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Written by Helen Mercer: Jubilee Scotland launch 29^th January 2020

There is a strong tendency among campaigners on PFI to see the problems with which we are all familiar – the high cost of finance, poor construction, excessive profits – as stemming from factors such as woolly thinking, incompetence, corruption, fraud, lack of transparency and weak monitoring. I argue first that while such factors may exist they are not the root causes: the problems with PPPs are systemic and structural in an environment deliberately created by governments.

A simple and curtailed history of PFI

1. By the 1990s Britain faced a pent up demand for renewed infrastructure. The IMF loan of 1976 agreed by the Labour government lead to major cuts in public expenditure, continued into the 1980s. By the 1990s major maintenance problems in public infrastructure were apparent, and often the preferred solution was to demolish the entire building and start afresh.

Pent up demand for investment in public infrastructure

2. However by the 1990s public authorities’ traditional access to public borrowing was limited by the Maastricht Treaty and its successors, together with severe unilateral targets adopted by Gordon Brown on levels of government debt and budget deficits. Central government has various tools to secure cheap borrowing rates, but these were no longer available to public authorities to address their infrastructure backlogs.

PFI BECAME THE ‘ONLY GAME IN TOWN’

3. Governments therefore gave the private sector a free hand in providing much needed public investment. Capital markets had been deregulated. Investors were seeking profitable outlets and Government was a willing tool in opening up the state sector as a source of profit. It passed legislation guaranteeing payments on PFI deals and offered special PFI subsidies to public bodies to ensure they could afford to pay the private premiums.

PROFITABLE INVESTMENT WAS UNDERWRITTEN BY GOVERNMENT

4. Public authorities were left to deal with predatory private investors and lenders. In forcing them down the PFI route the government deliberately set up a situation of asymmetric information. All the knowledge and experience was on the side of the private investors and lenders, on the public side was a urgent need for what only they could offer.

PUBLIC AUTHORITIES WERE SENT NAKED AMONG WOLVES

PFI schemes also became a key driver of the outsourcing of public services, as privately provided servicing and maintenance of the PFI building became part of the PFI contract. (This has not been the case for the variants PF2 and NPD/Hub projects but has re-appeared in the Mutual Investment Model (MIM’s) The PFI mix was a toxic one of heavy debt, outsourced servicing, together with a lack of control over the contractors themselves.

This mix of factors shows that the failings of PFI cannot be characterised as unintended or unfortunate. The solutions therefore cannot lie just in FOI requests, or judicial review or tax adjustments. These activities provide publicity and additional knowledge and are therefore useful in campaigning, but such actions cannot be paraded as solutions.

Hence the economic history of PFI shows a systemic, in-built purposeful failure in which even personal or corporate corruption, assuming it can be proven, is of minor importance in understanding the root of the problems. This picture of the system, the environment within which PFIs have developed needs to be complemented by considering the way PFI contracts are structured.

The structure of PFI contracts

To describe the structures set up through PFI and similar projects is again to broach a large and complex area so I want to focus on just one key point element – the role of the company which signs the contract with the public authority – the Special Purpose Vehicle or SPV.

It is the SPV which, in return for an annual payment, secures all sources of finance, pays building contractors and, where relevant, the service providers. They are private companies, whose shares are owned by private investors increasingly infrastructure investment funds, such as HICL, Dalmore Capital, Standard Aberdeen, 3i, Innisfree, Semperian.

The diagram shows an SPV sitting like a spider at the centre of a web of contracts – the primary contract with the public authority and then the various contracts with lenders and with the contractors.

The role of the SPV is effectively to pump public money to various private actors and most importantly to the shareholders themselves. The shareholders extend 10% of the finance needed for the project and their loan carries interest rates usually of around 10-15% and is one of the reasons why PFI is so expensive. In addition as shareholders they are entitled to dividends and these accrue from any difference between what the public body pays the SPV (in debt, payment for services etc) and the monies owed by the SPV to lenders, builders and service providers. In the case of the Scottish Non-Profit PFIs any such surplus does not accrue to investors.

