Under agenda item 2, I welcome our panel of witnesses to give evidence on the Scottish Government’s 2015 major capital projects progress update. I welcome Alyson Stafford, who is the director general of finance at the Scottish Government; Peter Reekie, who is the deputy chief executive and director of investments in the Scottish Futures Trust; Andrew Watson, who is deputy director for financial strategy at the Scottish Government; and Sharon Fairweather, who is deputy director, finance programme management, at the Scottish Government.
I understand that Alyson Stafford would like to make a brief opening statement.
Thank you, convener, and thank you for the opportunity to discuss with the committee the latest six-month report on major capital projects. Very detailed questions might best be answered by individual project owners, so if there are any points of detail that go beyond the information that we have with us today, my colleagues and I will take a note of them and seek to respond swiftly.
When we last met on 29 April, members were understandably interested in the work that was under way by the Office for National Statistics to classify a major non-profit-distributing—NPD—road project that has been signed since the introduction, in September 2014, of the rather confusingly labelled European system of accounts 2010.
The Scottish Parliament has been kept informed throughout by the Deputy First Minister, including through two inspired parliamentary questions and a substantive oral parliamentary question in February, July and September respectively, but I will recap more recent events briefly.
On 31 July 2015, the ONS published its decision to classify the Aberdeen western peripheral route project to the public sector. As there is no route of appeal, I corresponded with the ONS to seek clarification on a range of points raised by the Scottish Futures Trust about the project—that engagement is continuing. In parallel, the SFT has submitted proposals to the ONS on the hub model—again, that engagement is continuing.
As chair of the Scottish Government’s infrastructure investment board, I am passionate about ensuring the delivery of vital infrastructure in Scotland, and I share the concerns of project partners and stakeholders in local communities, so I continue to impress upon the Office for National Statistics the importance of the issues that we have raised with it, while recognising its congested overall work programme.
The classification by the ONS has no bearing on how the Scottish Government accounts for projects in our statutory accounts. The classification does have a bearing, however, on how the Scottish Government records its activities against its HM Treasury annual budget. Without a conclusive position from the ONS, the budget discussions with HMT cannot be finalised. In the interim, the Scottish Futures Trust continues to engage closely with project partners to work through the implications with them.
Meanwhile, progress continues in the Scottish Government’s overall investment programme. Since my last written report to the committee, the Queen Elizabeth university hospital and Royal hospital for children in south Glasgow, Inverness College and the Inverness campus, Borders rail, ElIon academy and Lairdsland primary school have all been completed.
Thank you for that statement. You have touched on these, but I ask you to elaborate on the issues with time delays and associated costs in connection with ESA 10 interpretation.
I ask Peter Reekie to respond on the time delays and costs, as he is close to the individual projects.
We have said that all of the contracted projects across the NPD programme are going ahead with no impact from the ONS issue on cost or on the delivery programme. That includes the AWPR project.
There are now a number of projects in hub that are affected or are more likely to be affected by the ONS issue. The list of 12 projects has been made public to the Parliament, and it includes the Lothian health centre bundle, an Inverclyde care home project, Kelso high school, Newbattle community high school, Baldragon academy, Elgin high school, Dalbeattie learning centre, Barrhead high school, Our Lady and St Patrick’s high school and Ayr academy. Given the timescales of responses and our discussions with ONS, Campbeltown grammar school, Oban high school and the East Ayrshire learning campus will now probably be affected. Those projects across the hub programme are approaching a stage where they will be ready to reach financial close, and we do not anticipate that they will be able to do so over the coming weeks.
You spoke about the cost implications. Until we finalise the position with ONS and we are in a position to move ahead with the projects and reach financial close, we will not be able to say what the full cost implication is of delays to those projects, if any. There will be a range of scenarios. Either contractors will have prices held, or the final project price may be subject to some inflation, given the state of commercial negotiations on each of the projects that are or could be affected.
You are advising us that you are not able to specify this, because of the nature of the contracts, but I take it that you will be aware of the details of the contracts, so you may have been able to quantify them.
The contracts are not yet signed. It depends on some of the contractors’ prices for projects that have reached what we call stage 2—which is their fully costed submission—in the hub development process. For those that have done that more recently, the contractor’s price might still be valid by the time we are able to tell projects that they may move forward to financial close.
