As the UK basks in the longest heatwave for many years, thoughts in the infrastructure community turn to what will be keeping the sector busy once summer holidays are nothing more than a memory.  The good news is that the Welsh Government has made important progress on its Mutual Investment Model (MIM) pipeline over the summer such that these projects should soon be ready to come to the market.

In June 2018, Eurostat wrote to the Office of National Statistics (coincidentally based in Newport) confirming its view that assets procured under the MIM framework should be classified as off government balance sheet.  Shortly thereafter the Welsh Government published its Standard Form Shareholders’ Agreement to add to other template documentation published in 2017.  Hopefully this will prove to be one of the final milestones ahead of the first MIM project (the dualling of the A465 between Dowlais Top and Hirwaun) coming to the market.

Balance Sheet Treatment

Eurostat’s analysis considered a number of technical points to determine whether a Project Company formed to deliver a MIM project would be controlled by the private sector or by the government.  MIM gives the Welsh Government the ability to invest a maximum of 20% of the project’s equity and subordinated debt which would in turn entitle them to up to 20% of the profits.  Eurostat explains that a shareholder of this size has a moderate influence on the balance sheet treatment of the assets but this by itself is not a determining factor.

Such a shareholding would also give the Welsh Government the right to nominate one Director, out of a minimum of at least three Directors, controlling the Project Company.  Again this in itself is not sufficient to give the Welsh Government control of the project although Eurostat did look very closely at the reserved matters in the Shareholders’ Agreement (i.e. the matters which require agreement of all Directors therefore giving the Welsh Government an effective veto over these decisions).

Contrast with NPD Projects

It is worth taking a moment to understand how Eurostat came to the conclusion that MIM projects are off government balance sheet whilst Non-Profit Distributing (NPD) projects procured in Scotland such as the Aberdeen Western Peripheral Route (AWPR) are on balance sheet.  The NPD structure (as implemented on AWPR) effectively capped the private sector’s return to a pre-agreed level determined at bid stage.  This cap is effected by any economic surpluses being distributed to the Scottish Government instead of being paid out as dividends to shareholders.  Eurostat concludes that as any surplus generated will remain with the Authority that the asset remains on government balance sheet.

Many market observers have commented that MIM is closely based on NPD.  Whilst this is certainly true when looking at the drafting of the template Project Agreement, removing the cap on private sector returns is a crucial difference which has allowed the Welsh Government to achieve its desired balance sheet treatment.  It should also be noted that whilst surpluses are not returned to the government, the model does have other innovative features that differentiate it from other procurement models such as PF2.  For example the Project Company is required to comply with the Authority’s Community Benefits Requirements and will be forced to pay liquidated damages if it fails to do so.

Equity Funding Competitions

Another feature of the MIM (which is drawn from the PF2 model used in England) is the right of the Welsh Government to call for an equity funding competition at the preferred bidder stage.  The approach to this type of third party equity participation will be decided on a project by project basis however it is worth noting that no such competition (of the type that lowers the gearing as described below) has been required on any of the PF2 projects that have closed in England at the time of writing.

The model Shareholder Agreement explains that where an equity funding competition is required then gearing will shift from the traditional 90:10 to between 80:20 and 75:25.  The agreement also notes that equity funding competitions may result in a tranche of equity with a lower equity return and that savings generated through this lower equity return requirement would be passed on in full through a lower annual unitary charge.

It is safe to assume that this additional tranche of equity would only be included if it did reduce the cost of the project and at the levels of de-gearing suggested by the Welsh Government, a fairly substantial reduction would be required to generate such a benefit.  In fact a saving would only be generated if senior debt investors in the project also took the view that the additional equity and subsequent lower gearing de-risked the project from their perspective such that their lending margins were also lowered.

Operis has run some analysis using typical funding rates for:

  • Equity in an availability based greenfield PPP project;
  • Secondary market PPP equity rates (assumed for the outcome of the equity funding competition); and
  • Senior debt rates for an investment grade PPP project.

This analysis indicates that senior debt margins would need to fall by 40 to 70 bps in order for the equity funding competition to ‘break even’ when compared to a project with no equity funding competition.  Operis’s view is that such a decrease is unlikely in the current funding market.

Early indications are that an equity funding competition will not be required on the A465 project and it will be interesting to see if this remains the case for future projects in the MIM pipeline.


MIM takes several tried and tested procurement models and builds on them to give a local flavour to the projects without fundamentally changing what is a proven structure.

As well as transportation projects the MIM pipeline covers social infrastructure projects in the health and education space.  Operis expects that these projects will attract high quality consortia made up of domestic and international companies.


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