The University for business

and the professions

Department of Property
Valuation and Management

Financing Urban Regeneration

Bill Rodney and Philip Clark

Real Estate Finance and Investment
Research Paper No. 2000.04
December 2000

“Property Investment in Urban Regeneration",

Property Economics & Finance Research Network (PEFRN) Seminar,
Ulster University,
Monday 4 th September 2000

ISBN 1-903834-04-X
 Financing Urban Regeneration

William Rodney, City University Business School, Northampton Square, London

EC1V 0HB.
Philip Clark, Norwich Morley Fund Management, Lime Street, London EC3M 7JE

Introduction
Two RICS Research papers make an important contribution to this debate as
does the Urban Task Force Report “Towards an Urban Renaissance”
RICS Research Findings Number 20 - May 1998 “How can we encourage private
finance in to urban regeneration? identified that confidence-building measures
are important in creating a climate conducive to private sector investment. These
measures do not have to involve extra expenditure, and can include such means
as a guaranteed minimum standard of infrastructure, clarity in public policy and
processes, targeting of initiatives, simplified planning procedures and land
assembly. Furthermore, developers, as short-term risk takers, occupy a pivotal
position in terms of stimulating initial confidence in the property market and in
creating opportunities for longer-term investors.
RICS Research Findings No 34 - July 1999 “Do Landowners Constrain Urban
Redevelopment?” identified the main types of ownership constraints and
concluded that the time and resources consumed can result in a dampening
effect on redevelopment which can prove fatal to proposed developments.
The Urban Task Force Report (1999) recognised that it is not feasible to rely on
public investment and short-term debt finance alone in meeting the regional
development needs. Private investors must take a long-term stake in our urban
areas to generate long-term capital gains. It put forward recommendations for the
creation of a number of joint public/private long-term investment funds to share
the risks and rewards of investing in a portfolio of projects in specially designated
regeneration areas.
The important contribution these documents collectively make is that they
recognise the need for the public sector to undertake certain functions to identify
and reduce the initial risks in a practical way. By reducing the constraints to
development long term, private finance can be secured.

Regeneration
The need for regeneration has developed from the degeneration of the social and
economic systems of cities. The central aim of achieving successful, sustained
regeneration therefore is to create wealth by revitalising the economy and
funding long term renewal and prosperity.
Regeneration must have a broad remit, including housing, health, employment, transport,
education and almost any other social, environmental or economic issue. Effective urban

2
regeneration therefore cannot simply be property led renewal. Rather it must
involve combining physical development with social community development in
an integrated programme of socio-economic renewal and improvement.
It is this comprehensive social and employment approach which distinguishes the
process from mere development or redevelopment of urban sites and results in
greater potential for economic improvement of an area. So whilst, physical
renewal constitutes only one element of a wider programme, it can in itself be a
major catalyst in successful regeneration because it can play a significant role in
transforming the perception of an area. It can be the target for inward investment
and change the external and internal perception of the area.
This also points to a partnership between the public and private sectors in
stimulating development. For instance the public sector could be responsible for
procuring services such as infrastructure, health care, social housing, libraries,
schools, hospitals and other forms of public accommodation by means of a long
term PPP/PFI contract. The private sector could be responsible for providing
employment, retail and leisure facilities by means of a risk / reward sharing
vehicle such as a Limited Partnership.

Does Size Matter?

Urban areas are dynamic, experiencing periods of growth and obsolescence. In
some cases an areas' inability to adapt rapidly enough to change can result in
economic decline which is so severe that market forces alone are insufficient to
provide a remedy. As it has been pointed out, urban areas are mixed use, which
might mean in value terms predominantly office, industrial, shops, leisure, hotels
and private residential. However, they also include non profit uses such as social
housing and community facilities such as education (secondary, further, higher),
health (doctors surgeries, nursing homes, dentists) and government
accommodation (social services, local government).
Economic theory tells us private sector piecemeal redevelopment will take place
when the value of a cleared site exceeds the value of the site in its existing use.
Such changes maximise the profit of the individual developer acting in isolation.
However, land uses and land values depend very largely upon neighbouring
uses, that is to say there are significant externalities involved. It is due to the
inability of the private, small scale, developer to take the externalities efficiently
into account that provides the main basis upon which the case for
comprehensive redevelopment rests.
Where an area is comprehensively redeveloped the amount of risk attached to
any one part will be reduced. For instance a developer, operating on a small-
scale or piecemeal basis, will be uncertain about adjacent landowners' reactions
and therefore less likely to undertake the most beneficial project for the area. A
strictly site specific solution will be preferred. Comprehensive redevelopment,
because of the control which the developer can exercise over all sites within the
larger scheme, eliminates these uncertainties, so making development more
beneficial to the area as a whole. Disincentives to develop due to imperfections

3
introduced through risk are thus diminished so improving the potential economic
outcome of the project.
Furthermore, externalities, such as those arising from the provision of open
spaces, will be largely ignored by developers operating on a piecemeal basis,
because they will not be motivated to improve the profitability of adjoining
property through their own expenditure. Some of the externalities may be
negative, particularly if the properties under consideration are in very bad repair,
thus detracting from the value of adjacent property. Adjacent owners in turn may
under-invest in repairs and improvements so creating the early stages in the
process of decline. Where ownership and redevelopment is on a large-scale
such externalities will be taken into account, because they will be reflected in the
assessment of the financial costs and benefits. Such gains from comprehensive
redevelopment can be appreciated where it is found profitable for schemes to
include (apparently) non-profit investments such as car parks, roads and special
features which enhance the financial returns on the profit-making parts of the
scheme. Piecemeal development tends to cope badly with the problem of
externalities and the need to provide public goods.
Large scale development, by internalising the externalities, will thus tend to be
more efficient. Those costs and benefits, external to the piecemeal development,
will be reflected as financial costs and benefits to the large scale development.
Consequently with large scale development profit maximisation is more likely to
correspond to social welfare maximisation and so be deemed efficient from an
economic point of view. Theoretically, if all the externalities from a number of
sites can be internalised in one large development then it becomes unnecessary
for any public intervention to achieve efficient resource allocation, except
perhaps, in helping the developer to decontaminate and assemble the site. This
is because the developer may be willing to invest in an optimal amount of public
goods such as roads and open spaces because the returns to them will be
reflected in the higher values of the profit making properties.
The private sector motivation is control over value drivers and the ability to create
a critical mass which generates its own internal environment and therefore the
commercial attraction of the scheme can be largely immunised against any
negative image for the adjacent area. The public authority can also obtain
economies of scale in the provision of services.
Some public authorities have adopted growth oriented local economic
development policies in an attempt to restructure and diversify the economic
base to project a new and dynamic image. The provision of high capacity, high
quality utilities, services, telecommunications and transport networks are crucial
business location factors and can be critical in sowing the seeds of regeneration.
Accessibility is of growing importance as national and international trading
markets demand quality infrastructure links.
During the 1980's and early 1990's this involved the development and promotion
of “flagship” projects as property focus for attracting inward investment. Forms of
prestige projects have included convention centres, specialised industrial parks,

