Capital Investment Projects (Funding)
The next item of business is a debate on motion S3M-3822, in the name of Andrew Welsh, on behalf of the Finance Committee, on its inquiry into methods of funding capital investment projects.
I commend to Parliament the Finance Committee's report "Inquiry into methods of funding capital investment projects". The report is ambitious in scope, and rightly so. When private sector capital spending on projects for public bodies is added to the Government's 2009-10 capital spending budget of more than £3.5 billion, there is clearly a huge issue of financial accountability and ensuring the best possible value for money in providing new schools, hospitals, transport facilities and other projects for Scotland. With both the Scottish and United Kingdom Governments now bringing forward capital spending as an economic stimulus, achieving value for money in the way we manage that spending can ensure maximum impact on the economy and will benefit in-service delivery for our constituents.
Nothing ever stands still. Throughout the inquiry, the committee was aware that it was dealing with a moving target. Both the availability and the cost of private finance for public capital projects have altered dramatically, and to say that the global economic situation has changed significantly since the beginning of our inquiry seems to be a breathtaking understatement. Although the shifting economic and political background obviously influenced our discussions and the evidence that we heard, the committee's aim was to move beyond short-term market conditions and immediate political debates. Rather, we aimed to analyse some of the myths and presumptions that have developed about different methods of funding and to identify criteria that could and should be applied in the longer term to all methods of securing public capital projects.
Some recommendations will involve discussion with the UK Government. Clarity is required on the effect of the international financial reporting standards on the options that are available to public bodies to fund capital investment, and on the scope to extend to other public bodies a prudential borrowing regime that is similar to that which is available to local authorities. We welcome the Scottish Government's agreement to pursue those issues.
Where it is possible, joint working and joint funding of projects across different parts of the public sector should be facilitated by making funding practices and accounting and tax treatment consistent across different bodies. Irrespective of whether public or private finance is used, service models must respond flexibly to changing service needs. In long-term contracts, the flexibility to evolve without excessive cost, to meet the changing demands and expectations of service users, is essential.
Although comparing like with like is extremely complex, the committee heard evidence of weaknesses in the evaluation and comparison tools that are currently in use. The key recommendations are: that consistent and comparable information on whole-life costs should be prepared for all types of projects; that a robust and credible investment options appraisal framework be developed that is capable of producing that kind of comparable information in the future; and that improvements in the way in which risks are measured and accounted for be made on a consistent basis. I welcome the Scottish Government's assurance that the infrastructure investment group and the Scottish Futures Trust will examine those issues.
In order to be more widely applicable and to get the most competitive market response, refinancing provisions need further refinement, and issues to do with complexity in procurement need to be resolved in order to allow smaller Scottish companies to compete cost-effectively for the work. I urge the Scottish Government to consider those issues carefully.
For individual bodies and at national level, the discipline of robust asset management is essential for achieving value for money from capital assets. There is a real prize to be gained for public finances if a robust, co-ordinated and systematic approach to investment, maintenance and disposal of assets is achieved.
The public sector must provide consistent and transparent predictability in the flow of capital projects to the market, ensuring optimum delivery and value for money through good competition, and by sustaining workload in the financial, advisory, design and construction sectors in Scotland. Some improvement in public sector co-ordination and planning is required to sustain the links in the indigenous supply chain for the construction sector, and the committee urges the Scottish Government to continue to develop that in its infrastructure investment plan.
We welcome the Scottish Government's response that a key aim of the Scottish Futures Trust is to be a centre of advice and expertise in bringing together public sector skills. The challenge is to centralise skills without creating a gap in local accountability or a disconnection between project management and the people who will deliver and manage the service. We look to the Government to give that particular problem careful thought and action, so that the claimed advantages—lowest-cost finance, effective assessment and management of risk, rigorous evaluation of project proposals, discipline to deliver on time and on budget, and robust project and contract management of different models—can be secured for all projects. The committee believes that with the right skills, those advantages can be harnessed by the public sector in procuring any type of project—indeed, it is vital that it happens.
We believe that the Finance Committee has produced a sound, balanced and noteworthy report. Although there were differences of opinion among committee members on certain matters, the vast majority of our recommendations were agreed unanimously. The report offers some positive and sensible suggestions, which we hope the Government will take on board in the constructive manner in which they were produced.
On behalf of the committee, I thank all the witnesses; the committee's advisers, Nathan Goode and Marianne Burgoyne from Grant Thornton; the research staff in the Scottish Parliament information centre; and the committee clerks for their hard work in producing the report and their guidance throughout the inquiry. I also thank the committee members for grappling with a huge amount of information and covering the big picture while considering issues in detail to make what we believe are useful recommendations for improvement. I commend the report to Parliament.
I move,
That the Parliament notes the conclusions and recommendations contained in the Finance Committee’s 8th Report, 2008 (Session 3):
Inquiry into methods of funding capital investment projects (SP Paper 182).
I thank the Finance Committee for its report, and I thank the committee's convener for his remarks in introducing the debate. The Government has, of course, formally responded to the report.
The Government agrees that the method of funding capital investment projects is a crucial issue, particularly in the difficult economic times that we face. It is vital that we maximise the outputs that we secure from each pound that is invested. The criterion that should determine the funding method is, quite simply, that it should be the one that delivers the best value for money. The committee questions whether the public sector has the skills capacity to deal with the massive programme that is planned, and the report recommends the recycling of knowledge so that repeated development costs are minimised. Mr Welsh made that point in his opening remarks. The Government has established the Scottish Futures Trust precisely to meet those requirements and to deliver greater overall efficiency in infrastructure investment in the years to come.
In his statement on the Scottish Futures Trust, the Cabinet Secretary for Finance and Sustainable Growth said that it would
"release up to £150 million each year for increased investment in Scotland's infrastructure."—[Official Report, 10 September 2008; c 10600.]
