We need renewed vision to end the public-private partnership model

A column for outside contributors. Contact: agenda@theherald.co.uk

THE recriminations over PFI will last long after Nicola Sturgeon’s intended inquiry, proposed by the First Minister on Tuesday, reaches its conclusion. Audit Scotland has found that debt repayments from PFI – a debt finance model for paying the private sector to build public infrastructure – are set to peak in 2025/26, drawing to a close in 2041/42.

Despite the fact Private Finance Initiative ended in 2007 when the SNP entered office, the children in Edinburgh who can’t go to school will still be contributing taxes to pay off PFI debts (reaching just shy of £1 billion per year at their peak) when they are approaching middle-age.

The three-letter acronym is surely on its way to becoming the most insulting word in Scottish politics, but if the heat from the Edinburgh schools scandal is to turn in to light, current practise will need to be scrutinised as closely as that of the past.

The fundamental tenets of PFI continue, just scaled down, and under new ownership with a new brand. The Non-Profit Distribution (NPD) model established by the LabourLiberal coalition and extended by the SNP in power is a misnomer: it is very much for-profit, with companies paid through debt repayments from future government spending, just like with PFI. Public-Private Partnership (PPP) lives on. Under NPD, investors don’t get equity returns in the project, and only receive the interest on the debt that is agreed when the deal is signed. This has curbed some of the worst excesses of the PFI era, but equity was only a cherry on the cake for investors: most profit was made from the government debt repayments far exceeding build costs, as it is now.

While NPD may (so far) be the scandal-free little brother of PFI, it is running into big problems of its own.

Firstly, John Swinney has set a 5 per cent legal limit on how much future revenue spend can be devoted to debt repayments to the private sector and, with 4.2% now committed, it is getting close to reaching those limits. In theory, Swinney could lift his own cap, but how much can one finance minister burden the taxpayers of the future with his spending decisions?

Secondly, changes to UK accounting standards has led the Office for National Statistics to rule that the Aberdeen Western Peripheral Route – the biggest NPD project planned to date – is a public-sector project and therefore must count on the Scottish Government’s current balance sheet. Such esoteric accountancy practises may appear incidental, but its impact is critical for Swinney’s investment strategy. No longer can major public projects be financed through the debt-based model of Public-Private Partnership that has been so seductive to successive finance ministers, exactly because it costs them nothing in the short-term.

Subsequently, there is little left to defend the PPP model: poor quality, unsafe, delays and now expensive in both the short and long-term. Just like Edinburgh’s schools, the case for PPP is collapsing.

Happily, the SNP already have a good idea for how to replace PPP, they just didn’t bother to implement it. In 2007, NPD was seen as a shortterm mechanism before PFI could be properly replaced by Scottish Futures Trust, which would “design, build, finance, operate, manage and own the facilities created”. The SFT never went on to become the national infrastructure company hinted at the start of the SNP’s now nine-year reign, instead acting as an advice-cumcoordination body in the post-PFI era, but there is no reason why the Scottish Government could not return to their original concept.

How to fund it? While the Scottish Government is restricted by Treasury borrowing restrictions, local authorities are not. A public-public partnership arrangement – used in other European countries and dubbed PuPs – could be fruitful in providing cash flow to the projects of a national infrastructure company.

It’s never been cheaper for government to borrow money, with interest rates at virtually zero, which is why even the IMF has been trying (and failing) to get Chancellor George Osborne to borrow to invest. Publicsector led public investment is unquestionably more cost effective than PPP.

A national infrastructure company operating public-public partnerships between Scottish Government and local authorities for the building of schools, hospitals, housing and more would ensure quality, reduce cost and create jobs.

If anger at the Edinburgh schools scandal is to have lasting substance, we need vision to end the publicprivate partnership model for good. Ben Wray is head of policy and research at CommonWeal.