The position of the SPV is the main reason why buyouts as the solution are to PFI are bound to be unsatisfactory. A buyout involves the public authority effectively ending a commercial contract under commercial terms, and as a result penalty clauses must kick in and investors and others will be compensated for the loss of anticipated earnings. They walk off with a lump sum from the public purse.

Solution: nationalise the SPVs as a way to end PFIs

It was recognition of the structural features of PFIs that prompted campaigners to look at the idea of nationalising the SPVs. It is not a buyout because no PFI contract is cancelled or ended: instead ownership of the SPV passes to the government and hence the parties to the main PFI contract are both publicly owned a situation which immediately opens new spaces for restructuring the relationship.

This has two effects which reverse the systemic problems referred to in the first part of this talk. First, control over the terms of borrowing returns to central government which can renegotiate debt with all the lenders. Secondly, the public authorities regain control over all the other contracts, including receiving the profits which had previously accrued to the owners of the SPV. Research with Dexter Whitfield has indicated that, using data up to March 2018, the elimination of SPV profits would reduce the costs to public authorities of their annual payments to the SPV by £1.4bn per year.ⁱ

Afterword

Many plans are being developed for publicly financed and provided infrastructure. However the question remains of how to deal with the toxic legacy we have inherited – from PFIs, PF2s, NPD/Hubs and now MIMs? The question cannot be continually ducked: nationalising SPVs is one option that merits serious consideration.

Read more about this in Nationalising Special Purpose Vehicles to end PFI: a discussion of the
costs and benefits.

The solution is in fact much more detailed than the outline provided in this talk and the full paper considers levels of compensation and the need to honour outstanding debts. It also considers the further changes that need to be made to move towards publicly financed infrastructure and insourced services.

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Presentation by Dexter Whitfield, European Services Strategy Unit, to meeting ‘Rethinking Private Financing of Scottish Public Projects’ at the Scottish Parliament on 29 January 2020, organised by Jubilee Scotland and chaired by Neil Findlay, MSP.

I welcome the refreshing straight-talking report on NDP and hub PPP contracts from Audit Scotland this week. I strongly recommend that the Scottish Parliament, local authorities and public bodies immediately adopt six strategies for public infrastructure projects in Scotland.

1 – Increase direct public investment in public infrastructure and stop all planned Mutual Investment Model projects

The Government should take the opportunity to increase direct public investment in infrastructure in the current period of low interest rates.

Planned MIM projects and those that have been approved with options appraisal and business cases, but yet not commenced the start of the contractual procurement process, should be stopped. The Scottish Government should support the local authorities and public bodies in arranging direct public investment for these projects.

The Mutual Investment Model (MIM) allows the public sector to invest up to 20% of the risk capital in project companies and to meet the private investment classification (off public sector balance sheet). However, the public sector, in effect, becomes a commercial partner with the private sector in sharing all the risks and rewards. This significantly deepens the degree of privatisation, extends the scope of secondary market trading in PPP equity and the takeover or merger of infrastructure funds (Whitfield 2016 and 2017b).

2 – Scotland should adopt a new public design/finance and operate model

This would have three objectives, to integrate the design and construction process, to reduce the cost of construction and to minimise the risk of delays. Two examples illustrate how these objectives can be achieved.

The UK’s Integrated Project Insurance (IPI) offers a guaranteed maximum price and protection against defects underwritten by insurance. A project alliance is formed with a Gain/Pain Share agreement under IPI in which all members of the project Alliance share in risk and reward. It was recently successfully piloted at Dudley College. The target outturn construction cost of £9.83m was agreed and exceeded by only 1.8%. The client share of the additional cost was only 0.34% of the target cost. The building was ready for occupation as planned at the start of the 2017/18 academic year.

Construction Management At Risk (CMAR) has been widely used in many US states for public building, transportation and utility projects. The client selects an architect who commences the design and later selects the construction manager/contractor, based on qualifications and track record, before the design stage is completed. The architect and construction manager work together in the final stage of the design process. The construction manager/contractor gives the client a guaranteed maximum price and coordinates all the subcontracted work. This process strengthens coordination, enhances transparency, delivers efficiencies and minimises delays (Whitfield, 2020).

3 – Local authorities and public bodies should intensify the monitoring of PPPs to identify defaults and poor performance.

