FI/S3/08/12/A

FINANCE COMMITTEE

AGENDA

12th Meeting, 2008 (Session 3)

Tuesday 6 May 2008

The Committee will meet at 2.00 pm in Committee Room 2.

1. Inquiry into the methods of funding capital investment projects: The Committee will take evidence from—

Gareth Hoskins, Board Member and Scotland's Healthcare Design Champion, Architecture and Design Scotland;

Alan Ledger, Project Director, Mott MacDonald; and

David Stark, Managing Director, Keppie Design;

and then from—

Alan Fordyce, Managing Director, Robertson Capital Projects;

Ian Rylatt, Managing Director, Balfour Beatty Capital; and

Steven Tolson, Director, Ogilvie Group Developments;

and then from—

Jo Elliot, Deputy Chief Executive, Quayle Munro;

Dylan Fletcher, Group Board Director, Forth Electrical Services Ltd; and

Andrew Gordon, Chief Executive, Canmore Partnership Ltd.

2. Annual report: The Committee will consider a draft annual report for the parliamentary year from 9 May 2007 to 8 May 2008.

3. Inquiry into the methods of funding capital investment projects (in private): The Committee will consider the main themes arising from the evidence sessions to date, in order to inform the drafting of its report.

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4. Creative Scotland Bill (in private): The Committee will consider a draft report on the Financial Memorandum of the Creative Scotland Bill.

Susan Duffy Clerk to the Finance Committee Room T3.60 The Scottish Parliament Edinburgh Tel: 0131 348 5215 Email: [email protected]

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The papers for this meeting are as follows—

Agenda item 1

PRIVATE PAPER FI/S3/08/12/1 (P)

Submissions FI/S3/08/12/2

Agenda item 2

Draft Annual Report FI/S3/08/12/3

Agenda item 4

PRIVATE PAPER FI/S3/08/12/4 (P)

FI/S3/08/12/2

Finance Committee

12th Meeting, 2008 (Session 3), Tuesday 6 May 2008

Inquiry into the methods of funding capital investment projects

Session 4: Submissions

This document contains submissions from—

Page Architecture and Design Scotland 2

Architecture and Design Scotland (supplementary) 5

Keppie Design 9

Mott MacDonald 20

Ogilvie Group 21

Ogilvie Group (supplementary) 23

Balfour Beatty Capital 26

Quayle Munro 31

Canmore Partnership Ltd. 34

Canmore Partnership Ltd. (submission to Scottish Government’s Scottish Futures Trust Consultation) 41

Forth Electrical Services Ltd. 45

Robertson Capital Projects 48

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SUBMISSION FROM ARCHITECTURE AND DESIGN SCOTLAND

Scotland is special. This specialness is attributable to a number of things, including its people, its culture, its history, and its natural and built environment. Its places are special. Many are of exceptional quality, requiring protection and, occasionally, enhancement. Some are of poor quality, requiring regeneration, renewal and improvement. All need to be cared for, continuously. This requires investment.

Capital investment produces new building and infrastructure projects. These shape our environment, by creating new places and changing existing places. It is important that the significant impact of projects on places and on people is recognised, and that projects of quality are produced: end products of the investment process that enhance and promote a feeling of well-being together with respect for, pride in and a responsible and caring attitude to these places. This will make the places of Scotland better, and Scotland a better place. Its attractiveness to visitors, and the economic benefits that this brings, will be increased. For all of these reasons we need procurement processes, and methods of funding capital investment projects, that deliver places of quality.

Conversely, failure to recognise and capitalise upon the broader potential of our investment results in additional expenditure by producing, for example, residential areas that no-one wants to live in; buildings where inefficiency, illness or crime increases running costs; and, ultimately, a requirement for new capital investment to demolish and re-build these facilities.

As our recently published Annual Report sets out we do not consider that Scotland is getting the best value from new developments in the built environment. We therefore welcome the Finance Committee’s current Inquiry into Methods of Funding of Capital Projects and see this as a timely opportunity for the Scottish Government to bring design quality to the fore in public procurement. We advocate that the review of methods of funding include an assessment of how these methods, and their associated procurement processes, affect the delivery of a sustainable product of long term value both to the service it embodies and the wider community. It is the prominence and delivery of such qualitative aspects through current processes that we address below and on which we offer our expertise and assistance as the national champion for good architecture, design and planning in the built environment.