Other projects have been in that position for a little longer. For example, in the case of the Lothian health centre bundle, it is unlikely that the price that the contractor put forward originally will still be valid, as it will have gone beyond what is usually a three-month validity period. We will have to refresh the pricing with the contractor and go back to the market, as all the projects have transparent sub-contractor prices involved. There will be some process to go through with the contractors to refresh their pricing for the projects.
You mentioned various projects. We represent constituencies, and my particular interest is in Elgin high school; there are serious concerns there.
Alyson Stafford mentioned ONS’s publication of its decision in July this year. I have a written answer from John Swinney, dated 13 February this year, which says that the Scottish Government is looking at contractual changes in order to reach a conclusion on the matter and that it would keep Parliament informed. I would not like to mislead anyone and say that the classification of the Aberdeen western peripheral route issue has suddenly come out of the blue in the last three months—it has been known for some time. I just want to put that on the record.
Mr Reekie mentioned some projects that will be affected by the ONS issue, including Campbeltown high school. On pages 61 and 62, the update has a considerable list of projects included in the pipeline for the first time. Will any of those or any other projects also be affected, or will it be just the ones that were mentioned—Newbattle high school, Elgin high school, Baldragon academy, Kelso high school, NHS Lothian and NHS Inverclyde?
It is a worry for people. Moray Council thought that it was going ahead with Elgin high school, and it is under a lot of pressure. Plus, apparently, the costs are rising by £100,000 a month, and people are really worried about who is going to pay.
I appreciate the point that is being raised. Given that it is about a detailed project, Peter Reekie is the best one to answer, because he is close to it.
The ONS issues will affect only projects that are due to be revenue funded through either the hub or NPD programmes. They will be noted as design, build, finance and maintain and will be flagged as revenue funded in the documentation. The majority of the projects that have recently been added to the list are primary school projects that will be design and build projects. They will not be affected by the ONS issues.
I have a question on that point. I tried to read and understand the briefing paper last night; I think that I got about halfway there. At about paragraph 20 it says that the Government had not put a cost on delays. I accept that; I also accept that the SFT has submitted proposals and that the ONS is expected to respond next month.
My understanding is that ONS reclassification depends on the amount of private sector, as opposed to public sector, involvement. The committee has had so many discussions about what a private finance initiative is and what an NPD is, and I think that it was Audit Scotland that said that NPD was a form of PFI. What I really want to ask is this: if we were using the old form of PFI, would we not be facing this reclassification? Is there something to do with the way that NPD or the hubco projects are set up that is making this investment more tricky and difficult and less able to fit in with ONS reclassification, which ultimately leads to delays?
I will start first and then allow Peter Reekie to come in.
I am trying to understand this—it is not the easiest subject.
You are not alone. There are a number of people who do not specialise in the area who are just trying to understand it, and I appreciate that it is very difficult to explain it to constituents as well.
You referred to a paper that I think is private for committee members, so I am unable to address any particular things that you refer to in it, although I will be happy to look at it afterwards and come back to you if that is useful.
The point about the Office for National Statistics is that it is actually a statistical body. Ultimately, it is there to set out in statistical terms the size of the private economy and the public economy in the United Kingdom. It starts at a very high level.
The reason why the ONS is part of our considerations in relation to the projects is that Eurostat has set out new standards for assessing projects, which the ONS must work to. Those new standards came in very late in the day—in September 2014—and that is why the issue is particularly nudging up against the Aberdeen western peripheral route contract, which was signed in December, with the long lead times that it has.
09:45The Treasury has chosen to use the European standard as an indicator of a measure when it asks Whitehall departments and devolved Administrations to budget for these things. The approach changed in 2009, at which time the accounting and the budgeting were absolutely aligned. When the United Kingdom Government changed to international financial reporting standards, it realised that that would sound the death knell for any PFI, public-private finance initiative or non-profit-distributing project, because they involved conflict between the two aspects.
Until 2009, everything was really straightforward. However, when the accounting arrangements changed, the budgeting was out of kilter and all PFIs and PPPs would not have continued. The Treasury, therefore, found another reference point for determining how we score activities against the Treasury budget and decided to use the statistical indicator.
The reason why we are having to consider the issue now is that that statistical indicator has changed materially and at short notice. The interpretation document that was designed to help us understand the new standard came out in August 2013. It gave us no particular cause for concern. The Treasury held a session for experts in the field, which was attended by Peter Reekie and others, in March 2014, and there was no cause for concern.
It was only when Eurostat revised its own interpretation in August 2014 and published the standard in September 2014 that it was understood that there were some material changes that started to call into question the private classification of not only the things that were well under way—the lead time for building any road is long—but also things that the UK Government was considering. The private finance initiative private finance 2 was something that was under scrutiny early on.
