Big projects must wait as SNP funding plan remains in doubt

The SNP's widely anticipated Scottish Futures Trust programme was also denounced as a broken election promise. Opponents said the Nationalists had gone back on their pledge by still allowing private firms to profit by funding major schemes.

Launching the SFT, Alex Salmond, the First Minister, said it would save up to 150 million a year by securing cheaper investment rates on markets through bulk purchasing. "The development of the Scottish Futures Trust is the way forward, offering both better value finance and secure investment," he said.

"It is right for Scotland, right for our public services and right for our times. By releasing up to 150 million each year for increased investment, we can ensure more resources for our public infrastructure compared to wasteful PFI."

However, critics immediately pounced on the document and said it appeared to be full of holes. On page 39, the proposal openly admitted that it still did not know how private finance would be raised – and while the Scottish Government plans to create a new municipal bond based on the collective assets and revenue streams of councils, none has yet signed up to it. This sparked immediate fears of delays for key projects, including the new Forth crossing.

The SFT is due to be set up in the summer as an arms-length government company. However, no new projects will be commissioned until at least the 2009-10 financial year, leading to concerns about schemes already waiting for funding.

The SNP had proposed the futures trust as a means of replacing the much-derided public private partnerships (PPPs) which they claimed allowed the private sector to profiteer at the expense of the public purse. The PPP had replaced the very similar private finance initiative.

But last night, unions damned the SFT proposal as simply being another form of PPP, a criticism echoed by political parties who also questioned why no projects were commissioned for a year while the SNP looked for an alternative to PPP.

They pointed to the fact the SFT would use the not-for-profit distribution mechanism which is a form of PPP, and simply means the level of profit is agreed at the outset of the contract. "It is merely PFI-lite," said Unison's Scottish secretary Matt Smith. "No amount of spin can change the fact that the private sector will continue to build, design and run public services under this plan, and they will continue to take a profit out of our essential services."

Andy Kerr, Labour's local government spokesman, added: "The SFT is PPP with a lick of cheap paint. Most observers recognise the makeover has only produced uncertainty. This is a hare-brained scheme, a shambles, which will only lead to delay or possible cancellation of vital projects like new schools or even the new Forth road bridge."

Derek Brownlee, the Conservative finance spokesman, said: "The Scottish Futures Trust has changed more often than Labour's referendum policy. However it is dressed up, the key principle of PFI/PPP is maintained – leveraging in private investment into public infrastructure. Put simply, it is not so much the SFT, as the SNP-PP."

Liam McArthur, the Liberal Democrat finance spokesman, also scorned the proposals. "The only thing about the Scottish Futures Trust which they haven't changed is the name," he said.

Business leaders were also unimpressed by the lack of detail.

In particular, a line from the document admitted that there was no real strategy to raise private finance. It said: "The details of how investment will be raised from the private sector has not been explored in any detail as part of this strategic business case, rather that will fall to SFT delivery as part of the business planning for SFT finance and investment."

David Lonsdale, CBI Scotland's assistant director, said he was unimpressed.

"While we want to see the maximum bang delivered for the taxpayer's buck, it's difficult at this point to see how these vague proposals will achieve this," he said.

"For one thing, it seems astonishing that none of the detail has so far been explored about how investment will be raised from the private sector. And the Scottish Government needs to be far clearer about what the incentives will be for firms looking to invest in our public services."

Michael Levack, from the Scottish Building Federation, said that there was too much delay and that he was concerned that nothing will be commissioned until 2009.

"If the delay goes on it is going to have an impact on the building trade because we need the volume of work," he said. "I was interested that the ministers were talking about huge profit margins for PPP, if we make 2 or 3 per cent we are doing extremely well.

"Whilst the building trade won't leave Scotland, the financing side may look elsewhere if there is too much delay."

The Convention of Scottish Local Authorities (Cosla) took a cautious stance on the proposal.

Its president, Pat Watters, said:

"Having just had the detail presented to us we will now seek a local government reaction to what is being proposed. I have however had an assurance from the Cabinet Secretary that Cosla will be fully involved in any future discussions."

But a senior Cosla source told The Scotsman that as things stand the SFT proposal is "a joke" and it is unlikely that councils will be rushing to support the bonds issue.

