Reform Scotland

Reform Scotland unveils creative new plan to replace PFI

An innovative scheme to finance and manage major public projects such as new schools, hospitals and transport links is unveiled today by a leading Scottish think tank.

Reform Scotland says the radical new strategy – called Scottish Capital Partnerships [SCP] – would replace the flawed Private Finance Initiative [PFI] and redefine the role of the controversial Scottish Futures Trust [SFT] which has been attacked for failing to deliver a range of key infrastructure projects.

‘We desperately need a new vehicle to get momentum back into public sector infrastructure projects and, after two years of achieving nothing under the Scottish Futures Trust, our proposals provide that vital mechanism,’ said Reform Scotland chairman Ben Thomson.

Under SCP, projects would continue to be financed jointly by the public and private sectors but with major changes that would avoid the pitfalls of PFI.

Primarily, the bulk of the money needed to finance SCP projects would come from public borrowing at government interest rates. Under PFI, money to fund projects was borrowed at much higher commercial rates but with risk remaining with the taxpayer, who was left to count the cost when there was default in the contract.

Crucially, under Reform Scotland’s blueprint, independent management companies would be invited to submit bids to build and run projects – as well as put up the equity risk capital.

‘This is usually around 10% of the total capital required and it will immediately act as an incentive to management companies to ensure projects are delivered on time, within budget and run well for the life of the asset,’ said Mr Thomson.

‘Management companies will bring the skills, innovation and efficiencies which until now has often been lacking in public sector infrastructure projects. This is why so many of them end up behind schedule and grossly over budget.’

In a report entitled Power to Build, the independent think tank says important lessons need to be learned from mistakes made under PFI and Public Private Partnership [PPP].

But it warns against ‘throwing the baby out with the bath water’ by failing to acknowledge that there are key roles for the private and third or voluntary sectors in providing public service infrastructure.

It says the SFT’s role should be to act as an independent facilitator, adjudicator and regulator of projects under a more flexible scheme that combines four key elements:

? Financing of infrastructure projects at government borrowing rates.

? Management efficiency and innovation through competition between the private, public and third sectors.

 ? Flexibility to enable the best elements of a bidding process to combine to form a project that is right for that location and service.

? Public sector retention of ownership of strategic assets which are vital to the nation.

The report, which also draws on the experience of financing and running infrastructure schemes in other countries such as Ireland, France, the Netherlands and New Zealand, recommends a number ways in which public sector borrowing could be achieved that would massively reduce overall cost.

While one of them depends on the Scottish Government being given increased borrowing powers as recommended by both Reform Scotland in an earlier report, Fiscal Powers, and the Calman Commission, another is to set up a ‘Scottish Infrastructure Bank’ from which money for projects could be borrowed at local level on behalf of the Scottish Government.

The report says that management companies bidding for public sector infrastructure projects could be set up by local councils, mutuals or the private sector. They could develop specialities such as running hospitals, schools or hub services for local authorities, or they could be companies that focus on national projects such as high-speed trains or bridges.

Reform Scotland says that under SCP the financial return on a management company’s equity investment in a project would be agreed in advance. If the company succeeded in saving costs or raising additional sources of income, the bigger its reward. But if it failed to deliver, the company could lose some, or all, of its stake.

The SFT was set up by the SNP Scottish Government to drive the country\’s infrastructure programme as a funding body and has been given a co-ordination role in a new school building programme. However, it has yet to build or fund any projects and, according to Mr Thomson, there is confusion about its role within the process.

He added: ‘Our proposals would involve no additional on-cost – indeed, we believe they will lead to significant savings for the taxpayer. Not only will they give the SFT a properly-defined role, but are more likely to deliver key public service projects on time and within budget, ensuring real value-for-money.

‘It is vital that we move quickly to enable infrastructure projects to proceed because we need to ensure that Scotland is investing in its future if we are to create the environment for sustainable competitive growth.’

Reform Scotland’s proposals were welcomed by leading economics expert Professor John Kay of Oxford University.  He said: ‘This is an important contribution to the debate on how Scotland can maintain its infrastructure, manage projects more efficiently, and move beyond the failed PFI model.’