The Government's Objectives

The Consultation on the Scottish Futures Trust launched by the Scottish Government in December of last year (responses by 14th March) has sparked a wide ranging debate on the options available for the future provision of public infrastructure in Scotland. The consultation paper is surprisingly brief, posing no more than 5 questions through which the Scottish Government is effectively inviting a detailed critique of its proposals.

Thus far, published commentary from Unison suggests that the main public sector union is somewhat short of being won over by the proposals, citing a major departure from proposals published by the SNP whilst in opposition and being particularly scathing of what it regards as "a welcome" for the involvement of the private sector in infrastructure investment. The union also expresses scepticism over the potential for the SFT to have a genuine public interest ethos. Unison, it seems, will be happy only with a move back towards grant aided capital projects, presumably not involving the transfer of public sector employees to the private sector.

The consultation document sets out three principle objectives for the new body, that is, it should operate on non profit distributing principles, provide lower cost funding for infrastructure projects, and it should provide 'additionality', that is, the funding it raises should not count towards public sector borrowing. It also describes four possible objectives for the SFT:

  • raise 'portfolio' funding
  • become a procurer of facilities on behalf of public sector bodies
  • become a manager of assets it procures
  • become a centre of expertise offering advice and support to public sector bodies.

Three things emerge from reading the document. First, the Government envisages that the new body will build up it services over time. Second, it appears to envisage that public bodies could choose which of its services they wished to buy e.g. advice in procurement, or the procurement of facilities itself. It is likely therefore to be a body which has diverse roles. Third, it appears the SFT is intending to raise private sector funding.

It is, however, light on the details of implementation. Many questions remain unanswered by the document, and not just the five questions posed by the Government at the end. It remains unclear for example whether local authorities would procure new schools or whether the SFT would do so, and if the latter, how this will comply with local authorities' procurement obligations. It remains unclear why SFT would be able to raise funding at a lower cost than PPP funds. It remains unclear who would own and control project companies - the SFT, commercial funders or contractors.

A private sector body

However, perhaps, the most fundamental point to emerge from the document is that it is intended to place the SFT Trust in the private sector. The primary driver for this is the need for the SFT to provide additionality. This has a number of consequences. First, the new body will own the asset and the 'user' of the asset (e.g. a local authority) will lease it from the new body. Second, at the end of the lease, it appears that the new body will own the asset not the local authority. In PPP transactions, in contrast, the asset is owned by the local authority at the end of the PPP contract. This means that, under the SFT proposals, a private body will own and control the future use of the land and assets at the end of the initial lease period. The SFT is said to have a 'public interest ethos' but very great care will need to be taken with this aspect of its structure to ensure that assets are available for public bodies to discharge their statutory functions in the future.

Developing SFT policy

No doubt many organisations both public and private will comment on the consultation. And we think many people in the PPP industry would agree that there is an opportunity to improve infrastructure procurement using private funds, learning from the lessons of the last few years. The SFT policy could be developed to build on these lessons. Examples of non profit distributing procurement exists today - at the end of last year we completed the largest such project to date. Examples of raising portfolio funding for public projects exist today.

However, perhaps the biggest challenge will be the implementation of new IFRS accounting standards. Press speculation has virtually concluded that most existing PPP contracts will come back on to the public sector balance sheet. If this turns out to be correct, it will be very difficult to design a structure where new infrastructure procured through the SFT policy will not appear on the public sector balance sheet, in which case, how will additionality be achieved? And if additionality cannot be achieved, where will this leave investment in infrastructure?

There are still more questions than answers.

For further information please contact Keith Patterson.