The RE:FIT London programme provides public bodies with an excellent opportunity to reduce their carbon footprint, generate financial savings, enhance asset management and potentially develop new income streams.
The framework is a tried-and-tested programme which has won many awards. It is a proven model based on energy performance contracting (EPC) with guaranteed savings, short payback periods and opportunities to use external funding including off-balance sheet solutions where required.
Decision-making on the RE:FIT funding option is based on the use of the Treasury’s better business case practice, ensuring that projects are developed, taken to market and implemented in a way that delivers the optimum payback, irrespective of the upfront capital funding available to public bodies, and that RE:FIT projects align to the wider objectives of public bodies.
Eurostat has recently published guidance on EPC, which to an extent mirrors the approach taken by the PPP guidance, and ensures that there is no confusion that EPC arrangements can be off debt.
This means that even where a public body does not have available finance of its own, it can still progress RE:FIT projects.
Local government, the NHS and higher education have borrowing powers, meaning they have the right and ability to borrow money in order to invest in property improvements such as those delivered via RE:FIT.
Often this borrowing is via the Public Works Loan Board (PWLB), but it is not compulsory to use PWLB and a range of options should be considered. It is worth noting that financing arrangements such as Salix are offered at more attractive interest rates.
Use of alternative financing and financial products
Central government bodies do not have borrowing powers and as with those bodies that lack sufficient borrowing headroom, they must look to a financial product. The types we are considering here are service contracts, leases and service concessions, which can be accounted for on or off balance sheet and/or on or off the debt numbers, which drives how they are scored to limited capital budgets.
Where the interventions under RE:FIT lack and identifiable capital asset, arguably the arrangement is a pure service contract. For example, if the RE:FIT contract guarantees to reduce energy bills but with the option to tackle this through replacing a range of energy consumables such as lighting (which would usually fall to be revenue items rather than capital), then this is off the balance sheet.
At the other end of the spectrum, where an energy asset is a large, separable and potentially removable asset with limited associated service but that could be available to third parties (eg CHP or solar), it might be that lease accounting applies with the current possibility of an operating lease treatment, hence off-balance sheet. (Note, we acknowledge that lease accounting is changing).
The third financial product that sits between service contracts and leases is service concessions. These are similar to PPP. Here it is important to understand the distinction between the financial accounting balance sheet and the government debt numbers, which are driven instead by statistical and economic treatment determines by Eurostat.
Achieving an off-debt treatment, which means that there is no upfront call on the limited capital budgets but instead a small annual call on the resource budget that would be more than offset by the energy savings guaranteed, depends upon a consideration of the risk and reward underpinning the contracting arrangement.
Expanding the use of EPCs
On 12 October 2017, the UK government released its Clean Growth Strategy (CGS), which details how the government will achieve the fourth and fifth carbon budgets in particular (covering 2023-27 and 2028-32). This is a legal requirement under the terms of the UK’s Climate Change Act 2008.
To drive down carbon emissions from the public sector, the CGS identifies three main proposals:
- Agree tighter targets for 2020 for central government and actions to further reduce greenhouse gas emissions beyond this date
- Introduce a voluntary public sector target of a 30% reduction in carbon emissions by 2020-21 for the wider public sector
- Provide £255m in funding for energy efficient improvements in England and help public bodies access sources of funding
The Department of Business, Energy & Industrial Strategy has an action to continue to support the expansion of EPCs in the public sector, as a new route for investment in energy efficiency alongside guaranteed savings.
Within London, RE:FIT can offer free advice on how to prepare for the implementation of these new policies and can support you to access part of the £255m of funding allocated to the public sector energy efficiency loan scheme when it becomes available.
Mark Williams is property and infrastructure lead at PA Consulting Group