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Funding of Public Capital Investment Projects

UNISON Scotland's response to the Scottish Parliament Finance Committee on their Call for Evidence on the Funding of Public Capital Investment Projects

December 2007

Scottish Parliament Finance Committee Call for Evidence: Funding of Public Capital Investment Projects

Introduction

UNISON Scotland welcomes the opportunity to respond to the Call for Evidence from the Scottish Parliament Finance Committee on the Funding of Public Capital Investment Projects. UNISON is Scotland's largest public sector trade union representing over 160,000 members delivering public services.

We welcome the Committee's remit to "report on the advantages and disadvantages of different actual and proposed models of funding capital investment projects."

The Case against PPP/PFI

We focus here on PPP/PFI. UNISON has long pointed out concerns including service quality, costs, accountability, inflexibility and the effects on staff terms and conditions. We strongly believe that the private profit motive should have no place in running public services. Opinion polls, including a BBC Scotland poll in April 2007 (1), show that Scottish public opinion agrees.

PPP/PFI has been used extensively in Scotland primarily as a means of keeping expenditure off the public balance sheet. We understanding the drivers for this approach however, we believe it is wrong in principle to account for over £53bn of UK public expenditure (capital value) in this manner. We describe this as ‘Enron economics' and we call for a return to proper accounting, a step that may be realised with the new IFR standards.

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. This has caused an affordability gap for many public service organisations even after Scottish Government subsidies for PFI schemes. 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 the CCT era.

Numerous studies have highlighted a range of serious flaws in PFI/PPP policy, the most recent being the House of Commons Public Accounts Committee Report of 27 November 2007 (2). It focused on tendering and benchmarking and concluded that value for money for taxpayers was often not being achieved with projects in England and Wales for several reasons, including fewer serious bidders due to the high costs and very lengthy tendering times. These problems clearly also apply in Scotland, on top of the many other ways in which this policy leads to profiteering at the expense of school children, hospital patients and taxpayers. Up-to-date research by Scots economists Jim and Margaret Cuthbert shows that the profiteering may be on a much greater scale than has been realised (3).

In October 2007 we published At What Cost - a UNISON Scotland report on the aggregate costs of PFI/PPP projects in Scotland (4), attached with this submission. This revealed new figures which confirm that billions of pounds of taxpayers' money are being wasted. The report looked at Full Business Cases from 35 projects. These official documents claim to demonstrate that the PFI/PPP route is providing value for money. Instead, they show that UNISON's calculation of £5.8 billion being wasted on PFI is likely to be an underestimate.

 

The Way Forward

In this submission we focus on a way forward for public capital investment. In particular we believe 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.

We note that many politicians at national and local level have in the past supported PFI/PPP projects with some reluctance, for pragmatic reasons. It was seen as ‘the only game in town' for the provision of new public infrastructure, but there has been considerable unease about the true financial costs to the taxpayer.

We believe that a commitment to creating a genuine level playing field could be the basis for cross-party consensus. We hope the committee will consider the following five proposals for short term action, while longer term solutions, such as the Scottish Government's proposed Scottish Futures Trust initiative, are developed.

We note with concern though that Finance Secretary John Swinney's October letter to the Committee refers to achieving a "better balance of risks and costs" within PFI. We disagree with this approach, preferring the SNP's own manifesto aim to "crowd out" PFI. We highlight in the SNP Proposals section below some of the flaws with the Non-Profit Distributing model John Swinney appears to endorse.

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. There may be some where it would be appropriate to ‘buy them out', if this benefits the public purse. Three PFI contracts have been bought out to date, but the Auditor General's 2005 report on the Skye Bridge contract buyout contradicted the 2004 claim by then First Minister Jack McConnell that the £26.7m deal was good value for money, reporting to Parliament that it was in fact neutral, in terms of public funds.

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. It may be argued that projects that have been published in the OJEU must be proceeded with. We do not agree. It is possible to adopt a legal strategy that ensures that additional costs do not fall on the public purse.  Even under the current rules final project approval is subject to an evaluation based on value for money and affordability.

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. Current arrangements generally only provide funding for PPP projects. 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.