We recommend that the review examine funding and procurement methodologies against the following three broad principles:

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1 Policy and delivery should be linked.

Policy makers, and those with an overarching responsibility for the delivery of design quality by the Scottish Government1, should be accountable for the delivery, by public bodies, of such quality. Their responsibility should go beyond the production of guidance and to include responsibility for the impact that guidance has on investment. They should monitor the outcomes of procurement and report on their success in improving the built environment through all the mechanisms that influence procurement across the sectors.

2 Public leadership of procurement processes.

Public procurement should value and deliver well designed environments that support our communities and public services and thus realise the full potential of capital investment. From our work and involvement in projects we note the following areas for improvement:

ƒ Client bodies need to recognise and understand that a development is not “fit for purpose” unless it supports the sustainable development of the community in which it sits and the health and wellbeing of users2. These broader qualitative issues should be a key objective of the commissioning body, and one in which the public has a voice.

ƒ The opportunity, through good design, to increase efficiency and reduce the cost of running a public service needs to be understood and capitalised upon. This will require strategic design skills to be targeted at appropriate points in the procurement process to ensure that the investment realises the broadest and best impact.

ƒ The client body should control the execution of the project to ensure that quality is delivered. Transferring responsibility for quality to those less motivated in the wider public interest makes the delivery of these broader objectives more difficult to achieve. Further, reducing the access of the client (and stakeholders) to the designer can be an obstacle to the constructive dialogue that assists designers in responding to the client’s needs and aspirations.

ƒ If the public sector client is to take a leadership role in procurement then project teams must be suitably resourced and trained. Client teams need to have the skills to plan and control the stages of the process by which it is delivered. This requires leadership at the highest level to ensure that quality is an objective given to the team, but also that senior people within the client

1 Such as Health and Education Directorates, Planning Directorate and Procurement Groups within the Finance Directorate. 2 The Local Government in Scotland Act 2003 gives a ‘power to advance well-being’. Guidance on this act intrinsically links this power to sustainable, community development through the obligation to achieve best- value.

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team have a professional design education (either in-house or consultant design advisors) so that they have the confidence and skills to make judgements on such issues.

3 Procurement processes should recognise and value design quality.

An understanding of the value and contribution that a well designed environment can make to service delivery3 and the wellbeing of the wider community is key in effectively targeting investment. We recommend that long-term qualitative objectives are given prominence in the following processes:

ƒ Project Initiation: the earliest documents describing the required outcomes of the project - the criteria against which the success of the project, and therefore the client team, will be assessed – should include quality as a required outcome.

ƒ Financial modelling of business cases: criteria should be developed to allow the value of a well designed environment to be quantified and recognised in financial assessments, particularly in relation to offsetting any revenue costs that may be seen as a bar to capital investment.

ƒ Project review systems4: these should include an assessment of the potential of the project to deliver an outcome of quality so that long-term best-value can be more readily realised and more properly planned for thus reducing the risk of cost and programme over-runs.

ƒ Competitive selection procedures: these currently include assessment of both quality and cost aspects of a bid, however the quality of the end product is often only a small proportion of the total score due to the number of other factors that are included in the quality section. We recommend that design quality be a separate and prominent part in the assessment of bids5.

We would welcome the opportunity to assist the Finance Committee further on these matters by making representation in person to the Committee. We look forward to discussing these issues with you.

Raymond Young CBE Chair, Architecture and Design Scotland 6 December 2007

3 For example there is compelling evidence that demonstrates that well designed healthcare facilities can speed the healing process and reduce requirements for medication; well designed schools can enhance learning opportunities and reduce truancy; and well designed workplaces can improve individual health and well-being and improve efficiency. 4 Current review systems (such as Key Stage Reviews carried out by PartnershipsUK for PPP projects or Gateway Reviews by either the Scottish Government or OGC) look at the project management but do not assess the quality of the outcome of the project. 5 i.e. “quality:cost” ratios would be replaced by “design:delivery:cost” ratios

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SUPPLEMENTARY SUBMISSION FROM ARCHITECTURE AND DESIGN SCOTLAND

Presenter’s Biography

Gareth Hoskins Board Member of Architecture and Design Scotland Scotland’s Healthcare Design Champion

Gareth was appointed as a Board Member of Architecture and Design Scotland in 2005 and as Scotland’s Healthcare Design Champion in 2006. This important role involves the strategic leadership of the NHSScotland Design Champions' Network and providing an overarching vision for work we do with NHSScotland and the Scottish Government Health Directorates.