In which financial year will that start?
The Government will set out in partnership with the Scottish Futures Trust its operating plan and the assumptions that underpin the activities that it will generate. Obviously, that is a material factor to the composition of that business plan.
The SFT is a body that has real commercial experience. Its aim is to promote and disseminate innovation, good practice and experience and to rigorously pursue value for money throughout the public sector. It is taking forward a range of projects including, as I previously announced to the Parliament, development of the hub projects in the north-east and the south-east and the next stage in the Government's schools investment programme.
I turn to other detailed points in the report. The Government shares the committee's disappointment that we have still not had clarification from the Treasury on the IFRS budgeting rules, even though officials have been expressing concern about that to their counterparts at the Treasury since January 2008. The rules particularly affect the many private finance initiative projects that, under previous accounting rules, were or would have been on contract signature and off balance sheet. Until yesterday, the balance sheet position was assessed on the basis of risk allocation between the contracting parties, but under IFRS the assessment is based on control of the facilities. That change means that, if the Treasury does not agree to provide budget cover for PFI projects that become operational from today onwards, the Scottish Government will need to find room in its capital expenditure limit for their capital costs.
If the cabinet secretary's interpretation is correct, will the same not apply to any private finance that is secured by the Scottish Futures Trust? In any case, is it not more likely that the projects will count on balance sheet but not against the departmental expenditure limit capital budget?
I am not sure on what basis Mr Chisholm founds his optimism that projects will not count against the DEL capital limit. My understanding of IFRS is that they will count against that limit. As we all know —including, I am sure, Mr Chisholm, given his experience as a minister—the DEL capital limit is a particularly restrictive constraint on what the Government can do.
The Government is wrestling with the ever-mounting costs of the PFI schemes that we inherited from the previous Administration, and which are eating into our expenditure capacity. When the Government came to power, PFI repayments totalled £520 million a year: they will reach £900 million a year by the end of the current session of Parliament, and a peak of £1.2 billion—
Will the cabinet secretary take an intervention?
I am short of time to cover the ground that I need to cover.
At the peak, the annual payment will be £1.2 billion a year. Over the lifetime of the contracts, they will cost the exchequer of Scotland a massive £30 billion. That is the position at a time when the constraints on public expenditure are becoming ever clearer and we realise that the growth in public spending that we have had since 1999—growth of 6 per cent above inflation, in real terms—will not be the profile of expenditure in the years to come. If there was ever an illustration of the age of financial irresponsibility, it is the commitments that were entered into, which will put a further strain on public spending in the future. The reality is that they will put great strains on the Government's revenue budget in the years to come.
In paragraphs 264 to 270, the committee recommends that we ensure a steady flow of capital projects and make the construction industry aware of the opportunities. We have published our infrastructure investment plan, which sets out our three to 10-year horizons for public expenditure. All major projects are advertised in the "Official Journal of the European Union" and appear on the public contracts Scotland website.
A steady flow of projects is particularly desirable in the present economic downturn. For that very reason, last August, the Government brought forward planned expenditure on affordable housing and used the budget bill to set out a substantial £230 million programme of accelerated infrastructure investment in 2009-10. That, and an additional £60 million for a town centre regeneration fund, will ensure that a massive investment programme will proceed in the new financial year, keeping the Scottish economy moving by supporting nearly 5,000 jobs.
Of course, the Government wants to do more, and we are certainly interested in the debate that has developed in Parliament about its acquiring borrowing powers to continue to ensure long-term investment. The Government's full infrastructure investment programme is supporting projects such as the completion of the M74 and the M80 Stepps to Haggs scheme, and we have also made commitments on the Forth replacement crossing and the southern general hospital in Glasgow. We will proceed with those commitments to invest in Scotland's infrastructure.
I, too, congratulate the Finance Committee on producing a very useful report.
In my view, the Scottish Futures Trust will, along with the local income tax, go down as an act of cold-blooded political treachery. In 2006, as they prepared for the Scottish general election campaign, the nationalists knew that the public were concerned about two issues: the council tax and public-private partnerships. From that point on, they cynically set out to mislead the Scottish public that they could deliver an alternative. As we know, that has not been the case for the local income tax, plans for which have fallen into disarray. As far as the Scottish Futures Trust is concerned, they have sought to hide their embarrassment with promise after promise; indeed, we got another promise this afternoon that it would be delivered.
Of course, the SNP thought that, by adding Sir Angus Grossart to the mix, it could make a silk purse out of this pig's ear. However, he has been set a simply impossible task. As others have pointed out, we knew last September that the SFT was an expensive and ineffective shambles. We thought that Sir Angus Grossart might be able to fix it; we know now that he cannot. Since its establishment, the trust has failed to commission a single new school and funding for capital investment projects has fallen by £1 billion at the cost of 20,000 jobs. What has the board been doing? Indeed, why do we have the Scottish Futures Trust? What has the cost been to the Scottish economy and to jobs?
I hope that, on April fool's day, the cabinet secretary might have the courtesy to admit that he has been fooling the Scottish public for more than two years now. Let us not forget that in the manifesto on which Mr Swinney stood at the election it says that the
"SNP government … will introduce a not-for-profit … Futures Trust".
Do we have such a trust? Do the working documents that have been made available specify that the trust is "not-for-profit"? Will the cabinet secretary state clearly whether the model that he is developing will be "not-for-profit"—yes or no?
Moreover, the manifesto says:
"it will be open to local authorities and other public bodies to choose between PFI/PPP and"
the Scottish Futures Trust
"for planned and future projects."
Is that choice still available?
