MARKET DUE DILIGENCE IS THIS A PARTNER OR PROJECT I REALLY WANT?

Despite global economic tremors the UK economy continues to improve, albeit slowly. As a result we are seeing an increasing number of development and regeneration projects coming to the market and being tested for viability and deliverability. At Urban Delivery we have seen a significant increase in instructions to advise on a wide range of projects in town and city centres and within heritage, marine, coastal and edge of settlement areas.

In many cases the public sector is not just seeking a specific private sector partner, but a partner that can sit alongside them in a longer-term relationship on a rolling programme of sites, or within an incorporated joint venture, acting as both a developer and investor partner.

In recent SMTs’ (soft market testing) that we have managed, there has been a very good market response and, as economic conditions improve, we are seeing a greater degree of due diligence by the private sector into the viability and delivery capacity of the public sector. Assisting with the due diligence processes is an increasing part of our workload, to establish facts and advise accordingly. This may include whether a council is ready to back up its ambition with hard intent and political commitment to resource and adopt new behaviours.

Equally the public sector is looking at the private sector. Not only for strong financial and development covenants but also to determine if they have the characteristics and understanding of a shared vision, particularly within the context of a longer-term shared vision. In this context while we are focussing increasingly on public sector due diligence the same is equally relevant to the private sector.

In many public sector bodies there have been changes of varying degrees, from large-scale redundancies and outsourcing of estate and regeneration services to managing restrained revenue budgets. It is within this ‘new world’ context that the role of council assets is being assessed. How can the role of assets be optimised to help deliver the financial resources needed? More emphasis on revenue streams is the message we hear again and again.

The opportunity to create longer-term relationships between public sector assets and private sector financial and development expertise clearly exists, but within this competitive market due diligence is becoming more sophisticated and precise.

So here are a few questions to ask which, from our recent experience, are being raised, some are obvious, others less so. The questions and issues raised of course could be anticipated in self due diligence, whether or not raised as an enquiry by the counterparty. They are based on actual issues and advice where we have assisted both councils and developers. 

1. Is the council politically stable, what is the political split between parties and when are the next elections? A similar question as to stability of the private sector partner could be raised!

2. Is the chief executive supportive and where is that support demonstrated, is the corporate management team supporting the regeneration officers and are the regeneration and planning officers working together or are there divisions?

3. How experienced is the council’s procurement team, what other similar projects have they delivered and can they carry elected members?

4. The Council Leader is quoted as being in favour of a longer-term joint venture. Please check his/her published "blog" on the council website to check he/she actually is onside and understands what that means. (This happened in practice and the council leader was not acting consistently!)

5. Please check the last district/external audit report as to council general performance and particularly as to planning and regeneration departments. How has the council performed in its latest district/external audit, particularly within its planning and regeneration sections?

6. Is the council intending to appoint experienced external advisers, does the council’s in-house skills-set cover all the inputs needed, are there sufficient capacity and resources?

7. Does the council fully understand the resources needed to manage an expeditious procurement programme?

8. Are there any state-aid issues arising? Are all assets proposed for disposal/inclusion in a joint venture vehicle at market value?

9. Is the council familiar with the land acquisition required and any proposed CPO strategy, when was a CPO last promoted by the council, does it have the resources in place or available on drawdown to settle potential compensation claims?

10. Is the Finance director (s151 officer) on side as to risks and are the requirements of the public sector client side as to governance clear and programmed? In short do they know what decisions are needed and when? If the council intend to use their PWLB borrowing powers to access low interest funds, is this realistic? Have they reached their headroom? If the council intends to use its PWLB borrowing powers to access low interest funds is this a realistic option, how much headroom exists?

11. Is the council looking for a 10 year joint venture with potential for extension, are members comfortable mandating nominated directors to act and make decisions within the joint venture?

12. Will this council as our counterparty be there in 5 years time? (we admit this is fictional to date but it may be a question with regard to devolution, shared services etc etc, that becomes more relevant).

So our advice is to take project due diligence seriously. It is a very competitive market where the best prospective partners assess political, economic, capacity aspects as well as the range and potential of assets. These are judgements that will shape the decision as to whether the opportunity is right and whether the council (or its private sector partner) has the right credentials to do business with.

- MALCOLM ILEY -