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The role of a Scottish Futures Trust in infrastructure investment in Scotland

UNISON Scotland's response to the Scottish Government Consultation on the role of a Scottish Futures Trust in infrastructure investment in Scotland.

March 2008

Introduction

UNISON Scotland welcomes the opportunity to respond to the Scottish Government Consultation on the role of a Scottish Futures Trust (SFT) in infrastructure investment in Scotland. UNISON is Scotland's largest public sector trade union representing over 160,000 members delivering public services.

The Consultation lists five specific questions and we respond to these below. However, we wish mainly to address the overall proposals contained in the December 2007 Consultation paper.

Firstly, we will argue for an immediate, real alternative to PFI, instead of the as-yet vague and unavoidably longer-term proposals for the SFT.

Secondly, we will address what is wrong with the SFT proposals and the Scottish Government's plan to expand the use of Non Profit Distributing (NPD) models of PFI while the SFT is established.

Finally, we will answer the five consultation questions.

 

The SFT is not a real alternative to PFI

UNISON Scotland's initial reaction to the somewhat sketchy proposals outlined in the late December 2007 consultation paper is to note the marked ideological shift since the original Scottish Futures Trust plans published by the SNP in 2006.

As recently as early December 2007 UNISON, amongst others, was not expecting the proposals to be so far removed from the expectations raised. We consider that The Herald Policy Editor Alf Young captured this shift well in describing the plans as "PFI-lite, paying private lenders their expected return…"

This conversion to a watered-down PFI is a disappointment to those who believe that the private profit motive has no place in running public services.

The SFT was supposed to provide cheaper financing for new schools and hospitals and other public infrastructure. However, UNISON warned prior to the election of doubts that a future Scottish Government would have the borrowing and tax powers to implement the SFT plan.

While there are obvious difficulties for a minority government in implementing its policies, the path outlined in the consultation paper neglects some of the straightforward ways available now to "crowd out" PFI, a stated aim of the SNP in their 2007 manifesto. These could be implemented while the Scottish Government pursues further powers to enable it to establish the SFT as originally envisaged.

UNISON Scotland laid out such a strategy for immediate action in our submission in early December 2007 to the Call for Evidence from the Scottish Parliament Finance Committee on the Funding of Public Capital Investment Projects.

The main aim of the SFT concept, according to the Scottish Government consultation paper, is "to provide alternative means to PFI for channeling public and private capital into infrastructure investment programmes and projects in Scotland".

We contend that our strategy is the genuine alternative to PFI and we urge the Scottish Government to turn away from its proposed path of using Non Profit Distributing (NPD) models of PFI while it is setting up the SFT.

We have pointed out that there is significant scope for a consensus in the Scottish Parliament on creating a proper level playing field between PFI/PPP and conventional capital funding. Many politicians at national and local level have in the past supported PFI/PPP projects with reluctance, for pragmatic reasons. It was seen as ‘the only game in town' for the provision of new public infrastructure.

We believe that a commitment to creating a genuine level playing field could be the basis for cross-party consensus around the following five proposals:

 

UNISON'S Five proposals for Short Term Action

 

1. Existing Contracts A review should be carried out of existing contracts, with rigorous monitoring and advantage taken of price review clauses, especially for FM services. For some, it may be appropriate to ‘buy them out', if this benefits the public purse. Where some parts of the contract are up for review, it is important to also ensure that the contracting public body is complying appropriately in implementation of the review with all the public sector equality duties.

2. No New Contracts No new PPP contracts should be approved. This includes all projects in the planning phase where no contract has been entered into.

3. Grants on a True Level Playing Field Basis Scottish Government grants should be offered for new capital projects irrespective of the method of procurement. This should lead to more local authorities using their prudential borrowing powers granted by Scottish legislation.