Gareth is an architect in private practice. He set up Gareth Hoskins Architects in 1998. From early competition winning projects such as the Mackintosh Interpretation Centre at The Lighthouse, the practice has gone on to win a range of major projects including the £47m redevelopment of the National Museum of Scotland in Edinburgh. The practice's work ranges from arts and heritage projects such as the new Architecture Galleries at the Victoria & Albert Museum in London and the new Culloden Battlefield Memorial Centre, to challenging social and community based projects such as the exemplar Elderly Care & Dementia Home in Edinburgh, The Bridge Arts Centre in Easterhouse and Robin House Children's Hospice at Loch Lomond. Both The Bridge and the Children’s Hospice were highlighted as project exemplars within “Building Our Legacy – Statement on Scotland’s Architecture Policy 2007”.

The practice's work has been widely published and exhibited, both within the UK and abroad, with the practice being featured most recently in major exhibitions in London, Parma and New York. Since setting up, the practice has grown to a team of 37, led by Gareth and a group of 4 other directors.

Gareth has won many national awards including: ƒ ‘UK Health Architect of the Year' at the Building Design Awards 2006; ƒ the AJ/Corus '40 under 40' in 2005; ƒ the Scottish Design Awards ‘Young Architect of the Year' and ‘UK Young Architectural Practice of the Year' at the Building Awards, both in 2000; ƒ The Bridge Arts Centre, Easterhouse, received the Roses Award 2007 and the BCI Regeneration Award 2007 and was the only Scottish building to win the RIBA National Architecture Award and to be nominated, in 2007, for the ‘Prime Minister's Better Public Building Award’.

Current projects include a school and concert hall in Shetland, the redevelopment of the National Museum of Scotland and the development of a major new mixed use scheme within Edinburgh’s St Andrew Square.

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Gareth is also an RIBA Advisor and Awards Assessor, Director of the Charles Rennie Mackintosh Society and contributor on various publications including, most recently as co-author of Design for Dementia for The Oxford University Press.

Architecture and Design Scotland 25th April 2008

Capital Investment – A+DS Briefing Paper

Introduction

The Scottish Government’s Infrastructure Investment Plan, 2008, states:

“In developing Scotland’s infrastructure, the Scottish Government recognises that good building design should be responsive to its social, environmental and physical context. It should add value and reduce whole life costs. …. Equally important to the design of individual buildings is the design of sustainable places. Well-designed buildings and places can revitalise neighbourhoods and cities; reduce crime, illness and truancy; and help public services perform better. “

“…it can be seen that assets created some 30-40 years ago have not always provided the length of good service anticipated at the outset. … It is vital that key national and community assets … are fit for purpose not just when built but throughout their economic lifecycle if they are to provide good value.”

Architecture and Design Scotland (A+DS) has provided comment to the Parliamentary Inquiry on Capital Investment, and on the Government’s Consultation on the Scottish Futures Trust, regarding the cultural and procedural changes needed across procurement routes to deliver such aspirations. Our recommendations are based both on the lessons learnt from three years of operation, particularly in reviewing school designs and working with public sector clients such as Health Boards, but also from the professional experience of our Board Members and the broader A+DS family. Our overriding conclusion is that Public Procurement has become all about the ‘HOW’, with insufficient focus on the ‘WHAT’ and the ‘WHY’.

Lessons Learnt

“It is disappointing that the majority of schools reviewed in that period fall below the quality which Parliament foresaw in the Architecture Policy – despite the best intentions and the good quality published guidance” Excerpt from A+DS School Buildings Briefing Paper

“[Firm Foundations]… together with SPP3, Planning for Housing, and the National Planning Framework 2008, presents an important opportunity to plan for housing in

6 FI/S3/08/12/2 an integrated and effective way: avoiding past mistakes, creating thriving communities. This will not be achieved by working to lowest cost denominators. Excerpt from A+DS response to Firm Foundations Consultation

“The client team described the situation where the preferred development option, which delivered the best environment with the least disruption and at lower cost and risk, was likely not to be affordable in revenue terms. This may result in the Board choosing an approach that will take longer to deliver (impacting operational efficiency and patient care over a greater period), cost more to build and have greater cost uncertainty.” Excerpt from an A+DS Design Assessment Report

