This article is written by Emma Saunders for Jubilee Scotland. It is an introduction to her thesis ‘Harvesting Debt: Hub South-East Scotland, Austerity and Public Procurement’ which explores the topic further. Emma was studying MSc by Research in Human Geography at the University of Edinburgh and has since completed this.
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On the 21st of November, two weeks after the American presidential election, Paul Krugman, a Nobel-prize winner economist, wrote an irate column in the New York Times. His post reacted to the new president’s infrastructure plan (see here), which promises a one-billion effort to renew the dire American infrastructure. The plan mostly suggests generous tax breaks, which Krugman believes will just enable a fire-sale privatization of revenue stream – the polls, and other ongoing payment the public pays to use public infrastructure – and blatantly benefits private corporations. Instead, he argues:
“If you want to build infrastructure, build infrastructure. It’s hard to see any reason for a roundabout, indirect method that would offer a few people extremely sweet deals, and would therefore provide both the means and the motive for large-scale corruption. Or maybe I should say, it’s hard to see any reason for this scheme unless the inevitable corruption is a feature, not a bug.”
What does this have to do with Scotland? As Krugman simply puts it: ‘if the state wants to build [and thus finance] infrastructure, then it should build [and thus finance] infrastructure’. Given the large cost of infrastructure, the most obvious route is through debt; the cheapest form of debt for state is bond borrowing, whereby the state issues bonds at low-interest rate, which are secure investment. As soon as convoluted schemes to attract private investments and/or secure additional investments enter the picture, a healthy advice is to understand what the plan is really about and question why it is introduced. The Scottish infrastructure plan, headed by the Scottish Future Trust (SFT) and implemented since the SNP’s electoral victory in 2008, has embarked on a journey to secure “6 billion of additional investment into Scotland (…) over and above capital budgets which will allow vital investment in infrastructure to continue” (SFT, 2015). Given ‘inevitable’ corruption Krugman deplores such scheme often entail, I believe a careful scrutiny of this scheme is called for. This blog post, the excerpts from Emma Saunders’ dissertation hereby made available, provide initial starts. To further this, Jubilee Scotland believes that the government should stop using NPD contracts and there should be a Scotland-wide strategy to audit and buy-out existing PFI/PPP, NPD contracts.
This blog post will first give a genealogy of the SFT, which needs to be understood within the wider context of the PFI schemes that have plagued Britain for the last 18 years. It then introduces one specific income stream set up by the SFT: the Non-Profit Distribution scheme.
The Scottish Future Trust is an independent company “wholly owned by Scottish ministers” (SFT, 2015) which advises local government borrowing for public infrastructure and secures private investment in Scottish infrastructure through a range of mechanisms. Originally a Scottish National Party (SNP)-led attempt to propose alternative not-for-profit trusts able to undertake infrastructure project and financed by bond-borrowing, the SFT’s original goals took a sharp turn after the 2008 Scottish election. During the 2008-election, the SNP promised to match ‘brick-to-brick’ the previous Labour administration’s infrastructure investment. In Scotland, the labour government, following the New Labour model introduced throughout Britain, funded a substantial amount of infrastructure through Private Finance Initiative (PFI) projects. These schemes allow a large number of infrastructure projects to take place, but have proven incredibly expensive in the long run (and for some, have provided incredibly poor quality infrastructure). They featured so-called partnerships between the public sector, who would be the end user of the building, and the private sector who provided financial means, design and construction services as well as maintenance services to the final building. The contracts governing such partnerships often locked the public partner into expensive annual repayment for contracts between 30 and 60 years. The sheer scale of the debt-to-investment ratio remains striking: in Scotland alone, the £5.2 billion of investment in PPP and PFI schemes up to 2007 created a public sector cash liability of £22.3 billion that will last at least three decades into the future (Jowsey 2011, 00), sustained by annual payments of 1.04bn (Scottish Draft Budget 2015: 182). Across the UK as a whole, that figure rises to at least £310 billion of outstanding debt (See Figure 1).
