Futures vision

Scotland is looking for alternatives to PFI and PPP funding and the Scottish Futures Trust could well be the answer, say Rhona Harper and Claire Donald

On 3 May 2007 the Scottish National Party (SNP) claimed a narrow but historic victory in the Scottish parliamentary elections. To most lawyers in Scotland the change in administration will make little difference, but for firms with teams of PFI lawyers there could be big changes ahead.

The SNP arrived at the forefront of Scottish politics for the first time with the promise to introduce “a new system of infrastructure funding as an alternative to the costly and flawed PFI/PPP” in the form of the Scottish Futures Trust (SFT). Indeed, only days after the election the SNP showed it meant business by stating that, not just planned, but current PFI prison projects would now be reviewed as a matter of urgent priority.

In a previously thriving Scottish PFI/PPP market, all of the major law firms in Scotland have built up sizeable PFI teams and will be watching with interest whether there is a future for PFI in Scotland, and if not what will replace it.

PFI lawyers, however, may be pleased to note that the SNP’s manifesto does not make adoption of the SFT mandatory rather it states that procuring authorities may choose to use PFI/PPP over the SFT model if they wish. It is a statement made with an underlying confidence that the SFT will be demonstrably better and therefore no rightminded procuring authority would choose PFI/PPP.

However, the SNP rhetoric since the election and the review of PFI/PPP projects both in procurement and in the pipeline (and in the case of the Addiewell Prison PFI, even mid-construction) currently being carried out would suggest that PFI lawyers will have to accept that it is the intention for Scotland in the long term to move away from PFI/PPP as a procurement model.

The nature of the SFT
The SFT is described as a ‘not-for-profit’ vehicle that will invest in Scotland’s infrastructure and will, the SNP says, provide lower-cost borrowing opportunities. Finance would be raised through a tax-free public bond issue at a proposed return of 4 per cent per annum.

In terms of the detail of the proposal, that is pretty much it. Immediate issues, such as whether central UK government will sanction this tax-free set-up, which favours Scotland over England within the UK, and how a new standalone agency will achieve the credit rating required to allow it to raise money at the preferential rates hoped for, remain unanswered.

The level on which the SFT would operate within the Government’s procurement framework is also unclear. On one interpretation it simply provides a method of funding, but there is also a suggestion that it may become a wholly new procurement agency in its own right.

Although the SNP has created the opportunity to address some of the longstanding political concerns with PFI, it is clear that if it wants to make this particular proposal fly, it has a lot of work to do. Work that will take years, not months.

But the SNP does not have years to wait. It has promised to match “brick for brick” current plans for improvements in schools and hospitals; there are fast-approaching EU deadlines relating to waste and recycling targets that were to be met, in part, through PFI projects; and prison overcrowding means that the need for increased prison accommodation is critical. Either the PFI/PPP model continues to be used in the meantime, or the SNP is going to have to come up with something else.

PFI concerns
Leaving aside traditional procurement, as that has always been, and will continue to be, an option for procuring authorities where it provides better value for money, any suggestion of the options available to the SNP require examination of their ideologies.

Although the SNP is critical of PFI/PPP, the actual criticisms suggest that it is not PPPs per se that it has a problem with, rather PFIs, which are of course only a subset of PPPs. The main concerns would seem to be the cost of borrowing and the private sector ‘profiteering’ out of equity stakes in the special purpose vehicle (SPV) delivery company, not the collaboration with the private sector itself. Indeed, law firms should note that the SNP does not appear to have ruled out working with the private sector to deliver projects, but unfortunately the distinction between PPPs and PFIs is often blurred.

Even the Futures Trust proposals appear to be addressing the ‘evil’ of the funding rather than the involvement of the private sector. On this assumption there are two procurement models in use in Scotland that would fit with the SNP ideology and which could be used to allow the stream of projects to continue, pending resolution of the SFT model.

Not-for-profit model
The first not-for-profit model was implemented for the first time in Argyll and Bute Council’s Education PPP. This model is set up in contractually the same way as a PFI project, but any surpluses generated by the SPV delivery vehicle are ploughed back into education in the area via an educational charity – they are not paid out as profit to the equity holders.

The benefits of PFI are retained, in that the SPV is not paid until the schools are delivered. The schools must be maintained for a period of 25 years, with penalties if they are not, and the procuring authority manages to spread the cost over the life of the contract.

This model has since been used on a different signed project and is being used on another that is at preferred bidder stage, so it is known to be marketable. Even if law firms have not been directly involved in these projects, most PFI lawyers are aware of the not-for-profit structure.

Hybrid PPP
Then there is the hybrid PPP structure, which is being used by Western Isles Council on its education PPP. Again this model is contractually similar to a PFI project, but the SPV delivery vehicle in this case is wholly council-owned. Private sector experience is imported through a private sector developcontinued #+ continued ment partner and a private sector director rather than through an equity stake.

This model would address both the concern regarding profit on equity and the concern over private sector borrowing, as all borrowing is done either by the council itself or its SPV. While the Western Isles Council Project has not closed yet and is therefore not a model with which most PFI lawyers will be familiar, it has already been approved for use on another project by the Scottish Executive.

Developing the SFT
In addition to using these two models to keep projects moving in the immediate future, they could well provide the SNP with the start point or framework required for its futures trust proposal.

The SNP now has the chance to iron out some of the politically unacceptable wrinkles of the current PFI model, and where some of the thinking has already been done by lawyers and other advisers, it should be used.

To maintain political momentum, the SNP has to introduce an alternative to PFI sooner rather than later – and it is likely that, regardless of form, this will be labelled the SFT. It is therefore inevitable that PFI as we know it will (particularly if the use of the SFT is mandatory) gradually be consigned to history and law firms will have teams of SFT rather than PFI lawyers.

But we have probably not seen the end of PPP and the hope is the SNP uses the alternative models already in circulation to keep large projects moving. This would present a picture of a party moving in the direction promised pre-election, maintaining momentum on capital investment, but doing so in a way that is marketable, while giving itself time to think through thoroughly and develop a new model that it finds more politically acceptable. nRhona Harper is a partner and Claire Donald is