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Home , John Swinney, Nicola Sturgeon

turning to more private money for public projects

Children’s hospital among affected projects after spending programme part-funded by private sector runs foul of new EU rules on measuring state spending

Scotland’s first minister, , and its finance secretary, , visit a construction site for new homes in Braehead in April. Photograph: Michael McGurk/Rex

The Scottish government is turning to increased private-sector funding to pay for a multibillion pound spending programme after a ruling that has delayed major public projects in .

Those affected include a bypass around Aberdeen, a children’s hospital in and more than a dozen secondary schools. They are being reorganised to increase private sector control and private funding, in order to prevent a curb on Scottish government borrowing and keep the projects off Holyrood’s balance sheet.

The changes are being introduced after the Scottish Futures Trust (SFT), the government agency overseeing programmes part-funded by the private sector, ran foul of new EU rules on measuring state spending.

The rules require greater clarity on the ownership of publicly funded building programmes and have led the Office for National Statistics to launch reviews into the status of several large projects in Scotland. Dozens of schemes that were to sign off funding terms from 1 September 2014 have been delayed as a consequence, leading to extra costs for councils and the NHS which the SFT has so far not quantified.

Although no clear costs for delays are yet available, a Guardian investigation suggests the first 24 projects in the SFT’s Hub programme to build new schools and community centres, as well as its programme for large standalone schemes for roads and hospitals, are already slated to set back the taxpayer about £10bn in borrowing and running costs from now until 2048.

The restructuring means that private contractors and lenders will now pay all the upfront building and project costs, which will be added to the long-term debt of NHS boards, local councils and the roads agency Transport Scotland. That debt, plus interest, is then paid off by authorities over a series of decades via regular payments known as unitary charges.

For Hub projects affected by the changes, a 20% stake previously held in each by public- sector partners will be transferred to a new private-sector charity. That will give the private contractors the right to increase their shares in the new companies set up to deliver each project from 60% to 80%.

The new measures, disclosed in a confidential SFT document leaked to , are designed to ensure that all its projects dating from 1 September 2014 will be counted as privately owned and funded so they do not get added to the Scottish government’s balance sheets.

The document states: “Any perception of public sector control over the [project] delivery company must be avoided … Public-sector financing of projects [through debt or capital financing] must be limited in order to maintain clarity of risk-transfer to the private sector delivery partner.

“The complete removal of any capital contribution to projects through the construction phase, or on construction completion, is the cleanest approach and will be adopted across the programme.”

As a result, the public funds needed to pay off debts to the private sectorincurred by the projects will be met from the public sector’s budgets for day-to-day spending over the next three decades – known as revenue funding – and not from capital funding.

Before the change, councils, Transport Scotland and health boards were to share some of the upfront building costs. Now their increased reliance on borrowing from private contractors means most projects will have higher debt costs.

However, increasing the dependence on borrowing from the private sector allows Holyrood to load up its balance sheet with more debt. The changes will make it far easier for Nicola Sturgeon’s government to borrow at least £2bn to fund further capital projects and bolster its anti-austerity stance using new powers from the Scotland Act 2012. This is because the SFT programme will not be counted as public-sector expense. But the first minister has yet to set out how much extra her government wants to borrow and how Scotland’s public sector can afford extra debt.

The at Holyrood, Edinburgh. Photograph: Murdo MacLeod for the Guardian

The restructuring is embarrassing for Sturgeon’s government, which has championed the so called non-profit distribution (NDP) method of using private contractors to fund new buildings and roads after it castigated the use of private financing by previous Labour and Lib Dem coalition governments at Holyrood.

The NDP system is a more limited form of the private finance initiative (PFI) that allows the SFT to cap private-sector profits and has lower, fixed rates of interest than before. But the new model will increase overall costs and public-sector debt, and increase private-sector control of the schemes for the lifetime of every project, which can last for 32 years or more.

The utter hypocrisy of the has been exposed

Jackie Baillie, ’s finance spokeswoman, has urged the spending watchdog Audit Scotland to investigate the financial impact of the changes, which have not yet been explained to the Scottish parliament, and the increases in public sector debt involved. She has also tabled questions at Holyrood, urging ministers to provide more details about the costs and impact of the changes.

“The utter hypocrisy of the Scottish National party has been exposed,” Baillie said. “The SNP government tell anybody who will listen that only they can protect our public services from the hands of private companies yet here we find they are handing over an increasing share of our public estate to the private sector. Yet again they say one thing in public and another in private.” A Scottish government spokesman insisted that the SFT approach was the most cost-effective way of ensuring roads and public buildings were modernised. The changes were being forced on ministers by new EU policies, he said.

