Prop Co (NO APPENDICES) 1
CONTENTS 1 Context 4 2 Overview of PropCo 5 2.1 Form of PropCo 5 2.2 Scope of PropCo 5 2.3 Included services 6 2.4 Excluded services 6 2.5 Services to be included subject to confirming value for money 6 2.6 Services provided by CCC to PropCo 6 3 Governance 8 3.1 Overview 8 3.2 CCC acting in its capacity as Shareholder and funder/financier 9 3.3 CCC acting in its capacity as Customer 9 3.4 CCC acting in its capacity as central services provider to PropCo 10 4 Resourcing 11 5 Legal documentation 12 5.1 Incorporation of PropCo 12 5.2 Post Incorporation Project Agreement 12 6 Business plan 14 6.1 Business plan update 14 6.2 Required amendments 14 6.3 Tax and accounting analysis 14 6.4 Tax treatment 14 7 Risk 15 7.1 General principles 15 7.2 PFI high risk transfer 15 7.3 Subsidiary SPV - low risk transfer 15 7.4 PropCo - balanced risk transfer 16 7.5 Proposed risk allocation 16 7.6 Payment mechanism 17 7.7 The cost of unplanned repairs 17 8 Programme 18 8.1 Relationship with wider TCC programme 18 8.2 Implementation timeline 18 9 Communications plan 19 9.1 Overview 19 9.2 All staff and public communication 19 9.3 Affected staff communication 19 2
Appendix 1: Glossary of Terms 20 Appendix 2: Articles of Association 22 Appendix 3: Shareholder Reserved Matters 23 Appendix 4: Incorporation Information 24 Appendix 5: Project Agreement Heads of Terms 25 Appendix 6: PropCo Transition Plan 26 Appendix 7: HMRC Letter 27 Appendix 8: Composite Trade CT Opinion 28 Appendix 10: Accounting Treatment 29 Appendix 11: Tax Treatment 35 Appendix 12: PropCo Financial Statements 45 3
1 CONTEXT 1.1 Purpose of Document 1.1.1 This has been prepared by the TCC Project Team and KPMG to set out the means by which Clatterbridge Cancer Centre NHS Foundation Trust will establish a wholly owned subsidiary (PropCo) tasked with construction and long term (25 years or longer) operation of the CCC facilities. 1.2 Structure of Document 1.2.1 The structure of this document is as follows: Overview of PropCo Governance Resourcing o Form of PropCo o Scope of PropCo Legal documentation Business plan Risk Programme o company documents and o contracts and SLAs Communications plan 1.2.2 Supporting appendices providing more detail in these areas are provided found at the end of the document. 4
2 OVERVIEW OF PROPCO 2.1 Form of PropCo 2.1.1 PropCo will be a wholly owned subsidiary of CCC and will provide a fully managed suite of healthcare facilities for use by CCC, in return for a unitary charge payment. 2.1.2 PropCo will provide value to CCC through its specific estates focus and through its ability to manage construction and operational risk for CCC and other parties, enabling the CCC board to focus on clinical matters. The Outline Business Case for PropCo set out in detail the benefits to CCC of establishing PropCo. 2.1.3 Whilst ownership of the buildings and fixed equipment will remain with CCC, ownership of equipment (excluding fixed equipment) and vehicles necessary to the delivery of the service will transfer to PropCo. PropCo will occupy the sites in order to construct and operate the facilities under a nonexclusive licence. 2.1.4 PropCo will be in receipt of loans and share capital from CCC which are intended to cover the capital cost of the new cancer centre and refurbishment of the existing facilities. PropCo will be responsible for repaying the loans from the income received via the unitary charge as well as distributing returns to CCC through dividends. 2.1.5 PropCp will be managed by directly employed director(s) with a small number of directly employed staff. 2.1.6 PropCo will seek opportunities for supplementary commercial income through trading where appropriate. 2.2 Scope of PropCo 2.2.1 PropCo will contract with Laing O Rourke for design and construction of the new Cancer Centre on the Royal Liverpool University Hospital Site and refurbishment of the existing Cancer Centre on the Clatterbridge site. The existing contract will be novated to Laing O Rourke on establishment of PropCo, [this has been agreed with Laing O Rourke subject to CCC providing a parent company guarantee.] 2.2.2 PropCo will have direct responsibility for the contractor performance, and will in turn be responsible for the delivery of the fully managed healthcare facility to CCC. Following construction, PropCo will run and operate the new and existing estate on behalf of CCC. 2.2.3 CCC will retain freehold interest in both the Liverpool and Clatterbridge sites and will grant PropCo a non-exclusive licence to operate from each site to perform the contracted duties. CCC will retain the leasehold interest in the Aintree site and again grant PropCo a non-exclusive licence to operate. 5