4. Prudential Borrowing for Health Boards Health boards do not currently have prudential borrowing powers, but should be given them by passing legislation. It is debatable whether the Scottish Parliament can do this but the UK Parliament introduced a form of this for Foundation Hospitals so would find it difficult to oppose Scottish legislation. (We are proposing only the financial powers not the importation of the discredited Foundation Hospital system.) As a last resort other innovative solutions might be found for health projects involving joint working. Local authorities could use their powers while health boards provide revenue funding

5. Strengthened PPP Staffing Protocol New procurement arrangements should at a minimum ensure that staff are excluded from transfer. The principles of a strengthened PPP Staffing Protocol must be applied across the public sector.

 

The Scottish Futures Trust

The SFT proposals unveiled in 2006 acknowledged the "credit card debt level repayments of PFI" and proposed diverting millions of pounds of savings back into frontline services by using cheaper bond financing provided through the SFT. We welcomed the criticisms of PFI, while cautioning about what powers would be available to issue public bonds.

Since then there have been numerous reports highlighting the faults with PFI/PPP and, of course, there was the collapse in summer 2007 of London Underground contractor Metronet.

UNISON Scotland's principled and long-standing opposition to PFI/PPP is reinforced by the uncontestable fact that traditional public funding of new infrastructure is cheaper than private financing.

PFI will always be a more expensive method of funding capital projects because of the requirement to finance the profits of the private firms, the additional borrowing costs and the very limited notion of risk transfer. In addition to the cost, PFI has resulted in a culture of secrecy that has excluded the public and staff from many aspects of the design of projects with a consequential impact on service quality. It has split up the public service team when facilities management staffs are privatised leading to many of the service delivery problems that were evident during the CCT era.

Our detailed report At What Cost, published in October 2007, found that Scottish PFI/PPP contracts could be costing around £2.1 billion more than procuring new infrastructure using conventional funding. In addition, An incredible £3.5 billion ‘insurance' policy is effectively paid to the private sector to cover the risks of things going wrong with the contracts. This is despite the fact that ultimately risk is effectively retained by the public sector. These figures were calculated from the official documents - the Full/Final Business Cases - for 35 PFI/PPP schemes, yet too often the public does not have proper access to the full financial details for this massive and controversial public expenditure.

The SFT consultation document makes a distinction between ‘standard' PFI and Non-Profit Distributing (NPD) models of PFI. It appears that the Scottish Government is keen to see NPD models being used during the period while the SFT is being established.

As we stated in our submission to the Finance Committee, UNISON sees the NPD model as ‘window-dressing'. While we can understand that some might be attracted to the concept because of the non-profit aspect, the NPD model still maintains most of the other flaws of PFI/PPP. NPD models retain the higher borrowing costs, private profit at the contractor level and elements of the risk transfer costs all leading to the same profiteering and inflexibility inherent in PFI. The charitable donations are simply recycling public money and they retain the secrecy and accountability deficit inherent in PFI schemes.

On secrecy and accountability we would urge the Scottish Government to bring private companies and other bodies providing public services under the scope of Freedom of Information legislation, as is currently being considered at Westminster.

The SPICe scoping paper for the Finance Committee capital investment inquiry points out that in the Argyll & Bute NPD model the private sector makes a profit at the sub-contractor level, while in Falkirk the private sector has a majority on the board. The Scottish Government Financial Partnerships Unit said that the model could deliver only "marginally lower" costs of financing. There are those in the industry who have argued that the NPD model is actually more costly and we suspect their conversion is simply tactical.

For these reasons we would urge the Scottish Government not to support extending the use of this model as this would simply be a cosmetic change to existing PFI schemes. Also, such a change would not implement either the SNP or Scottish Labour manifesto commitments.

We were astonished to note that the consultation document does not rule out 'traditional' PFI where the risks in a project are deemed 'exceptionally high'. This seems incredible in the light of the January 2008 House of Commons Transport Committee Report on the London Underground PPPs, following the collapse of Metronet. The Committee concluded that the return anticipated by Metronet shareholders appeared "out of all proportion to the level of risk associated with the contract". It pointed out that 95% of the loans secured were underwritten by the public purse, at an inflated cost, "the worst of both possible worlds". The Committee recommended that "if finance cannot be secured at reasonable terms without guaranteeing the vast majority of the debt, loans direct to the Government, which would enjoy the highest credit rating and significantly lower costs, would seem to be the more cost-effective option". That is why UNISON has consistently argued for conventional public funding of new infrastructure and it is why we have said we would support an amendment to the Scotland Act to give the Scottish Government borrowing powers similar to other devolved administrations around the world.