4
tourist attractions and sports and entertainment facilities. English Partnership, for
instance, has been particularly keen to promote projects which attract inward
investment, strengthen local economies and create jobs.
It is difficult to generalise about the financial or physical scale necessary to
achieve such critical mass. Clearly this will depend on project specific features
and opportunities.
The argument here is large scale solutions can provide optimum solutions. This
is not a one sided argument because there are disadvantages such as political
intervention, "spillover" effects on adjoining authorities, changing the social
character of an area, the risk of making large scale mistakes and access to
adequate capital.
Perhaps the strongest practical problem is that big projects are long projects and
run the risk of spanning a business cycle and so altering the demand for some of
the components. However it must be accepted that regeneration is a long term
process, probably extending 10-15 years and therefore plans need to recognise
that various elements may progress at different speeds and deviate from the
implementation programme.
The example below outlines the programme and progress on the Paddington
Regeneration in Central London.
Mid- Various landowners and developers apply for planning consent.
1980s Westminster council changes its planning policy for the area, allowing
commercial uses
1989 Developers take up positions. Lonrho to develop the Metropole hotel;
Trafalgar House takes the Basin; Regalian and National Freight
control Goods Yard; Railtrack has the station
1992 Outline planning approval is given to all the developers except
Trafalgar House, which cannot meet legal requirements
1992 Property market recession. Proposals shelved
1996 Chelsfield and European Land buy Basin from Trafalgar House and
British Waterways. The JV immediately sells 0.8 ha (2 acres) to
Frogmore and Rialto Homes for £20m
1998 Completion of the Heathrow Express
1999 Permission granted for Rialto/Frogmore’s West End Quay residential
scheme
1999 Chelsfield applies for outline consent for phase 2 at Paddington Basin

5
May Frogmore sells West End Quay to Rialto/Wates consortium and
2000 residential site to its original partners, Rialto
Development Securities with Norwich Union and Equitable Life, buy
the Goods Yard site from Grainhurst Properties, the joint venture
between Regalian and NFC
Godfrey Bradman’s European Land consortium puts its 50% stake in
the Basin site up for sale
June Rialto finally starts work on 453 apartments
2000
July DevSecs’ Goods Yard gets full outline planning permission for whole
2000 site. Applies for detailed permission for phase 1

This may not be typical but it does illustrate some of the potential problems. The
obvious response to this problem is phasing, in the context of a master plan with
core components and the adaptability to respond to the changing needs and
resources of the stakeholders. It is quite an intellectual challenge, but one which
goes back at least as far as the New Towns movement.

Partnerships
The formation of partnerships is seen as the key to successful regeneration by
many commentators and has become a prerequisite for accessing some of the
competitions for funding, SRB being a prime example. Partnerships may be set
up in a variety of forms such as Public Private Partnerships, Limited Partnerships
or companies limited by guarantee but they often retain an informal structure
such as ground leases and building agreements - the system used to develop
London's Georgian squares.
Central government supports the formation of public/private partnerships and this
is particularly evident in housing. Housing associations have been, and are,
partners in development activity and may be in a position to use some of their
reserves to assist in joint venture regeneration.
This paper goes on to consider issues associated with access to private sector
capital.

Local Government and PPP

Public Private Partnerships (PPPs) is an extension of the Private Finance
Initiative (PFI) which is a means of funding public sector capital projects from
future revenue streams.
The question of whether local authorities are within their powers to enter PFI
deals has been addressed by the framework of the Local Authorities (Capital
Finance) Regulations, which have been amended extensively in recent years to
accommodate such schemes. Under these regulations local authority powers
have been clarified to provide reassurance to contractors and funders on the

6
legality and enforceability of contracts and how local authorities can obtain
additional revenue support from central government to help make contracts
affordable.
Given sufficient risk transfer, the capital investment undertaken by the private
sector will not score against public sector capital spending limits. So a compelling
reason why Local Authorities should consider the PFI option is because most will
lack the capital to finance regeneration schemes. However, the application of PFI
to urban regeneration is perceived to be problematic particularly in relation to the
transfer of a financial model to a real estate scenario (RICS 1998). In part this is
because it has been difficult to quantify the demand risk the private sector is
expected to take on board. Yet the government seems keen to promote its use.
"The success of PFI is vital for Britain. Our infrastructure is
dangerously run down. Our schools and transport networks are
seriously neglected and all too often our urban environment has
been allowed to deteriorate. In an age of tight public spending,
value for money public/private partnerships will be at the heart of a
much needed renewal of our public services" Geoffrey Robinson,
June 1997.
There have of course been examples of PFI being used to fund regeneration,
although there is no single model of what an effective PFI/PPP should be like.
Different circumstances require different solutions. The initiative has gained
importance at Local Government level due to the inability of the public sector to
finance regeneration schemes.
There probably is a minimum value for a PFI scheme. Discussions with
practitioners suggest £8-10 million for central government schemes that have
been started, but projects have been launched as low as £2 million (see
Appendix 1). However, this will depend on a number of factors, such as the
service area, whether the project is a forerunner to a series of projects that will
be replicated, the availability of previously negotiated templates and the level of
market interest in the proposal. Generally, Authorities contemplating developing
projects of less than £5 million of capital value are advised to discuss their
proposals at an early stage before undertaking substantial preparatory work on
the proposed project.
In response to the criticisms that PFI is too bureaucratic and only suitable for
very large schemes, it is argued that recent initiatives such as the Treasury
Taskforce's ‘Standardisation of PFI Contracts’ document (July 1999). should help
introduce greater consistency and clarity into the complex process of negotiating
a PFI deal, and therefore reduce the costs and time for those involved. In
addition, their Technical Notes and 4Ps' Guidance is providing a greater
understanding of the techniques involved. The 4Ps (Public Private Partnership
Programme- the local authorities' private finance unit) is a dedicated unit to assist
local authorities develop PFI projects and other partnership initiatives. As well as
providing guidance notes it is developing case studies and contractual

7
documentation to encourage "best value" approaches to be replicated in other
authorities.