Monitoring of PPP projects has often been inadequate due to inadequate monitoring staffing levels being included in business cases and contracts and over-reliance on self-monitoring by the private sector. Local authorities should now intensify contract monitoring focusing on all aspects of the quality of performance and other contractual requirements. This information should be reported to relevant committees and publicly disclosed.

Local authorities should also establish contract reviews where defaults and poor performance have been significant or systemic. They should draw on evidence from service users, community and tenants organisations and trade unions. There remains considerable scope for local authorities and public bodies to consider terminating operational PPP service contracts and return provision in-house. Where defaults and poor performance are evidenced and remain after the issue of contractual warnings by the authority, termination without compensation is a viable and legal option. In some cases a contractor has withdrawn from a contract on technical or operational grounds. There have been 27 PPP contract terminations and 12 buyouts in the UK to date (Whitfield, 2020).

4 – Establish a comprehensive and rigorous Economic, Social, Equality and Environmental Cost Benefit Analysis methodology

This should be mandatory for all infrastructure projects in Scotland. The Scottish Government should also require comprehensive and rigorous impact assessments to identify the positive and negative economic, employment, equality and environmental consequences of projects and to identify where and what form of mitigation action is required.

The quality of impact assessment is reliant on assessment of the impact on inputs, processes, outputs, equity and outcomes to establish cause and effect and the use of a counterfactual (the situation that would exist if the project did not proceed). Furthermore, employment impacts must include a full analysis of current jobs, terms and conditions, health and safety and equality practices and planned changes.

5 – The Scottish Parliament and local authorities should oppose the sale of equity in PPPs

The average annual rate of return on the sale of equity in PPP projects was 28.7% (based on a significant data sample) at the end of 2016 with acquisition mainly by offshore infrastructure funds in tax havens (Whitfield, 2017b). This evidence is in sharp contrast with the expected 12%-15% rate of return contained in PPP business cases or contract documentation.

The scale of equity transactions and offshoring to tax havens is very significant. “A total of 87.5% of Scotland’s PFI/PPP education projects (280 out of 320 schools) are currently partly or wholly owned by offshore tax haven funds. Nearly half the schools had 100% of their equity owned offshore” (Table 11, Whitfield, 2016). The NDP and MIM models in effect lock-in and legitimate public sector investment in PPP projects and the secondary market.

Whilst the sale of equity is legally permissible, there is a very strong case that it should be opposed on political economy and ethical grounds.

6 – Challenge the trend of Scottish pension fund investment in PPPs

There are direct links between Scottish public sector pension fund investments, offshore tax havens and shares in NPD and hub companies. At least four Scottish pension funds have investments in offshore infrastructure funds with stakes in NPD and hub projects. Glasgow City Council, on behalf of Strathclyde Pension Fund, has had a £30m investment in the Equitix Fund IV LP since 2016 which was extended by further £50m investment in the Equitix Fund V LP, managed by Equitix GP 5 Limited (Guernsey).

Edinburgh City Council, on behalf of Lothian Pension Fund and Lothian Buses Pension Fund and the Falkirk Council Pension Fund have investments in the Equitix Fund II LP. Equitix Ltd is one of the largest UK PPP companies and although a registered UK company it is owned by Tetragon Financial Group Limited and registered offshore in Guernsey (Whitfield, 2018).

The targeted 10% annual rate of return of these investments is not in the public interest because it ramps up the cost of public infrastructure. Likewise, public sector investments in NDP and MIM projects feed potential gains in the secondary market which may only cover the cost of risky investment in other PPP projects.

I believe these policies are essential in developing a genuine public alternative to PPPs in Scotland.