If the Government is intent on allowing PFI/PPP to continue in the NPD format, we would suggest that urgent independent research is carried out to examine whether NPDs actually deliver the benefits attributed to them in the consultation document.

A giant private company

Establishing a new giant private ‘non-profit' and ‘public interest' company to run all future Scottish PFI schemes is merely putting a gloss of accountability over a fundamentally flawed base. The only ‘advantage' appears to be that by bulk-buying, cheaper financing might be possible, although this would not be cheaper than prudential borrowing. UNISON is also sceptical that a private company such as the proposed SFT can have a genuine public interest ethos. It may not take a profit, but the banks and the private firms it contracts to run our services certainly will.

Indeed, whether through refinancings or equity sales or other methods, the private sector will always be seeking to boost profitability. Only last week (4 March 2008) the Guardian newspaper revealed the lengths to which private firms will go to maximise profits in ways we believe sicken the general public. The paper reported that more than 50 PFI schemes have been moved offshore by their investment company owners to avoid paying tax on their profits. Three big companies - HSBC Infrastructure, 3i Infrastructure and Babcock and Brown Public Partnerships - have moved the schemes to portfolios held in the Channel Islands.

If the SFT does go ahead, we believe all possible loopholes must be closed, such as the one allowing PFI companies to transfer ownership to tax havens.

There are obvious governance and accountability issues surrounding the structure of the SFT company and there are uncertainties too about the impact of the change to new International Financial Reporting Standards which would make it more difficult to secure off-balance sheet treatment. We also note that the Chancellor announced in the Budget that he was deferring the introduction of the new accounting standards in the public sector for another year.

The Welsh Water model has been pointed out as having similarities with the proposed SFT. However, UNISON has long criticised that in terms of lack of democratic control and we campaign strongly against a similar mutualisation of Scottish Water, which would essentially be privatization (see STUC publication It's Scotland's Water.)

We note that Audit Scotland has pointed out the need for the proposed SFT's "governance arrangements to be particularly robust given the public nature of the activities of SFT but bearing in mind the expected lack of direct government control".

We believe the best option for the Scottish Government would be to scrap PFI/PPP altogether by simply ensuring a genuine level playing field, as detailed in our five point plan above. This would allow PFI/PPP to wither on the vine. This can be done immediately while the Government pursues the borrowing powers it would need, but which are not under its control.

Consultation Questions

How would the availability of expertise and support from SFT change the way public bodies handle infrastructure investments?

 

We do not see that somehow the SFT would suddenly be able to provide a higher level of expertise and support than currently exists, in that some of those functions are provided now by Partnerships UK and/or the Scottish Financial Partnerships Unit. It is not clear what the purpose is of this side of SFT and how it would fit with or replace some of the existing functions of PUK and the SFPU. Both of these have operated to some extent from an ‘ideological' point of view, based on the policy of the previous administrations and the UK Government, about promoting the use of PFI/PPP. While there have been reports critical of a lack of public sector expertise at local levels in PFI/PPP projects, this seems to be more of a switch from one ‘national' body to another, than anything new. If anything the proposed new arrangements might ‘drain' expertise from local authorities and other public bodies into the SFT, partly because it would be centralising some work that currently is carried out at a more local level.

 

What are the advantages and disadvantages in setting up SFT to generate surpluses to invest in further projects?

 

UNISON believes that prudential borrowing powers at local government, health board and Scottish level are the simplest and most cost-effective way to achieve funding for infrastructure investment.

 

What are the advantages and disadvantages in public authorities entering into

agreements with SFT for the use of facilities?