Figure 1: Cumulative private finance investment and charges over time for all current deals (HM Treasury, 2014)
Widely rejected and politically despised now, PFI still provided an incredible fast stream of debt to build infrastructure throughout the UK. This was mostly due to an accounting trick, which gave local politicians the attractive option of ‘build now [and thus fulfill election promises] and pay later [even when you are no longer elected and thus can wash your hands form the insane cost this ‘investment’ actually represent]. It was also backed by the myth of the private sector’s innate superiority to procure, finance, design and build in the most ‘efficient and ‘cost-effective’ manner. Such a myth is sustained by the slippery notion of risk allocation and the private sector’s superiority in managing risks I briefly debunk both the ‘trick’ and the ‘myth’.
The ‘trick’ relates to accounting rules. Under the European Standard of Accounting (ESA) adopted in 1995 [and no longer in use as of 2014]:
“in national accounts, (…) PPP assets are classified in the partner’s [the private sector] balance sheet if both of the following conditions are met: the partner bears the construction risks; the partner bears at least one of either availability or demand risk, as designed in the contract. If these conditions are met, (…), then the treatment of the contract is similar to the treatment of an operating lease in national accounts; it would be classified as the purchase of services by government.” (Manual on Government Deficit and Debt – Implementation of ESA95 (2010), p.257)
The debt incurred by the public partner was thus accounted for ‘off-balance’ sheet, as the purchase of an annual service rather than as the repayment of a long-term debt. Although the term ‘service’ could imply that the council or public authority could theoretically decide not to spend its fund for that services, in practice they didn’t have a choice. The PFI ‘service’ costs are debt repayments[1] yet, under ESA 1995, they were allowed to suddenly disappear form public authorities’ balance sheet. They could borrow beyond limits set by the national government, to curb the debt by a cheating mechanism, the PFI scheme, created by that very government. Genius. Absurd. And financially disastrous.
The ‘myth’ of private sector so-called efficiency also withers under scrutiny. PFI projects were based on opaque contracts, hugely inflated costs and high legal tendering fees. External evaluations of multiple PFI schemes reveal that risk transfer remained a fiction, public information and monitoring were poor, value for money was not secured, borrowing costs were consistently higher than public bonds (Shaoul et al., 2007; National Audit Office, 2009; Cuthbert and Cuthbert, 2008; CPA, 2014) and that private equity shareholders were routinely making returns almost 10% above “the market rate” whilst being ‘contractually protected and underwritten by government’ (Pollock and Price, 2013: 11). A number of the largest contractors went bankrupt, or effectively reneged on aspects of the contract that did not gain them the highest profit margins (Pollock and Price 2004; Wolmar 2002). PFI projects were arranged without clear lines of accountability and a rigidity that seemed to lock absurdly complex agreements into place for decades (Froud and Shaoul, 2001; Shaoul, 2005; Bailey and Asenova, 2011). To make matters worse, PFI projects intensified the creation of huge monopolies, with smaller firms unable to bid for contracts (Pollock, 2004). The veneer of “competition” actually created a situation where the contractors became ‘too big to fail’(CPA, 2014: 13). The projects themselves are often set to run for decades and are usually too important to be left incomplete. This dual pressure leaves public authorities with little room to maneuver (CPA, 2014), for whilst one “partner” could effectively back out through declaring bankruptcy; the other cannot. As a shareholder of (some of) the PFI debt, they would lose money; as a service provider, their reputation would suffer (not to mention the lives of those reliant on such services); as elected representatives, their track record would be compromised. In other words, contrary to the rhetoric around the transfer of risk from the public sector to the private sector through PFI deals, the risk was overwhelmingly allotted to public authorities, who entered into contracts with limited control and limited revenues whilst shouldering the bottom line responsibility for service provision.