Scottish Futures Trust

The SNP manifesto accurately described PFI/PPP as "costly and flawed". It said the proposed Scottish Futures Trust should emerge over time as a more attractive source of funding which would effectively crowd out PFI/PPP. The reason for the SFT is that public borrowing is cheaper than private. Tax efficient bond issues would be able to raise sufficient funds to finance large infrastructure projects that would be hard to fund within conventional capital budgets.

There are obviously significant vires problems with the SFT as set out in the SNP proposals. UNISON Scotland would support an amendment to the Scotland Act to give the Scottish Government the powers to raise money in this way. These powers are available to other federal and devolved administrations elsewhere in the world. Concerns about the impact on overall UK public spending could be addressed by adopting measurements of public spending used elsewhere in Europe, here in the UK. These have the effect of removing certain items of expenditure from the calculation of aggregate public spending, creating headroom for spending for investment.

Whilst we support the constitutional change as set out above this must not be used an excuse for delaying the abolition or ‘crowding out' of PPP/PFI in Scotland. As we have identified in our proposals, much can be done within existing powers.

Non-Profit Distributing models

We note that Finance Secretary John Swinney's October letter to the Committee highlighted the Non-Profit Distributing (NPD) model of PPP, piloted by Argyll and Bute Council for their schools project. The PFI industry is now attempting to save their discredited approach (and profits) by attempting to differentiate the ‘standard PFI model' from the NPD model.

While we can understand that some might at first be attracted to the concept of this because of the non-profit aspect, UNISON has always warned that the NPD model still maintains most of the other flaws of PFI/PPP and is therefore essentially window dressing. 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.

The SPICe scoping paper for the capital investment inquiry points out that in Argyll & Bute 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 Committee members not to support extending the use of this model as this would simply be a cosmetic change to existing PFI schemes. Quite apart from the fact that such a change would not implement either the SNP or Scottish Labour manifesto commitments.

 

Accountability and access to Information

One extremely important aspect of PFI/PPP is that too often information that is essential for the proper monitoring of public expenditure is withheld due to so-called commercial confidentiality or commercial sensitivity.

We urge the Committee to revisit some recommendations from the Finance Committee's 2001 report on PPP and the then Transport & Environment Committee 2001 report on the water industry. We note just one example, among many, of accountability problems. Neither Scottish Water, nor the Scottish Executive, as it then was, were able to provide Full Business Cases for ANY of the nine waste water treatment PFI schemes when UNISON requested them last year under Freedom of Information legislation. Both bodies said these documents, the basis for millions of pounds of public spending, were "not held". Yet these Committees emphasised the importance of public access to FBCs. See Note 16 in At What Cost for full details.

This level of secrecy is inherent in PPP/PFI including NPD models and undermines public accountability and involvement in the development and design of public buildings. We would also urge that companies involved in PFI/PPP contracts should be brought under the scope of Scottish Freedom of Information legislation.

Conclusion

We believe UNISON Scotland's proposals would establish a new capital procurement regime quickly, enabling most public bodies to develop essential infrastructure now, without the expense of PPP/PFI. We would also urge the Committee to reject cosmetic changes such as the NPD model. We would support in principle the Scottish Futures Trust but we should not allow the potential constitutional wrangling to distract from the importance of developing a more cost effective and accountable method of funding capital infrastructure.

  1. BBC Scotland opinion poll, April 2007. Building and running state schools and hospitals through public bodies is the top priority for Scottish voters.
  2. http://news.bbc.co.uk/1/hi/scotland/6526715.stm

  3. House of Commons PAC Report - HM Treasury: Tendering and Benchmarking in PFI.
  4. http://www.publications.parliament.uk/pa/cm200607/
    cmselect/cmpubacc/754/754.pdf

  5. Lifting the Lid on PFI, Scottish Left Review. Issue 43. Jim and Margaret Cuthbert.
  6. http://www.scottishleftreview.org/
    index.php?action=article&docid=409

  7. At What Cost : a UNISON Scotland report on the aggregate costs of PFI/PPP projects in Scotland - and some suggestions on a way forward. This is attached to this submission and is also available online at:

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

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

UNISON UK website PFI info:
http://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 0845 355 0845 Fax 0141 342 2835

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

 

 

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