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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