References

Whitfield, D. (2016) The financial commodification of public infrastructure: The growth of offshore PFI/PPP

secondary market infrastructure funds, ESSU Research Report No. 8,

https://www.european-services-strategy.org.uk/wp-content/uploads/2017/01/financial-commodification-public-infrastructure.pdf

Whitfield, D. (2017a) PFI/PPP Buyouts, Bailouts, Terminations and Major Problem Contracts, ESSU Research

Report No. 9,

https://www.european-services-strategy.org.uk/wp-content/uploads/2017/02/pfi-ppp-buyouts-bailouts-and-terminations.pdf

Whitfield, D. (2017b) PPP profiteering and Offshoring: New Evidence, PPP Equity Database 1998-2016 (UK), ESSU Research Report No.10,

https://www.european-services-strategy.org.uk/wp-content/uploads/2017/10/PPP-profiteering-Offshoring-New-Evidence.pdf

Whitfield, D. (2018) Ownership and Offshoring of NPD and Hub Projects: Scottish Futures Trust, May,
https://www.european-services-strategy.org.uk/wp-content/uploads/2018/06/SFT-Offshoring-report.pdf

Whitfield, D, (2020) Public Alternative to the Privatisation of Life, Spokesman Books, Nottingham.

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The post Dexter Whitfield recommends that Holyrood stops all MIM projects appeared first on Jubilee Scotland.

Last month at the Scottish Parliament we launched our report ‘Rethinking Private Financing’, the culmination of work from Jubilee Scotland over the past year researching PPP & PFI schemes. You can download and read it here. The launch was hosted by Neil Findlay MSP, who spoke to us about how passionate he was about this issue affecting Scottish people. In late January Neil Findlay had questioned Holyrood’s approach to many of the key issues the government have been quiet or unclear about when it comes to financing projects with private money, and what they plan to do in future.

Scandal at Holyrood

Derek Mackay MSP as the Finance Secretary of Scotland was the person answering these questions put forward to parliament, a mere fortnight before he was hit with a scandal that has put his career as a politican into disrepute. Mackay has been suspended from the SNP for sending inappropriate messages to a 16 year old, breaching a duty and care expected as a member of government, failing to  uphold a responsibility not to act in a way that puts young people at risk. In that context, these may be some of the last questions Mackay ever answers at Holyrood, but they still offer a snapshot of the Government’s current approach to these schemes that Jubilee Scotland are campaigning against.

Questions asked of the Scottish Government

Question S5W-27047: Neil Findlay, Lothian, Scottish Labour, Date Lodged: 21/01/2020 To ask the Scottish Government what its position is on whether local authorities could benefit from direct borrowing for public projects, rather than financing them through public private partnerships.

Answered by Derek Mackay (29/01/2020):Local authorities are entitled to use all resources available to them including their existing borrowing powers and support from the Scottish Government. It is however up to local authorities to decide how they wish to borrow and any commitments made by them are based on what they deem to be prudent and affordable.

The government’s approach to this is relatively Laisse-Faire as they have limited borrowing capacity themselves. Of course local authorities have to make financial decisions that are responsible, but the commitments that a PPP binds a council by are never prudent. They are at such high rates of interest that nobody can honestly say with what we know now, that they are affordable. They only seem that way in the short term. So by saying this, you are effectively shifting the blame onto councils for the debt they’ve accumulated, taking no moral responsibility while still introducing NPDs, a replacement model for the PFI.  What is forgotten here is while councils are allowed to use all resources available to them, there is no real alternative to PPPs supported on a national level in Scotland – there needs to be other options.

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The problem with PPP

At Jubilee Scotland we campaign for the cancellation of unjust debt worldwide. This year we have been focusing at one of the main causes of rising debt here at home and abroad, one that has long been criticised yet little has been done about. Public Private Partnerships (PPPs) are long-term contracts where the private sector designs, builds, finances and operates an infrastructure project.  This scheme in its various forms over the years has left local authorities across Scotland paying much more than needed for public projects and in some cases putting people at risk. Long contracts with high interest rates and poor building standards have left Scotland with flawed or unfinished buildings, the taxpayers sometimes paying double what they’re actually worth. It has created unjust debt problems and added unnecessary financial pressure on local services across the public sector.

The Oxgangs School catastrophe put PPPs on the map for a lot of people in Scotland. After the wall collapse 17 schools across Edinburgh that were built under the same PPP, ‘Edinburgh Schools Partnership’ were forced to close and undergo inspection and repairs. 2 years later, after the partnership told the council that all problems had been fixed, it was found that there was still issues with many of the buildings, forcing the council to undertake emergency repairs of their own. Because of the nature of these PPPs, the parties responsible are usually protected through corporate confidentiality contracts, but it’s the council that take all the blame for schools they were promised were built properly.

