Agenda item 2 is an update on major capital projects. I welcome to the meeting our witnesses, all of whom are from the Scottish Government: Alyson Stafford, director general finance; Sharon Fairweather, deputy director, finance programme management; Andrew Watson, deputy director, financial strategy; and John Matheson, director of health finance, e-health and analytics.
I understand that Alyson Stafford wishes to make a short opening statement. Ms Stafford, you have five minutes.
Thank you, convener, and thank you for the opportunity to discuss with the committee the Government’s six-monthly report on major capital projects. The report is the product of effective collaboration between the Scottish Government’s infrastructure unit, Audit Scotland and the committee, and I hope that the committee finds its current format helpful.
It is perhaps worth reflecting on the steps that we have taken together to consider how the Government manages, monitors and reports on major capital projects. In June 2013, the Auditor General for Scotland published a report entitled “Scotland’s key transport infrastructure projects”, the three main recommendations of which were to improve Transport Scotland’s control and decision making; develop scrutiny of major projects by the Scottish Government; and improve the Government’s openness and public accountability. Subsequent to that publication and a meeting with this committee, the permanent secretary agreed to review the reporting arrangements for future major capital projects updates and agreed that Scottish Government and Audit Scotland officials should work with the committee clerks on a revised reporting format for future six-monthly updates.
The major capital projects report provided by the permanent secretary in December 2013 included an additional section on actions taken by the Scottish Government in response to the Audit Scotland report, which included a revised reporting format for future six-monthly updates and the refinement by the infrastructure investment board, which I chair, of its framework for scrutinising, challenging and monitoring major investment projects.
We agreed with the committee in its former shape a revised format for the six-monthly major capital projects update to include projects over £20 million—previously, the update looked at projects over £50 million—an annual update on the local economic benefits of projects and progress updates against agreed cost and time parameters for projects that have progressed beyond outline business stage. That approach has been reflected in the updates provided in March and September 2014 and March of this year, and I am grateful for Audit Scotland’s positive feedback on the steps that we have taken. I believe that we now have a fit-for-purpose process and format for our reporting, but I am interested in hearing the committee’s views on that matter.
The latest six-monthly report illustrates the good progress that is being made across our investment programme, with a wide range of significant projects at an advanced stage. Infrastructure investment remains a key part of the Government’s economic strategy and through the infrastructure investment board and our wider governance, assurance and project management arrangements, we are taking steps to ensure that projects are well managed and deliver value for money.
As Scotland has a strong reputation for its ability to deliver major projects and for being an attractive place in which to invest, it is important that we do all that we can to maintain and enhance that reputation, and I would welcome the committee’s input in that context. I should say that any very detailed questions about individual projects might best be addressed by those projects’ senior responsible officers, and when we get an inquiry from the committee, we always consult the project owners to ensure that members are getting the most robust and best up-to-date information. We will continue to endeavour to get those responses for the committee, and if anything today requires us to take that route, we will signal that and endeavour to come back to you timeously.
That said, I am happy to answer the committee’s questions, and I am joined by John Matheson, whose title I will not repeat as it has already been read out by the convener; Sharon Fairweather, who is currently deputy director for finance programme management but as the previous finance director for Transport Scotland brings live experience of Transport Scotland’s operational work and of managing individual projects; and Andrew Watson, whose role and responsibilities include looking at infrastructure investment strategy.
Thank you for listening. I am happy to move to questions.
Thank you, Ms Stafford. Mary Scanlon will ask the first question.
Thank you for your opening statement. First of all, as a Highlands and Islands MSP, I want to say that although transport infrastructure is important throughout Scotland it is an absolute lifeline for the Highlands and Islands. We are not talking about five minutes off a journey—the fact is that you just do not move. I also want the Highlands and Islands to be an attractive place in which to invest.
As I have got in first, I seek some clarity on four particular projects. First, I will remain consistent about the A9. In fact, there is nothing more important to the Highlands than that road, but after eight years of a Scottish National Party Government that promised that the whole 110 miles from Perth to Inverness would be dualled, only 7.5km from Kincraig to Dalraddy has been started. There are still 67 miles to dual, and I note that the Luncarty to Birnam stretch has gone to a public inquiry. Given that it has taken eight years to plan to start a 7km stretch in July, is it realistic to expect 67 miles to be dualled by 2025?