Irrespective of the type of model that is being used to get, in effect, additionality over and above the usual capital programme, the latest changes have caused not only we in Scotland but also the UK arm, which is called infrastructure UK—I am trying to remember the full names rather than just use the initials—to pause and think about things again. The same thing is happening across Europe.
Is it the invariable practice to form an SPV for any of these individual projects?
Just for the record, I ask colleagues to say what the acronyms that they are using mean.
An SPV is a special purpose vehicle.
Yes, that is the invariable practice. When a project is project financed, the financiers like a tight ring fence to be put in place around the money that they are putting into the project, so that they can see exactly what risks they are exposed to and exactly what rewards they will get for taking that risk. In financial circles, that is generally done by setting up a specific company whose only job is to do that one project. After the project is completed, 25 years later, the company will cease to exist. Because they do only one thing, they are known as special purpose companies or special purpose vehicles. For the sort of projects that we are discussing, such a company is always set up.
In the past, SPVs have been wholly owned by a hub company, and were called sub-hubcos—someone good must have thought of that name. You are changing that to a design, build, finance and maintain—DBFM—arrangement, which reduces the public sector interest in that company. What are the implications of that in terms of cost and in terms of management and control?
The previous structure, as you said, was for the project company that was set up for every design, build, finance and maintain project to be 100 per cent owned by the hub company that was set up in the hub territory to take forward the hub programme. The revised proposals are to set up separate DBFMcos—we love our acronyms—with a specific company for each project. Sixty per cent will be owned by the private sector development partner in the hub area, 20 per cent by a charity and 20 per cent by the public sector, with half of that being SFT and half being the public body that holds the contract.
Within that overall structure, there will be no implication for the unitary charge or the cost that is paid for the project, and within the governance arrangements we will still have a public sector director sitting on the board of the delivery company to bring good governance and accountability to the delivery side of the project and enhance the overall partnership arrangements over the long term.
Will you give me a bit more information on the newly formed private sector charity that will have 20 per cent of the company?
In the lead on the charity that is being established are the five private sector development partners across the hub territories. It will have independent trustees, plus one trustee from the private sector development partners and one from the Scottish Futures Trust. It will be established to take the stakes in the design, build, finance and maintain companies, and it will then be able to use its share of any of the returns from those investments to take forward charitable works that are associated with the types of facilities and programmes that the hub is there to deliver.
Will the charity exist across Scotland or will it be localised?
The intention is that one charity will be set up across Scotland, because some of the activities that it will be involved in as it invests in the projects will be reasonably specialist. I cannot speak for the charity because it will have independent trustees, but it is likely that it will act as a foundation and fund other charities to do works in local areas rather than undertaking charitable activity itself.
My concern is that money that is raised through the local community should go back into the local community. If it is a national charity, there will always be a risk that money will be siphoned off and used elsewhere, perhaps on the basis of greater need. There is a lot of need in my constituency and I would like any earnings that come from there to go back into it.
It is absolutely right to want to see local benefits from local projects. That is one of the things that the hub is there to deliver overall. I am sure that over the very long term—the 25 years or so for which the charity and the projects will be set up—distributions will be made to various causes across the country, but I cannot say exactly which causes they will be at which points in time.
I asked in particular about the possibility of any additional costs arising from the use of the new model. The document that I have mentions the possibility of increased borrowing costs because of the new structure, so there is a potential cost from moving to it.
Separately from the establishment of the new structure, one of the things that the ONS potentially has concerns about is public sector bodies making capital contributions to projects and paying for elements of the construction either during the construction period or when construction is completed, rather than paying a charge over the life of the use of the asset.
It is likely that, rather than public bodies making those contributions—typically, in a schools project, a local authority will be able to borrow from the Public Works Loan Board and make a contribution of capital—that will have to be financed through the project and repaid over the life of the asset in the unitary charge.
There would likely be a small increase in the cost of borrowing from that element of the structure. If there is, that element would be picked up as part of a sort of no-better, no-worse arrangement that has been arrived at with the local authorities. Any additional cost of financing would be picked up in the central contribution to the projects.
That does not sound like a great outcome, if we are paying extra for the borrowing. Does that depend on what the ONS comes up with, or is it a done deal?
Nothing is a done deal at the moment. As Alyson Stafford said, we are awaiting feedback from the ONS.
So it is speculation at this point. If it goes one way, we will incur the extra costs.