There is a very important reason for asking these questions. I believe that the SNP has been elected on a false prospectus in this regard. The Scottish Futures Trust will not be not-for-profit; indeed, as the cabinet secretary has admitted on a number of other occasions, it will be for profit. This is simply an attempt by the nationalists to reclaim the non-profit-distributing model as a not-for-profit model. As we all know, that is not true. The cabinet secretary has said at committee—
If Mr Kerr's basic premise that a non-profit trust is essentially the same model as PPP is right, do we not have to level at Labour and SNP members alike the same criticism—that both desire to max out the nation's credit card to pay for infrastructure instead of cracking on with empowering the Scottish Government to pursue conventional funding practices?
As far as empowering the public purse is concerned, if the member has paid any attention, he will know that the traditional capital budgets that are being made available to the Scottish Government have been growing.
Mr Swinney said that this is about value for money. However, the Scottish Government has explicitly prohibited public sector organisations from using PPP models or, indeed, being able to compare PPP and Scottish Futures Trust models. That is simply a disincentive as far as the public purse is concerned. Mr Swinney cannot argue with Mark Hellowell, Unison, Allyson Pollock, the Cuthberts and others, who—to save the cabinet secretary any embarrassment—all accept and understand that the model being pursued is the non-profit-distributing model.
Of course, all the research from the Institute for Public Policy Research and the others whom I mentioned indicates that the NPD model is more expensive. At the heart of the SNP's approach is its incompetence, which is shown in the lack of delivery and in its dogma. That incompetence and dogma are ensuring that Scottish construction workers are losing their jobs, our children are not being educated and our patients are not being treated within the public infrastructure that should exist.
I, too, welcome the Finance Committee's report and pay tribute to that committee's convener, clerks and all its members for producing it.
The report is particularly welcome because it is on a topic that thus far has been dealt with by soundbites. The process has allowed the committee to take written and oral evidence, delve into the issues and flush out some of the myths about the Scottish Futures Trust and the Government's views on infrastructure.
One of the main issues that the committee considered was the Scottish Government wanting the NPD model to be the default option. Many members of the committee and many in industry believe that a range of funding methods ought to be available through PFI/PPP, the Scottish Futures Trust and conventional funding, and that the right funding model should be put forward for particular projects. That was the committee's view by decision and it has been the industry and the Scottish Conservatives' view for quite a time. We need to get rid of ideology in the debate and focus on best value over the lifetime of the project for taxpayers and service users.
The SNP's manifesto made it clear that public bodies and councils would have the choice of going for a PPP, PFI or Scottish Futures Trust approach. The theory was that the Scottish Futures Trust approach would be so good that every public body would want to go for it, but the manifesto was clear: it left the options open. It is therefore wrong that the Government has closed the door on PFI and PPP projects.
The committee struggled to find any real differences between PFI/PPP and what the Government wants to do. Once again, Mr Swinney talked about the amount of money that is coming out of the Scottish departmental expenditure limit budget each year that is made up of the unitary charges for all the PPP projects out there—I think that the figure is around 2.5 per cent at the moment—but he does not say, and the Government has not realised that NPD projects also have a unitary charge. Every single NPD project will have pretty much the same unitary charge as a PPP/PFI project. If that is the issue, surely the Scottish Government's default preferred option will create the same problems. Of course, we have also heard that the term "non-profit-distributing" is something of a misnomer because—SNP back benchers may wish to close their ears at this point—there is a profit to the private sector, but it is simply a capped profit as opposed to an uncapped profit. In many cases, the profits will not be dissimilar.
The committee's report provided a bit of balance by fairly criticising some of the downsides of PPP/PFI, but it also mentioned some of its benefits and some areas in which it has been successful. Some 80 per cent of PPP/PFI projects have been on time and on budget. They have provided incentives to the construction process, and discipline, because, at the end of the day, the contractor will be paid only when the product and service are delivered. Audit Scotland said that such projects have been successful in many areas in respect of the project management, risk transfer and financial control that they have involved.
Many unanswered questions remain about the Scottish Futures Trust. We have again heard that there is still not an operating plan. This must be the only time in history when someone has predicted £150 million-worth of savings before they have any kind of operating plan. Surely something must have come from a Jim Mather brainstorming session alone.
We firmly believe that a range of options should be available, as per the SNP manifesto, and that the test must be the best value over the lifetime of the project to taxpayers and service users.
I welcome the report and endorse all the comments that the convener of the Finance Committee made.
When the Finance Committee was publishing its report, the Government was publishing statistics on construction sector jobs worth over £2 million in each of the Government regions in 2007-08. Those figures are striking for Britain as a whole: they fell by over 10 per cent from £25 billion to £22 billion. In Scotland in 2007-08—the period in which the Finance Committee began its consideration and exactly the time at which the fiasco of the Scottish Futures Trust started—the equivalent figures were £1.9 billion in 2007 and £856 million in 2008. That is a 65 per cent fall in new orders for construction jobs worth over £2 million. That is the context for this afternoon's debate. Rather than debate purely the Finance Committee's considerations, we need further debates. Those figures are disastrous for the Scottish economy and bring into stark relief the paralysis at the heart of construction in Scotland as a result of the fiasco of the Scottish Futures Trust.
The Scottish Futures Trust was designed, as we are told, not simply to be an advisory body, not simply to be a centre of procurement expertise, but to do much more: it was promised to fund, build and deliver. We can look back at the business case to see how effective it has been. The business case said that it would
"Establish programme support arrangements for residual waste investment".
That is not happening. It was also to set up the development and delivery of local authority bond issues, but that is not happening. It was to
"Undertake further detailed development of innovative asset provision models"
in the appropriate sector and that is not happening. As a result of a freedom of information request that I made, it became clear that none of that was happening. The SFT was to pilot a funding and aggregation model for the housing and further education sectors. The Scottish Government has had no contact with the further education sector through the Scottish Futures Trust for the aggregation of funding of new investment.
