An MSP has called for investigations into a charity that has banked £2.5 million from investments in private finance projects funded by Scottish taxpayers but given out only one £9,000 grant.
The Hub Community Foundation (HCF) was set-up in December 2015 by the Scottish Futures Trust after rules setting out how European governments should account for privately financed schools, hospitals and roads were changed.
The charity generates cash from its financial interests in tax-payer funded private finance projects around the country.
These include schools such as Baldragon Academy in Dundee, Oban High School and Campbeltown Grammar, as well as health facilities in Inverclyde, Stirling and the Gorbals in Glasgow.
But despite operating for more than two years the charity has no public website, email address, telephone number or named contact. During this time it has banked £2.5m from its investments but made only one £9,000 grant to an organisation called Pilotlight.
The HCF governing document show that it has a wide remit. It can invest in projects that will promote education, health and employment and the “relief of those in need.”
Critics say that charity must be more open about how it plans to use its cash. They have called for regulators to investigate it amid claims that it may not deliver value for money for Scottish taxpayers.
What is the Hub Community Foundation?
The Hub Community Foundation was set-up after the so-called ESA10 accounting rule change forced the Scottish Government to bring hundreds of millions of pounds worth of borrowing for major public projects back onto its books.
This cut almost a third off the Scottish Government’s £3bn capital investment budget in a stroke.
But, to avoid many millions more being cut from the capital budget, the level of public ownership of more than 40 other Scottish private finance projects had to be cut along with rules that restricted the profits that private investors could make.
To do this, 20 per cent of the shares in each project – formerly in the control of public sector bodies – were transferred into the HCF.
The HCF was also given the right to invest in the risky, but lucrative sub-debt in each project. These investments, which are all ultimately funded by Scottish taxpayers, are the only source of income for the charity.
The Ferret has also established that at the same time as the HCF was set up, the accounting rule changes forcing the Scottish Futures Trust (SFT) to scrap “capping and sharing” rules that limited the returns that private sector investors could make from their stakes in some Scottish private finance schemes.
This means that there is now also the potential for private companies to make greater profits from investments in taxpayer funded public infrastructure, if they perform better than expected.
A bad deal?
Scottish Labour have criticised the charity as an “accounting work-around” and have been joined by the Scottish Greens in calling for the HCF to operate more openly.
Jim Cuthbert, a former chief statistician for the Scottish Office and private finance expert, also criticised the “obscure” accountability of the HCF. The structure was “potentially a bad deal for the public sector,” he said.
Labour MSP, Jackie Baillie, acting convenor of the Public Audit and Post-legislative Scrutiny Committee at the Scottish Parliament, said she had concerns about the “so-called” charitable foundation.
It is quite astonishing that HCF has £2million yet has only made one grant of £9,000 to date. Jackie Baillie MSP
“ESA10 was actually put in place to help understand a government’s debt liabilities. SFT has managed to keep these projects off balance sheet by creating a so-called charitable foundation,” she said.
“This new charity status appears to be simply a technical fix for an accounting problem to get around ESA10. It is a concern that the classification can be avoided in this way and that charitable status is deemed appropriate.”
The Hub Community Foundation’s only public contact address is the same as the SFT office in Edinburgh.
It redacted the names of its trustees from the public version of the first annual report it provided to charity watchdog, the Office of the Scottish Charity Regulator (OSCR).
Documents published by The Ferret, including the founding statements and every subsequent board meeting minute, show that membership of the HCF is tightly controlled.
The only bodies guaranteed membership of the foundation are private companies who operate the SFT “Hub” programme in Scotland and the SFT itself.
Whilst the constitution of the HCF requires three out of the five trustees on the board to be independent of these companies, The Ferret has learned that two out of the three independent trustees currently in post formerly had financial links to private companies that profit from SFT Hub programme projects.
Bill Mackintosh, is the Chair of the HCF and one of the Independent Trustees.
He is also a former director of Galliford Try Investments Ltd. Galliford Try is a company which has significant investments in the SFT Hub Programme. It holds sub-debt in at least 16 Hub projects, and further interests in the operation the North and South East Hubs.
Galliford Try Secretarial Services is also listed as the current secretary of the HCF investment company.
These arrangements prompted Baillie to call for the charity regulator and Audit Scotland to conduct a joint investigation into the governance of HCF.
