New Sick Kids Hospital, Edinburgh

New figures for Scottish private finance schemes show taxpayers charged ‘extortionate’ fees

New figures published by the Scottish Government’s infrastructure quango suggest that taxpayers may be paying “excessive costs” for new schools, hospitals and roads funded through private finance schemes. 

Dr Jim Cuthbert, a former chief statistician at the Scottish Office, called on Scottish Futures Trust (SFT) in September to publish more financial information on private finance projects. He made the request when he appeared alongside its chief executive at a meeting of the government’s public audit and post-legislative scrutiny committee.

The SFT has made some of that information available on its website, publishing tables that show two different measures of what it costs public sector bodies to access private sector cash.

It did not, however, publish another metric – the net present value – which Cuthbert said is key to determining whether projects could have been funded more cheaply with a loan from the National Loans Fund.

Cuthbert said the SFT had taken a “grudging step” by publishing the information it had, adding that even without the full data “indications are that this is not particularly good value for the public purse”.

The SFT is not playing the part of a public body getting value for money.

Dr Jim Cuthbert

“I’m not saying it’s a scandal but there are indications from the figures that there may well be excessive costs to the public sector and more questions need to be asked about that,” he said. “The SFT is not playing the part of a public body getting value for money.”

The interest rate figures supplied by the SFT are the weighted average cost of capital (WACC) and project internal rate of return (IRR) of the projects it has been involved in. The former relates solely to construction costs while the latter also incorporates running expenses.

Although the former is typically quoted by the SFT as being indicative of the overall interest rate the public sector is paying, in some cases the disparity between the two is significant.

James Gillespie’s High School, in Edinburgh, for example, had a WACC of 5.94 per cent and an IRR of 8.13 per cent, while the WACC on the Inverness College project was 5.2 per cent and the IRR was 8.85 per cent.

SFT chief executive Peter Reekie said the organisation has now published an “unprecedented volume of information”, adding that the financial models for all projects are held on the SFT’s website.

“These models include detailed pricing information covering construction, financing and operational costs for each project, allowing those who wish to look at the detail of the cost of the project financing structures to do so,” he said.

However, Cuthbert called the suggestion that interested parties could use raw data to do their own analysis “very weak” because it is “very difficult” to make sense of that information.

“To take a set of financial projections [for one project] and really feel you understand them takes about a fortnight,” he said.

Private finance schemes in Scotland have been undertaken under different names and different political administrations – from the private finance initiative (PFI) under Labour to more recent projects under SNP-led administrations, such as so-called “non-profit distributing” (NPD) projects.

Patrick Harvie MSP, co-leader of the Scottish Greens, said his party is opposed to private finance initiatives because of concerns over a lack of transparency on costs, adding that the figures indicate they should be “ditched for good”.

It’s clear that the SNP’s [non-profit distributing] model is very close to PFI in that it still relies on extortionate private finance contracts to hide debt.

Patrick Harvie, Co-LEader Scottish Greens

“The more that private interests are involved in public spending, the less transparent it gets, but even using the figures we already know about, it’s clear that the SNP’s [non-profit distributing] model is very close to PFI in that it still relies on extortionate private finance contracts to hide debt,” he said.

“It has continued to saddle public bodies with unsustainable debt paid back through unitary payments while transferring no liability to corporate interests. Just look at the ridiculous situation with the new Edinburgh Children’s hospital, which has cost NHS Lothian £46,000 a day while it lies unusable and empty.”

The £150m contract to design, build and maintain the Royal Hospital for Sick Children, was awarded to Integrated Health Solutions – a consortium comprised of funders Macquarie Capital Group, construction business, Multiplex, architects HLMAD, and facilities management company, Bouygues Energies and Services – in 2014.

The hospital was originally supposed to open in 2017. Although some services have been provided from the building since July 20, it is still not fully operational after a last-minute safety inspection found problems with its ventilation system.

NHS Lothian has been paying the contractors £1.4m a month to cover debt repayments and running costs since taking over the site in February 2019.

The new data from the SFT follows an Audit Scotland report released at the start of 2020 that warned that Scottish Government private finance schemes were lacking in transparency, and came at “significant cost.”

Dexter Whitfield, director at the European Services Strategy Unit, said the situation highlights how important it is for the SFT to be transparent about the total cost of projects and how success is measured and failure is sanctioned.

“It’s all very well to say ‘look, we have schools and hospitals’, but the other question that has come up time and time again with PFI projects is how are they performing, not so much in financial terms but in terms of quality of service,” he said.

“It’s really important to look at financial value for money, but there’s another series of aspects of value for money that the Scottish Futures Trust doesn’t want anyone to look at.”

Reekie said that the SFT publishes all individual contracts on its website and that if any “project-specific contractual issues” arise it is for the “procuring public bodies and their private sector partners” to find a solution to those.

However, Scottish Labour’s finance spokesperson Jackie Baillie, who in 2017 commissioned a report on the SFT’s finances from Cuthbert and his wife – fellow economist Margaret Cuthbert – said that as the SFT negotiates these contracts it must take greater responsibility for ensuring problems do not arise in the first place.

“There’s no question that these issues should be identified further upstream – the due diligence should be sufficiently robust that you don’t have this happening further down the line,” she said.

“A lot of expertise that used to sit in local authorities and health boards was sucked into the centre at the SFT so you would expect the SFT to make sure that this due diligence is being done.”

A spokesman for the Scottish Government said it has always been recognised that private finance “is more expensive in cash terms than capital grant funding any particular project”.

“The value for money arises from the fact that revenue finance models deliver additionality – they enable provision of assets that would not otherwise be able to be delivered at all,” he added.

Correction note: This story was updated on December 7 22.16pm to clarify that some services have been delivered from the new Sick Children’s Hospital in Eidnburgh since July 20 2020.

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