Private Profit over public safety

Recently two of the countries biggest hospitals have been in dispute with their own faulty PPPs. NHS Lothian is paying out £1.4m every month for the new unfinished Sick Kids Hospital with little oversight of how much of that money is going back into the public purse. The hospital hasn’t opened because of design flaws that make it uninhabitable, yet there’s nobody to take to task, nobody to answer questions why these mistakes have happened. NHS Greater Glasgow and Clyde have decided to take legal action against the contractor of both hospitals. Brookfield Multiplex were responsible for the construction of Queen Elizabeth University Hospital which opened in 2015 with many severe issues, leading to deaths in the children’s ward due to contaminated water. 

PPPs like these have led to a loss of accountability in our public services, because local councils and the government are rarely given any power to renegotiate when things take a turn. The country has a ballooning amount of debt that we have no control over as the contracts in a PPP are not usually transparent, last for decades and almost always favour the private contractor. Scotland has had issues with them, but has still has been involved in exporting PPPs to countries abroad through the UK’s Department For International Development. On an international level these Partnerships have led to corruption, environmental issues and inequality. It’s an unacceptable move for a country that committed to the Sustainable Development Goals to export schemes that undermine progress on them.

Finding a way forward

We need an alternative solution for Scotland’s problems with funding. On the 29th of January 2020, the fourth anniversary of the Oxgangs School collapse, we will debut our report at the Scottish Government. It examines Scotland’s relationship with PPPs, highlighting all the issues with the current system of private financing while presenting solutions to how we can fund infrastructure here in Scotland that the public have control of. By taking on an approach that serves the needs of local communities, we will be able to make their projects work for us instead of being being held ransom by private companies to access of our own public services.

Click here to download our report, Rethinking Private Financing of Scottish Public Projects

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This article has been written by Dexter Whitfield, director of the European Services Strategy Unit as an accompaniment to his new book, which will have a launch in Edinburgh later this month.

The new book Public Alternative to the Privatisation of Life sets out the scale, cost and impact of different forms of privatisation and encompasses public goods and services including the welfare state, the public realm or built environment (and right of assembly), public domain or creative commons, public sphere (collective debate and elimination of economic and social inequality) in which nature and biodiversity, climate and the environment are an integral part. A political economy framework assesses the impact of privatisation that combines the concepts of accumulation by dispossession and the primary and secondary circuit of capital. It demonstrates how privatisation is interwoven with, and is co-dependent upon, financialisation, marketisation and individualisation.

Four decades of neoliberal ideology and a decade of austerity have had a major influence in extending privatisation beyond the sale of state-owned corporations and outsourcing of support services to encompass core services, multi-service public private partnership contracts and ‘choice’ mechanisms for patients and pupils in industrialised countries and the global south.The UK developed and exported privatisation on an industrial scale since 1981 – 50 state-owned industries and corporations were sold with net proceeds of £74.9bn (£165.5bn at 2018 prices). Debt write-offs, council house sale discounts and public subsidies to privatized services totaled £174.4bn (£324.4bn current prices). In addition, 770 PPP projects and 340 PPP health centre projects led to £320bn in contractual payments. 

Decline in quality of services and jobs

Neoliberal public management focuses on outcomes but has marginalised inputs, processes and outputs, which are critical determinants of service quality, to try to conceal the full negative consequences of privatization. For example, the downward spiral in the quality of jobs, terms and conditions and pension rights is considered a contractor responsibility and of limited, if any, concern for public clients awarding contracts.

The book details the impact of privatisation in education, health and social care, transport, criminal justice and other services the UK and other countries over three decades, which evidences the consistency of failure and impact of market forces on services, jobs and increased inequality. Offshoring and tax avoidance is rife, particularly as private equity fund ownership of public assets and the growth of secondary market transactions of PPP equity to infrastructure funds accelerates.

The final part of the book analyses why it is vital to challenge new forms of privatisation and public-private partnerships promoted by global institutions and transnational corporations which will continue to embed new ways of extracting profit and control. The potential impact of technological change and automation and the continuing urbanisation and growth of megacities must also be taken into account.

