A new model for Welsh infrastructure: 'MIM's the word!'

Introduction

On 24 March 2017, the Welsh Government launched its new model form Project Agreement for use on privately financed infrastructure projects, known as the "Mutual Investment Model" (MIM).  Two versions of the standard form were issued: one for roads projects and the other for accommodation schemes.  A User Guide was also published.  As is made clear in the User Guide, the drafting of the two versions of the standard forms have been aligned "to the extent possible" in order to "facilitate joined-up contract management across sectors in the future".  Since then the Welsh Government has also issued a number of procurement-related standard form documents and guidance notes for use by contracting authorities when rolling out MIM projects.  The Welsh Government is also planning to issue a standard form Shareholders' Agreement to enable it to take an equity stake in MIM projects, but this is not due to be published until later in the year.  

In a statement to the Welsh Parliament prior to the launch of the new model form, Mark Drakeford, the Cabinet Secretary for Finance and Local Government, made a commitment to invest approximately £1 billion in capital infrastructure investment through MIM, in the transport, health and education sectors. Plaid Cymru's Shadow Cabinet Secretary for the Economy, Adam Price, welcomed the announcement but pointed out that, whereas the Scottish Government had invested the equivalent of 4.5 per cent of its overall budget in its own private infrastructure investment model, the Welsh Government was only committing to investing 1 per cent of its budget in the MIM.  He therefore urged the Finance Secretary to "go further and faster" in terms of investment in the model.

Background to the MIM standard form

The MIM standard form project agreements are, according to the User Guide, based on "various UK precedent and standard project agreements", updated to accommodate the specifics of the Welsh Government's infrastructure programme and Welsh Government policy.  In fact, a summary review of the MIM standard forms indicates that the principal document on which they are based is the Scottish "Non-Profit Distributing" (NPD) Model Form Project Agreement.  The NPD Model Form contract was itself influenced by the drafting contained in the Department of Health's Standard Form Project Agreement (Version 3), which dates from June 2007.

Accounting treatment issues

The MIM model is to be used on three pilot projects: the dualling of the A465 from Dowlais Top to Hirwaun, the new Velindre Cancer Centre in Cardiff and a significant tranche of the next phase of the 21st Century Schools Programme.  In terms of launch dates, at a MIM Industry Day hosted by the Welsh Government on 11 October 2017 indications were that an OJEU Contract Notice for the Velindre Cancer Centre and A465 were planned for Q2 2018, with the Contract Notice for the first batch of schools projects following some time in Q3/Q4 2018.  

These pilot projects had originally been earmarked for delivery through amended versions of the NPD model form, but this approach had to be halted when the Office for National Statistics (ONS) ruled in 2015 that NPD projects needed to be accounted for on the Government's balance sheet.  This ruling stopped the Welsh plans in their tracks, as an essential component of the procurement model is to avoid the relevant project from appearing on the government's balance sheet.  The Welsh Government therefore worked with the ONS and the European Investment Bank (EIB) to develop an alternative model – the MIM – with the aim of keeping MIM schemes "off balance sheet", i.e. ensuring that no debt liability is recorded on the government's balance sheet, thereby making sure that the project has no impact on the public sector finances.

As a result, the MIM model forms have been developed with the aim of meeting the requirements of the "Guide to the Statistical Treatment of PPPs" issued in September 2016 by the EIB and Eurostat (Eurostat Guidance).  This guidance sets out detailed statistical requirements, compliance with which will ensure that a project is not inadvertently defined as a government asset, which would require it to be listed on balance sheet.  For example, any form of profit-capping, a right for the public sector to receive 50 per cent or more of the profits generated by the project, or any important veto/approval rights on the part of the public sector would each automatically mean that the project was deemed to be on the government's balance sheet.

The User Guide states that the MIM Standard Form Project Agreement does not envisage any third party revenue generation activities forming part of MIM projects. However, it does concede that some MIM projects may charge for services or activities which are ancillary to the primary use of the asset, but warns that, under Chapter 2 of the Eurostat Guidance, Eurostat will not classify a project as being off balance sheet if the revenues which the procuring authority is forecast to receive from users exceed 50 per cent of the total value of payments that the authority is forecast to make to the project company over the life of the contract.

Equity participation in the project

Although the MIM standard form Shareholders' Agreement has not yet been issued, the Welsh Government has advised that a particular feature of the MIM model will be an option for the public sector to share in profits through the investment by the Welsh Government of a minority equity stake in the holding company set up for the project (of which the project company is a wholly-owned subsidiary).  The User Guide is light in detail on the terms of such an equity participation facility, but it refers to a maximum government equity stake of 20 per cent of issued share capital.  At the Industry Day on 11 October it was announced that the Welsh Government would be investing a minimum 15 per cent equity stake in MIM projects, potentially rising to 20 per cent on individual projects.  This approach reflects recent projects procured under HM Treasury's Standardisation of PF2 Contracts (the PF2 Model) such as the Priority School Building Programme (PSBP) where the UK Government was a minority public equity co-investor.

The User Guide also states that "the Welsh Government may elect that an equity [funding] competition is held in respect of a portion of "Third Party Equity". This is something that drew much criticism from market participants in relation to the PF2 Model although (while not forming part of the PSBP programme) an equity funding competition was carried out on the Midland Metropolitan Hospital PF2 project.  According to the User Guide: "This approach is intended to encourage long-term investors to invest at the outset of a project, thereby limiting the potential for excessive profits and, consequently, the potential for windfall gains on secondary market sales."  It appears that the Welsh Government is listening to industry concerns on this issue, as it was announced at the Industry Day that there would be no third party equity competition for the Velindre Cancer Centre or for the batched schools project, and that a decision had not yet been reached in relation to the A465 project.

In terms of the detailed provisions of MIM, one novel element is the introduction of a right for the Welsh Government to appoint a director to the boards of Project Co and Hold Co on deals where it invests in projects, and the option to appoint an observer to the boards of Project Co and Hold Co where MIM projects are procured by an authority other than the Welsh Government.  This is, according to Mark Drakeford, to enable the Government to "exert influence to ensure that the public interest is protected". 

The template project agreement for road schemes contains sector-specific drafting which differentiates it from the template project agreement for accommodation schemes.  Some of these drafting differences simply relate to terminology (e.g. referring to a "Permit to Use" which is typical terminology in road schemes) and others cover responsibilities which are road scheme specific, such as the inclusion of drafting which prescribes when relevant roads must be kept open for public use.  In general terms the templates are relatively similar, although there are some differences in risk allocation in the detailed drafting.  In addition, it was mentioned at the Industry Day that the issue of whether the operation and maintenance role on the A465 project would cover just those sections of the road built under the MIM contract or would also encompass the capital-funded sections was yet to be decided.

The future

On 5 September 2017, the Welsh Government issued a Prior Information Notice in respect of the redevelopment of Sections 5 and 6 of the A465, to be procured under the MIM.  As mentioned above, it is planning to publish a contract notice for the scheme in Q2 2018.  In the meantime, it will be conducting a market engagement exercise, in order to inform the scoping, approach to, and content of the procurement of this project.  So, after a few false starts, it now looks like Wales' ambitious plans to develop infrastructure projects using the MIM model are finally coming to fruition.