Types of PPP project

To enable Local Authorities to make maximum use of the opportunities offered by
partnerships with the private sector, a succession of measures have been
introduced including a framework to allow the development of private finance
projects for virtually the full range of local services. A variety of partnership
approaches are therefore available to local authorities.

1. Financially Free Standing

The private sector contractor undertakes the project on the basis that costs will
be recovered entirely through charges on the user. The Public sector’s role is
generally limited to enabler, for example, by undertaking some of the initial
planning, licensing, awarding works concessions, providing ancillary works or
obtaining the necessary statutory orders and planning. If a project qualifies as
financially free- standing, there is no need to compare it with a theoretical public
sector alternative.
The private sector recovers the cost of constructing an asset through charges to
the end user. Examples include toll roads and the provision and operation of
visitor centres at tourist sites.

2. Service Provision Sold to the Public Sector

The "classic" PFI where services are provided by the private sector to the public
sector, typically by a Design Build Finance Operate (‘DBFO’) scheme. The
private sector get a return on the capital cost of the project through a revenue
stream paid by the public sector for delivery of services in accordance with an
output specification.
Examples include privately financed health centres, libraries, schools, hospitals
and other forms of public accommodation.

3. Joint ventures
JVs seek to increase capital investment to assist service delivery, or to
encourage economic development and urban regeneration. It involves
participation from both the private and public sectors. The cost of the project is
met partly from public funds and partly from private funds but overall control of
the project rests with the private sector. The public sector contribution is usually
made to secure the wider social benefits (for example road de-congestion) of a
project that may not otherwise have gone ahead. The public authority will need to
decide, on the basis of an initial study, that the project is feasible and that it will
lead to improvements in the delivery of their core objectives. The feasibility must
identify the size of public sector contribution in terms of money and risk sharing.

8
Examples implemented are mainly infrastructure projects such as the Croydon
Tramlink. The importance of innovative public transport systems such as the
Croydon Tramlink or Portsmouth's proposed monorail is that they can be a prime
stimulus for the development of commercial, residential and leisure markets in
otherwise unfeasible locations and bring wide-reaching economic benefits.
Such projects can open up development sites, especially in brownfield
environments with a resultant uplift in land values and allow the local authorities
to open up land with enhanced planning consent that has been unviable because
of lack of access.
JVs can also be directly applied to urban regeneration schemes. For instance,
British Waterways is drawing up proposals for a major regeneration-based
public-private partnership. The scheme will target institutional investors and
banks to provide the gearing needed to exploit British Waterways’ £250m
property assets. It will target key sites adjacent to canals in many towns where
the waterway passes through priority areas for regeneration.

Facilitating Regeneration: A Dual approach?

PFI mechanisms exist. They can be utilised to procure public services as part of
the process of regeneration. They can provide, at least in part, the physical and
social infrastructure necessary to lever further private sector development and
finance.
PFI will not attract some financiers. Experience with central government
procurement shows the process is still time-consuming, costly and complex. This
will deter some, but there are long term funds seeking the potentially higher
yields available from regeneration schemes. They will not however accept
unlimited risk.
Financiers and developers have perceived inner city urban areas as risky
investments and only just at the margins of acceptability for viable projects.
Factors such as cost and complexities of land assembly as well as uncertainty
over the commercial future of certain parts of the area can all act as a barrier to
the private sector and make greenfield sites appear to be the natural first choice.
To encourage developers to take a wider view it is desirable for the state to
intervene and reduce the risks. A number of measures can be used to stimulate
market processes and the removal of constraints can make urban areas as
attractive in cost and locational terms as greenfield sites. This touches on the
concept of "Additionality". A project is said to be (fully) additional if, without
assistance, the project would not happen at all (HM Treasury, 1997).
From the private sectors point of view a market analysis is necessary to identify
the locations which might offer opportunities. This should involve an assessment
local authority planning policy and any central government initiatives which might
affect the area and then all risks must be quantified. Development is unlikely to
take place unless there is clear occupier interest. Attitudes are starting to change
in a search for higher yields. Leisure is often viewed as a way to open up the site

9
for development so long as sufficient infrastructure exists or is provided to kick
start private sector investment.

Risk
Risk minimisation lies at the heart of all forms of finance. As the RICS Report
(1998) states
"Urban regeneration scenarios are no different from the normal
decision making process based upon the application of risk reward
strategies"
For PFI schemes Treasury guidance (HM Treasury 1998a) shows how to
construct a "Risk Matrix" (see Appendix 2) to establish which party retains
responsibility for the various types of risk, such as:
• demand risk, either volume related or from third party revenue;
• availability and performance risk;
• pricing risk;
• residual value risk;
• operating cost risk; and
• design risk.

A further risk is bidding risk. A common complaint is that the PFI process is time
consuming, costly and bureaucratic. For instance, Treasury Taskforce Guidelines
advocates a 14 step stage to procurement (HM Treasury 1998b) and EC
procurement directives require the Public Sector to publicise a contract notice in
the Official Journal of the European Community (OJEC). The advertisement
should include sufficient explanation of the project to attract any relevant
supplier, including the fact that a PFI solution is being sought. There should be
some indication of the criteria which will be used to assess potential suppliers’
economic and financial standing and technical capacity. The advertisement
should indicate where the procurement falls within the EC’s framework of
procurement law, and what procurement procedure will be used. In general, for
PFI procurements, the Negotiated Procedure with a call for competition is
appropriate. From advertising in the OJEC to financial closure can be at least 21
months.
The first step in the risk analysis is to identify the principal risks. A brainstorming
session may be held by the project team, and the following list illustrates the
issues that could emerge:
• Planning takes longer to secure
• Site assembly takes longer and is more expensive
• Site and building costs are more than expected
• Decontamination takes longer and is more expensive
• Strikes, archaeological discoveries or variation orders delay completion
• Changes to European Regulations require more expensive
“environmentally friendly” construction