I argue for the centrality of public ownership with scope for community and cooperative provision and why they must not mirror the policies and practices of social enterprises, housing associations and many other third sector organisations in capitalist economies. The development of alternative policies and plans are important because public ownership and re-municipalisation alone are inadequate. The systematic decommodification of services is necessary to strip away the neoliberal commissioning and contract culture to be replaced by new accountable governance, transparency and service user and public employee participation and radical public management. Green New Deals should be part of wider national, regional and local economic, social and environmental plans to ensure a holistic approach that integrates sector strategic plans for public housing, employment, education, health and social care with the preservation of nature and biodiversity and climate action. 

A radical public management is urgently needed to break the hold of neoliberal ideology and managerialism. Ownership alone is no guarantee that a service will be provided effectively to meet public needs and is more likely to be re-privatised. Therefore, all sustainable proposals for public ownership must be accompanied by a detailed plan for how services will be provided, managed and monitored. Increased sustainable public revenue can be obtained through progressive taxation with increased wealth and corporate taxes whilst eliminating the cost of corporate welfare subsidies and tax breaks. Corporate interests must be challenged by building new alliances between trade unions, community and civil society organisations taking joint action to advance a radical agenda. 

Book launch by Dexter Whitfield

We are holding a book launch on

Tuesday 28 January 2020, 3.30pm – 5.00pm at

Jubilee Scotland,

Augustine United Church,

41 George IV Bridge,

Edinburgh EH1 1EL.

Chaired by Robin McAlpine, Director of Common Weal. The event is free but you can book a ticket easily through our event page on Eventbrite.

Copies of the book

Public Alternative to the Privatisation of Life is available in paperback (£25.00) and eBook (£15.00) formats from Spokesman Books; paperback and Kindle (£15.00) formats from Amazon; and paperback copies from bookshops. 

Dexter Whitfield is Director of the European Services Strategy Unit and Adjunct Associate Professor, Australian Industrial Transformation Institute, Flinders University, Adelaide.

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Find out more about our campaign about rethinking private financing

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Oxgangs School wall collapsed in 2016, due to poor management by PPPs

Our schools are collapsing, hospitals are being failed and yet there’s more money being spent on them than ever, with nobody around to be held accountable. That’s the situation that our country has found itself in after years of contracts forged by Public Private Partnerships. Our infrastructure is costing taxpayers billions more than it’s worth, because of contracts that has private companies draining public funds year after year.

Scotland has been entering PPPs since the early nineties, as a way to bring investment to the country’s infrastructure. The country’s limited ability to source funds for new projects meant that PPPs were a lifeline in getting projects off the ground, but decades on they have dramatically exceeded the costs of most projects financed by government funding. High interest rates, declining service standards, and lengthy contracts have put local authorities in more debt than ever before, having a knock-on affect on our public services. Projects considered failures can still benefit private companies greatly, with tax haven investors making millions off the currently empty, unfinished new Sick Kids Hospital in Edinburgh.The current interest on Scotland’s 84 Private Financing Initiative (PFI) contracts is currently projected to cost the government and taxpayers £11.5 billion, double the capital value of the of what they’re actually worth, paid over long contracts of up to 30 years. At Jubilee Scotland, we are proposing a new way of public financing that values the public over profit.

A New Scottish Model

A Local-National Partnership is a model where Local Authorities are supported by a national body. It could take the form of a Scottish National Investment Company (SNIC) that finds the best possible solution for managing and financing infrastructure projects. It will offer guidance to local councils in legal, energy and construction issues, looking over financing packages that fit them and avoiding the traps of short term thinking and expensive problems that come from these extended contracts. In this model, local authorities and their operators will be the legal owners of their projects instead of private companies, with public interest and transparency maintained at the core of each one.

The Scottish Government is restricted by strict borrowing rules but local councils are not. A number of options are open to funding public work, such as borrowing from the Public Works Loan Board (PWLB) and the Scottish Investment National Bank (SNIB) that is set to open in 2020. There is little new risk associated with sub-national borrowing, PPPs at the moment have our councils paying large amounts in rent for public work, with complex contracts that are impossible to default on. The risk of local authorities facing bankruptcy in a Local-National Partnership is lower than in a PPP because the payments made are significantly lower. By reducing the risks of sub-national borrowing, our government can aid local councils borrow funds as a guarantor, providing oversight and assistance which allows them to work on their own projects.

