Scotland’s public spending watchdogs are planning to investigate a multibillion-pound scheme to build privately funded roads, schools and hospitals after serious doubts emerged about its value for money.
Audit Scotland and the Accounts Commission will scrutinise the Scottish government’s privately financed NPD (non-profit distribution) programme after it breached strict European Union rules on government spending. The inquiry is due to start in 2018 and will test whether Scotland’s equivalent of the private finance initiative – a funding method for public projects that became widespread under the Blair and Brown governments – is economically efficient. It is understood preparatory work for the investigation has already begun.
The error over interpreting EU rules is expected to cost Nicola Sturgeon’s government the equivalent of £932m in lost expenditure because it must now match the private finance spending under the NPD programme with money borrowed from the Treasury. The scramble for matching funds is expected to have knock-on effects on public expenditure in Scotland.
Further details about the hit to Scotland’s finances are expected to emerge on Thursday when Derek Mackay, the Scottish finance secretary, publishes next year’s draft budget.
Mary Alexander, deputy Scottish secretary for Unite, one of the trade unions that will protest against the NPD programme outside the Scottish parliament on Thursday, said the deals tied public authorities into “exorbitant” 25- to 30-year contracts.
“The funding model rolled out by the Scottish government is nothing other than a public relations repackaging of the private finance initiative, with zero transparency and minimal accountability,” she said.
The NPD programme, which was introduced by former first minister Alex Salmond, echoes the PFI structure by allowing private companies to build hospitals, schools and roads with debt finance which is then paid off by the taxpayer over a period of decades. Critics argue that the process costs governments more over the long term and fails to hold private operators to account.
The Office for National Statistics raised the pressure on the NPD programme last year by deciding that the £865m in construction costs of four major private finance projects – the Aberdeen bypass, two hospitals and a blood transfusion service headquarters – must be added to government accounts under new EU spending rules because the schemes are heavily controlled by the public sector. Scottish ministers now admit a fifth scheme, to build a new hospital on Orkney for £67m, needs to be added to that. Because these projects must now go on the Scottish government balance sheet, ministers have less room to finance other infrastructure schemes.
Opposition MSPs have been leading calls for a formal Holyrood investigation into the non profit distribution programme – or NPD – and the government agency which set it up, the Scottish Futures Trust.
A joint investigation by the Guardian and the Ferret website has also found that the private consortium building Scotland’s largest NPD hospital in Dumfries – one of the four projects singled out by the ONS – is expected to generate £160m in interest and finance fees on loans totalling £242m, including the £212m spent on building the hospital.
According to documents released by NHS Dumfries & Galloway under FoI legislation, the consortium – whose members include insurance group Aviva and building firm Laing O’Rourke – is charging an interest rate of 5.1% on borrowings of £218m. This results in the consortium earning more than £100m in interest payments from the public sector. It is also charging 11.3% on a further £24.2m in “subordinate debt”, which will earn financiers £37.5m in interest. If Scottish ministers had instead used public borrowing they would expect interest rates from the state-run national loans fund of about 1.6%. NHS Dumfries & Galloway failed to respond to questions on this from the Guardian.
The joint investigation has also established that the NHS will be charged about three times as much as staff would earn for electricians, joiners and plumbers employed by the private contractors building and running new mental health facilities at the Royal Edinburgh hospital. The contractors, Galliford Try, will charge NHS Lothian £33 an hour for an electrician and £26 for a painter – excluding overheads and VAT. An NHS electrician’s wage starts at £9.82 an hour; a painter’s £8.59. Lothian NHS said health service pay rates did not include employee and tax costs, and said the contractors’ fees were competitive.
Public spending experts, trade unions and opposition parties said these disclosures raise substantial questions about the NPD programme.
Since the launch of the private finance scheme by the Scottish Futures Trust, dozens of health centres, hospitals, roads, colleges and schools have been built under two models: NPD and a related scheme known as “hub”, in which public bodies pool different building projects into joint contracts in the hope it lowers costs. These projects are on course to cost up to £9bn because they include substantial private maintenance contracts lasting for up to 30 years.
However, the Scottish Futures Trust failed to forecast that new EU rules on private financing for public infrastructure meant that all the NPD contracts which were signed after September 2014 would be counted as public assets. As a result, ministers had to match their capital costs with the equivalent value from public borrowing – a figure which has now reached £932m.
This accounting exercise means that £932m in public borrowing money cannot now be spent, while the NHS and Transport Scotland must still pay the higher interest rates and fees charged for those projects by private financiers.
Neil Findlay, the Labour MSP and convenor of Holyrood’s health committee, said this reinforced his view there was a strong case for a Holyrood investigation alongside Audit Scotland’s.
“We need to find out who actually owns these so called ‘public services’, who benefits and profits from investment in them, what is the scale of that profit, what is the impact on workers affected by any change in ownership and whether we could do things better in a way that offers far better value for the public pound,” he said.
Jim and Margaret Cuthbert, economists who specialise in investigating private finance projects, said the NPD system could be an improvement on PFI because it should involve greater controls on private profits. But they said the ONS report on the Aberdeen bypass raised concerns over the high finance charges levied under NPD projects.
“There is extremely limited information about what is going on. And that is really probably the biggest problem about [Scottish Futures Trust] activities – the lack of information we have, the lack of accountability,” Jim Cuthbert said.
Caroline Gardner, auditor general at Scotland’s public spending watchdog, said the Scottish government had to take a far more strategic approach to its investment plans and finances. Gardner said this was a pressing need because the chancellor’s autumn statement last month allocated Scotland an extra £800m in capital funding from the Treasury.
“We will continue to keep a close eye on the Scottish government’s approach, including its plans for funding its investment programme, and report where appropriate,” she said.
The Scottish government said the revised EU rules were released after its NPD projects were underway. A spokesman insisted they still offered value for money, and helped strengthen Scotland’s economy.
“The NPD and hub models are an improvement on previous PFI deals,” he said. “They enable investment in public projects in Scotland to be brought forward more quickly than would otherwise be available through our capital allocation and limited borrowing powers.”
He added: “We have been open and transparent about the impact of classification on the NPD programme and is willing to assist Audit Scotland should they choose to undertake any further review.”
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