10
 • Lettings take longer, do not achieve the target rent, require greater
incentives
• Shorter leases expose obsolescence risks
• Economy changes expose investment risk
Having identified the key risks, decisions have to be made about how risks
should be managed. For example by absorbing them, reducing them, pooling
them, transferring them, insuring them, or avoiding them altogether by changing
certain aspects of the project. It may be possible to obtain at this stage the
commitment of long-term institutional finance once the project comes into
successful operation, so that developers can conserve scarce “risk capital” to
future projects rather than it being locked in the project. This process can be
helped if pooled investment vehicles are used giving life insurance companies
and pension funds a spread of risk.
The "Green Book" (HM Treasury 1997) identifies the distinction between risk and
uncertainty,
"risk being used when probabilities can be precisely estimated
and uncertainty when they cannot."
Thus coping with the financial appraisal of transferred risks depends on getting a
good estimate of the probabilities involved. There are some well-tried techniques
for obtaining probability estimates, based on the opinions of experts, although a
degree of uncertainty will inevitably remain. Some elementary calculations may
be used, such as those outlined in Treasury guidance on the Public Sector
Comparator (HM Treasury 1998a).
In principle the analysis should include sensitivity, optimistic and pessimistic
scenarios and for large complex schemes, simulation. Typically, the choice of
probabilistic inputs will be based on sensitivity and scenario testing. The
appraisal is then repeated a large number of times randomly to combine different
input values selected from the probability distributions specified. The results
provide a set of probability distributions showing how uncertainties in key inputs
might impact on key outputs (Rodney and Venmore-Rowland, 1996).

Sources of Finance
PFI schemes have already attracted long term fixed rate funds. The attraction
appears to be the combination of the security of government rated cashflow and
the higher spreads associated with project finance. Funds have a clear need to
find a source of long-term income to match their liabilities. With PFI comes longer
debt maturities which are not naturally met by traditional bank funds, although
banks have responded to competition by offering maturities of up to 20 years.

Project Finance
The nature of regeneration is such that long term finance has to be secured. A
key driver to the development of project funds is growing appetite from
institutions to find a yield pick-up over their investment holding periods. Insurers

11
and fund managers are having to look for greater income through higher yielding
investments to meet the rising demand for private pensions.
The recent launch of Europe’s first dedicated project debt fund - the European
Project Finance Fund - will provide senior and subordinated debt at fixed rates
with maturities stretching to 35 years. It is targeted at project sponsors working in
the infrastructure, environmental and transportation sectors and those involved in
PFI/PPP.
Institutional investors are an important segment of the debt universe for long-
term fixed-rate lending. Bond choices range from the highest credit quality
Treasury securities, which are backed by the full credit worthiness of the
government, to bonds that are below investment grade and considered
speculative. Since long bonds will not be redeemed, or reach maturity for several
decades, credit quality is an important consideration. Rating agencies, such as
Moody's, Standard & Poor's or Fitch, assign ratings to bonds when issued and
monitor credit quality during the bond's life.
Most investment grade project risk tends to be around the triple-B level, classified
as "medium grade and the lowest acceptable investment rating. This is
unacceptable to many international institutional investors, but the increasing use

Bond Yield Curve

6.50

6.00

5.50
%

5.00
UK France
4.50
Italy US
4.00
10 rs
ths

rs

rs

rs

rs

rs

rs
rs

rs

15 rs

20 rs

30 rs
ars
ea
ea

ea

ea

ea

ea

ea
ea

ea

a
on

Ye

Ye

Ye

Ye
9Y
1Y

2Y

5Y

6Y

7Y

8Y
3Y

4Y
M
3

Source: Bloomburg 02 Aug 2000

of credit enhancement insurance in project finance will allow such investors who
are restricted to investing in triple-A rated paper to gain some exposure.
Institutional demand for good quality long-dated stock has exceeded the limited
supply of investment grade sterling bonds and gilts. The minimum funding
requirement (MFR) applied under the Pensions Act 1995 to pension funds since
1997 has led to strong institutional demand for bonds, especially long-maturity
and index-linked gilts. In addition, there has been substantial demand by
insurance companies for bonds, to hedge liabilities arising from guarantees of
minimum returns on annuities sold several years ago when yields were much
higher than now.

12
As a result, the market has been persistently short (6% Treasury 2028, the
longest-dated gilt is relatively small in size at £5 billion in issue). In addition,
hedging of the 30 and 40-year tranches of the large long-dated sterling bonds

issuance has added to the borrowing demand for long dated debt. Futures-
related activity has also increased the borrowing demand.
These factors have led to strong demand for sterling bonds and, because of a
very limited new supply of gilts and a reduction in liquidity in the gilt market, gilts
have become more expensive (ie lower-yielding) than government securities in
other countries.
Securitised deals have boosted sterling issuance. In addition to the familiar asset
and mortgage-backed deals, there have also been PFI related bonds. Higher-
rated mortgage lenders have also seen opportunities to use securitisation to
release capital such as Abbey National's securitised deal through the special-
purpose vehicle, Holmes Funding (BoE 1999).

Risk Adjustments
The increasing use of RAROC (risk adjusted return on capital) models are typical
of project finance deals. The perception has been that residents of inner cities
and businesses in inner cities had little money to invest and were bad credit
risks. With a RAROC model, high tenant risk projects can be priced favourably
based on a sponsor’s covenant strength. Financiers may shy away from deals

13
without substantial sponsor guarantee. Limited-recourse project finance permits
investors some recourse to the sponsors. This will take the form of assurances of
some kind of support for the project, such as completion guarantee or minimum
guaranteed rent. Investors, however, still look to the success of the project as
their primary source of repayment. In most projects with significant construction
risk, project finance is generally of the limited-recourse type. Previously, brown-
field developments have been a problem, but an increasing proportion of
financiers realise that there is less planning support for greenfield developments
and more emphasis on brownfield projects. The emergence of an insurance
market supports this and is bringing increased confidence to the market.
Repayment of the financing relies on the cash flow and the assets of the project
itself. The risks (and returns) are borne not by the sponsor alone, but by different
classes of investors (equity holders, debt providers, quasi-equity investors).
Although the risk-sharing attributes of a project finance arrangement make it
suitable for large projects, by allocating the risks and the financing needs of the
project among a group of interested parties or sponsors, project finance makes it
possible to undertake projects that would be too large or would pose too great a
risk for one party. This form of structured finance with tiered equity has been
used in more conventional property finance and can be applied to regeneration
projects.
It also helps that the number of active participants in these markets also
increased as many international institutions (investment banks, commercial
banks, institutional investors, and others) have moved quickly to build up their
project finance expertise. Regeneration can benefit from this.
To raise adequate funding, project sponsors must settle on a financial package
that both meets the needs of the project—in the context of its particular risks and
the available security at various phases of development—and is attractive to
potential creditors and investors. By tapping various sources (for example, equity
investors, banks, and the capital markets), each of which demand a different
risk/return profile for their investments, a large project can raise these funds at a
relatively low cost.
Also working to its advantage is the globalization of financial markets, which has
created a broad spectrum of financial instruments. Particularly significant is the
increasing importance of private equity investors, who tend to take a long-term
view of their investments. These investors are often willing to take higher risks,
by extending subordinated debt, in anticipation of higher returns through equity.
Since project finance structuring hinges on the strength of the project itself, the
technical, financial, environmental, and economic viability of the project is a
primary concern. Anything that could weaken the project is also likely to weaken
the financial returns of investors and creditors. Therefore risk analysis is
paramount. It is essential to identify and analyse the project’s risks, then to
allocate and mitigate them. Though it may be costly and time-consuming,
detailed risk appraisal is absolutely necessary to assure other parties, including