“There are well recorded issues of accountability, transparency, and value for money. It would be very helpful for Audit Scotland to work with OSCR to consider whether the HCF has been set up as an accounting work-around and is not operating as a charitable structure,” Baillie said.
The Scottish Green Party urged more openness if the SFT was to avoid the “toxic legacy” of historic private finance initiative (PFI) projects.
“It’s important that the SFT operates with a greater degree of transparency,” said a party spokesperson.
“If it uses a charitable arm, it should be clearly for charitable purposes only and the organisation should have a website so that anyone wishing to scrutinise its work can do so without having to jump through hoops.”
Audit Scotland confirmed that it intended to liaise with OSCR as part of the planned investigation into the SFT Hub programme in the next financial year.
“We will be scoping this report next year so we can’t say at this stage what will be in it. But the wider role of hub companies, including HCF, is of interest to us and we will be speaking to OSCR as part of the scoping process.”
An OSCR spokesperson said: “We note the comments concerning the Hub Community Foundation. We are not aware of the precise scope of any planned work by Audit Scotland in this area, but if there are issues of mutual interest we will of course cooperate closely with them as we have done in the past.”
An August 9 meeting minute for the HCF, recorded on Galliford Try headed paper, show that the trustees were asked to consider subsidising the employment costs of former apprentices working on Hub projects, by its former members.
Although the trustees rejected these proposals, Baillie questioned whether the HCF’s trustees were making the best use of charity funds.
“Making grants available to cover staffing costs in the Hub programme would represent a direct conflict of interest and would be entirely contrary to the HCF’s intended charitable purpose,” she said.
“Given that public finances are tight and communities across Scotland are facing huge cuts to their public services, I believe funding could be better spent. It is quite astonishing that HCF has £2million yet has only made one grant of £9,000 to date.”
This concern was echoed by Jim Cuthbert, who said it was “not clear” how the charity would decide what it would spend its cash on.
It is not clear whether the way in which HCF will choose to allocate its resources will relate at all well to what democratically determined public sector priorities might be. Jim Cuthbert
He said: “The question of HCF accountability is so obscure that it is unclear how HCF priorities are actually determined. So it is not clear whether the way in which HCF will choose to allocate its resources will relate at all well to what democratically determined public sector priorities might be.”
He went on to point out that the SFT use of a charitable structure to invest in sub-debt raised further concerns.
Firstly, he explained, that when a body like the HCF invests in the sub-debt associated with a private finance project, “they bear a substantial element of risk if the project goes wrong.
“This weakens the whole question of risk transfer to the private sector which is part of the fundamental rationale of public private partnerships,” he said.
Secondly, allowing public bodies and “allied” charity bodies, as he described the HCF, to invest in the sub-debt of a project could create perverse incentives, he argued.
Although Hub private finance projects have fixed rates of interest, the phasing of payments through time is not fixed, he said, “so there could be a perverse incentive to favour debt payments phased later in the life of the project.”
Were this to be the case he said, it would be more costly for tax-payers, but more profitable for organisations that held sub-debt investments.
Bill Mackintosh, commenting as an HCF trustee, pledged that the charity would soon begin accepting applications for cash.
He said: “Hub Community Foundation is a private charity and therefore entirely independent from Scottish Futures Trust. You are correct in saying HCF has been granted investment rights in privately financed hub projects, which rights have been used to generate funds so that the charity can carry out its objectives.
“On this front, following a period of careful consideration as to the appropriate way forward, we expect to soon be deploying significant sums from the more than £2m raised in the aid of disadvantaged young people to assist them into employment. It is widely recognised that more needs to be done in this area.
“We have appointed Inspiring Scotland to help us ensure that this money is put to the best of use in this area. HCF expects to open up an application process for charities operating in this space very early in 2018.”
An SFT spokesperson said: “HCF is a private sector charity, with charitable objectives that have been approved by the Scottish charities regulator. HCF is therefore not a charitable arm of SFT. SFT has a right to appoint only one of five HCF trustees.”
The spokesperson added: “SFT acts with substantial transparency. The vast majority of our work sits under programme boards or governance arrangements involving, and often chaired by, the Scottish Government or other public bodies.”
Data on the companies that hold sub-debt in selected SFT Hub private finance projects can be found on our Github page.
Below, you can search through minutes of the HCF and its investment company, along with copies of its constitution and first public accounts.