My second question is about the Ullapool to Stornoway ferry, which is an absolute lifeline for the Western Isles. Indeed, I travelled on it a couple of weeks ago. I understand that the harbour upgrades were not completed in time and that in July, which is the busiest month of the year, no cars will be able to cross on that ferry because of poor planning.
My third question is about the prison for the Highlands. In 2009, the Government announced £40 million for that prison; however, we are now in 2015, and according to your update, a feasibility study is being done on a potential site. People are getting a wee bit impatient about having the smallest and most overcrowded prison in Scotland.
My final question is about Inverness College, which I visited recently. That is an excellent facility: well done on that. As an ex-lecturer at the college, I would like clarity on the sale of the two existing sites at Midmills and Longman, which are obviously worth a significant amount of money. All that we get in the reports is how much it costs. I would like clarity on how much money from the sale of the sites has been taken into account to fund the new building and how that works with the non-profit-distributing model.
Those are all my questions, convener.
Thank you. I invite Sharon Fairweather to deal with the transport questions first.
We have a detailed programme for the delivery of the A9 project. It will be delivered in stages. The programme is still on track for completion by 2025, but stages will come on stream between the completion of the first stage, which Mary Scanlon has already mentioned, and 2025.
Members will be well aware that that is a very complex engineering project, and a whole range of processes must be gone through before going out to procurement for any individual section. I will give members a flavour of that.
Throughout the whole dualling, the bodies that need to be negotiated with in order to take that forward are the Cairngorms National Park Authority, three national scenic areas, 14 scheduled monuments, one historic battlefield, three historic gardens and designed landscapes, one conservation area, 51 listed buildings, seven special areas of conservation, two special protection areas, 12 sites of special scientific interest, two national nature reserves, 142 sites that are registered on the ancient woodland inventory and 222 watercourses.
I think that we have all known that.
Just allow the witness to continue, please.
I am just trying to explain the complexity of the work that needs to be done in order to enable the design work, the public consultation and the statutory processes to be undertaken. As you mentioned, one section may go to an inquiry because of the objections that have been received to the scheme.
We have an obligation to undertake all those statutory processes in a professional way that allows the public, affected landowners and so on to have an opportunity to object before we can progress with the processes of procuring the land and taking forward the scheme. It is therefore a hugely complex scheme to design and take forward. That is why the timetable is that the overall scheme will take until 2025 to complete. However, we will take forward sections as soon as we can and as soon as we have completed all those processes.
It has taken eight years to plan to start 7.5km in July this year. Will the A9 from Perth to Inverness—the full 110 miles and the remaining 67 miles of dual carriageway—be completed by 2025? That was my question.
That is certainly the plan at this point in time.
Can I pursue Mary Scanlon’s other questions?
If you do not mind, I will ask for a more up-to-date position from the ferries team on the question about the ferries. I am aware that there are concerns around the ferry not being able to take cars in July, but I know that alternative routes have been planned for the car traffic during that period. However, I would rather get up-to-date information for the committee from the ferries team on the exact dates for when things will move forward on that. I am afraid that I do not have that information to hand.
The committee will follow that up and ensure that we get a response in writing.
Can you deal with the other questions?
Andrew Watson will pick up the question about HMP Highland.
As members are aware, the most challenging issue around the prison has been identifying an appropriate site for the development, given the size of the area that it will cover. There is a strong preference to ensure that the site will be well connected to the transport infrastructure that will support it.
A number of options are being considered, but a site has not yet been agreed. As has been said, good progress has been made recently with the appearance of the option of a potential site. Discussions with the landowner on that are on-going. Progress is being made, and we would obviously want to update the committee as soon as we could on the progress with that.
To be fair, I did not say that progress had been made; I said that, after six years, we have a feasibility study. I do not know whether that is progress.
What about Inverness College?
Your last point was about Inverness College.
Yes—it was about the sale of the sites.
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Inverness College is an NPD project and it will be financed by future revenue payments to satisfy the contract for the delivery of the facility, great as it is.
On the sale of existing sites, we will come back to you with the specific information but, as part of managing our overall capital programme, where there are assets that are owned by public bodies, the Scottish Government or its agencies, we look to recycle back into the capital programme receipts that come from the disposal of unused land that is not required for particular purposes. However, we will ensure that we get the latest information on the specifics of the sale of the two sites that you mentioned and we will come back to you on that.