“The non-profit distribution model is particularly good value for money when compared with historic public private partnership and PFI schemes, which have become widely discredited and which in some cases are still seeing punitively high sums charged to the taxpayer,” he said.

The Scottish government documents show that of the 24 Hub projects that have been built or authorised, the total lifetime borrowing will be £7.7bn – although that total is now set to increase following the EU-mandated changes.

There are a further 23 school and health projects in the pipeline which, in April 2014, were expected to have a capital cost of about £494m. Based on the average lifetime costs of the projects already fully costed, the total price for those projects could be about £1.8bn, which is also expected to rise.

That will be paid off in annual unitary charges paid from the main revenue budgets of Scottish councils, colleges and NHS boards, totalling hundreds of millions of pounds a year by the mid- to late-2020s. Barry White, chief executive of the SFT, said the interest rates on debts incurred by the projects were very competitive, at 3.5% to 4%, and capped for the lifetime of the contract. Extra costs from the restructuring, he said, would be met from contingencies built into project costings.

Aberdeen is notorious for its grid-locked roads. A new bypass is one of the projects in the so- called Hub programme to be affected by changes to EU rules. Photograph: VisitBritain/Britain on View/Getty Images The schemes affected include one of the mostly costly building projects being undertaken in Scotland. The Aberdeen western peripheral route is designed to relieve heavy congestion in the city and will eventually cost the taxpayer at least £1.5bn, including all its lifetime costs.

The restructuring follows the decision by the ONS to launch an investigation into the project last December because the new rules from the EU statistics agency Eurostat means it could result in an increase in government debt and its liabilities, unless the SFT can prove it is a private-sector scheme and keep it off Holyrood’s books.

As a result, John Swinney, the Scottish finance secretary, sought a £300m contingency loan from the UK Treasury and set aside £150m of Scottish government money to cover Holyrood’s potential liabilities until the project is moved off the public books.

The ONS is about to launch a similar assessment into two other SFT projects: a new paediatrics hospital on the outskirts Edinburgh, a £310m project which has suffered years of delays; and a £469m acute services hospital complex in Dumfries.

An investigation by the Guardian has established that the lifetime costs of the children’s hospital, known in Edinburgh as the Sick Kids, are projected to reach at least £438m over its 26-year management and maintenance contract, while the Dumfries hospital is expected to cost £534m over its 26-year contract.

But the Scottish government does not yet know whether the SFT restructuring will meet the new Eurostat tests or satisfy the Office of the Scottish Charity Regulator – potentially adding to the delays to all the affected projects while it is checked.

The OSCR has been consulted on the planned private company charity model but has not yet signed it off. The ONS has not been consulted on the proposals or on how they impact on the AWPR or the two hospital projects. ONS officials said they would launch fresh reviews if changes are made to their contractual arrangements. Aberdeen project under ONS spotlight

Aberdeen, Europe’s oil capital, is notorious for its grid-locked roads. So building a bypass around the city – a 36-mile long dual carriageway called the Aberdeen western peripheral route (AWPR) – has been a political and economic priority.

Construction has now started but a Guardian investigation has found that the estimated lifetime costs of the privately-financed design, build, finance and maintain (DBFM) project will eventually be nearly double the price announced by Scottish ministers, at nearly £1.5bn until it is fully paid off in 2048.

In December, Scotland’s then transport minister, Keith Brown, said the overall cost of the AWPR, including buying the land, would be £745m at 2012 prices. He said the cost of construction and operation cost elements within that total were £530m, at today’s prices.

In fact, because the money is being borrowed by Transport Scotland, another Scottish government document reveals the projected annual repayments to the European Investment Bank, the project’s lender, will actually total £1.45bn, with repayments hitting £50m a year by 2042.

The AWPR is significant for a second reason: the scale of the project is so great it is the first UK public building project to be reviewed by the Office for National Statistics to make sure the UK meets stricter tests introduced by EU statistics agency Eurostat for what constitutes a publicly owned or private sector capital project. If it is ruled to be publicly owned, that has implications for the UK’s national accounts and its net debt and borrowing.

The ONS is scheduled to announce its decision within days, but the Scottish Futures Trust has already agreed to revise the contract to make sure it is counted as a private-sector project. The financial implications of that, which likely involves increasing its cost to the public sector, have not yet been disclosed.