“At this stage, Architecture and Design Scotland has particular concerns about ‘using a greater degree of standardisation based on exemplar, energy efficient, sustainable designs to meet public authority requirements.’ (question 4) … We recognize that there can be some benefits and economies of scale in appropriately repeating small components of a design. However, larger scale repetition and the commissioning of ‘clone’ buildings across Scotland is contrary to the principles contained in The Policy on Architecture and Designing Places and A+DS would oppose such a proposal.” Excerpt from A+DS’s response to SFT Consultation

Recommendations We recommend that the review examine funding and procurement methodologies against the following three broad principles:

1.0 Policy and delivery should be linked. Policy makers, and those with an overarching responsibility for the delivery of design quality by the Scottish Government, should be accountable for the delivery, by public bodies, of such quality. Their responsibility should go beyond the production of guidance to include responsibility for the impact that guidance has on investment.

2.0 Public leadership of procurement processes.

Public procurement should value and deliver well designed environments that support our communities and public services and thus realise the full potential of capital investment. From our work and involvement in projects we note the following areas for improvement:

ƒ Client bodies need to recognise and understand that a development is not “fit for purpose” unless it supports both the sustainable development of the community in which it sits and the health and wellbeing of its users. These broader qualitative issues should be a key objective of the commissioning body, and one in which the public has a voice. ƒ The opportunity, through good design, to increase efficiency and reduce the cost of running a public service needs to be understood and capitalised upon. This will require strategic design skills to be targeted at appropriate

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points in the procurement process to ensure that the investment realises the broadest and best impact. ƒ The client body should control the execution of the project to ensure that quality is delivered. Transferring responsibility for quality to those less motivated in the wider public interest makes the delivery of these broader objectives more difficult to achieve. Further, reducing the access of the client (and stakeholders) to the designer can be an obstacle to the constructive dialogue that assists designers in responding to the client’s needs and aspirations. ƒ If the public sector client is to take a leadership role in procurement then project teams must be suitably resourced and trained. Client teams need to have the skills to plan and control the stages of the process by which it is delivered. This requires leadership at the highest level to ensure that quality is an objective given to the team, but also that senior people within the client team have a professional design education so that they have the confidence and skills to make judgements on such issues.

3.0 Procurement processes should recognise and value design quality. An understanding of the value and contribution that a well designed environment can make to service delivery and the wellbeing of the wider community is key in effectively targeting investment. We recommend that long-term qualitative objectives are given prominence in the following processes:

ƒ Project Initiation: the earliest documents describing the required outcomes of the project - the criteria against which the success of the project, and therefore the client team, will be assessed – should include quality as a required outcome. ƒ Financial modelling of business cases: criteria should be developed to allow the value of a well designed environment to be quantified and recognised in financial assessments, particularly in relation to offsetting any revenue costs that may be seen as a bar to capital investment. ƒ Project review systems: these should include an assessment of the potential of the project to deliver an outcome of quality so that long-term best-value can be more readily realised and more properly planned for - thus reducing the risk of cost and programme over-runs. ƒ Competitive selection procedures: these currently include assessment of both quality and cost aspects of a bid, however the quality of the end product is often only a small proportion of the total score due to the number of other factors that are included in the quality section and the weighting of these elements. We recommend that design quality be a separate and prominent part in the assessment of bids i.e. “quality:cost” ratios would be replaced by “design:delivery:cost” ratios.

Architecture and Design Scotland 25th April 2008

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SUBMISSION FROM KEPPIE DESIGN

The Purpose of This Paper

To highlight, from Keppie Design’s vast experience of public building procurement, lessons that have been learned, and to feed these into deliberations that the Scottish Parliament is having on new and improved methods of procurement. With problems in progressing English PFI hospital projects in recent years, and with new governments in Edinburgh and Belfast questioning past performance, there is a danger that the current renewal of public sector infrastructure will stall at a time when the job is little more than halfway done. The paper concludes by providing a case study using a procurement method called Open Book Partnering, whose protocols have been formed from best practice, tried and tested methods over the last 10 years.

Keppie Design

Keppie is an architectural practice founded in Glasgow over 150 years ago in which Charles Rennie Mackintosh was a partner for 24 years. It currently has a 260 strong team of designers in five bases in Scotland, one in Belfast and one in Manchester. Its workload has always contained a mixture of private and public sector projects, the latter including new schools after the 1872 Education Act, new schools and hospitals in the 1960s and early 1970s, and it has been fully involved in the largest UK programme of public sector premises renewal ever, that has taken place during the last 12 years. This experience includes over £4 billion worth of healthcare projects, advising both public and private sector organisations, and the design of over 50 schools.