We have heard very little about an infrastructure board for Scotland, which was promised. All those promises were made and none of them has been delivered, which is why constituents of mine would have been slightly concerned—and no doubt slightly amused—to hear the cabinet secretary on "Good Morning Scotland" this morning. When he was asked, "Hand on heart, cabinet secretary, has the Scottish Futures Trust turned out to be everything that you wanted it to be?" John Swinney replied, "Of course it has." With no schools? No waste management projects?
When it comes to infrastructure, the Borders railway in my constituency has been delayed by more than two years. Dogma has been put in the way of delivering an infrastructure programme into the heart of the rural Borders. The Government seems to be in discussions with the European Investment Bank to borrow funding to deliver the railway because it recognises that its non-tested, design-built, maintain-profits finance scheme, as part of a holding model that has never been attempted before, will simply not be successful.
When the Scottish Futures Trust was promised, the cabinet secretary said that the SFT
"will provide opportunities for swifter project planning and delivery".—[Official Report, 10 September 2008; c 10601.]
If the Government now has to rely on the European Investment Bank to provide straight capital support for the railway, the 65 per cent fall in construction orders will get even worse and it will be a disaster for the Scottish economy.
I welcome the Finance Committee's report on methods of capital investment, which is another nail in the coffin of PFI. The committee report highlights exactly why we need a robust, fully scrutinised and carefully considered model of capital investment for Scotland.
Future generations will be utterly shocked by the squandering of public funds and naked profiteering that has gone on in the private sector at the taxpayer's expense. Many will find it inconceivable that such contracts were merely the result of blunder and flawed systems. Unfortunately, however, that is the sad truth of PFI.
In Dundee, the PFI contract for parking at Ninewells hospital typifies all that is bad about the PFI system. Although parking is free at most hospitals throughout Scotland, Ninewells, Edinburgh royal infirmary and Glasgow royal infirmary are stuck with PFI contracts that would be very expensive to buy out.
I am grateful to the member for giving way; I know that he does not have much time. Is he as shocked as I was to hear, through my FOI request, that the business model that the Government is proposing for the Borders railway includes charges right along the route for all the aspects of PFI projects that he has mentioned—charges for advertising, parking and access?
I think that most people will accept that things have to be paid for. Whether they are paid for in the public sector or the private sector, there are costs, but the problems with PFI are many and extensive. The excessive costs of the PFI system, which we have heard about, will absolutely shock the public.
There might be members in the chamber who are partly responsible for the PFI contract for parking at Ninewells. The contract is so badly written that it appears that there is no clause to allow a buy-out, which leaves NHS Tayside at the absolute mercy of VINCI Park, whose priority is its shareholders and its profits.
The parallels with the banking crisis are uncanny. A combination of greed, incompetence and denial has left us in a situation where the Scottish Government and local authorities will have to find £700 million to pay debts to private firms for PFI contracts this year. More than £1 billion a year is due to be paid out by 2017 to finance new Labour's credit card spending.
Today—April fool's day—Gordon Brown has made a fool of the Scottish taxpayer. Today, new Labour's folly is on the balance sheet for the first time, in accordance with the new international financial reporting standards, which, at a stroke, add at least £200 billion to our national debt, and for what? There is no value for money, as we are often paying twice the capital cost of projects. There is no transfer of risks, as only the taxpayer ever loses money—it is never the private company that loses. Even the argument that the money stays off balance sheet has now gone.
It is a pity that today's debate has been shortened, although I appreciate fully that ministerial statements are important and necessary. I could go on at length about the PFI disasters. However, the evidence is all there, no matter how hard new Labour tries to ignore it. The previous Administration's record is there for all to see, and it is utterly shocking.
In stark contrast, the SNP is committed to ensuring the best value for the Scottish taxpayer, rather than taking the build now, pay double later approach of the boom-and-bust parties. With the NPD model and increased flexibility for our local authority partners, this Government has been delivering, and it will continue to deliver, with £35 billion of infrastructure investment over the next decade. The Scottish Futures Trust will ensure that future generations of Scots can benefit from that investment without being saddled with credit card debts.
As a member of the Finance Committee I welcome the opportunity to take part in the debate. There is no doubt that the world has changed since the committee started work on its inquiry. We are now in the throes of an international recession.
The report focuses on the importance of capital infrastructure in promoting economic growth. There is no doubt that if we build modern schools in which our children can learn, our children will be skilled up in order to take advantage of the 21st century economy. If we invest in transport projects, we will improve connectivity and promote economic growth. If we invest in housing, we can take construction workers off the dole and give homes to the homeless.
There are a lot of issues to cover, but I have only four minutes in which to do so. I will pick out a few highlights. I will start with some comments on the non-profit-distributing model. Back in 2007, when the SNP was drawing up its manifesto—when, it seemed to me, it was in fairyland—it told the voters that it was going to abolish PPP and replace it with a low-interest scheme that would develop public infrastructure projects throughout the country. The reality is that, just because the non-profit-distributing scheme includes the words "non-profit", that does not mean that there are no profits. There are profits, and they are generally similar in an NPD scheme and in a PPP scheme, except that under an NPD scheme, profits are capped, which prohibits some investors from entering the market. In addition, the Scottish Government's default option is NPD, which will put investors off coming forward. That limits competition from bids, so taxpayers do not obtain value for money. The NPD option is not value for money.
The report discusses options appraisals. Full options appraisals that cover all funding methods should be undertaken. That would allow us to explore what achieves the best value for the taxpayer. I have no doubt that that would introduce the option of PPP. KPMG told the committee that PPP finance rates were 0.6 per cent greater than Public Works Loan Board rates. There is no doubt that PPP provides certainty, delivers 80 per cent of projects on time, as Gavin Brown said, and minimises risks.