2.2.4 PropCo will be responsible for client responsibilities in the design and build contract with Laing O Rourke, including design development. The design team will novate to PropCo. 2.3 Included services 2.3.1 PropCo will self-deliver or subcontract with third parties to provide the following services for all CCC facilities: Estates (maintenance and lifecycle); Grounds & gardens; Car parking management; Security; Catering patients; Catering staff/retail; Cleaning; Portering (including post); Distribution (linked to portering); Waste management; Transport; Linen and Laundry; 2.3.2 PropCo will be responsible for designing and undertaking (with subcontractor as required) changes, modifications and variations to facilities/buildings and services to support changes in CCC requirements. 2.4 Excluded services 2.4.1 Specific exclusions from PropCo scope identified at present are: Reception; Ward housekeeping. 2.5 Services to be included subject to confirming value for money 2.5.1 Provision of a Managed Equipment Service (MES) to CCC for medical equipment. 2.6 Services provided by CCC to PropCo 2.6.1 CCC will provide a number of Management Services to PropCo via a Management Services Agreement (MSA); these will include: Human Resources (Payroll and Recruitment) Tax Services Accounting Services 6
Company Secretarial Services Insurance Services 7
3 GOVERNANCE 3.1 Overview 3.1.1 The proposed relationship between CCC and PropCo is as follows: ITFF NHS England 1 ccc TRUST BOARD FINANCE & BUSINESS DEVELOPMENT COMMITTEE Sub committee (Re: PropCo) 8 MONITORING GROUP 5 2 3 PropCo PROPCO BOARD 9 4 Design team contracts will transfer from CCC to PropCo and to LOR. Design Team Laing O Rourke PROPCO EXECUTIVE MANAGEMENT TEAM 6 7 Operational Supply Chain Figure 1: Governance Structures & Legal Agreements (see Section 3) 3.1.2 CCC will simultaneously fulfil three roles as sole shareholder, funder/financier and customer of PropCo. Alongside those three roles CCC will also provide some central services to PropCo in accordance with the relevant MSAs. 3.1.3 The PropCo governance structure will comprise: Trust board - existing Finance and Business Development committee - existing PropCo investment committee - new Monitoring group - new PropCo board - new PropCo executive management team - new 8
3.2 CCC acting in its capacity as Shareholder and funder/financier 3.2.1 The Trust will establish a PropCo Investment Committee. This Committee will have powers delegated from the Trust Board to oversee PropCo in matters relating to shareholding and lending. Reserved matters will be listed and in each case require Trust Board approval. 3.2.2 The proposed schedule of reserved matters is provided (see Appendix 3). 3.2.3 A PropCo Board of Directors will be established comprising the following individuals; 1 independent chair, 1 Executive Director (Managing Director), 3 Non-Executive Directors (who are expected to be Trust Directors). These individuals will report to the Trust via the Investment Committee (in relation to PropCo but not the services it provides). The PropCo Board will have powers to undertake the management and control of PropCo within any limits that may be imposed on PropCo by CCC by way of the reserved matters listed. 3.2.4 CCC will have the ability to nominate and remove directors. 3.2.5 The PropCo Executive Management team (for details on staffing see resourcing section 4) will have delegated powers from the PropCo Board of Directors. 3.3 CCC acting in its capacity as Customer 9
