Highland fling

Even if Scotland isn't exactly embracing PFI/PPPs, its law firms are finding them irresistible. Drysdale Graham reports

In many respects, the PFI/PPP market in Scotland represents a microcosm of the market throughout the remainder of the UK. According to figures from the Scottish Executive, financial close has been reached on projects with a capital value of circa £2.5bn, ranging from education to health, roads to waste management.

Water and sewerage
The key feature that distinguishes the Scottish experience from England's over the last few years has been the water and sewerage sector, which has remained in public hands.

The focus of the major commercial firms in Scotland is shifting south of the border and abroad

To meet EU directives on water quality, 10 schemes have been let for the construction of water and sewage treatment plants, with a capital value of around £700m and with the last to reach financial close being the Moray Firth project, which signed in summer 2001. The water industry will undergo further reorganisation later this year when the Water Industry Bill is enacted and three water authorities will be replaced by one public sector entity, named Scottish Water. Scottish Water will not only let further projects, but also be involved as adviser and bidder to provide services in other sectors – for example, the three existing Scottish water authorities are part of a consortium bidding for the Ministry of Defence's (MoD's) Project Aquatrine (the UK-wide project to transfer the responsibility for maintenance and operation of all MoD water and waste management to the private sector) .

Partnerships UK
Another distinguishing factor in the Scottish market is the enthusiasm with which the involvement of Partnerships UK (PUK) has been embraced.
Of the 49 per cent minority stake held by the public sector in PUK, 4.4 per cent is held by the Scottish ministers, with the balance being held by HM Treasury. PUK has entered into 'development partnerships' with local authorities for three Scottish school projects and is also brokering a standard document for Scottish schools projects based primarily on the document used for the Glasgow and Edinburgh schools projects, and which currently takes the form of a consultation draft. It is anticipated that the final version will be available for use by local authorities in spring 2002. PUK is also playing a key role in the ebusiness project currently being let by the former Scottish Tourist Board, now renamed visitscotland.com.

Growth areas
The key growth area in the Scottish projects market over the next year or so is anticipated to be in the schools sector. The pump priming steps, which the Scottish Executive took last year to encourage schools PFI projects by making available £5m of funding to assist local authorities in carrying out feasibility studies, should ensure that this sector continues to grow incrementally.
The Scottish ministers are due to announce in the spring which local authority bids have been successful in obtaining support from the Executive. Likely candidates include Dumfries & Galloway Council, which will be the first project to outsource an entire local authority's schools stock in one deal, and Argyll and Bute Council. Other key growth areas include waste management, where the Argyll and Bute Council project has signed with two more – Highland Council and Dumfries & Galloway Council. The Scottish tranche of the MoD's Project Aquatrine has also reached the prequalification stage. As more Scottish projects reach their operation/services phase, refinancing, bundling and trading of equity interests in projects will become more prevalent.

Value for money
On the political side of the equation, the Finance Committee of the Scottish Parliament is currently reviewing the PFI/PPP process to see whether it offers value for money, and a separate report is being prepared by Audit Scotland for the Accounts Commission to “appraise the value for money of recent and forthcoming PFI schools deals in Scotland and to make recommendations to help promote good practice in the preparation and delivery of PFI contracts”. Should these reports conclude that PFI/PPP does provide value for money, it will be a welcome boost to the Scottish ministers.

The Wider Markets Initiative
Pursuant to the Office for Government Commerce's Wider Markets Initiative, the Scottish ministers are currently considering, as part of their strategy for extending the availability of broadband telecommunications services in Scotland, the aggregation of telecoms procurement for the public sector. The vehicle for achieving this may be a public-private partnership between the Scottish ministers and local authorities and health boards in two pathfinder areas, namely the South of Scotland and the Highlands and Islands, to act as the interface with the telecoms companies and to provide those companies with the guaranteed demand necessary to encourage investment in the telecoms infrastructure.
Another live issue in the Scottish market is the use of non-profit distributing organisations, with parallels being drawn with the social housing sector, where such vehicles are more common. This structure has not yet been used for a PFI/PPP project in Scotland, but it may be that in due course local authorities will test the water by seeking mandatory variant bids. The Scottish National Party remains strongly opposed to PFI/PPP and continues to promote its concept of a 'Scottish Trust for Public Investments', despite reservations being expressed by funding institutions.

Consortia have prequalified for two roads projects: the M77/Glasgow Southern Orbital roads project, jointly let by the Scottish Executive and East Renfrewshire and South Lanarkshire Councils, with the Invitation to Negotiate (ITN) due to be issued at the start of February; and the A92 roads project, being let by Angus Council, with the ITN due later this year. Various other transport schemes have been mooted but have yet to see the light of day.

The Royal Bank of Scotland and HBOS remain the key players in the funding market, although Abbey National and some of the foreign banks are now active north of the border, with the European Investment Bank playing a key role in the recently signed Edinburgh schools project. It is anticipated that the bundling together of smaller projects will become more prevalent.

The major commercial law firms in Scotland are all active in Scotland's PFI/PPP sector to a greater or lesser degree, but their focus is shifting south of the border and abroad, where opportunities are greater, in particular in the schools and hospitals sectors, whether acting for consortia or funders.
Those firms that have full-service London offices are well placed to compete with the key national players. Two of the nine firms on the recently-announced MoD panel are based in Scotland. The Irish market, both north and south of the border, is also providing opportunities for several Scottish law firms.
Opportunities further afield exist where other jurisdictions are embracing the concept of PFI, and UK law firms can – hopefully – contribute to shortening the learning curve there. n
Drysdale Graham is a senior partner in McGrigor Donald's projects unit