Revealed: the £932m cost of private finance projects

Revealed: the £932m cost of private finance projects
The Ferret

Private finance schemes to fund roads and hospitals have blasted a £932 million hole in the Scottish Government’s budget and are to be investigated by public spending watchdogs.

Audit Scotland and the Accounts Commission are planning a joint examination into whether privately funded building projects overseen by the Scottish Futures Trust – which replaced previous governments’ discredited Private Finance Initiative (PFI) schemes – are “value for money”.

Ministers have been told that four of the biggest Non-Profit Distributing (NPD) projects have to be included in the government’s budget under new European Union accounting rules because they are mostly under government control. Ministers had previously been planning to keep them off the public balance sheet.

According to Audit Scotland, the Aberdeen Western Peripheral Route, completion of which has been delayed until winter 2017-18, will now cost taxpayers £469m in capital investment. The new Dumfries and Galloway Royal Infirmary will cost £213m, the new Edinburgh Sick Kids Hospital will cost £150m, and the new centre for the Scottish National Blood Transfusion Service at Heriot Watt will cost £33m.

A joint investigation by The Ferret and The Guardian has discovered that a fifth NPD project – the new £67m Balfour hospital at Kirkwall on Orkney – is also likely to end up on the public balance sheet. This will increase the total amount of capital lost from public sector borrowing to £932m.

The Scottish finance secretary, Derek Mackay, is due to announce his draft budget for 2017-18 on the 15th December. He will have to explain how the government is going to cope with the missing £932m, which amounts to nearly a third of the Scottish Government’s £3 billion capital borrowing allocation.

The announcement at Holyrood is expected to be greeted by protests from trade unionists, who are angry about spending cutbacks and privatisation. Private finance schemes have brought job losses and “exorbitant” 30-year contracts, warned Unite’s deputy Scottish secretary, Mary Alexander.

“The funding model rolled out by the Scottish Government is nothing other than a public relations repackaging of the private finance initiative, with zero transparency and minimal accountability,” she said.

The Ferret can also reveal that the Dumfries hospital will earn its private consortium backers – including the insurance group Aviva and the building firm Laing O’Rourke – £160m in interest and fees on a capital cost of £213m, from loans totalling £242m. In recent weeks the hospital has been picketed by the construction workers’ union UCATT in a dispute over union access.

Figures released under freedom of information law show that the National Health Service (NHS) is paying interest rates of 5.12 per cent and 11.29 per cent for the Dumfries hospital. Although this is lower than the interest rates charged under the initial PFI schemes, it is much higher than the 1.6 per cent it would be paying to borrow from the state-run national loans fund.

A table released by NHS Dumfries and Galloway gave summary financial information on the hospital project, including some figures that were so poorly redacted they could be read by cutting and pasting the text into another document. The health board did not respond to requests to comment.

Other documents obtained during our joint investigation show that the NHS is paying private contractors three times the hourly rate for electricians, joiners and plumbers working at the new Royal Edinburgh psychiatric hospital in Morningside.

Contractors Galliford Try will charge NHS Lothian £33 an hour for an electrician and £26 an hour for a painter, excluding overheads and VAT. An NHS electrician’s wage starts at £9.82 an hour, while a painter’s starts at £8.59

Leaked documents also show Galliford Try wants to charge £250.58 to install an electrical socket and £395.58 to move a fire exit sign – also excluding overheads

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This story was mentioned in Holyrood:

Neil Findlay (Lothian) (Lab): When the finance secretary met the chancellor, did he discuss public infrastructure funding? Today The Guardian newspaper and The Ferret online have exposed how the Scottish Government’s failure to interpret EU rules correctly will result in £932 million being lost to public investment. At the same time, private financiers are profiteering from the taxpayer via sky-high interest charges at a time when interest charges across the western world are at a historic low.

Is it not abundantly clear that the non-profit-distributing model is just another financial scam and that the only people who think that it is a good idea are members of the Scottish Futures Trust and people around them, who will make fortunes out of schemes? Will the cabinet secretary join me in calling for a committee of the Parliament to investigate the whole issue of NPD financing of our public services?

Derek Mackay: Members would never know from that question that the Labour Party in office totally supported the public-private partnership model—that started under the Conservatives as the private finance initiative, which was the worst regime possible. Our model is much better at profit capping and we have been able to accelerate capital infrastructure investment to build schools, hospitals and community facilities and undertake other infrastructure projects, which have been welcomed across Scotland. We have been, and will continue to be, perfectly transparent about how those projects are delivered.

I will say more about infrastructure in tomorrow’s budget statement. We will make wise decisions on our capital spending and infrastructure projects, but we continue to pay for the legacy of borrowing and profiteering that we inherited from first the Conservatives and then the Labour Party.

There was also a follow-up in The Guardian and The Fraser of Allander Institute also published a blog post on this topic.

See Ferret for more.