Figure 2: CCC Customer role 3.3.1 The proposed performance monitoring regime is as follows: Executive team has primary responsibility for self-reporting against the performance regime (SLAs, deductions regime, payment mechanism). Validation and verification of sub-contractor self-reporting combining sub-contractor reports to show overall performance. CCC will rely on the PropCo self-reporting unless concerns with performance cannot be resolved and CCC consider direct evidence of performance is considered necessary. The CCC Monitoring Group role is to monitor performance against the contract, deal with operational issues affecting PropCo performance or escalate issues up to the Trust Board if needed, and create the link between PropCo and the clinical/operational CCC teams. Note on potential conflict between Monitoring Group and Investment Committee. 3.3.2 There is an inherent tension between the roles as a shareholder and customer. For example, in seeking a service variation a customer will naturally want to secure the lowest cost whilst a shareholder will want to protect investor return. By playing both roles CCC will be in a position to undertake holistic cost and benefit assessment. CCC will need to agree a protocol for dealing with this potential conflict. Suggested mechanism to consolidate Monitoring Group and Investment Committee. 3.3.3 To limit management burden it is possible and feasible to merge the Monitoring Group and Investment Committee to a single body that meets periodically to review the performance of PropCo. The focus of separate agenda items and the role of specific teams in this should appropriately reflect either financial or operational input. Ultimately issues can be reported to and dealt with by the Trust Board. 3.4 CCC acting in its capacity as central services provider to PropCo 3.4.1 To the extent PropCo requires central services it will be expected to judge the most appropriate internal or external means of providing those services. It is anticipated that a number of services such as HR and accounts will be provided by CCC to PropCo (please refer to 1.3.9 for the full list). To achieve suitable provision of services, SLAs will be agreed between the parties and suitable fees paid in relation to those services. and 10
4 RESOURCING 4.1.1 It is suggested that TCC Project Team and Estates roles will transfer from CCC to PropCo. The Estates team comprise of 5 staff who are expected to transfer under TUPE into PropCo. A further 4 staff who currently support the TCC Project will transfer on a secondment basis for the period of the project. All transferring staff will retain their current NHS terms and conditions. 4.1.2 It should be noted that no individual can be compelled to accept a transfer of employment. Should an individual s role transfer under TUPE, yet they select not to take up employment with PropCo, then PropCo will be responsible for the redundancy cost of that post. The Trust will endeavour to work with PropCo should there be an option for redeployment within the Trust, however the financial liability for redundancy remains with PropCo. 4.1.3 For any individual who transfers employment under either TUPE or on a secondment basis, their current NHS Agenda for Change Terms & Conditions and length of service will be maintained. 4.1.4 A consultation period with transferring staff compliant with the notice requirements for TUPE will be followed. 4.1.5 Secondment of staff at a senior executive level should only be used for a finite period of time (for example during the construction period), to cover the period when a permanent employee could not be resourced. This is to ensure that the management of PropCo is at arm s length to the Trust. Secondment of staff at an operational level is acceptable. 4.1.6 The PropCo Managing Director post will be recruited to internally from the Trust. The job description for this post will include the current TCC project director responsibilities plus additional corporate responsibilities as set out for a company Director. This post will be the first post recruited to within PropCo. 4.1.7 As CCC does not intend to make redundancies there are no statutory requirements for consultation. However, the intention is for a typical full TUPE consultation process to be followed, giving time for the concerns or individuals to be addressed, to involve unions and follow the communication with affected staff and other staff. 4.1.8 The timing of the transition will allow some contingency for delays in transfer of employment to ensure that this does not impede progress in establishing PropCo. This is facilitated by the early incorporation of PropCo prior to service commencement as addressed in Section 8. 11