When it comes to public works being built with private financing, the system has failed. We need to ensure that in future we don’t make the same mistakes in handing over our public money to people hiding it in tax havens, with no accountability for their mistakes. By taking on an approach that serves the needs of local communities, we will be able to make their projects work for them instead of being indebted to faceless organisations that only care about profit.

Find out more here about Public Private Partnerships and why we need your to help calling on your MSP to bring an end to them

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On the 21^st 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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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:

https://www.commonspace.scot/articles/3294/why-ons-ruling-set-kick-start-new-debate-about-scottish-governments-investment

 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:

https://www.commonspace.scot/articles/3986/margaret-cuthbert-speech-bundling-or-bungling-procurement-pfi-and-scottish-economy

[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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The middling poor, those on $2 a day, are pulling children from school and cutting back on vegetables so they can still afford rice. Those on $1 a day are cutting back on meat, vegetables and one or two meals, so they can afford one bowl. The desperate—those on 50 cents a day—face disaster.

Puzzling because it neglects that the poverty metrics cited are “purchasing power parity” figures, pegged to 1993 US prices. That means the “middling poor” are living on the equivalent of that could have been purchased in the US, in 1993, for $2 (Pogge and Reddy set this out [PDF]). People on $2 PPP US 1993/day are not sending their children to school and buying vegetables (at least in any reasonable quantity). So to describe them as “middling poor” is tendentious in the extreme. “Tendentious in the extreme” means: “wrong”. The description of the eating habits of “the middling poor” and their less fortunate cousins in the lower categories is also “tendentious in the extreme.” Those on $1 PPP US 1993/day are not cutting out meat, ‘cos they’re not eating it.

The Economist reserves the adjective “desperate” for those on 50c (presumably 50c PPP US 1993/day). Such verbal economy leaves a vague but reassuring impression that things are not after all really all that bad. But I doubt any letters will be published next week insisting that the description “middling poor” should be reserved to those in industrial countries living on less than 60% of the national median household income (ref here).

After all, comes the standard riposte, we’re talking “absolute” rather than “relative” poverty. I think this is a bogus distinction: it lets the complexity of defining “poverty” act as a convenient buffer against the truth. New economics foundation takes life expectancy as the key determining factor in defining poverty, and defines an “ethical poverty line” of $3 PPP/day. At $3 PPP/day people in general live for their whole genetic lifespan; where poverty cuts life short, it certainly breaks human rights.

Let’s at least not describe as “middling poor” people who fall below this line. And let’s at least not restrict the epithet “desperate” to only those who live (on average) on for a couple of dozen years. Brief existences, true; but perhaps still not unworthy of fair treatment by the self-described “authoritative weekly newspaper.”

But perhaps there is a little more to say on this matter. The Economist’s enlightening account of “The food crisis and how to solve it” seems to have been occasioned by a quotation from Josette Sheeran, Executive Director of the World Food Programme. Sheeran was chosen for the job after consultation with UN Secretary General then-elect Ban Ki Moon. Apparently, there was some concern regarding her previous association with another moon, viz: Rev. Sun Myung and his Unification Church. Some unkind people have called “Moonies.”

The Washington Post writes:

Sheeran said of her candidacy, “I don’t know why personal faith has any relation or bearing,” adding: “It is a matter of record that I have no association with the Unification Church.”

This doesn’t appear to the the Post‘s view, which writes (same link):

The Bush administration [which nominated her – ed] was sensitive to the possibility that Sheeran’s former membership in the Rev. Sun Myung Moon’s Unification Church would emerge as an issue in the race. A U.S. official pressed The Washington Post not to mention Sheeran’s past links to the church, saying it was inappropriate to describe her religious affiliation.

But enough of Ms Sheeran’s quasi-religious interests. They are personal matters, and irrelevant. Suffice to say that someone who thinks living on $2 PPP US 1993/day counts as being “middling poor”, is in charge of the “world’s safety net”, the World Food Programme.

Max Hiatus at DebtTribunal

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