicle with have experience of, or knowledge of, a � they are not owned or controlled separate legal identity which is used in PFI project where the consortium has by external private shareholders - the UK economy (and accordingly they generated substantial profits exceeding risk capital is not inherent in the are generally familiar). They have also those which had been expected when project vehicle. All surpluses are re- been used for the significant majority the project was initially put in place. invested in the organisation rather of PFI and PPP work to date. Procuring authorities may, for example, than being available for distribution have found themselves unable to adjust the unitary charges they pay even though substantial and Why use NFPs? unexpected profits are being made by the consortium. Advantages of NFPs It is worth asking why is there now an However, whatever the form of the increased interest in using NFPs in the vehicle delivering the services, the context of public service delivery. general principle that pertains is that to Firstly, NFPs may offer the same the extent that any private enterprise is advantages as standard limited taking any risk in a project it will companies in delivering PFI projects. negotiate strongly that it should be For example, they may bring private paid for doing so. Actually, this may sector disciplines to public services and, be perfectly acceptable to the 2
Summer2003 Capital and Fiscal Issues Familiarity procuring authority, provided that profits are contained and politically There are a number of other issues A potential disadvantage of NFPs is justifiable. The procuring authority affecting NFPs. The traditional model that it may take longer to establish may therefore be thinking of using allows equity participation in the them within a bid because of a NFPs not so much in a sweeping project and the equivalent of this may general lack of familiarity with them rejection of the private sector making be needed. The banks to a project compared with limited companies. In profits but as a vehicle which fits in with substantial risks may be unwilling some cases, this may be a with its aim of linking profits to good to lend without there being any discouragement to bidders. In general services. This aim may be felt most equivalent to risk capital. Financial terms, however, diversity is being achievable with the project vehicle not support could then be called upon in encouraged by central government, being inherently run for profit. In legal the event of the lenders' requirements with a number of different NFP terms, the specific rights of the not being met. For example, in the models being used. This may in fact procuring authority in its contract with case of Network Rail, which is a well- generate a lack of clarity in the area. the NFP are supplemented by the known NFP , the UK Government general protection of the vehicle itself entered into contingent funding Governance not being run for the purposes of agreements to support the financial generating a profit. Any distributable structure proposed for its acquisition The governance structure of private profit which is unforeseen in of rail assets. In the model being put companies is well defined and contractual arrangements (which can forward by the Argyll & Bute council understood. In effect, day to day last for 20 or 30 years in some cases) is for its school investment programme, governance is usually under the therefore not automatically available to risk capital is being provided through supervision of the executive directors be paid to the consortium members. Partnerships UK, which is partly and within the control of the board of government owned, in the form of directors. The directors are limited by Using NFPs is not the whole answer to subordinated debt. Another method decisions of the shareholders and such political issues and issues of of building up sufficient reserves in an ultimately by the power of the getting genuine value for money. Care NFP is through the generation of a shareholders to remove them from will also be needed that services from surplus over a short term to meet office. NFPs need to be structured to the sub-contractors are paid for at an medium and long term risks. have an effective form of governance affordable rate which does not diverge to replace this model. from the market rate over time. The financing of NFPs will invoke fiscal Ultimately, service delivery is likely to be issues. NFPs will have a role in the the single most important test of the public good but will not benefit from political success of the project. charitable status unless they meet its stringent requirements. Tax NFPs may well be used in LIFT transparency is another key issue. structures, where several projects are co-ordinated together and required to meet standards set by a national co- ordinating body. LIFT is seen as potentially offering a way of implementing high standards in the health and education fields. 3
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