In the words of the Scottish Government’s Finance Secretary, John Swinney, infrastructure investment lies at the core of the Scottish National Party (SNP) administration’s policy of increasing sustainable economic growth. The £35bn investment programme planned for the next 10 years appears even more significant when the current economic slowdown is taken into consideration.
But how is this actually going to be delivered? On the face of it, not by the public private partnership (PPP) model, which has had an even more chequered history in Scotland than in England and was criticised heavily in the SNP’s manifesto for the level of returns to investors and funders. Yet the Scottish Government’s proposals for a new delivery structure to replace PPP, the Scottish Futures Trust (SFT), are still short on detail and very much a work in progress.
In the meantime, the few projects that are in the immediate pipeline are likely to take the form of non-profit distributing organisations (NPDOs), which are not proving particularly popular among the existing PPP market players. This market uncertainty comes at a time when more conventional PPP and private finance initiative (PFI) structures are well established in England and Wales, and have become popular internationally. Consequently, Scotland now risks losing infrastructure expertise as both funders and contractors look for safer bets elsewhere. This could have longer term implications for ensuring effective competition and value for money in Scottish public sector projects.
Why then, is the Scottish Government committed to change? A brief recap may be helpful. The PFI was first introduced by the Conservative Government more than a decade ago and has proved controversial ever since. The Labour-led Scottish Executive later dropped the PFI label in favour of PPP, as it is currently known in Scotland. At one level, PPP simply bundles together a number of contractual features that would otherwise be purchased separately by the public sector over an extended period of time. But there is another layer; PPP has introduced private investment and funding on a scale not otherwise seen in the public sector — and for a time PPP also involved substantial ‘contracting out’. The latter, in particular, has upset public sector unions and proved the catalyst for much of the criticism in
Scotland.
However, that criticism has not led to a decline in use. On the contrary, Scotland has been the largest per capita user of PPP in the UK. As a way around this, prior to the change of Scottish Government, a number of SNP-controlled councils used an NPDO model in place of PPP. NPDOs retain the essential ingredients and contract structures of their predecessor PPP models but any profits of the company go to charity rather than private investors. They are often portrayed in Scotland as removing the need for private investment and therefore the perceived opportunity for the private sector to make windfall profits. That is partially true; the PFI company will still have private investors but investment will take the form of (subordinate) debt rather than share capital. However, the investors cannot make ‘windfall’ profits as, unlike shares, their return is fixed. Consequently, the current NPDO model is perhaps more accurately described as ‘capped return PPP’.
Now it is the turn of the SNP in government, with ministers promoting SFT — a central, non-governmental body — as the uniquely Scottish vehicle for procuring major public sector infrastructure projects. The intention is to set up SFT in the late summer, initially as a government-owned company.
Much of the publicity around the SFT announcement has focused on SFT as a provider of cheaper funding than traditional PPP. The trust will borrow money from the private sector and/or through public bonds. It is hoped efficiencies of scale will lead to savings in funding costs. However, this will probably require legislation and take several years to put in place. In the meantime, SFT is likely to focus on helping public bodies work together on joint projects and assisting with the Government’s review and approval processes for major public infrastructure investments.
Even without savings in funding costs, it is hoped value for money benefits will be realised through encouraging shared developments between different public sector bodies. Pending further development of the SFT longer-term delivery structures, NPDOs will be used as an interim solution.
While the Scottish Government is right to be seeking ways to optimise the procurement of capital projects, there are genuine concerns over market appetite for something new, untested and complex — particularly when contractors can focus resources on simpler, tried and tested English models. The industry has finite resources and will become even more stretched with initiatives such as the Commonwealth Games. It is not a buyer’s market. The current SFT proposals may prejudice rather than enhance the speedy and efficient development of capital-intensive public resources. As for NPDOs, again there is not much overt enthusiasm, not least because they fail to address the real criticisms of PPP, other than eliminating investor returns — at a price.
Having said that, PPP can be an expensive and complex form of procurement. It should not be used uncritically. And, like all forms of procurement, regular reviews are needed. Reducing funding costs, bid costs and potential levels of return to investors — at least in circumstances where these are seen as excessive — should be part of an ongoing development. So too ensuring flexibility for the future and quality design. However, reviewing and updating is one thing — reinvention is another. The UK market is familiar with PPP. So is much of the rest of the world, with more than 50 countries using or considering PPP. The model has been described as a British invention.
Arguably, there are other ways of addressing the Government’s understandable concerns without fundamentally changing existing models. There is no right and wrong way of contracting. There are, however, good and bad ways of running individual projects. And there are models that work well in one context but are less suited to others. Procuring and maintaining buildings is not a core business for the public sector. Also, the disciplines of PPP have generally led to the delivery of public buildings on time and on budget. We know that paying for a building annually, based on the quality of service, leads to greater price certainty. The trick is optimising the advantages while addressing reasonable criticism. In other words, the market would benefit from a toolkit of tried and tested procurement options that public bodies could choose to suit the circumstances. The key should be evolution rather than revolution.
Of course, none of the theory is of much importance if there is no money. If the Government is serious about investing in the future, it needs to find the appropriate resources and simplify planning processes. Councils need encouragement to plan strategically so that the market sees Scotland as an exciting and dynamic construction economy worth investing in. Government’s can win votes by improving our environment and services in a way that offers value for money to the taxpayer. They are not remembered for developing clever contractual models. The SNP’s vision for SFT will have to stand up against the options available in a highly competitive global market.
David Nash is consultant to Pinsent Masons’ projects and procurement team and is based in Scotland.ScotlandJuly2008