The SNP has different messages for different audiences. I have no doubt that Joe FitzPatrick's speech would go down well at the SNP conference but, last week, Alex Salmond was at Forth Valley hospital to open a PPP facility. All over the country, SNP ministers are ready with their hard hats and shiny trowels for topping-out ceremonies at PPP facilities.
The clocks went forward at the weekend, but the SNP is stuck in reverse. It is time to wake up and build the infrastructure that is necessary for Scotland in the 21st century.
I joined the Finance Committee only lately, so I did not have the pleasure of listening to the evidence, but I did have the pleasure of reading the report, which was the Parliament's first true scrutiny of the Government's approach to capital investment. The inquiry was worth while. The Scottish Government has engaged in the process—that is evident from its detailed responses to the committee's recommendations.
The inquiry represented the first real engagement on the issue between the Parliament and the Government. Of course, the previous Administration attempted to convince us and the public that analysis had been undertaken to ensure that Scotland obtained the best value for money when procuring major public projects, but that was not the case.
In June 2003, the then First Minister formally announced the Fraser inquiry—which he had trailed before the 2003 election, of course—into the Holyrood project's management. He said on the record that that investigation's purpose was to produce not only a clear public record of events in that project, but a set of recommendations for future large-scale public construction projects. The recommendations were not produced—the then Scottish Executive conveniently forgot that commitment.
In 2002, the Finance Committee undertook an inquiry into PFI. Despite the evidence that it took, no detailed analysis was made of the work of the principal witness—the much-respected Professor Allyson Pollock—as the then responsible minister, Mr Andy Kerr, admitted in a parliamentary answer in 2004.
Will the member give way on that point?
No—oh well, I will give way briefly on that point.
The member quotes Allyson Pollock, who compares the Scottish Futures Trust to PPP. What is the member's reaction to the Chartered Institute of Public Finance and Accountancy's comment that the Scottish Futures Trust will cost more?
Mr Andy Kerr has always been very good at selecting little soundbites, but that will not wash this time. He should work with the Government to consider the best future for Scotland.
The facts about PFI speak for themselves. In January 2006, the Labour-Lib Dem Administration bought out the contract for Inverness airport for £27.5 million, although the airport cost a private company only £9.6 million to build. Still Labour defended PFI. The contract for West Lothian College had to be bought out at a cost of £20 million, because 35 per cent of the college's expenditure was on property costs and an average of only 9 per cent was on further education. The companies behind the deal to build Hairmyres hospital—that Labour flagship project—gained around £145 million from an initial investment of just £8.4 million. Despite all those examples, Labour continues to defend PFI. Indeed, its refusal to admit that PFI was not a good deal for the taxpayer is typical of new Labour. Also typical is its attack on the Scottish Futures Trust. In terms of PFI, the Labour Party cannot defend the indefensible. It therefore goes on the attack with no consideration of constructive engagement for the benefit of all.
PFI has never been worthy of defence. It is no more than a cynical exercise that has allowed Governments of the day to keep capital projects off balance sheet. We have known for some years now that the international financial reporting standards would apply. We also knew the effect that the IFRS would have on accounting for such projects. Despite that, the Labour Party carried on regardless: it continued to build; it continued to defend the indefensible.
PFI is a child of the age of irresponsibility—terrible irresponsibility. It gave Labour a perfect way of taking credit for building without having to pay for it. And that from a generation of Labour politicians who received free education and the benefit of schools and hospitals that were built within the public sector. How selfish Labour is to disregard in such a cavalier fashion the needs of those who come after.
You should finish now, Ms Fabiani.
Labour's obsession with PFI has mortgaged Scotland's future. It should work with us to make it better.
I begin by pointing out the most obvious contradiction in Linda Fabiani's speech. There was an earlier inquiry into capital procurement: it took place in 2001-02, at the time at which I became convener of the Finance Committee, a position that Mr Welsh now holds.
During the inquiry, members looked at PFI, PPP, traditional forms of procurement and procurement alternatives. The recommendation, which all members of the committee accepted, was that we should look at which procurement method offered the best value for money. We agreed that we should be open minded on the issue. We need only contrast that with the fact that, on 25 November 2008, the current Finance Committee divided on the proposition
"that all methods of finance should be considered equally on their merits."
Five members voted in favour of the proposition, but three members—all SNP members—voted against. Members must not close their minds to the alternatives. The verdict of the Finance Committee in its report is this:
"The Committee's view is that there is insufficient information to judge whether the SFT will be a mechanism for delivering improved value for money."
The SNP Government is putting all its eggs into one basket and yet it cannot demonstrate that that will provide any improvement in terms of value for money.
The Finance Committee report led to significant improvement in the way in which PFI projects are taken forward. A number of failures and problems are associated with PFI and many were rectified as a result. Many PFI mechanisms now involve better co-ordination and integration. They are the self-same things that Mr Swinney now trumpets as being associated with the SFT. He cannot have it both ways; he cannot point to the worst aspects of PPP—some bad projects were brought forward—and ignore the successes.
In the previous debate on the Scottish Futures Trust I said that, when the SFT was announced in the SNP manifesto, it was called a "fund" and then, when Mr Swinney entered Government, the SFT became an "alternative funding mechanism". Thereafter, when ministers were unable to find any credible support for the SFT, either from the construction or financial services industries or to explain to anyone how the SFT might work differently from PFI, Mr Swinney turned the SFT into an "advisory board", albeit one that—as we have seen—neither meets very often nor transacts very much business. Of course, the reality is that the SFT is now a very expensive face-saving vehicle.