5 LEGAL DOCUMENTATION 5.1 Incorporation of PropCo 5.1.1 PropCo will be incorporated as a company limited by shares to act as the wholly owned subsidiary of CCC with the Trust as its sole shareholder. It is proposed that PropCo be incorporated by 31 January 2016. 5.1.2 Articles of Association are provided as Appendix 2 to this Plan, a schedule of Reserved Matters as Appendix 3 and a proforma Incorporation Document as Appendix 4. 5.1.3 The incorporation of PropCo will entail: preparation of board minutes, articles of association and shareholder resolutions; preparation of share certificates; preparation of Companies House forms (and the making of all necessary filings); updating of the statutory registers; VAT registration. 5.1.4 The Transition Plan will detail key milestones and activities in relation to incorporation and set up of PropCo. A proforma Transition Plan is provided as Appendix 7. 5.2 Post Incorporation Project Agreement 5.2.1 Once incorporated, PropCo and CCC will enter into a number of legal agreements including: Project Agreement (PA) and schedules detailing the specification of works and services to be provided by PropCo to CCC and the payment mechanism under which such services will be provided; Non-exclusive licence to occupy the facilities granted by CCC to PropCo; Management Services Agreement (MSA) setting out the services to be provided by CCC to PropCo and the payment mechanism under which such services will be provided; Loan agreement for the funding of PropCo by CCC; 5.2.2 PropCo will enter into a number of legal agreements with third parties, some by novation from CCC, including but not limited to: Design and Build Contract with Laing O Rourke; Service Agreements with FM contractors; Agreements with equipment providers. 12
5.2.3 The range of legal agreements anticipated to be required are listed below, numbered with reference to the contract structure diagram in paragraph 3.1.1. ❶ ❷ ❸ ❹ ❺ ❻ ❼ ❽ ❾ ❿ CCC loan agreement with ITFF and CCC arrangements with NHS England for capital funding. Shareholding in PropCo by CCC. Equity investment in the form of a shareholding in PropCo. Loan Agreements between CCC and PropCo for the senior debt and subdebt. PropCo will be incorporated with Articles of Association which will form the basis of PropCo s governance framework, including provision for CCC (on an ongoing basis) to establish certain restrictions on PropCo as may be appropriate to its governance. The PA between CCC and PropCo will set out the specification for the accommodation and FM services which must be provided, the payment mechanism used to calculate the UC and the performance regime used to monitor and incentivise PropCo performance. The existing contract with the design team will be novated initially from CCC to PropCo and then novated from PropCo to Laing O Rourke. The D&B contract between CCC and Laing O Rourke will be novated to PropCo. CCC will provide a parent company guarantee as a condition of Laing O Rourke accepting the novation of the contract. Operational sub-contracts will be put in place between PropCo and the facilities related sub-contractors (many will be novated form existing arrangements). The Investment Committee will have terms of reference and delegation of responsibility set by the Trust Board. The Executive Management Team will have terms of reference and delegation of responsibility set by the PropCo Board. SLAs will be agreed between CCC and PropCo for the provision of central services such as HR and accounts and potentially some intellectual property rights. 13
6 BUSINESS PLAN 6.1 Business plan update 6.1.1 A business plan for PropCo was presented in the OBC and has been updated with the relevant cost inputs from the full business case. 6.1.2 The update reflects amendments to the scope and cost assumptions since OBC. 6.2 Required amendments 6.2.1 Amendments and refinements are: Inclusion of Haemato-Oncology; Inclusion of car parking; Inclusion of equipment subject to confirming value for money; Revision of capital cost assumptions to align with FBC and to reflect agreement with Laing O Rourke; Revision of operating cost and lifecycle assumptions to align with FBC; Revision of PropCo operating costs to reflect confirmed staffing and scope. 6.3 Tax and accounting analysis 6.3.1 Tax and accounting treatments are being validated against the updated business plan prior to incorporation of PropCo. 6.4 Tax treatment 6.4.1 PropCo will be within the charge to tax (adopting composite trade tax treatment, similar to PFI companies) and would be required to register for VAT independently from CCC. PropCo being a fully taxable business would charge VAT to CCC on its unitary charge which should be recoverable to CCC under Contracted-Out Services VAT Heading 45 (subject to HMRC approval). 6.4.2 CCC will be in a position to zero rate qualifying items of eligible medical equipment purchased from donated funds. 6.4.3 HMRC clearances will be sought in relation to both VAT and corporation tax treatments 14