You said that you recycle receipts. If the receipts from the sale of the sites come to more than the cost of the college, will the money go towards the building of the college and the remainder be recycled elsewhere? Is that what you mean by “recycle”?
Capital receipts that come from sites can be used on a one-off basis to invest in capital somewhere in Scotland. The commitment that is being made around Inverness College is an NPD, so the financing involves making sure that, in future years, the revenue that is required to pay for the contract will be made available. There is a particular funding stream that will ensure that the college is paid for over the lifetime of the NPD contract. That commitment has been made by the Scottish Government.
If there are sites that are part of public ownership that will give us one-off receipts when they are made available, that gets factored into the overall capital programme.
Good morning. My first question is about schools, in which I have a particular interest. On page 16 of your update to the committee, you mention Newbattle high school, and you state that construction started on 23 March. I am aware—I hope to get clarification from you—that there have been some delays with schools as a result of the need to comply with new European Union regulations. Can you give us more information on that and advise what sort of delays we are talking about?
I will pick up on the general issue around the EU regulations and the impact that they are having on schools. The information stands, in line with the answer to the inspired parliamentary question that the Deputy First Minister set out to the Parliament on 13 February. We are still waiting for the process of review by the Office for National Statistics to be completed. That review is based on one particular project—the Aberdeen western peripheral route—but it is the first opportunity since the new European rules came in to test the appropriateness of the contract structures that we have in place.
In relation to schools, we are trying to ensure, through the Scottish Futures Trust, that individual projects are as far advanced as they can be so that, as soon as we have the information from the ONS, we will be in a position to keep the progress moving.
Do you have a timeline from the ONS?
It has said that the process can take several months.
Has it not had several months?
It is still working on it. It has inches of detailed legal documents on the AWPR and it has the European system of accounts 10 position from Europe. Equally, guidance is continuing to evolve around the interpretation of ESA 10, so it is still a moveable feast. As you would expect, we keep in touch regularly with ONS and we ensure that, if it requires any information to help it with its analysis, we provide it, but we still expect it to take a bit longer. It will be a few more months before we get a conclusion from the ONS and a resolution to the matter.
Is it correct to say that any work on schools is at a halt, including starting construction and issuing contracts? Is all that on hold across the board?
Through the SFT we are doing everything that we can to ensure that everything that can be ready is ready when the information and position are clear. I am still encouraging local projects and teams to see whether there are other things that they can address, so that we can be as far advanced as possible when we have that clear position and are able to move forward.
So, you can do everything up to the point of completing the contract and actually starting the work.
Yes.
However, we do not know when you will be able to start.
That is fair, yes. That is the position that we are in.
How many schools are affected? Has none of the schools started construction?
When the IPQ was put to Parliament, eight schools were identified as being on the list of schools that would be in the next phase of activity. They are the ones that are more immediately affected.
Convener, it might be useful to get that list of schools for the interest of members.
Can you provide that?
Yes, of course.
I am sorry, but I do not understand; I am sure that you do not really want to explain, because it sounds as though it must be complicated. Once the ONS gives you a view, is that it? Or, as I suspect, will we be in a position in which courts might disagree with somebody, and you might actually go through a very long process before you are sure what the position is?
The contract is one of the first that the ONS has looked at since the issue of ESA 10 and, more important, the more recent interpretation guidance, so the ONS will want to do a thorough job as quickly as possible. However, there is every possibility that it may wish to go to Eurostat to get further clarification. That is because the guidance is very new, as I said, and is evolving. In addition, Europe is taking into account the analysis that is being done not only of projects in Scotland but of projects—and their design—across Europe.
As Nigel Don said, the landscape is complex. There is a tremendous amount of detailed paperwork, of which further interpretation is needed.
Is there a risk of the delays becoming interminable because you feel that you are paralysed, for understandable legal reasons?
I am chair of the infrastructure investment board, and I am sure that you can appreciate that the whole thing has been about keeping up the momentum around these areas.
There are risks, which you have identified, and we are doing everything that we can to mitigate them and to keep up the traction and activity around this. However, there is a collision between having a long-term programme of investment that has, as we have rehearsed, long lead times in a number of cases, for the necessary reasons—to get everything in place—and the moveable parameters that are coming through from Europe, which is driven by different things and is looking at how things play for countries that use the euro as their currency.