14
passive lenders and investors, that the project makes sound economic and
commercial sense.
Arguably, the most effective method of allocating risk will be to ensure that the
party best equipped to manage and minimise a particular risk is the party to
whom that risk is allocated. This is of course a principle of PFI. By properly
allocating risks the parties should reduce the overall costs of those risks and
should promote a better working relationship. Despite it being a principle of PFI, it
has not always been implemented successfully. Anecdotal evidence from
members of bidding consortia indicates that the public sector seek to transfer
more than the optimal amount of risk, which increases the cost.

A Typical Structure
To illustrate a typical project's finance structure, the first step would always be a
detailed feasibility study undertaken by the project sponsors. The viability of the
project will depend upon an analysis of existing and future supply and demand,
the expected costs and revenues, potential users and the creditworthiness of
contracting parties.
A single-purpose project company might be formed to build and operate the
scheme. Shares in the company would be owned by the project sponsors, which
could be one company or a number of entities which have an interest in the
development.
The typical security package would include a mortgage on available land and
fixed assets, sponsor commitments of project support, assignment of the
construction agreements, financial covenants ensuring prudent and professional
project management and assignment of insurance proceeds in the event of
project calamity.
The project sponsors will provide a detailed information memorandum to
potential debt funders as a basis on which they can tender for the funding.
Depending on the size of the project, a syndicate of banks could be formed to
provide funding. The banks would likely agree to provide financing to construct
the project on the basis that they will be repaid on completion and
commissioning.
During the construction the financiers are likely to require a guarantee from the
project sponsors sometimes backed by separate bank credit. The funders of the
project will likely be the same syndicate of banks and the construction financing
would, in effect, convert to non-recourse project financing secured solely against
the project assets and its cash flows. The project sponsors will provide the
balance of funding by way of equity subscription in the project company or
subordinated debt or a combination of those. This is normally required to be
advanced before any debt funding is drawn. Smaller projects will not usually
warrant the expense involved in establishing complex financing arrangements.
Financiers do not usually take construction or commissioning risk. A financier
expects that the money that it provides will be used to construct the project which

15
is to be finished by a certain time, within a certain budget and to certain
specifications. The financier’s recovery of its loan is dependent on the project
being completed accordingly and contractual arrangements providing for a
guaranteed cash flow coming into effect. The risk that the project is not
completed is not one that a financier is likely to assume. Typically the financier
will require the project sponsors to take the risk of non-completion.
The construction financiers’ key concern will be that prior to completion and
commissioning they have recourse to parties of a sufficient credit standing in the
event that the project is not completed and commissioned to perform at an
agreed standard to enable the non-recourse financing to be put in place. Other
banks may be asked to act as guarantors in respect of the construction financing,
giving either a guarantee or a letter of credit to support the obligations of the
sponsor.
The project sponsors may be either one company or a consortium of parties
interested in the project, for example developer, contractors, possibly the
landowner. It is likely that the project sponsors will set up a special purpose entity
to build and operate the project in order to isolate them from any project risks
additional to the capital they have invested. An important consideration will be
exit strategy. The project sponsor will want to recover the development expenses
of the project, to obtain low cost financing, minimum third party equity
participation and to achieve flexibility in financing other projects and in the
permanent financing of the project itself.

Limited Partnerships
If short term construction finance is used the project sponsor will want to find an
exit strategy to crystallise development profit and reduce the cost of debt by
demonstrating how the construction loan will be repaid. If a special purpose
vehicle is to be set up it may be a corporate entity, but that would not be tax
inefficient for exempt funds. One solution is a Limited Partnership, which has now
grown to be a £9 bn market. However, it is still a relatively immature market with
no more than 500 partnerships in existence, most of which have been set up
since 1996.
In the absence of real estate equity securitisation in the UK, limited partnerships
offer an attractive route into indirect property. They are collective investment
schemes under the Financial Services Act 1986, and consequently are required
to be operated by a regulated entity. This can offer a comforting degree of
protection to passive investors. It is common practice that these vehicles have a
predetermined life of up to 10 years to reflect the period over which the parties
expect to realise their objectives. However, they can also be constituted so as to
continue indefinitely or so that their life span can be extended, automatically or
by agreement.
A limited partnership enables a pool of investors to co-invest in one or more
assets. The number of partners is limited to 20, and while at least one, the
general partner, must have unlimited liability, the other partners may be limited.

16
The investment is therefore passive and importantly the investment itself is tax
transparent. A particular attraction for some institutional investors is the ability to
gear up, albeit generally at reasonably cautious levels of about 50%.
There are a number of such examples of such vehicles being created for
regeneration. For instance, the Birmingham Alliance, set up by developers
Hammerson, Henderson and Land Securities, is the partnership involved in the
redevelopment of the city centre which forms part of Birmingham’s programme of
inward investment, urban renewal and civic improvement. Also the Argent Group
is looking at setting up a £350m co-ownership vehicle such as joint venture
vehicle or Limited Partnership to own Brindleyplace in Birmingham. The vehicle
could provide an exit route for Citibank and UBK, which are thought to be
reconsidering their commitment to development finance.
Mercury Asset Management and Enterprise are launching a fund to buy high-
yielding industrial buildings in areas in need of regeneration. The debt will be
partly sourced from the Nationwide Building Society. The fund will target local
authorities, institutional investors and private companies as potential vendors.
Norwich Union Public Private Partnerships fund was set up in 1998 with Mill
Group to establish a £200 million PFI fund with the aim to be the first institutional
property investor into the PFI market. It is seen as a highly specialised and time-
consuming market. They take prime development risk and operating risk on
these investments rather than participating in a consortium. They manage these
primary risks and contract out the delivery of the associated services. The fund,
which specialises in the health and community sectors, has eight projects in its
£115m portfolio, one of which is completed and operational, three of which are
under construction and a further four which are due to reach financial close
shortly. The motivation behind setting up the fund is simple - a search for yield, in
this case the yield is enhanced through gearing. They view PFI investments as
an attractive alternative to investing in Government bonds and similar financial
instruments.
Whilst not strictly speaking, a regeneration fund, the IO Group has set up the
UK's largest industrial development fund with LaSalle Investment Management.
The £250m geared fund includes as partners, Norwich Union, Clerical Medical
Investment Management, National Provident and Scottish Widows. It will target
speculatively developed industrial schemes in locations such as Woolwich and
Stratford in London and expects to achieve a minimum return of 15% over its 10
year life. The structure of the fund will minimise risk at portfolio level and at
project level by using a developer with a proven track record.
As a consequence of the Task Force report (1999), the government intend to
launch a £100m structured fund to attract private sector investment to
regeneration projects. With gearing at 50% the fund is expected to be worth
£250m within three years. The Fund includes English Partnerships, AMEC (the
development manager) and Legal and General (the Fund manager). The fund
will have a life span of 10 years. Although it does not require new legislation, the
fund is due to be included in the forthcoming Urban White Paper and subject to