7 RISK 7.1 General principles 7.1.1 The PA governs the terms on which PropCo will provide services to the Trust in return for the payment by the Trust to PropCo of a unitary charge. Heads of Terms for the PA are provided in Appendix 5. 7.1.2 PropCo will operate on an arm s length basis and the final risk allocation will ensure that: An appropriate degree of risk is transferred to PropCo, reflecting the extent to which PropCo is capable of managing the risk; Risks which PropCo is unable to manage without incurring significant additional cost are not transferred. Flexibility for CCC and PropCo to vary services and unitary charge to suit changing circumstances will be incorporated into the PA. 7.2 PFI high risk transfer 7.2.1 A full PFI project PA and schedules can comprise several hundred pages, and such projects have the following characteristics: the parties are entirely at arm s length; the contract is long-term so that it needs to cover almost every contingency that may arise over that period; the PA creates an extremely sophisticated and detailed allocation of the very many risks can arise in the course of the project; external funders are involved who will require the income stream to be highly secure. 7.3 Subsidiary SPV - low risk transfer 7.3.1 In the context of contractual arrangements between a parent and its whollyowned subsidiary SPV, and in the absence of external funders and other influencing factors, the PA can be much less complex, since the parent: is the only party affected by how the SPV performs its obligations under the PA; is the sole source of finance for the subsidiary's operations and can fully control how well or badly the SPV is resourced; can readily take action to rectify matters (including, terminating the PA, taking the services in-house or putting alternative arrangements in place). 15
7.4 PropCo - balanced risk transfer 7.4.1 The PropCo option represents a hybrid between the above two examples. It will be entering into a long term agreement and taking on long term debt (albeit from the Trust). It will be managed on an arm s length basis. 7.4.2 However PropCo differs from a PFI in many respects including: D&B contract with Laing O Rourke is not consistent with a PFI risk allocation and does not include provision for availability deductions No firm commitment can exist for lifecycle and hard FM provision since supply chain is not in place. PropCo cannot absorb the same risks typically retained by an SPV in a PFI project (unless the Trust wishes to include contingency funds for PropCo to do so) 7.5 Proposed risk allocation No. Project Risk CCC risk PropCo risk Shared risk 1. Demand for healthcare services 2. Clinical cost 3. Design design not complying with planning requirements 4. Construction works risk 5. Planning 6. Change in law 7. Damage 8. Decant 9. Underutilised estate and income from hire 10. Repair and maintenance 11. Grounds maintenance 12. Industrial action (own staff) 13. Availability of utilities & negotiation 14. Availability of facilities 15. Car park revenue 16. Training, development, and recruitment of operational staff 17. Lifecycle costs (subject to budget agreement) 18. Vandalism 19. Negotiate insurances 20. Consequential effects of sub-contractor failure 16
21. Statutory compliance 22. Responsibility for the delivery of healthcare services and fulfilling regulatory requirements (including Monitor and CQC) 7.6 Payment mechanism 7.6.1 The PA between CCC and PropCo will set out the payment mechanism used to calculate the UC and the performance regime used to monitor and incentivise PropCo performance. 7.6.2 The UC will be an annual sum, payable monthly, calculated in accordance with the financial model as incorporated in the FBC and subject to indexation annually based on agreed indices. The UC may include fixed, variable and semi-variable values to ensure that PropCo receives payments which are commensurate with the services specified. 7.6.3 Any changes to the services required and agreed will be accompanied by a variation to the UC to reflect the change. 