All the issues remain subject to the on-going discussions with the ONS.
That is clearly something that we should perhaps follow up down the line, convener.
Okay. I will bring in Stuart McMillan for a brief supplementary, and then I will bring in Colin Keir.
Convener, if I might, I will just add something and then I am happy to take the question from Stuart McMillan.
Mr Beattie is obviously concerned about some of the changes that might happen and whether they would have marginal cost implications—and they are likely to be marginal. At some point, we will weigh up the relative benefits of a marginal change to enable things to continue on the current trajectory. One of the key reasons for all these initiatives is that the main grant for the capital budget in Scotland has been cut by 25 per cent in real terms since 2011 up to the end of this year. That has been the trigger for these initiatives—and the ones that we are discussing are not the only ones—to bring additionality for Scotland as a whole and in local areas.
We will weigh up the two issues but, clearly, there is a drive to keep the pipeline live and active, because we know that it has a material impact on Scotland’s economy. Last year, about one third of the whole economic growth performance in Scotland was attributed to infrastructure investment, and the vast majority of that was through the public domain, whether through our grant funding, through the national housing trust, through local government investment or through NPD and hub-type initiatives. All those things are material. We have to weigh up the whole picture when we get to that.
Convener, can I come back in?
Very briefly. Can we keep the exchanges as focused and as brief as possible please?
I appreciate what Alyson Stafford has said, but my concern is that we are basically talking about a bookkeeping change that will have a real cost for our projects, which I think is unacceptable.
Okay—we note that and we will take action on the issue.
Stuart McMillan has a brief supplementary.
It is on the creation of the charity. Will the charity be able to deal with arm’s-length foundations, which we have discussed before in relation to colleges and which the committee has highlighted?
The charity will be established explicitly for the hub programme to deliver investments in hub projects and, through the returns on investments, to deliver charitable funding for similar sorts of activities. It is very separate from anything that has happened previously or that we have discussed previously in the colleges sector.
Will the charity have an opportunity to invest in the college sector through arm’s-length foundations?
I think that it is still too early to tell. Obviously, part of the development of the charity is still around getting the additionality through the programme, so we want to get over that hurdle first. Obviously, we do not want a cluttered landscape in Scotland. Bearing in mind that, as Peter Reekie said, the charity will by its nature have to operate from a more distant position, it will have to decide what its arrangements will be. Therefore, I do not rule anything out; equally, at this stage, the best advice to follow is to take one step at a time.
10:00
I think that the witnesses have answered one of my questions, but I have another question, which is about the hubcos and in particular the health board partnerships. I admit that my interest is in the north-west Edinburgh health centre, which is due to be built at Muirhouse. There is a degree of worry since the ONS issue has kicked off. From what I gather, we do not know exactly what will happen with future funding, but are there any cost implications in terms of work that has already been completed on projects? Obviously, there is a design aspect in the way that things move forward. Is there anything that might end up as a cost to projects just because things have stalled but the initial work has begun?
The development work that has been done to date on all the projects has been around design development, scoping and understanding the requirements. The design on the project that you mention and the other projects has been taken to quite a well-developed stage. None of that design development is wasted work, as there is a full commitment to taking forward all the projects once the issues have been resolved. We expect that, given that the project that you mention has been in this state for a little while, there will have to be a refresh of some of the construction costings, but that will allow the project to go ahead with its current design and scope and on the current land that has been allocated to it.
Have any problems been caused to any of the other partners?
I cannot give you the detail of every individual project and say whether there have been costs to any of the partners that have been involved to date. There will have been design costs, but that work is very much needed and will be important for the project going forward.
One of the issues that we looked at when you were before the committee previously was the two Caledonian Maritime Assets Ltd ferries. Ferguson Marine in Port Glasgow was recently awarded preferred bidder status for those, but the final announcement has not yet happened. However, our paperwork suggests that the final announcement was to take place by the middle of September. I am keen to have an update regarding the situation with that particular order.
My understanding is that we are close to getting a final signing on that—we expect it in the next few weeks. I do not have the details on the delays in getting the signing, but I have no reason to believe that it will not happen shortly.
Were there any complaints from European Union member states regarding the process? That could by why the process was not completed by the middle of September.
No—not as far as I am aware.
Okay—thank you.
On behalf of the committee, I thank the panel for their contribution. We can follow up through the clerks any further information that might be required.
I suspend the meeting briefly to allow the witnesses to change over.
10:03 Meeting suspended.Next
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