Can you reassure us that the delay will not affect public or private funding of the projects and that the funding is earmarked? I would not like to see the projects put at risk because we are sitting here waiting for legal clarification.
The SFT’s role on all those projects is to liaise actively between the consortium of funders, the designers, the builders—the people who are likely to be the contractors supplying the work—and, equally important, the local authorities and local communities that have a very real interest in seeing these particular projects happen.
I restate that we are actively managing all the risks that we possibly can and we will continue to make representations to get speedy resolutions, because of all the points that you raise.
Are you comfortable that funding will remain in place?
We have a good track record of relationships with the different people who come together in these consortia. We have the established landscape of hubcos and the architecture around that. I do not see that being at risk, but we will continue to manage it actively; we would not want to be complacent about those things.
I wish to continue the same line of questioning, starting with the question that you have just been asked by Colin Beattie. The north hubco’s private sector partner has changed since the present hiatus started. I would be very hesitant to suggest that there is no risk when there has already been a change of private sector partner in one hubco—has there not?
I think that what I was saying in response to Mr Beattie that there are risks to manage. That is the whole reason why the SFT is active in this space. I can bring in John Matheson if that is helpful, as he is on the oversight board for hub and hubco. He can say a little bit more about how we are getting the governance and the assurance around the things that you raise.
There are five arrangements in Scotland, but I will focus on the north one. You are absolutely right, Mr Scott: the partner has changed. However, that was unconnected to the ESA 10 issue, which was totally unrelated. As a result of that change, some of the projects that were in the pipeline have now been expedited. The Forres health centre project is now concluded, Tain health centre is now open and we have a good, rich pipeline as far as the hubco is concerned.
The governance around that is very important, which is the point that you are touching on. We have the territory partnering board, which all the local authorities and health boards in the area, and the police, fire and ambulance services, are part of.
I know all that. What I am interested in is the risk and what happens if a private sector partner changes. The hiatus has already lasted seven months, having started in September last year. That is not your fault—it is coming out of the ONS. Colin Beattie alluded to this. What is there to say that a new private sector partner will stay with the programme when there is no certainty on the timescale for it being allowed to get on with the schools that are now being and have been delayed? There is no financial close on Anderson high school in Lerwick, as you well know.
I do well know. That is absolutely right. We are not alone in managing the risk. A lot of the private sector partners are involved in mixed-economy financing arrangements, not just in this country but across Europe. We have had some partnerships involving the European Investment Bank. We have a very active pipeline where the EIB is involved.
But it is not involved in the ones that we are discussing.
I appreciate that, but I am giving the general picture. We have been very transparent about this. It is a point for consideration, further clarification and the further evolution of guidance across Europe. It is therefore something that is affecting the businesses concerned on a much broader span. We are in the vanguard with the AWPR and a lot of other projects. We are still able to offer investors good, well-run projects at good, sensible rates, with assured safeguards of funding as we go forward. I am not seeing anything that is diminishing that confidence.
However, you are right that we should remain vigilant, and we absolutely will. We will keep up our communications with the various parties, and we will keep the right amount of pressure on the ONS, which needs the time to do the work, so as to get a timely response and mitigate the risks and keep them in a manageable space, at least.
You say that the guidance is evolving. Do you mean on a weekly or monthly basis? What does that mean in practical terms?
Some guidance was issued on interpretation at the back end of 2013, before ESA 10 was implemented in September 2014. Between then and another set of guidance coming out in August 2014, things had changed. With ESA 10, the clue is in the number: it was in 2010 when the arrangements were defined. It took some time between 2010 and the autumn of 2013 even just to put out guidance about how it should be interpreted. In the months to August 2014, it changed again. Because more people are now starting to use the guidance, to raise questions and to test it with real-life examples, that is now a more active space. That is why I talked about the guidance evolving. The rhythm and intervals at which we can expect things in that regard are not defined.
So it could go on for ever. I know that it is not for ever, but it feels like it to me—it feels like it for members such as me, trying to get a school built in our constituency.
I can only restate what I have said.
I understand that.
We remain vigilant. We obviously all have the same shared endeavour.
I agree. I will ask you a better question. You made a very fair point about the AWPR. Has the Government taken legal advice about whether the issue of a ruling on the AWPR generally directly affects all the other projects in the pipeline?
