Time to look again at PPP schemes

The Scottish Government’s spending plans for 2017/18 is unlikely to be a cheery read when it's published on Thursday. However, when budgets are being cut, it is all the more important that government ensures that resources are not being wasted.


A good example of this is set out today in a joint Guardian/Ferret investigation into the Scottish government’s NPD model of PPP schemes in Scotland.


The report covers errors over interpreting EU rules which is expected to cost the Scottish government the equivalent of £932m in lost expenditure because it must now match the private finance spending under the NPD (PPP) programme with money borrowed from the Treasury. The scramble for matching funds is also expected to have knock-on effects on budgets.


The investigation also found that the private consortium building Scotland’s largest NPD hospital in Dumfries is expected to generate £160m in interest and finance fees on loans totalling £242m, including the £212m spent on building the hospital.

The consortium is charging an interest rate of 5.1% on borrowings of £218m. This results in the consortium earning more than £100m in interest payments from the public sector. It is also charging 11.3% on a further £24.2m in “subordinate debt”, which will earn financiers £37.5m in interest.


If Scottish ministers had instead used public borrowing they would expect interest rates from the state-run national loans fund of about 1.6%. If government argues that their borrowing consent was insufficient, then a deal could have been done with the local council who can also borrow at this rate.
 
A similar deal has been done by Northumbria Healthcare Foundation NHS Trust for its PPP contract at Hexham General Hospital, saving £67 million. This was funded by a loan from Northumberland County Council, which borrowed from the loans board.

This is precisely what UNISON Scotland suggested over a year ago in our ‘Combating Austerity’ report. We calculated that the austerity cuts in Scotland could be wiped out by refinancing PPP schemes in this way. Sadly, progress has been at a snail’s pace with a handful of projects being examined. Ironically, we believe Dumfries hospital may be one of those.


When jobs and services are being lost, it is absolutely vital that we chase every available saving. Effective monitoring, restructuring and refinancing PPP schemes are just some of the range of proposals we set out - and some authorities, to their credit, have acted on these. On PPP refinancing, it requires the Scottish government and their arms length agency the Scottish Futures Trust to take action.

Big questions over increasing private financing for Scottish PPP programme

A strong investigation by the Guardian’s Severin Carrell today shows the Scottish Government is bringing in extra private sector funding and control to its multibillion pound infrastructure programme.

The aim is to keep key projects off balance sheet to ensure the Scottish Government meets European statistics agency Eurostat rules on measuring state spending.

Companies set up to deliver hospital, roads and other projects are being restructured, with greater private sector control and funding.

This is bad news for taxpayers and for accountability. Conventional funding with full democratic control and proper financial transparency is the best way to finance schools, hospitals and other infrastructure.

The changes have caused delays to contracts being signed off and are a major setback for the so-called Non Profit Distributing model and hub programme, which the Scottish Government tried to claim heralded the end of disastrously expensive Public Private Partnership/Private Finance Initiative schemes.

UNISON Scotland said such claims misrepresented the continuing widespread use of private finance in public infrastructure.

We have highlighted for years the ways in which the Scottish Futures Trust and the NPD model and hub, which it promotes, merely continued PPP/PFI with some ‘slight financial tweaking’ – PFI lite.

Indeed the SFT this year again won the Government PPP Promoter of the Year Gold Award.

However, the structures it helped set up seem to have fallen foul of the European System of Accounts 10 (ESA 10), applied in September 2014, despite seeking external financial advice five times since 2010 to ensure the correct classification for NPD/hub projects.

Interestingly, the increased dependence on private sector borrowing, as pointed out in the Guardian: “allows Holyrood to load up its balance sheet with more debt”, making it “far easier for Nicola Sturgeon’s government to borrow at least £2billion to fund further capital project and bolster its anti-austerity stance using new powers from the Scotland Act 2012.”

Finance Secretary John Swinney said in Parliament on June 18 that ESA 10 “is designed to provide a comparable estimate of the level of debt that is carried country by country across the European Union so that the levels of debt can be assessed on a comparable basis.

“Frankly, those definitions are constantly changing and are also then the subject of reinterpretation. The issues broadly relate to the governance of projects and whether they are controlled by the public sector or the private sector, and the acceptability of the approach to profit capping that is implicit in the NPD programme.”

He said in a letter to the Finance Committee on 1 June that the SFT has developed proposals for changes to contractual and shareholder arrangements for hub projects “which further strengthen the case for a private sector classification” and he has instructed the changes to be implemented across the hub programme, which should take 6-8 weeks.

The Guardian report says that a leaked SFT document shows that “for Hub projects affected by the changes, a 20% stake previously held in each by public-sector partners will be transferred to a new private-sector charity. That will give the private contractors the right to increase their shares in the new companies set up to deliver each project from 60% to 80%.”

The document says that “any perception of public sector control over the (project) delivery company must be avoided.”

Labour’s finance spokeswoman Jackie Baillie has tabled a series of questions in the Scottish Parliament, scheduled to be answered on Friday.

These include asking whether the Scottish Futures Trust’s revised structure for design-build-finance-maintain projects halves the public sector share of the project from 40% to 20% and, if so, for what reason.

And for what reason the construction of (a) Our Lady and St Patrick’s High School, (b) the North West Edinburgh Partnership Centre, (c) the Royal Hospital for Sick Children in Edinburgh, (d) the Dumfries and Galloway Infirmary and (e) the Aberdeen Western Peripheral Route has been delayed and what the (i) length and (ii) cost of the delay is.

There must be full transparency on the costs and effects of these changes, which clearly reinforce our reasoned opposition to PPP/PFI. And the Scottish Government should be using its coming, far too limited, extension of Freedom of Information law to cover all companies and other bodies providing public services.