17
satisfying the EU that it does not breach State Aid rules, it is due to be launched
in late 2000 or early 2001. The reported advantages of the funds would be to:
• Avoid the inefficiency of individual investments in small regeneration
projects;
• Bypass the lack of public sector financial expertise at the local or project
level;
• Spread the risk in the timing of investment returns;

A further recommendation of Lord Rogers' Task Force was for a lightly regulated,
fully tax-transparent trust, limited to investment in the private-rented residential
sector. In research undertaken by City University for institutional clients in 1998
showed a high level of interest in investment in the rented residential sector. Of
the responses, 87% by value favoured investment in the residential sector and
34% already had an exposure to this market. The responses on preferred
vehicles revealed Limited Partnerships and listed REITs were clear preferences.
One third of respondents favoured Limited Partnerships, one third thought listed
REITs superior, a quarter preferred Property Unit Trusts and the remainder
chose unlisted REITs. However, when the choices are expressed by the
weighted value of funds, Limited Partnerships were almost twice as popular as
REITs, with other vehicles attracting only marginal interest.
The persuasive argument for institutional investment residential property is the
long-term relationship between house prices and earnings. Generally, average
earnings growth has been consistently higher than the growth in price of other
goods and services. Over the longer term, house price growth bears a much
stronger resemblance to this salary growth than retail price inflation (RPI). This
has attractions to pension funds that require investment performance in line with
earnings rather than general inflation. Furthermore, long-term rates of return for
residential property have been higher than commercial property. Only equities
have exceeded the returns on residential property whilst volatility of total returns
(standard deviation) of residential property is lower than most other major types
of investment.

TABLE 1: Long-term Average Annual Real Rates of Return

Average Period
return %
Equities 6.7 Q2 1946-Q2 1995
Bonds (20 yr.) 0.3 Q1 1945-Q21995
Residential property 4.9 Q1 1953-Q21995
Commercial properties 3.1 Q1 1971-Q21995
Source: Merrill Lynch
The comparative volatility of returns over a recent five-year period is shown in
Table 2.

18
TABLE 2: Comparison of Variability of Total Rates of Return 1992-1996
IPD index 7.32%
FTA property share index 43.29%
Private rental sector * 4.18%
FTA All-Share index 13.55%
FTA 15-year gilt index 16.84%
FTA index linked gilts index 10.38%

* The return for the private rented sector has been calculated by using the composite index for capital values from the
Council of Mortgage Lenders. Rental values have been based on unfurnished markets rent until 1995 (Source DOE) and
the JRF Rental Index for 1996.

This suggests the Task Force's proposal would be welcomed by institutional

investors as it is in effect an 'Index-Linked' investment. Other examples of index-
linked investment which could be applied to regeneration projects include
Norwich Union's £250m joint venture with Quintain Estates and Development
called Quercus. The Fund invests mostly in health-related premises such as
nursing homes or EMI units, where the tenant pays a rent geared to RPI. One
exit option would be to securitise the income.
Probably, the major concern about Limited Partnerships is liquidity and finite exit
routes Usually partnership agreements will state when the partnership will be
wound up and that the assets must be disposed of. Disposal may to be by way of
an open market sale although a call option or pre-emption right at a negotiated
value, appraised value or by matching open market bids allows control of the
investment to be tightly held. Although there have been several examples of pre-
emption rights being exercised recently which has boosted the secondary trading
in these vehicles to almost £500m, liquidity remains a concern. There is no buyer
of last resort and the investment cannot be quoted on the London Stock
Exchange. Also valuation may not be an easy matter. It will be dependent on the
value of the underlying assets and financial implications of any borrowings made
by the partnership on the value of the partnership agreement and any restrictions
on the disposal of interests such as pre-emption.

Limited Liability Partnerships

The Limited Liability Partnerships Bill, introduced in November 1999 could be
used to set up REIT-type vehicles for investment in commercial property, which
may enable a securitised tax transparent vehicle to be established and traded,
although it is not yet clear if the Stock Exchange allows trading in it.
London Stock Exchange rules prohibit partnership shares from being quoted, so
at first LLPs would be private equity vehicles. However, the Dublin Stock
Exchange already allows trading in partnership shares, although with only 20
partners, there is not much trading in them. If more partners were allowed, as
envisaged for LLPs, a stronger secondary market could develop. Whilst the draft
bill is not specifically designed for property, legal advice suggests the vehicle
could be used for direct investment in property.

19
The new structure offers two significant features. It is a body corporate governed
primarily by company law and it will be taxed as though it were a partnership. In
other words, it will be ‘tax transparent’. Unlike limited partnerships formed under
the Limited Partnerships Act 1907, there are no limitations on the number of
members. Another key provision of the Bill is the exemption from Stamp Duty on
any instrument by which property is conveyed to a limited liability partnership.
The exemption only applies if each partner has subscribed to the incorporation
document and there has been no change to the person’s entitlement after
incorporation. Furthermore, it should not be difficult to convert limited
partnerships into LLPs, bringing benefits in terms of operational ease and
increased numbers.

