Finance model adopted by Scotland to fund future projects has not been tested

A new private finance funding model adopted by Scotland to fund future major infrastructure projects has not yet been tried and tested and could leave the Scottish Government facing financial losses, Welsh experts have warned.

The still vacant Royal Hospital for Children and Young People in Edinburgh. Picture: Ian Rutherford

The Mutual Investment Model (MIM), was identified by the government to fund projects such as roads and schools after its own model – the Non-Profit Distribution scheme (NPD), fell foul of European Union rules and was abandoned in 2016.

But experts have warned that the MIM model, pioneered by the Welsh government, could expose both administrations to significant financial risk.

Sign up to our Politics newsletter

Sign up to our Politics newsletter

The Welsh Government’s finance committee is holding an inquiry into the administration’s capital funding sources amid political concerns about the scheme – and is due to publish a report in October.

Gerald Holtham, Hodge professor of regional economics at Cardiff Metropolitan University, told the inquiry that it left governments open to financial losses as well as rewards through the scheme.

He said: “What you’re doing essentially is taking up to 20 per cent in the project company or the special purpose vehicle that’s set up to build and own the asset. If you like, you can see that as a belief that the private sector is likely to drive a better bargain than you are.”

He added: “But...if actually you’ve driven too tight a deal with them that they’re going to lose money, then taking the equity risk exposes you to that. The original effort under the Scottish system of non-profit distribution was to actually try and cap their return, and that was what was declared to be inadmissible and would turn it into a public project.

“So, you can’t cap it, so we’ll just take a share of it – and a minority share of course; you can’t own a majority.”

NPD was an alternative to the controversial UK-wide PFI scheme and was used in ten major projects, including the construction of the new Royal Hospital for Children and Young People in Edinburgh, which was forced to abandon plans for its opening last month after problems were found with ventilation and drainage.

The Welsh government’s finance committee report is likely to give a cautious welcome to the MIM scheme – but with caveats.

A total of three projects have so far been planned in Wales using the funding model – including the redevelopment of the Velindre Cancer Centre in Cardiff, work to complete the dualling of the A465 road and investment in the government’s 21st Century Schools Programme – but none have yet progressed to construction stage.

In an evidence session with the Welsh finance committee in June, Alan Bermingham, policy manager at the Chartered Institute for Public Finance and Accountancy, warned that if the company set up to run the project under a MIM ends up making a loss, the government would take the hit on up to 20 per cent of that loss.

He told Welsh politicians that the method allows governments to keep major projects off their balance sheets. The Scottish Government was told it needed to declare projects financed under NPD because of the level of public sector involvement.

Bermingham added: “But what you do have is a 20 per cent stake investment in an associated company and obviously any future profits or losses that company makes, you take your 20 per cent share of that.”

Unlike NPD, the MIM is compliant with the revised Eurostat guidance that determines how public-private partnerships are treated for budgetary purposes.

A spokesman for the Scottish Futures Trust said “SFT’s Options Appraisal report recommends that the Scottish Government adopts a Scottish version of the Mutual Investment Model and confirms that the model provides the best value-for-money option which conforms to current Eurostat rules.”

Murdo Fraser, Scottish Conservative shadow finance secretary, said: “Given the SNP government already has a £1bn black hole in it’s finances they must listen very carefully to any concerns regarding their preferred financial vehicle.”