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Sharon Fairweather can talk about the advice that has been taken on the AWPR.
I ask you not to use acronyms.
Sorry. It is the Aberdeen western peripheral route.
Sorry, convener. The old transport bit of me came out there. I apologise for that.
It is just to make it clear for the record.
We will both make sure.
We have taken considerable advice on the financial side around our assessment of the classification of the Aberdeen western peripheral route. I believe that we have taken some legal advice on how the ONS decision fits with Westminster and other bodies and how we apply the accounting. I am not sure that we are completely clear as to the legal basis of Eurostat, but the ONS makes the decision as to how the Government has to apply the accounting of the projects.
Would it be ridiculous to suggest that the schools programme could therefore continue? What is the risk if the Government continues with it and reaches financial close on all eight schools that Colin Beattie and I have referred to on the basis that you do not know whether the ruling on the AWPR will directly affect the rest of the capital projects programme? In other words, could the Government get on with it?
As well as addressing your point on that judgment, I will address your point on the legal aspect. Obviously, the Government’s statutory responsibility to Parliament is how we account for activity. We have an established method that requires the financial reporting manual to specify how we treat these types of contract. That method is not in question at all, and we do not need to seek legal advice about our statutory accounts.
There is another school of thought on the international financial reporting standards—I will try to avoid causing everyone’s eyes to glaze over at this point. However, there is a clear picture around that. Thankfully, our statutory obligations to Parliament and how we account are much more straightforward. This issue reads across to the administrative arrangements that are determined country by country—in this case, it is done by the UK Treasury—for how items are budgeted for. The issue is the budgeting.
Just to be absolutely clear, that does not have any cash impact at all—the flows of cash are not affected at all. It is about the nature of how activities are represented by the UK Treasury in the budgeting guidance. In fact, we have still to see budgeting guidance that takes into account ESA 10 in relation to the projects in question, for the reason that I have already rehearsed, which is that we are in the vanguard of the activity.
I take all that, and I think that it is very fair. However, if the problem is an accounting procedure, I think that quite a lot of us would think, “Solve it.” However, my final question is on how you are accounting to this committee. With regard to the schools that we have mentioned this morning, there is no note to this committee in the report—for example, in relation to the table in annex A, which includes reference to the Anderson high school project—that says all that you have just said.
What you have said about the capital projects is a very material issue for all the committee and there should be a note in the report to the committee about what is going on, which should be regularly updated. As the AWPR issue started in September, I really think that the onus is on the Scottish Government to keep the committee up to date with it. I would therefore like to have an assurance that that will happen in future in these reports. If there is any kind of major issue that is slowing down a project, we should know about it and it should be in the kind of table that is in annex A. In fact, the table is structured in such a way that it suggests that the Anderson high school project will start tomorrow; I drove past the place yesterday and I can tell you that it ain’t starting tomorrow, so the table is not accurate. I ask that you get that right in future.
We obviously want to make sure that the information is accurate. I am happy to commit to including in future reports the kind of information to which you have referred. As I mentioned in my answer to an earlier question, the IPQ that was put forward by the Deputy First Minister on 13 February is still very much the touchstone reference point on the issue. Parliament has that, but we can obviously make sure that if there is anything further like that, we continue to copy it into the Public Audit Committee as well.
Thank you.
I have two questions that I want to put to you. Like other members, I have a constituency interest. My first question is about Forfar academy. I note that it has not reached financial close, but you have already started construction through an advanced works agreement. Can you explain to me in a few sentences, using words of relatively few syllables, what that means?
My second question is about the V&A down the road in Dundee. We have heard many comments about that, mostly via the press. How has that project progressed? Clearly, the numbers have changed significantly and your view on that would be helpful.
I will ask Andrew Watson to deal with the issue of Forfar academy and the V&A. The V&A is a project that is led by others, but I know that Andrew has had some contact with it. He will seek to address both your questions as far as he can.
On the question about Forfar academy, the principle around the advanced works is that those involved in the project take as many steps as they can to get the site ready, so that, once we reach financial close, we can make progress as rapidly as possible. That might involve clearing the site, laying down some initial structure and so on, so that the project is match fit when we get to the point of financial close.
