Watchdogs raise worries over value for money on Scottish councils’ private finance deals

Scottish councils have been incentivised to overlook value for money when weighing up how to finance infrastructure spending, according to spending watchdogs.

A report by the Accounts Commission and Auditor General assessed the operation of the Private Finance Initiative model and its successors north of the border.

3rd LATIF NORTH
March 25th, 2020, Manchester
Council treasury investment & borrowing

It found that, because the Scottish government contributes to annual repayments on private funding projects, local authorities are likely to choose such schemes over other financing routes.

The report said: “A council considering building a new asset, for example, is therefore unlikely to consider alternative financing routes as it would have to meet all of the project costs rather than a proportion of them.

“Scottish government support therefore makes private financing a more affordable prospect for councils.

“This means that affordability, rather than value for money, becomes the focus of an individual public sector organisation’s decision-making.”

The report studied the operation of the Non-Profit Distributing (NPD) and hub models introduced by the Scottish government to replace PFI.

It said that guidance by the Scottish Futures Trust (SFT) states that councils should consider factors including service design, site selectin and community benefits when assessing business cases for financing specific programmes.

However, it said: “During our examination of a sample of NPD and hub projects, we found that the SFT’s and individual public sector bodies’ assessments focused on the benefits to be delivered from the project compared to the costs incurred.”

The report said that a consequence of councils paying a proportion of the annual commitments for their privately-finance projects is that they have “less flexibility when setting their annual budgets, and potentially less funding available for other services”.

“In deciding whether to pursue and accept the provision of Scottish Government funding,” the watchdogs said, “it is important that councils and other public sector bodies consider the extent of future financial commitments carefully, as well as issues such as contract length and loss of control of the assets, when deciding whether to proceed with privately financed projects”.

Working with councils and other public sector bodies, the SFT set up five hub companies (hubs) between 2010 and 2012 on behalf of the Scottish government.

The report said: “The hub model has enabled private finance to be obtained for smaller community-based projects, but some aspects of competition are limited.

“Hub structures and governance are complex, and councils and other public bodies have mixed views about how well hubs are supporting their aims.”

The report found that the Scottish public sector is contracted to pay a total of £40.1bn in annual payments between 1998/99 and 2047/48 under current PFI, NPD and hub contracts.

Although contracts cover maintenance and service costs over a period of decades, the authors said: “This is over four times the capital value of the assets developed.”

A statement from the Scottish government said it no longer used NPD or hub schemes.

It added: “NPD and private financing through hub companies has enabled £3.3bn of additional investment in Scotland’s infrastructure that would not otherwise have been possible.”

“The value of investing in infrastructure goes beyond the physical homes, schools and hospitals. It has the capacity to unlock economic potential, support jobs, and enable our businesses and communities to grow – as outlined in our national infrastructure mission.”

The Scottish government is set to unveil a refreshed Infrastructure Investment Plan by June, and is considering a new iteration of its private financing model.

In April last year, the SFT shortlisted options included the Mutual Investment Model (MIM), originally developed by the Welsh Government, an evolved version of PFI and also NPD (for comparison).

In the Welsh version of MIM the public sector has a 20% shareholding in the SPVs set up to construct and manage assets.

The Office for National Statistics has reviewed this structure against Eurostat guidance and has classified it as being under private sector control, which allows investment to be funded from revenue without impacting upon the Welsh Government’s capital budget.

The Room151 Weekly Newsletter covers local government treasury and pension investment, funding, development, resources and technical finance. Register here. 

The LGPS Quarterly Briefing focuses purely on pension fund investment. Register here.