REPORT TO: POLICY & RESOURCES COMMITTEE ON 7 OCTOBER 2014 INVESTMENT IN HUB NORTH SCOTLAND LIMITED PROJECTS CORPORATE DIRECTOR (CORPORATE SERVICES)

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1 ITEM: 11 PAGE: 1 REPORT TO: POLICY & RESOURCES COMMITTEE ON 7 OCTOBER 2014 SUBJECT: BY: INVESTMENT IN HUB NORTH SCOTLAND LIMITED PROJECTS CORPORATE DIRECTOR (CORPORATE SERVICES) 1. REASON FOR REPORT 1.1 To ask the Committee to consider whether the Council wishes to take an option to make a financial investment in the Hub North Scotland in respect of the Elgin High School Project. 1.2 This report is submitted to Committee in terms of Section III(A)(20) of the Council's Administrative Scheme to deal with the management and investment of any funds. 2. RECOMMENDATION 2.1 It is recommended that the Committee notes the opportunity to invest in both: a) The company that will be established to build and manage (building structure and plant) the new Elgin High School; and b) Other companies established by Hub North Scotland Ltd for similar projects in other areas of the north of Scotland and other public services that use Hub North Scotland Ltd for construction projects. 2.2 It is further recommended that the Committee should not invest in either of these opportunities for the reasons set out in the report. 3. BACKGROUND 3.1 Moray Council is a shareholder in Hub North Scotland Limited (HNSL). Ownership of HNSL is as follows: 60% Private Sector Development Partner, 10% Scottish Futures Trust, and 30% 18 Public Sector Partners (including Moray Council). One of the opportunities that the Council s shareholding creates is the potential to invest in the projects that Hub North Scotland Limited implements. The Council has not previously considered these opportunities and with the development of the Elgin High School Project, some work has been done to assess the risks and benefits of investing in these projects.

2 PAGE: Elgin High School is referred to as a revenue funded project under the hub model. This is because the majority of funding comes from additional annual revenue funding from the Scottish Government. If additional funding is required the Council can choose to either fund the balance as a capital payment or an annual revenue payment (noting of course that any capital would require to be repaid via annual instalments). The model is similar to the PPP funding for Elgin Academy, whereby, the Council pays for its annual use of the school. 3.3 Hub North Scotland Ltd establish a separate sub-company for each new project and the Council has the opportunity to invest in all of these subcompanies, if it so chooses. To date, the council has not taken up any options to invest in the sub-companies created by Hub North Scotland Limited (HNSL). As the Council has committed to using HNSL for the construction of the New Elgin High School it seems appropriate to consider the opportunity of investing in the sub-company that will be created for this purpose. 3.4 HNSL sub-companies are funded via a structure consisting of 90% senior debt, which is obtained from the external funders, such as banks, and 10% subordinated debt which will be provided by the shareholders. The subordinated debt will initially be made available to shareholders on a pro rata basis to their ownership of HNSL as follows:- 60% - Private Sector Development Partner; 30% - Participants (i.e. councils in the north of Scotland, NHS Grampian, NHS Highland, Police Scotland, the Scottish Fire and Rescue Service); and 10% - SFT Investments ( SFTI ) on behalf of Scottish Ministers 3.5 The Participant sponsoring each individual project gets an opportunity to take the full 30% share of the subordinated debt. If the Participant does not elect to take up the offer to provide subordinated debt, their portion will be offered to the other Participants in the first instance. Any subordinated debt provision not taken up by the Participants will then be offered to Scottish Futures Trust and finally to the Private Sector Development Partner. 3.6 Assuming a total cost for the Elgin High School Project of 30 million the senior debt will amount to 27 million leaving 3 million of subordinated debt, of which The Moray Council will have the option of providing 30%, amounting to 900, It follows from the above that opportunities have and will continue to arise for the Council to invest in other projects sponsored by other participants. 3.8 There are a number of issues to consider that are common to investing in The Moray Council sponsored projects and projects led by other organisations. An initial assessment identifies the following issues:

3 PAGE: 3 i) Benefits, including rate of return; ii) Risk assessment; iii) Conflict of interest; and iv) Impact on council treasury management. Each of these issues is dealt with below. i) Benefits, including rate of return Other than the potential financial gain the Council may see a perceived benefit in the confidence it would express in investing in key projects, both Council and other partners within the Moray area. The target rate of return is 10%, which, in the current market, is very attractive. However this rate is not guaranteed. ii) Risk assessment If the Council is minded to investigate this opportunity further expert advice would need to be sought on the risks associated with the investment. This would require a thorough understanding of the business plan and the factors that will influence financial success, such as: performance, general price increases, industrial action, changes in demand for the completed facility. The Council would need to commit to the cost of the risk assessment prior to making a decision regarding the investment. iii) Conflict of Interest If the Council has concerns regarding the performance of the subcompany, during the 25 year period for which the sub-company is responsible for the building and plant, it could result in a financial penalty for the sub-company. This in-turn would impact on the rate of return that the sub-company could pay to all investors. iv) Impact on treasury management policy The Council reviews its treasury management policy and strategy annually and this was last done at the Council meeting on 11 February 2014 (paragraph 6 of the Minute refers). The council is not permitted to borrow in advance of need and therefore, any investment would relate to longer term reserves held by the Council. For many years, and even prior to the Landsbanki insolvency, the Council has aimed at keeping amounts on loan to a minimum. In treasury terms, Council reserves have been used to reduce the amount of borrowing required for capital projects. Money held for ongoing cashflow purposes has been deposited according to Council policy which takes account of the ratings applied by the recognised financial sector bodies and setting a maximum amount that can be invested with any single counter party. Investing in a sub-company for the longer term would require the Council to undertake a major review of its treasury management policy to include the higher risk subordinated debt.

4 PAGE: 4 4. SUMMARY OF IMPLICATIONS (a) Moray 2023: A Plan for the Future/Service Plan The Elgin High school project will be a major contributor to Moray 2023 in terms of the environment provided to young people to assist with attainment, the impact of major construction works on the economy in the short term and the impact on the economy in the longer term resulting from the potential for educational outcomes that are more fit for the 21 st century. (b) Policy and Legal The Council is permitted to invest in longer term investments such as the HNSL sub-company arrangement referred to in this report. The Council would need to agree a new treasury management policy to incorporate longer term investments and a strategy that accommodates the risk profile of the HNSL sub-company arrangement. (c) (d) (e) (f) (g) Financial implications The Council would need to incur costs associated with a full assessment of the risks and benefits of investing in the sub-company. Risk Implications The Council would need to obtain independent expert advice prior to making a decision to invest in a HNSL sub-company. Staffing Implications Opting to investigate this matter further would impact on staff already fully committed to supporting the delivery of Council priorities. Property There are no property implications arising from this report. Equalities There are no equalities issues arising from this report. (h) Consultations The Head of Financial Services is in agreement with the contents and recommendations in this report.

5 PAGE: 5 5. CONCLUSION 5.1 Whilst the Council might wish to consider a further demonstration of its commitment to the Elgin High School Project by investing in the subcompany that will be responsible for building and maintaining the new school, it would have to commit to additional costs of assessing the risks and benefits of the investment. The Council is already, clearly committed to delivery of the new school and the additional costs and time commitment would be abortive if the Council subsequently decided not to invest. The investment is not in line with the Council s current treasury management policy and strategy, and it is therefore concluded that the investment should not be considered further at this time. Author of Report: Background Papers: Ref: Mark Palmer