The dynamic for the V&A project is different from that for some of the other projects in the scope of the progress report. The Scottish Government is a key funder of the project, but it is not the procuring authority or a project partner in that sense. As the report notes, there has been an increase in the estimated cost for the project. Dundee City Council has put out a fair amount of information on the reasons for that. It has also commissioned John McClelland to produce a review of the situation. His remit covers three areas: the reasons for the increase in cost; whether further steps can be taken to ensure that the project sticks to budget and is delivered on time; and whether there are lessons to be learned about the wider governance and monitoring of capital projects. That is a welcome step.
A key issue is the fact that it is a novel project, with a novel design and there have been some changes to the specification already. That partly explains why there was not a large number of bidders for the contract. When competition for a tender is limited, it can have an impact on price. There has been an element of inflation in the cost estimates, too.
The Scottish Government is engaging closely with the council on the project. It is a key part of our priorities in the culture sector. Through the Scottish Futures Trust, we are working with the council on the growth accelerator model dimension of the funding package. That is in the context of a wider consideration of the Dundee waterfront and greater Dundee area in relation to the prospects for a GAM. Those discussions are going well. The SFT is leading those and we would expect a business case to come before the Scottish Government in due course.
Dundee is a part of the world that I know quite well, as I was a resident and a councillor there for some time.
Can you give us some clues as to when that independent report is expected to be published? Do you know?
I do not know. Dundee City Council would be better placed to answer that question. When the council initiated the review, it did not set a fixed deadline, in order to allow Mr McClelland the scope to take it where he needed to take it. However, there was the suggestion that because of the wide public interest in the project, the process would need to draw to a conclusion relatively quickly. I think that it will be a matter of months, but the council would be better placed to advise you of that.
Good morning, panel. My first question relates to the two Caledonian Maritime Assets Ltd ferries. The document that we have suggests that the procurement process will run through April and potentially into May. Can you clarify where we are with that process?
I ask Sharon Fairweather to answer that.
I am afraid that I cannot. I am just trying to remember. If you give me a few minutes, I will see whether I have information on that in my briefing pack. If so, I will come back to that; if not, we will follow it up.
Okay—thank you.
My second question is on the ESA 10 regulations and the changes last year. What was the genesis of those changes?
To set the context, ESA 10 is a statistical code that requires countries that come under the Eurostat umbrella to have consistency in the way in which they report particular information. That is done through the statistical arms. Actually, ultimately in the hierarchy, it nests in the United Nations—that is where it all starts. Particular geographic teams are then authorised to take the consistently derived transparent information that is used at national and international level as the basis of statistics to be taken forward. Please bear in mind that that is the explanation of a chartered accountant, rather than of the Government’s chief statistician, but I hope that the architecture is now at least a little more accessible to you.
As I say, those teams have the motivation to ensure that the information that is prepared can be used for comparisons across international boundaries. They will look at how gross domestic product figures are derived and constructed. They also look at things to do with the level of debt and how it can be measured with a statistical methodology. When we boil that down to Eurostat’s interest, particularly for countries that share the common currency of the euro, Eurostat is motivated to ensure that there is a consistent way of assessing the various elements that it takes into account in looking at the economic and financial health of individual countries. That is the very high-level architecture of the process.
If we think about what has been happening locally on strength of currencies, exposure to debt, the banking industry and the extent to which risks have been managed, we can see why further emphasis has come through from the UN and Eurostat on ensuring that there is still a consistent and defined way of measuring and communicating those various elements. Some of the motivation in Eurostat is to ensure that there are consistencies in how public measurement of certain parameters and private measurement of parameters are defined, and to try to mitigate any criticism that countries across the eurozone are putting certain things under different headings so as to show a different position of their financial health and wealth.
That is probably the most accessible way that I can describe what I think are some of the motivations on the matter. ESA 10 has origins in UN-defined requirements that predate it. There was a delay between the UN saying what it wanted to happen and that being captured in the 2010 ESA, which is being implemented and has been a requirement across Europe from September 2014. There is a huge long pipeline of activity. The Treasury uses that particular benchmark to consider how budgeting should take place. That is its choice—how any country chooses to budget on a particular thing is a local administrative choice.
That is the background to the matter.
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That is helpful, because a lot of your comments earlier were at a high level, and what you have just said provides further context for the discussion that we have had this morning, particularly with regard to schools.