7.6.4 PropCo will be subject to a self-reporting performance regime. UC payments will be subject to deduction based on the actual performance of PropCo relative to the required standards. The performance regime will set out a formal means of calculating the applicable deductions from the UC based on the performance relative to agreed criteria. 7.6.5 The value of deductions will be calibrated to ensure that PropCo is incentivised to perform to the required standards consistently. 7.6.6 PropCo is therefore assuming a financial risk that the accommodation is provided and PropCo management undertaken to meet the specification and to support healthcare provision by CCC. 7.7 The cost of unplanned repairs 7.7.1 The FBC financial model will include allowance for the anticipated cost of planned maintenance, lifecycle asset replacement and reactive repairs. 7.7.2 In normal circumstances PropCo will manage all expenditure within the modelled expectation. A particular emphasis for PropCo will be to focus decision making on reducing whole life cost of running the asset which may entail initiatives which promote, for example, a fix first time ethos or invest to save opportunities. 7.7.3 Where early asset failure leads to an unexpected cost of replacement, PropCo will be expected to identify ways to reduce other costs in the period to absorb the financial effect of the unplanned cost. In circumstances where PropCo incurs costs which it is unable to cover through available funds it may receive further support from CCC in the form of additional borrowing which will be agreed on the basis of measures to allow repayment over a suitable timescale. 17
8 PROGRAMME 8.1 Relationship with wider TCC programme 8.1.1 The programme for PropCo implementation is informed by and aligned to the TCC business case and programme milestones. A Transition Plan is provided as Appendix 6. 8.1.2 Initial incorporation of PropCo has few external dependencies; however, the signing of the Project Agreement and related documentation between CCC and PropCo is dependent on the wider programme. 8.2 Implementation timeline Date Activity December 2015 Trust agree scope of services Update PropCo business plan January 2016 Complete FBC and submit to Trust Board Trust agree board composition February 2016 Agree heads of terms for Project Agreement Final presentation to Board on legal documents Finalise incorporation documents Consultation to determine which roles will transfer Submit plans to Monitor for approval, including updating LTFM March 2016 Pre-Service commencement Draft or amend employment contracts and TUPE for transferring staff Incorporation of PropCo and related activities Draft legal documentation and commercial agreements between CCC and PropCo Set up arrangements for novation of D&B maintenance and facilities contracts to PropCo. Novate maintenance and facilities contracts 18
9 COMMUNICATIONS PLAN 9.1 Overview 9.1.1 CCC has an experienced communications team who will take the lead in developing a Communications Plan for PropCo. 9.1.2 The implementation of PropCo represents an exciting opportunity to transform the way estates services are delivered. PropCo is also a key component of the wider TCC programme and will be treated as such for communication purposes. 9.1.3 Staff who may find their roles changing or transferring as a result of PropCo implementation will have other concerns, which will be specifically addressed. 9.2 All staff and public communication 9.2.1 All staff and public communication in relation to PropCo will be aligned to the TCC communication plan and will include: Refresh of the messages around the plans for the new hospital building. Explanation of why a new subsidiary is being established, the opportunities and benefits this brings, and any change to activity that the Trust currently undertakes in-house. Plans to transfer or second some staff into the new subsidiary organisation. 9.3 Affected staff communication 9.3.1 A communications plan to staff who may transfer to PropCo will be aligned to the HR and consultation requirements and will include: Explanation of what the changes in their employment will mean for the terms and conditions of their contracts; any changes to working practices; who employees will report to; how any grievances will be addressed and the implications for TUPE; the exit strategy in case of the PropCo being reincorporated back into the parent company should be explained, and the impact this would have on TUPE. 19