In Scotland, the latest disaster of the PFI schools built in Edinburgh illustrate quite clearly the point. The buildings featured an essential construction flaw, which led to the collapse of the external wall of one school and prompted the closure of 17 buildings throughout Edinburgh. Bearing the responsibility to ensure service provision [school] provision, the council incurred large costs to relocate all the pupils, which were not (and will not) be reimbursed by the consortium of companies who build the school. The BBC (see here) attempted to find who could be held responsible, and encountered only a maze of companies, as the debt (and thus responsibility) for the building had been sold many time over, which no clear owner and responsible company to be found. Jim and Margaret Cuthbert’s argue (see here) that the Edinburgh ‘fiasco’ actually illustrates a flaw feature of the process of ‘risk allocation’. They argue that in reality a major risk was overlooked in the cost calculation: that of the transfer of private risk to the public sector. This gave a financial advantage to the PFI solution, and in reality grossly underestimated the risk that mistakes would be likely to be reproduced throughout the project (rather than incrementally caught as with smaller scale projects…!) and bring about large-scale domino effects.
Clearly, PFI projects were a mess both in Scotland and throughout the UK.
Let’s come back to 2008, after the Scottish election. The newly elected SNP then were faced with:
- the impossibility to continue the PFI scheme they had to vehemently opposed,
- their promise to build as much infrastructure as the previous Labour administration and
- the caps on Scottish government borrowing and taxation rules set by Westminster[2].
The SFT was tasked to deliver such an impossible solution. It was inspired by the scheme developed under a Lib-dem council in Argyle & Bute and then introduced to Scotland by the Labour-led administration: the Non-Profit Distribution (NPD) scheme (Hellowell and Pollock, 2009). Such a scheme resembles in many ways the previous PFI structure, except in one:
“The key difference between PFI and NPD is that, whereas in the former, the [private structure’s] capital includes a small element of private equity, in the latter its members invest only loans. In consequence, while [private company] shareholders receive returns on their capital in NPD, the level of these returns is to a large extent ‘capped’ at the point at which contracts are signed, and any surpluses remaining at the end of the contract are passed to a designated charity. This is distinct from the PFI model, in which surpluses are passed to [private company] members as dividends.” (Hellowel and Pollock, 2009: 406)
Thus, the only benefit of the new structure is that the benefits are capped, whilst retaining the advantageous position of being off-balance sheet.
My dissertation, written in summer 2015, explores what such the NPD structure meant in practical terms to several public authorities using a ‘HubCo’ structure in order to access such funding routes. In July 2015, an ONS ruling challenged the off-balance sheet status of NPD funding. Since, plans forwards have been incredibly ‘fuzzy’; John Swinney has alternatively transferred a greater number of control to the private partners in order to keep projects off balance sheet, halted construction plan and featured the new NPD debt on the capital budget. I was not able to pursue my research beyond that time.
You can read Emma’s full dissertation here: Harvesting Debt: NPD Dissertation
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If you wish to write a piece for our site then please get in touch via: mail@jubileescotland.org.uk
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Recommended readings on the topic:
Hellowell M. and Pollock, A. (2009) Non-Profit Distribution: The Scottish Approach to Private Finance in Public Services, Social Policy & Society, Vol 8(3), pp.405-418
What happens since the ONS ruling:
Common Space, Ben Wray, January 2016. ‘Why an ONS ruling is set to kick-start a new debate about the Scottish Government’s investment strategy’ available at:
Common Space, Jim Cuthbert, October 2016, ‘Jim and Margaret Cuthbert: Edinburgh schools fiasco suggests another flaw in the logic of PFI’ available at:
https://www.commonspace.scot/articles/9553/edinburgh-schools-fiasco-suggests-another-flaw-logic-pfi
Common Space, May 2016, ‘Margaret Cuthbert speech – Bundling (or bungling): procurement, PFI and the Scottish economy. Available at:
[1] To be precise, maintenance costs are accounted for in what is called the
[2] Though these constraints are important to note, and could partially relieve the SNP of some of the responsibility for their poor decisions, I have yet to find promises by the SNP that they would increase taxes (especially those of the high earners and/or of high inheritance and/or of capital transactions). Taxing is unpopular. And all parties try to avoid it.
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