Obviously, the change is EU-wide in that the EU has set out the regulations. Are you aware of similar potential delays to building projects arising across the EU? I do not want you to name individual projects, but I assume that this is occurring elsewhere.
We are aware that there is active dialogue with other countries about their schemes and where they sit. We have had an active pipeline in Scotland. During the difficult times that we have had, the Government has chosen to respond to some of the recession in a way that involves stimulating the economy through infrastructure investment. There will be parallels in Europe. Equally, there is a challenge in relation to what is happening with the Eurostat changes. It has its own particular line of sight and activity, which sometimes seems to contradict what Juncker is saying about the pipeline and the drive for further investment. Therefore, there will be lots of motivation for people to resolve these issues. We have them here in Scotland, but they will also exist across Europe. Juncker himself will have a keen interest in ensuring that they are resolved.
I am just trying to put this all together. Am I right in understanding that, at rock bottom, this is not about how much money you spend but about how much you put in the capital column and how much you put in the revenue column, and that we are delaying projects on the basis that we are not sure where we write the numbers in the cash book afterwards?
Before you answer, Ms Stafford, I appreciate that you are trying to be helpful, but it would be good if you could keep your answers as brief as possible. You can send additional information to the committee in writing.
We should follow up some of this in writing, but I can say that the key thing that is happening around ESA 10 concerns whether the projects are being run by an arrangement in the public sector or the private sector. That leads to detailed analyses of issues to do with the governance arrangements and the sharing of risk.
In answer to the question about the ferries, the tenders were due in at the end of March. I have seen nothing to indicate that that has not happened or that the progress is not on track. Obviously, it will take some time to evaluate those tenders. We can follow up our evidence today with more up-to-date information as the tendering process continues.
That would be helpful, thank you.
The report clarifies that private finance remains a significant part of the programme—I think that there are 30 capital projects where private finance continues. What is the difference between the new model and others, such as the private finance initiative or public-private partnerships?
The private finance initiative, PPP, NPD and so on are all variants of the same sort of model, which is about having consortia that can finance and build an asset and, often, maintain it when it is built. The variants that you have described are part of that same arrangement.
Can you confirm that the companies that would be involved in a PPP model would still be involved in the model that you have outlined? That is not a political question; I am asking whether, in your experience, there is a significant difference between the projects.
We have found that there has been active engagement with the new models. Some of that will be a result of the nature of the models and the timing—during a recession—of when investment was sought, when people who have wanted to invest have found it attractive to invest in Government programmes of activity—
I am not asking about who is engaging. We have the PPP model, which existed before, say, 2007, and we have the current model. What is the difference between them?
The main elements are to do with the level of profit and the extent to which previously there were no constraints in relation to how contracts were competed for. Under the NPD model, an explicit cap around elements of the profits is a more up-front part of the competition and procurement exercise. That ensures that the whole programme is delivered at better value for money for the public purse. Those are the main defining factors.
Are the companies that were involved in the PFI/PPP models involved in the NPD model?
Yes.
The same companies are involved in the new model.
They have not been deterred by the NPD model, and other companies have come into the market, too.
As I say, we have seen active competition in the vast majority of cases. With the NPD model and with the models that came before it, people see Scotland as a good place to invest in.
Companies that, prior to the new model’s introduction, enjoyed profits in PFI and PPP projects continue to make the same profits as a result of the NPD model.
Yes. There will be examples of refinancing exercises, which give an opportunity to renegotiate, wherever possible.
The more constrained profit environment under the newer models has not deterred investors that did business in Scotland previously, and it has attracted new investors in.
What is the advantage to Government of the current model over the previous model?
Value for money.
Can you give me an example?
Sharon Fairweather may have one.
We need to separate out the two parties that are involved. The funders—the financiers, the banks and the bond providers—will receive their return, as they always have done. The consortia of companies that are delivering the projects—the construction and maintenance companies and the special-purpose vehicles that run the projects—are bidding in the expectation of a certain profit. That was the case under the previous models and it is the case now. The profit is built into their bids, and it is transparent in the bid process.
Previously, with PFI, if excess savings were made on a contract or there were any other circumstances in which those at the SPV level could make more money, the companies kept the excess profit, particularly in the form of dividends towards the end of the project. The NPD model diverts dividends towards the end of the project into the public sector and back into the public purse.