In describing the SFT, Mr Mather told the Economy, Energy and Tourism Committee that
"Absolutely stellar people are involved in it",—[Official Report, Economy, Energy and Tourism Committee, 5 November 2008; c 1231.]
but I am afraid that Mr Mather and Mr Swinney have not been able to sell this particular pup to the Scottish business community, which is united in its condemnation not just of the flawed concept of the SFT but of the damage that has been done to the construction industry, which has experienced an unprecedented interruption to the flow of projects as a result of the abandonment of PFI with nothing put in its place. The party that claims to put Scotland's interests first has let Scotland down.
Members might recall the "Newsnight Scotland" item featuring Bone Steel, a construction firm based near Motherwell that specialises in steel fabrication for new schools, hospitals and other public buildings.
The member should wind up now.
The managing director explained how new projects had dried up and the company was looking for new work down south. That is the consequence of Mr Swinney's actions, and he should change his approach.
We come to winding-up speeches. Members will need to stick to their time limits.
I acknowledge the work that has been done by Andrew Welsh, his committee, the clerks, the back-up team and all the people who gave evidence. It is a complicated subject and, although I am not a member of the Finance Committee, I know enough about local government and Scottish Government finance to realise what a huge job of work has been done.
The argument has crystallised fairly quickly down to SFT or not SFT. John Swinney mentioned early in his speech that he hopes that it will deliver the next stage in the schools investment programme. Given what I have said in the chamber in previous months, that strikes a chord with me.
Gavin Brown displayed what was, from a Liberal Democrat point of view, a worrying knowledge of finance and made a very sound speech. He made the point that NPD was not that far away from PPP in terms of costs—I would not disagree with a word of that. He also pointed out, as did Des McNulty, that we are looking for a choice in funding mechanisms. Jeremy Purvis gave us the reason why we should have that choice. Whatever one might say about PPP, and whether we like it or not, the fact that orders have dropped from £1.9 billion to £856 million—a 65 per cent fall—speaks for itself. That gives us what Jeremy Purvis termed a
"paralysis at the heart of construction".
On Linda Fabiani's speech, I merely say that I wish that she would not raise old ghosts, which simply alarm me—that is, the Fraser inquiry.
I am a kindly and well-meaning fellow, and I would of course give the SFT the benefit of the doubt in the hope that ministers will beaver away on it so that we get something that works. I am beginning to think that I might have rather a long wait on my hands but, as I am of a kindly disposition, I will go along with it. Having said that, we do need a choice—if we are not to continue to fall into the abyss that Jeremy Purvis has described, with the collapse from £1.9 billion to £856 million, we will have to spend the money on projects in some way.
No speech from me would be complete without a mention of Wick high school in my constituency. Like it or loathe it, PPP delivered a brand-new Dingwall academy, which is the envy of the length and breadth of the Highlands, and my constituents wish that they had something similar in Wick. To be helpful to the cabinet secretary, I believe that other mechanisms could be considered—or rather, other approaches that would help the cabinet secretary out of the impasse that he has reached. Capital from current revenue was a method used by local authorities in the past as a way of saving and amassing capital sums over a number of years—it can be used year on year.
The 32 Scottish local authorities hold considerable land banks. In realising land that is held on one account but used to finance another account, many capital projects can be achieved within a council's own financing. For example, Highland Council might be desirous, I hope, of building a new high school in Wick. It will hold land on other accounts—perhaps social work and transport—that could be sold to an incoming supermarket or for a housing development or whatever. I used the mechanism myself when I was a councillor, and it can release capital funding. That does not affect the balance sheet, PPP projects or anything, but it is internal to the council and can enable cherished projects to proceed.
In my constituency, we do not necessarily want a new Wick high school built on the present location; people just want a new school. People ask me, "Where is the new school?", and in the streets of Wick and in Caithness people do not mind if it is PFI, PPP or the Scottish Futures Trust—they just want that school. That is the sort of issue that lies before us. It is about choice and carrying on with the capital programme. Patient and kindly as I am, I fear that we are going precisely nowhere with the Scottish Futures Trust.
I thank the Finance Committee's members and clerking team for their work on the report, which has presented an opportunity to shine a light into the darker recesses of capital financing in Scotland. Those recesses become particularly dark when we compare the work that was done in the past to finance public projects with work that has been done more recently and with rather less success.
I understand why the Labour Party and the Liberal Democrats get annoyed when Scottish National Party members turn up to open facilities that were begun under the PPP model when Labour and the Liberals were in government. That would annoy me too, but the SNP Government and councils throughout Scotland are still paying for those projects, so perhaps SNP members are entitled to a glass of champagne and a photograph in the local paper.
The truth is that we need to find ways of financing projects in Scotland. We heard from members about problems in various areas and, like the previous speaker, I will not pass up the opportunity to mention my area, Aberdeenshire, where there is a problem with school building. Aberdeenshire Council has managed to find funds for the replacement of two secondary schools through other funding methods, but there remains an enormous burden on the council as to how it will find funds to replace secondary schools at Laurencekirk and Kemnay and the large number of primary schools that were classed D in the most recent round of inspections, which means that they are in the worst physical condition. Indeed, half the D-classed schools in Scotland are in Aberdeenshire, which will place an enormous burden on the council in future.
The debate has covered a number of points. Gavin Brown took the opportunity to point out that Conservatives have never had a particular preferred method of funding projects and have always wanted a range of options. Perhaps for the first time, I heard Labour and Liberal Democrat members express a similar view, although they did not go as far as to say that the Scottish Futures Trust might be an acceptable method.
We must consider the SFT more closely. When the Government came to power, it took the view that there might be better ways of funding capital projects. It has been looking for better approaches for two years, but so far it has not come up with an alternative method.
Will the member give way?
I am sorry. I am about to finish.