Conclusion
It is clear that urban regeneration requires a wider vision and a broader package
of programmes for finance, education, enterprise development and social
provision than any one agency devoted to property-led physical regeneration can
achieve.
Traditional policy concerns, such as housing and economic development, remain
central to any regeneration strategy and this can benefit from innovations such
as PFI and investment vehicles which provide access to returns from the
residential market. However, this addresses only part of the problem.
Regeneration embraces a wide range of mixed uses including income producing
assets such as offices, industrials, shops, leisure, hotels and private residential.
In today's low inflation, low growth environment debt is cheap and investors are
chasing yield pickup. This has contributed to the development of vehicles which
enable investors to access the upside risk of gearing, whilst diversifying specific
risk across a range of projects held by the vehicle.
These elements could provide the ingredient for attracting much higher levels of
private finance into urban regeneration. The key to unlocking this flow of funds is
risk identification and minimisation by the public sector. It implies a greater
understanding than that already demonstrated in PFI for government
accommodation. It involves an understanding of the physical risks of site
assembly and decontamination. It importantly involves and an understanding of
financial risks and how to analyse them.

20
Bibliography
4PS (1998) "PFI and Social Housing - the potential for increasing private sector
investment"
Bank of England (1999) "Markets and operations"
DETR (1998a) "A Guide to the Local Government Capital Finance System."
HMSO, London
DETR (1997a) "Local Authorities' Involvement in Companies: Findings of
Research." HMSO, London
DETR (1997b) "Local Authorities' Involvement in Companies: Good Practice
Guide." HMSO, London
DETR (1998b) "Local Government and the Private Finance Initiative - An
explanatory note on PFI and Public/Private Partnerships in local government."
HMSO, London
DJ Freeman (2000a) "An Overview off Limited Partnerships"
DJ Freeman (2000b) "Limited Liability Partnerships Bill 1999-New Structure for
Property Investment"
HM Treasury (1997). ‘The Green Book - Economic Appraisal in Central
Government - Treasury Guidance’, HMSO, London.
HM Treasury (1998a) "Policy Statement No.2 Public Sector Comparators and
Value for Money" HMSO, London
HM Treasury (1998b) "Step-by-Step Guide to the PFI Procurement Process"
HMSO, London
Lewin, C (1996) "Financial Appraisal of Project Risk" Private Finance Initiative
Journal, Volume 1, 1, pp 48-56
PriceWaterhouseCoopers (2000) "A Good Moment to Restructure the Balance
Sheet?"
RICS Research Findings No 34 - July 1999 “Do Landowners Constrain Urban
Redevelopment?”
RICS Research Findings Number 20 - May 1998 “How can we encourage private
finance in to urban regeneration?
Roberts, P. and Sykes, H (2000) "Urban Regeneration: A Handbook" Sage
Publications, London
Rodney, W. and Venmore-Rowland, P., (1996) “Private versus Public Sector
Property Development: Risk Evaluation Techniques”, RICS, Cutting Edge
Research Conference,
Sangster, A. (1993), “Capital investment appraisal techniques: a survey of
current usage”, Journal of Business Finance and Accounting, Vol. 20 No. 3, April,
pp. 307-22.

21
The Local Authority (Capital Finance) Regulations 1997, HMSO, London
Urban Task Force (1999) "Towards an Urban Renaissance" DETR, London

22
 Appendix 1: Examples of PFI Projects
North East Derbyshire Social Housing (Non - HRA) - signed August 1998
The Holmewood housing PFI scheme in North East Derbyshire is part of a wider
regeneration strategy for the local area. The authority is negotiating a contract
with South Yorkshire Housing Association for the construction, management and
maintenance of 51 homes for young and single elderly households, reflecting
local housing priorities. The authority is demolishing defective dwellings and
contributing the cleared site in return for 100% nomination rights for the duration
of the contract. The contract will be for 15 years with an option to renew for a
further 15 year period.

Kingston upon Hull LEA: Victoria Dock Primary School - signed July 1998
Kingston upon Hull City Council have signed a 25 year design, build, finance and
operate contract to provide a new primary school with a capital value of some £2
million in the Victoria Dock redevelopment area of the city. The private sector
partner, Sewell Construction plc, is a locally based company which will build the
new school, with its subsidiary Sewell Facilities Management responsible for
maintaining and running the building, leaving the teaching staff to get on with the
business of education.
The scheme has demonstrated the viability of small-scale PFI deals, and the
opening of the new school in January 1999 marked a major step in the
transformation of the Victoria Dock area from derelict dock to urban village.

North Wiltshire Property Rationalisation - in procurement

The District Council has council offices in six separate locations. The
accommodation is inadequate in terms of location and facilities. A feasibility
study concluded that, not only would centralised accommodation meet the
Council's objectives, but it would also offer considerable value for money
savings.
The scheme will also increase the potential for operational efficiencies and
contribute to the regeneration of Chippenham town centre by the release of land
for commercial development and social housing. There are indications of a
strong private sector interest and a highly bankable project. By focusing on the
output requirements, the authority has considerable scope to incorporate
flexibility in the final agreement.

Energy Services to HRA housing in Manchester - pilot project in negotiation

Manchester's economic regeneration initiatives are being shaped to make the
most of opportunities presented by the competitive energy supply market. The
City Council is committed to providing affordable warmth and reducing
environmental emissions as part of it's housing investment strategy.
The proposal involves work on a total of 420 flats in six multi-storey blocks at two
sites. The blocks were built in the late 1960s utilising reinforced concrete frames
and cladding panels with insulation levels that are poor by modern standards.

23
Current heating sources are limited to Parker Morris Standard, comprising
electric under floor to 132 flats and gas warm air to 288, supplying heat to the
lounge and hallway only. Both systems are unreliable and expensive to use, and
the use of on peak electric fires to unheated rooms raises fuel costs higher. It is
envisaged that service operators will design, install, and operate the schemes
under long term energy management contracts, the scope of which will cover the
provision of heat to individual consumers at agreed comfort levels within a
metering system which identifies individual consumers' costs.
This scheme, and also an energy service scheme being procured by the LB
Tower Hamlets, have been given approval from DETR to proceed as pilots. The
Department will consider the benefits arising once the deals are closed before
deciding if further similar schemes should be supported.

24
UK: Construction works
26/04/2000 - Prior information procedure
ABSTRACT
Works: CPV: 45212330, 45214200.
The project will include, but not be limited to, the design, build,
fitting-out and finance of additional facilities and the refurbishment of
existing facilities, including classrooms, ancilary rooms, offices,
dining facilities and indoor and outdoor sports facilities at up to 4
secondary schools, 1 primary school, 1 community library and 1 community
centre, by a Public Private Partnership. Associated works may include
landscaping and car-parking facilities. Works, design etc. will be
expected to meet the council's inclusive education policies. The contract
to be awarded may also contain facilities management for some or all of
the sites, but will exclude teaching. (See services PIN).