I must ask what is pretty much a layman’s question. Are private companies still making money out of the public purse?
They still make a profit on the contracts that they are delivering.
Something may be written into the contract that means that some money is paid back to the Government, which is all very well, but the companies have not walked away saying, “There’s no money in this, because someone else is making money out of it.”
No. They make a market return on the contracts, but they are not allowed to make excess profits out of the contracts.
Alyson Stafford mentioned an “explicit cap”. What is the cap?
It depends on the specifics of the contract. I ask Sharon Fairweather to respond, as she has been dealing with the contracts.
There is no equity funding in the contracts, so no dividend funding comes out. The funding that goes in is on the basis of sub debt, bank debt and bond debt, which goes with a return rate that does not change throughout the contract’s life, irrespective how the contract does. Effectively, that is a form of cap, because the return on the investment is based on the coupon of the investment—
It is very helpful that you have given that evidence. The explicit cap is not a cap at the beginning. You make a very fair point about the end of the contract and companies not being able to make excess profits by literally walking away, not doing any maintenance and so on.
Yes. The contracts have substantial clauses to ensure that companies deliver the services that they are required to deliver at the level that they are required to deliver them. They take significant risk in delivering that, and are penalised if they do not deliver.
Depending on the shape of the contract—the contracts all vary between projects—there are opportunities for additional savings to be made. For example, under the Aberdeen contract, those excess surpluses, which is what we call them, come back to the public sector in the form of a reduced unitary charge.
That is very helpful.
I asked about this earlier, but you did not get a chance to answer. Can you give an example of a contrast between PPP and the current model? Is there a specific project that you can point to?
The early-stage PFI/PPP projects in Scotland did not come under the NPD model. The Royal infirmary of Edinburgh project was PFI/PPP as opposed NPD, I think.
It might be helpful if we use that as an example and give the committee some figures on it. The interesting point about the Royal infirmary project, which was a PFI project, relates to the site, which is to the south of Edinburgh. A new development—the replacement of the Royal hospital for sick children—is taking place on that site and will be an NPD project. In fact, the identified successful bidder for that NPD project is the company that has just completed the South Glasgow hospitals development, which was done under a traditional public sector model. Your point about companies expressing an interest in various types of models is very much a live one, and the new development that I have just described is a very good example of that.
We can give some richness back to the committee outwith the meeting by comparing the Royal infirmary with the Royal hospital for sick children—
Let me be clear about my question. We have the PFI/PPP model versus the current model; just give us one example of where there has been a massive success with the new model. I take it that we will not use the new model unless it saves the public purse substantial sums of money. That is the point that I am making. If there is some proof of that, that would be good evidence for the committee to build on.
I have a quick supplementary point. I want to reassure the committee that we are not being complacent about existing PFI projects. Where possible, we are looking at whether refinancing a project is an option; we are also looking to get efficiency gains out of current contractual positions. The Royal infirmary of Edinburgh has been refinanced, and, working with the Scottish Futures Trust, we are looking at delivering efficiencies from existing PFI projects.
Can I get some clarification on that? For the projects that you refer to, have additional contracts been attached to existing contracts? Have we signed an addition to a PFI/PPP contract?
We have not signed an addition, but, for example, for the two major PFI hospital projects in Lanarkshire at Hairmyres and Wishaw, we have just—
Would “extension” be the best—
We have extended the facilities management services there. Part of that extension was a reduction in cost of several hundred thousand pounds. There is also an extension in the range of services that are provided under that contract. Again, I am happy to provide further details.
You are saying that extensions to current PFI or PPP contracts have been signed. I know of one in my own constituency, some time ago.
The Lanarkshire example arose from a seven-year review that was part of the contract for the soft FM services, so it was not an extension—the tenure of the contract is still the same. However, the review was an opportunity to look at delivering increased value for money from the soft FM services. I am happy to provide further details.
I will take us back to the new Royal infirmary contract. What are the anticipated savings on the old PFI contract? I ask because I know that it came in for some serious criticisms over the years.
The refinancing, which took place eight years ago, released £31 million back into the public purse over the duration of the contract. Those were the savings that were realised from that particular angle.
I thank the witnesses for their time. I look forward to following things up in the correspondence exchange that we have committed to.
10:29 Meeting suspended.Next
Section 23 Report