18 November 2008

Scottish Government defends plans for PFI reform

The Scottish Government has insisted that its new mechanism for funding the development of waste treatment facilities – the Scottish Futures Trust – will be capable of delivering value for money despite concerns raised by the private sector that it will offer them little financial return.

The Trust, which was officially announced as a replacement for the previous funding model of private finance initiative (PFI) in September 2007, is due to invest £35 billion into developing public projects in Scotland over the next decade and intends to provide a better deal for taxpayers by reducing the “credit card levels of repayment” incurred by the PFI route.

The cost of this quango, which isn't even set up, is to be £22 million, but we now know that the SFT is only to be an advisory board

 
Jeremy Purvis, Liberal Democrat MSP

However, waste management companies have expressed fears that the model could see firms unwilling to work in Scotland, as it will see their profits slashed in a bid to return more money to communities.

Despite these concerns, a spokesman for the Scottish Government told letsrecycle.com that the SFT was still a viable vehicle for public infrastructure, commenting: “Clearly that is a massive amount of money and clearly there will be opportunities for the private sector to get involved, and the Scottish Futures Trust will deliver increasingly better value for money.”

SFT

Formally announced on September 10 2007 by finance secretary John Swinney, the Scottish Futures Trust will have two arms, with a public company providing advice to the public bodies that are planning major infrastructure investment, and a private company, which will provide private some investment for these projects.

Former Bank of Scotland Group vice chairman and merchant banker Sir Angus Grossart has been appointed chairman of the SFT Company, and will oversee the development of the Trust as an operating model and help it administer £150 million a year to public infrastructure projects.

The Scottish Government explained that the new mechanism was “unlikely to be a direct funder of projects in the short term” but would organise and aggregate funding and offer “better-value-for-money” than the PFI route by limiting the risk caused by placing public sector money into private sector hands.

According to a report published in October 2007 by the Scottish public services union, UNISON, the PFI route uses around £2.1 billion more than conventional funding models and currently operates with an insurance safeguard totaling £3.5 billion, with the Scottish Government keen to cut these costs through the adoption of the Trust.

Liberal Democrat finance spokesperson, Jeremy Purvis MSP, attacked the slow adoption and the initial cost of the new mechanism during a debate in Scottish Parliament last week (November 14).

He said: “The cost of this quango, which isn't even set up, is to be £22 million, but we now know that the SFT is only to be an advisory board. This makes it the most expensive advisory board ever in Scotland.

“The SFT duplicates and complicates the work that the Scottish Government should be doing anyway. The money should be saved,” he added.

Private Sector

Companies have also expressed concern about the implications that introducing the Trust could have for the Scottish residual waste framework.

A spokesman for one waste management firm said: “One of the main issues is about deliverability and setting up time scales. Scotland has some fairly challenging targets.”

“There is a quite serious concern about the Scottish Futures Trust and what that will mean, there are unanswered questions at the moment on how it will work and whether it is a viable model or not and whether it will allow a reasonable weight of return,” he added.

The company spokesman also indicated that with the introduction of the new system, PFI projects which had been developed over the past eight years and were now reaching implementation could now face delay while the funding model was restructured.

Concern

Such disquiet from the private sector over how the new system will work and whether it is deliverable was also evident in consultation work undertaken by the Scottish Government in December 2007.

The Scottish Environmental Services Association (SESA) – a trade body representing the Scottish waste industry – said it would “find it difficult to envisage UK waste management operators providing residual waste infrastructure in Scotland under the proposed model” and stated it believed that the policy had not been formed in “economic reality” as it did not take into account unforeseen life cycle costs or the loss of sunk capital if a contractor became insolvent.

SESA also warned that local authorities were already struggling to contest with the current procurement route for PFI of Competitive Dialogue and this would be compounded if the Trust introduced an alternative, such as the Restricted Procedure route where contracting local authorities would draw up a pre-qualification short-list of bidders before tendering a contract.

In its response to the consultation, the Committee of Scottish Local Authority (COSLA) also expressed concern about the implications for the waste management sector, and claimed “there are a number of uncertainties associated with the SFT”.

The committee explained that the SFT “addresses the concern that the returns made by the private sector equity participants are currently excessive”, however, it highlighted that “any reduction in investment returns will either require a transfer of risk back to the public sector, or reduce the number of investors”.

Labour

Speaking during first minister's questions at the start of October, Scottish Labour leader Iain Gray urged Scottish National Party leader Alex Salmond to shelve plans for the not-for-profit distribution model given the current economic climate and the need for investment projects.

However, the first minister insisted that the government was pressing ahead and asked for flexibility from the Treasury to accelerate the capital budget.

And, responding to questions about concerns from the private sector, the spokesman for the Scottish Government said: “It is for the private sector and their views, we have set up the Scottish Futures Trust which will help deliver the infrastructure.”

The Futures Trust scheme is currently developing on a small scale, and is working on ‘pathfinder' projects in the South-East and the North of the country aimed at developing joined up services for local communities through purpose-built premises.

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