Publication 20000426
Date
Document 52708-2000 _[;95sCOUNTRY : GB _[;117sREGION : UK531 - EAST
Number SUSSEX _[;96sORIGLANG : EN
Deletion 20001231
Date
Country GB
Region UK531 - EAST SUSSEX
Original EN _[;79sDELDATE : 20001231_[5v _[8v20001231_[7v 31/12/2000
Language 31/12/00 31 Dec 2000 31 Dec 00_[0v
Document Type 0 - Prior information procedure
Contract Nature 1 - Public works contract
Procedure Type 0 - Prior information or periodic information notice
Cpvcode 45212330 - Library. 45214200 - Construction work for school
buildings.
Authority Name BRIGHTON AND HOVE COUNCIL
Authority Town HOVE
Successful
Bidder:
TEXT
1. Awarding authority: Brighton and Hove Council, PO Box 2503, Kings
House, Grand Avenue, UK-Hove BN3 2SU. Att: Ged Rowney. Tel.: (012 73) 29
34 41/35 15. E-mail: ged.rowney@brighton-hove.gov.uk. Fax: (012 73) 29 35
86/36 95.
2.(a) Site: Expected to be 4 secondary schools, 1 primary school, 1
community library and 1 community centre on school sites within the area
of Brighton & Hove, United Kingdom. More specific site information set
out in prospectus/information memorandum.
2.(b) Works: CPV: 45212330, 45214200.
The project will include, but not be limited to, the design, build,
fitting-out and finance of additional facilities and the refurbishment of
existing facilities, including classrooms, ancilary rooms, offices,
dining facilities and indoor and outdoor sports facilities at up to 4
secondary schools, 1 primary school, 1 community library and 1 community
centre, by a Public Private Partnership. Associated works may include
landscaping and car-parking facilities. Works, design etc. will be
expected to meet the council's inclusive education policies. The contract
to be awarded may also contain facilities management for some or all of

25
the sites, but will exclude teaching. (See services PIN).
2.(c) Cost of works: Estimated total costs of works at NPV is 14 000 000
GBP - 15 000 000 GBP.
3.(a) Estimated date for initiating the award procedures: Financial
close anticipated in 7/2001, with formal contract completion as soon
thereafter as possible.
3.(b) Estimated date for start of work: 7-8-9/2001, dependent on
negotiations.
3.(c) Estimated timetable for completion of work: Construction period of
12-14 months anticipated. Critical delivery date is start of school year
in 9/2002.
4. Financing and payment: The council will enter into a project
agreement, which will regulate unitary payments for the total project,
over a proposed period of 25 years. See 5 for further information.
5. Other information: Potential contractors who wish to register an
interest, may do so now and will, in return, receive an information
memorandum, outlining the nature of the project and its scope, inlcuding
the mandatory element and variant bidding options. It is considered
suitable to carry out the project pursuant to the Private Finance
Initiative (PFI), or an alternative Public Private Partnership, and to
use the negotiated procedure. The project has not yet been greenlighted,
but the council has been encouraged to hold an open day on 5.5.2000, in
anticipation of being greenlighted in 6/2000. The council intend to
follow Treasury Taskforce Guidance on PFI contract standardization.
6. Notice postmarked: 13.4.2000.
7. Notice received on: 13.4.2000.
8. Covered by the "GPA" agreement: Covered by the Government Procurement
Agreement.

26
 Appendix 2 Example of A Risk Allocation Matrix

RISK DESCRIPTION ALLOCATION

PRE-CONTRACT RISKS
Change in output A change in the output specification by Client
specification the Client between tender return and
contract signing leads to a cost to the
Provider
Detailed planning Unexpected cost increases or Provider
permission additional unforeseen restrictions as a result of
costs detailed planning permission
DESIGN RISKS
Redesign Redesign required as a result of Provider
problems during construction, or non-
accordance with the design brief.
Costs Greater than expected construction Provider
costs result from final design
Change in Regulations Design or build alterations resulting Provider
from changes in design, construction
or other regulations
CONSTRUCTION RISKS
Change in Output During construction the Client requires Client
Specification a change in output specification which
has attendant costs for the Provider
Archaeological Archaeological remains are found Shared
creating delays or increased costs.
Latent defects in existing There are latent defects in the building Shared
building to be refurbished which cannot be
picked up before work commences
Liquidation/default of The building contractor or sub- Provider
contractors contractors are unable to fulfill
contractual obligations
Force Majeure As a result of a force majeure event Shared
the construction is delayed
Commissioning delays Delays in commissioning the building Provider
result from delay in construction or
facilities services delay, or decant
delay

27
Project Management Project management failures result in Provider
construction delay
Site conditions Unforeseen ground conditions or Provider
additional demolition costs
Labour and material costs Labour and material costs higher than Provider
expected
Industrial action Delays and costs incurred due to Provider
industrial action by employees of
Provider
General Industrial action Delays and costs incurred dye to Shared
industrial action by non-employees of
Provider
Security Delays and costs arising form lapses in Provider
site security
SERVICING,
OPERATING AND
MAINTENANCE RISKS
Availability of facility Facility unable to be used after agreed Provider
date for intended purposes
Unforeseen costs Unexpected cost overruns due to Provider
inaccurate base cost estimate
Performance standards Services not supplied to agreed Provider
standards
Health and Safety Non-compliance with health and safety Provider
Public Liability Liability for damage or injury suffered Provider
to third parties using the facility
Damage by Client staff Costs of repairing wilful damage by Client
Client staff
TUPE Risks associated with transfer of Client Client
employees to Provider
UTILITIES RISKS
Utilities Unit cost increase Provider
Continuity of supplies Disruption to supplies Provider
Energy efficiency Energy efficiency of design and Provider
construction
Financing Risks
Inflation Impact on financial viability Shared

28
Interest rates Variation in interest rates impact on the Provider
financial performance of Provider
Financial close delayed Financial markets or economic Provider
conditions result in a delay in financial
close
INSURANCE RISKS
Adequacy Insurance cover proves inadequate Provider
Availability Insurance costs higher than expected Provider
or insurance unavailable
TAXATION RISKS
Changes Changes in corporation tax, VAT or Provider
any other Government levies or other
aspects of tax legislation affect viability
of contract
SOURCE: Redcar and Cleveland MBC (1999)

29