However, there was some praise for the SFT.

Keith Patterson, a partner at the law firm Brodies, said: "This approach ensures investors a return on their investment but the capped return structure means it is not possible to make windfall profits, and this should be more acceptable to the public."

The greatest praise came from Professor John Kay, a Fellow of St John's College, Oxford, a Visiting Professor of Economics at the London School of Economics, and a member of the Council of Economic Advisers,

He said: "PFI is well past its sell-by date. The Scottish Futures Trust can achieve its three objectives of cheaper finance, better project management and the operation of infrastructure projects for the benefit of the people of Scotland."

SFT

So what's the difference between new and old?

DESPITE the SNP's original intention, the Scottish Futures Trust does not mean the end of public-private partnerships.

The SFT would be an arm's length company split in two and run by a board. The board would have a public sector wing for the delivery of projects and a private wing to raise finance.

The board would be chaired by the Finance Secretary, who would have primary responsibility to parliament on the issue. The reason an arm's length company is being created is to get round the borrowing limitations of the Scottish Government.

The SFT would act as a point of central expertise in Scotland and co-ordinate projects across the country. Councils or other public bodies would approach it for advice on how best to get a project off the ground.

The SFT would then suggest it took a not-for-profit model of the PPP, or get together with other councils to raise bonds to fund a series of similar projects, or find an alternative funding mechanism, possibly prudential borrowing from the public loans board.

The issue of bonds has caused some confusion because the original plan was for the SFT to raise Scottish Government bonds for all projects. However, the Scottish Government cannot raise bonds or take on debt under the terms of the Scotland Act.

The way round this is for councils with much needed projects grouping together and using their assets and revenue stream to raise money through bonds. Bonds give investors a guaranteed income and are seen as a safe investment, especially with councils, which are not allowed to go out of business.

The document says the SFT will not be able to finance projects itself until 2009-10.

One difference with PPP is that maintenance may now be carried out by the council instead of having that agreed as part of a scheme.

PPP

PUBLIC private partnerships, known more commonly as PPPs, were Labour's way of softening a financing scheme invented by the Conservatives.

The original concept was known as the private finance initiative (PFI). Both enabled a council, health board or other public authority to bring forward an infrastructure scheme, such as a road, school or hospital which needed to be built, but for which they did not have the money or the borrowing power.

They would ask consortiums of builders and financiers to make an offer to build and then maintain the project for between 20 and 30 years.

The public body would then commit itself to pay an annual sum to the consortium, and at the end of the period take ownership of the building. The problems arose because some councils were paying well over the odds for a project, partly because of hidden profit margins within the maintenance side.

The not-for-profit model was the latest PPP development to have an agreed profit margin before the project was started. However, even under this model, a school or hospital would be built for the cost of two.

Analysis

Not the big bang we need, but not a total damp squib

"THIS is not the big bang that we were hoping for and is clearly a watered down version of what the SNP had talked about previously," said John Watt, a partner in Government and Infrastructure Advisory at Grant Thornton, Scotland.

"Whilst this announcement is long-awaited and it's very interesting to see where the Scottish Government is going, it is clear that there is still much work to be done for the Scottish Futures Trust to deliver all that ministers are seeking to do.

"It is important that it facilitates a pipeline of projects in Scotland to be brought forward as soon as possible because we have already had a year's delay.

"We still need to see details on how private financing will be raised for projects and how they expect to deliver them. This is absolutely crucial to the whole concept being a success.

"There are schools projects in Moray, the Western Isles and Orkney which are going to be complicated and difficult to deliver and which the SFT is going to have to address.

"With this there is also a potential problem in the use of not for profit distribution (NPD) models which potentially reduces the amount of profit, especially in projects where there is a high degree of risk. Private sector investors may think, 'what is in this for me?'

"It is also clear that the SFT is going to have to start working very quickly.

"The government wants to spend 14 billion on infrastructure projects in three years and we have already had a year's delay waiting for details of the SFT. However, it is clear that a lot of work has been done on the business case for the SFT, which is good and there are many positive things in this document and the government is offering a new way forward.

"Whether it will succeed or not will depend on what the government brings forward in the coming weeks."