The hiatus in the commissioning of public projects, large and small, is beginning to have a significant impact on the construction industry in Scotland at a time when, as a result of failures in the wider economy, the industry is suffering from fewer orders than in recent years. We need to find ways of overcoming the problem, and Conservatives are prepared to admit that the SFT might lead us in that direction. However, we need a Government that puts ideology on the back burner.
The problem is that money for public projects is not being delivered. The Government must make progress quickly; if it does not, it will simply store up bills for future Governments and local authorities. We need results now.
Mr Johnstone was right to say that we have been waiting and waiting for the Scottish Futures Trust to develop. I have also been waiting to hear from the cabinet secretary whether the SFT will be not for profit and whether local authorities and public bodies will have a choice of delivery vehicle. In written answers to parliamentary question after parliamentary question that I have asked, the cabinet secretary has said that local authorities and public bodies will have a choice, as it said in the SNP manifesto. However, in relation to a bid from Moray Council, the council's PPP information memorandum says:
"The project will be delivered by an NPD model. This is a requirement of Scottish Government Support for the project."
Therefore, the council will not have a choice. In essence, the absence of choice was the point of the Finance Committee's report.
I share the concerns of Canmore Partnership, which said:
"the Scottish Government has explicitly prohibited bidders from offering PFI alternatives to NPD bids, regardless of whether they offered better Value for Money. This leads us to conclude that reducing private sector profit appears to be a more important policy objective than reducing the cost of infrastructure to the public sector."
SNP members continue to berate PPP schemes. However, it is not Labour voices that will take up the argument with the SNP, but its own voices. Jim and Margaret Cuthbert, who are often the arch-critics of PPP, have questioned whether the NPD model offers value for money. It is not just the Cuthberts who doubt that model: as we have heard, Allyson Pollock also criticises the Scottish Futures Trust. The quotation from CIPFA is interesting, so I repeat for Mr FitzPatrick that CIPFA states that the Scottish Futures Trust will cost more. The Chartered Institute of Housing in Scotland has said that no explanation has been given in the consultation of how and why the costs would be lower.
Far from producing a cheaper model, we have a combination of incompetence, dogma and the SNP trying to save political face. The SNP is introducing a model that is clearly not fit for the purposes that were set out in its manifesto and, more important, for the purposes of construction workers throughout Scotland. Let me remind those of the left-wing anti-private sector persuasion on the SNP back benches what Unison had to say about the Scottish Futures Trust:
"UNISON had earlier described the SFT proposals as PFI-Lite, but they are increasingly looking like full blown PFI/PPP, with attempts to mask this based on semantic debates over terminology."
That is the model that Mr FitzPatrick's Government is developing.
Then there is Mark Hellowell, who is often quoted by the cabinet secretary and others in the SNP to attack the PPP structure. He states that the internal rate of return from the Argyll and Bute non-profit distributing scheme, which was introduced by a Labour-led administration to test the model, is
"about the norm for the mainstream PFI market".
Let us not forget the Institute for Public Policy Research, which has said that the non-profit-distributing model would generate more profits, rather than fewer, and could be worse value for the Government.
Recently in Holyrood Magazine, Mark Hellowell said about the Scottish Futures Trust:
"It is a relatively minor variance on PFI."
He went on to say:
"There is some confusion, I think, among ministers".
I agree. In my view, he hit the nail on the head when he said of the SNP:
"It depends on who the audience is. If they are talking to their core support, PFI is evil and we need to get rid of it. If they are talking to the industry, it's business as usual."
Those are not the words of a Labour politician or a Labour supporter, but the words of someone whom the SNP frequently refers to in criticising our model of funding public infrastructure.
I do not in any way wish to alienate Jamie Stone, as it is never my desire to do so, but he said that he is patient and kindly, and I gently observe that he must have been patient and kindly while waiting for the previous Administration to get round to doing something about Wick high school in the eight years in which it had an opportunity to do so. He was an enthusiastic supporter of that Administration.
That is going too far.
Perhaps I accuse Mr Stone of being something that he was not. I make the point simply to articulate that we have a significant backlog of infrastructure commitments, which the Government aims to address as quickly as possible, but that must be done in a sustainable fashion in relation to the available resources.
Mr Kerr and Mr Purvis talked about an apparent fall-off in construction activity. The latest statistics from the Office for National Statistics, which were issued on 9 March, show that over the four quarters of 2008 the value of construction activity in Scotland fell by 3.8 per cent. I accept that figure, but in Wales it fell by 11.2 per cent, and in England it fell by 6.4 per cent. I use those statistics to illustrate the fact that, on the volume of construction activity, the Scottish Government has sustained a better performance than that in the rest of the United Kingdom in a difficult economic climate.
Yesterday, I met a series of ministers from countries in the Organisation for Economic Co-operation and Development, every one of whom expressed to me concerns about the construction industry. The figures that I quoted demonstrate that, in Scotland, we are continuing to put in place a flow of construction activity to support the sector.
Does the cabinet secretary accept that, with regard to contracts set at more than £2 million, which is the key level of contracts for the Scottish Futures Trust, the delivery of schools, hospitals, roads, and waste and water infrastructure fell by 65 per cent between 2007 and 2008?
The statistics that I read out give the overall position of construction activity in Scotland, which is the clear explanation of the position that we face.
A number of members have articulated arguments for PFI. I simply ask how they will address the international financial reporting standards, which mean that all those contracts come on balance sheet. As he always does in Parliament, Gavin Brown made an eloquent case for PFI, but I have not heard a hard argument about how we deal with IFRS. Equally, I have not heard a hard argument about where in the capital markets the money will come from. Across the UK, the Chancellor of the Exchequer has now had to put in place resources to bail out PFI contracts that have been unsuccessful in attracting support from the market. Those are some of the hard realities that Opposition members have to address.