 

A major concern for UNISON would be that staff should be excluded from transfer. The consultation document says nothing about this issue, while looking at standardisation of design and at the sale of public sector owned sites. As a minimum we want to see the principles of a strengthened PPP Staffing Protocol applied across the public sector. Too often there are mismanaged transfers of staff when some services are outsourced. A recent example was the Traffic Scotland traffic information system when key Glasgow staff were being transferred from the city council to the contractor and to Transport Scotland, but without guaranteed protected pension rights in some cases.

It is essential, if the SFT proceeds, that it ensures all relevant guidance and protocols are applied to protect any staff concerned, whether transferring or seconded to a new employer. Staff fears that this may not happen seem likely to be compounded if all Scottish projects in future come under the umbrella of the SFT, potentially creating greater uncertainties than when a single project negotiation is carried out at a more local level. We would also be concerned that the SFT might run like Welsh Water with all services privatized. It seems to us that there would be considerable disadvantages in terms of local accountability in setting up a large private company that would own all the new facilities to be ‘leased' back to the local health board or council or other public body.

What would be the advantages and disadvantages of using a greater degree of

standardisation based on exemplar, energy efficient, sustainable designs to meet public authority requirements?

 

UNISON Scotland has strong environmental policies and sees climate change as a key issue for Scotland and the world. The public sector has a strong role to play in cutting our carbon footprint and new infrastructure should be built to energy efficient, sustainable designs. However, we are not convinced that this means standardisation, rather than simply designs that meet certain key standards. There should always be room for innovation and we are concerned that designs should be flexible to local circumstances and climate. We have already questioned how precisely the ‘private sector' SFT will have a public service ethos and we have genuine concerns about ensuring from the start that new public infrastructure will in fact be fit for purpose. In particular, we note that despite a multi-million pound PFI investment, new Glasgow schools have ongoing health and safety problems with ventilation systems which are now having to be replaced. Meanwhile Raymond Young, Chair of Architecture + Design Scotland, said in January: "Transferring responsibility for the quality of the finished product to those less motivated in the wider public interest makes delivering a quality school more difficult to achieve."

 

Are there any difficulties envisaged in transferring/selling public sector owned sites to the SFT investment vehicle for use in providing the new facility?

 

Yes. Will the SFT pay a properly assessed ‘going rate' for such facilities? When land sales have taken place to help finance PFI/PPP schemes, it has not always been clear what the precise sums are, nor whether the public sector has achieved value for money in such a sale. It is essential, if this is seen as part of the ‘package' for authorities to be able to access SFT funding, that the whole process is transparent. But there is still a danger that schemes will only be funded where the local public body has some assets to sell to contribute to the costs. Yet that is not going to be the best indicator of need or viability for new infrastructure investment.

 

Conclusion

Seeking the constitutional changes necessary to provide the required borrowing powers must not be used as an excuse for delaying the abolition or ‘crowding out' of PPP/PFI in Scotland.

As we have identified, much can be done within existing powers. We believe that is what the Scottish public wants to see happen as soon as possible. If NHS Greater Glasgow and Clyde can conclude that conventional funding provides the best value for money for the massive new hospital campus at the Southern General site, why can this not be the approach across Scotland?

UNISON Scotland's Submission to the Scottish Parliament Finance Committee's Call for Evidence on the Funding of Capital Investment Projects: www.unison-scotland.org.uk/response/capitalinvest.html

At What Cost : a UNISON Scotland report on the aggregate costs of PFI/PPP projects in Scotland - and some suggestions on a way forward:

www.unison-scotland.org.uk/comms/atwhatcostoct07.pdf

UNISON Scotland PFI info: www.unison-scotland.org.uk/comms/pfi.html

UNISON UK website PFI info: www.unison.org.uk/pfi/index.asp

For further information please contact:

Matt Smith, Scottish Secretary
UNISON Scotland
UNISON House
14, West Campbell Street,
Glasgow G2 6RX
Tel 0141-332 0006 Fax 0141 342 2835

e-mail matt.smith@unison.co.uk

www.unison-scotland.org.uk


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