Would the cabinet secretary's argument not also apply to NPD, the Government's preferred default method, coming on balance sheet?
I accept, as I have accepted before in parliamentary debates, that the same constraints apply to NPD under IFRS, which is exactly why the Scottish Futures Trust has a responsibility to aggregate contracts and maximise the effectiveness of the public infrastructure that we can put in place. That is the Scottish Future Trust's central purpose.
Mr McNulty, in one of his spectacularly inaccurate remarks, said that the business community was united in opposition to the Scottish Futures Trust. Perhaps he should read the CBI Scotland position paper of February 2009, which presents a number of constructive suggestions about how the Scottish Futures Trust can contribute to public infrastructure in Scotland. Because Mr Kerr is so excited, I will give way to him.
I am very excited because that is a spectacular misrepresentation of the CBI's position. It set four conditions, two of which the Government will not meet. Those conditions are: first, to allow others to choose what method they employ; and, secondly, to stop using the private sector as a battering ram against PPP.
Mr Kerr just gets himself excited about elements of the report that, on the whole, provides a constructive contribution. Mr Kerr might want to emulate the CBI's constructive approach in contributing to the debate rather than rehearse the same quotations and arguments that he uses all the time.
Audit Scotland said to us in June 2008 that we had to strengthen the strategic direction and planning of Government-wide investment activity. That was an objective assessment of the previous Administration's failure and that is why we have put arrangements in place to do exactly as required.
It is my privilege to sum up the debate on behalf of the Finance Committee. In doing so, I thank all those who gave written and oral evidence and our clerking team, who had the sometimes challenging job of co-ordinating strong opinions.
This is a detailed report on a complex subject that took almost 18 months to put together. Evidence was taken from a large number of expert witnesses from public sector bodies, legal and financial advisers, lenders and investors, academic and financial commentators, architects and designers, construction firms, project managers and trade unions. I deliberately read out that list so that members can see how comprehensive it is.
As we have heard in the debate, the subject is still contentious. The report's purpose was
"to identify major issues that should be considered in any approach to public capital investment, along with key points that should be addressed in the development of the Scottish Futures Trust to ensure that it operates in an appropriate way and delivers value for money".
The committee found difficulties in providing comparable information on the lifecycle costs for different methods of funding and procurement. It was also clear from the evidence that there is no one-size-fits-all method. Despite that, I believe that we produced a balanced and informative document. I say that even though Joe FitzPatrick helped to draw up the report. He was aided and abetted by Alex Neil, who is sadly no longer one of our number. However, I agree with Mr FitzPatrick on one thing—not enough time has been set aside to debate the report.
The committee asked the Scottish Government to develop and publish a robust investment option appraisal framework that is capable of producing comparable information on the whole-life costs of future projects, regardless of which method of procurement is used. In his response to us, the cabinet secretary said that the Scottish Government will consider what further action it can take to promote more widespread and consistent use of whole-life costing. That is to be welcomed, and the convener has already mentioned the recommendations on risk assessment.
One subject that caused considerable comment was the practice of refinancing PPP/PFI projects, which in some cases has resulted in significant financial gains for the private sector. The committee welcomed the UK Government's recent guidance on the matter and recommended that any method of refinancing should be transparent and equitable and should ensure that the public sector gets its due share of any benefit.
The report's key paragraph is paragraph 129 on page 39. Unfortunately, as Des McNulty said, it was the cause of division, but it was carried by five votes to three. It states:
"The Committee believes that a broad range of options for funding and procurement of capital projects should be in place. The Committee notes the Scottish Government's decision to make NPDO models the default form of private finance, and the statement in the Value for Money Guidance that, where NPDO is not suitable, other private finance models will be assessed. The Committee recommends that public bodies should select the method of financing which delivers best value to the taxpayer. The Committee, therefore, agrees by division that all methods of finance should be considered equally on their merits. A minority of the Committee endorses the Scottish Government's position that the NPDO model should be the default option."
As Mr Welsh said, much has changed in the short time since the report was published. The cabinet secretary agrees that value for money should determine the procurement model that is used—I would have been astonished if he had said anything else. He believes that the NPDO model, which he says eliminates uncapped returns and directs surpluses for community benefit, offers a better deal. That is his view, but it is not shared by the non-SNP majority on the Finance Committee. In the current economic situation, we were right to say that no method of public procurement should be ruled out.
As I have said, the evidence showed that there is no one-size-fits-all solution. The Government is instigating more work on whole-life costing and further improvements on risk assessment. The committee welcomed the Scottish Information Commissioner's recent decisions to order the release of information on some PPP/PFI schemes and asked for a review of what information can be made public on all types of contracts, with a view to ensuring that they are as open and transparent as possible.
Finally, I turn to the Scottish Futures Trust. In evidence to the committee, the cabinet secretary explained that its purpose was to secure less expensive funding and to develop a new approach to the organisation and packaging of infrastructure investment opportunities. We heard what he had to say but, as reported at paragraphs 296, 301, 308 and 315, we were unanimous in our view that there is insufficient information to judge whether the SFT will deliver improved value for money and be a centre of excellence, what role it will perform in managing a pipeline of projects and what its accountability and governance responsibilities will be.
In overall conclusion, the committee states:
"while it is the Scottish Government's view that the SFT will become a more attractive source of funding for national and local projects, that has yet to be proven. The Committee believes that the current economic climate may make it more difficult to introduce a new funding model for capital projects. The Committee, therefore, recommends that no infrastructure projects, national or local, should be delayed or postponed pending the introduction of the SFT funding."
It is my pleasure to commend to Parliament the report of the Finance Committee on its inquiry into the funding of capital investment projects. I trust that the cabinet secretary and the Scottish Government will pay heed to its contents and recommendations.