Evolving Procurement Methods

A large number of procurement methods have been used in different situations at different times, each with its own characteristics. For large projects, the last 12 years have been dominated by Public Private Partnerships which have been adapted over the years into initiatives such as PFI (major hospitals and bundled schools projects with private funding), Local Improvement Finance Trusts (English primary healthcare with private funding but some public equity), Primary Community Care Infrastructure (Northern Ireland primary healthcare with either public or private finance), ProCure 21 (smaller healthcare buildings with public funding) and Building Schools for the Future (English schools projects, often with private finance).

Seeking Improved Procurement Methods

There are those in Keppie who can remember the construction of hospitals and schools in the 1960s and 70s, where low cost solutions were sought, ongoing maintenance was ignored, and high public spending had disastrous consequences on the economy. We are replacing these buildings today, and while progress has

9 FI/S3/08/12/2 been made over the last 12 years, the task is far from complete. In seeking to contribute to the debate, the following sections indicate where various attributes of modern procurement methods have been beneficial, or where they have been deficient and require improvement.

Lessons Learned and Often Applied

1. Lowest cost solutions are less sustainable in the longer term than value for money ones. 2. Placing the responsibility for design and construction with a single party leads to more efficient delivery and less chance of defects. 3. To properly maintain buildings so they will remain valuable and serviceable assets for 30 years and more, the ratio of 30-year maintenance cost to initial capital spend should be about 5 to 1 (inclusive of inflation). 4. Procurement methods that combine design, construction and maintenance of assets not only ensure that money is ring fenced for maintenance, but allow ‘spend to save’ measures to be incorporated into the design, and ensure that maintenance regimes are compatible with materials and systems specified by the designers. 5. Where maintenance is built into long term contracts, the facility must be available for periodic open-book, value for money reviews. 6. Planned maintenance is better value for money than responsive maintenance, the latter resulting in poorer services and more downtime. 7. The biggest costs in running schools or hospitals are those associated with the staff and equipment, which in hospitals can be as much as 200 times the capital cost of premises over a 30-year period. The costs of good design, construction and maintenance of buildings are small in comparison but reap large benefits and efficiencies for staff and their operating systems. 8. Proper maintenance regimes cost more, but the UK has gradually realised, for a number of reasons, that increased investment in public services is good value for money, and the percentage of GDP spent in healthcare services has now risen almost to that of other major European countries. 9. Where a large programme of public infrastructure is planned, some investment has to be off balance sheet and treated as services rather than capital spend, in order to keep the Public Sector Borrowing Requirement within prescribed European Community limits. 10. In service contracts the private sector supplier does not start obtaining money from the public sector until the buildings are complete and the service is available, and therefore projects are almost always delivered on time. 11. In service contracts, the outturn cost is known before the project starts on site, giving greater cost certainty and better public sector budget predictions. 12. Where such whole life, whole facility services involve the use of privately sourced money, the supply of this money will be more expensive, and for value for money to be demonstrated, efficiencies gained by private sector involvement, and risks transferred to it, must be clearly demonstrated.

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13. Where a large programme of public infrastructure is planned, central government must control the release of projects to the market such that the suppliers can respond effectively. Swamping the market will lead to a small number of more expensive tenders, or even single bidder situations. 14. A consistent flow of projects will allow private sector suppliers to invest in their people and systems, and engage with the public sector to apply lessons learned in a constant spiral of improved performance. 15. Private sector suppliers must make fair profits in order to service the public sector well. 16. Where private funding is applied, the borrowing rates will be higher at the risky early stages of a project, but refinancing after the project is up and running will allow lower rates and savings to be made. Contracts now ensure that these are properly shared between the public and private sector partners. 17. A whole life, whole facility service contract will ensure that premises will be in good working order after 30 years, and contracts now allow the public sector to take back the asset after this time, at no cost to it. 18. The public sector used to rely on standard design solutions that it believed were cost efficient, but they proved insensitive to individual user requirements. Solutions now contain some standard elements where it is sensible not to reinvent the wheel, but are generally better tailored to individual circumstances.

Lessons Not Always Applied

1. The cost of bidding whole life, whole facility contracts is very expensive, and the private sector will pass on the cost of these bids (including unsuccessful ones) to the public sector in increased service charges. It is in the public sector’s interests to simplify bidding processes. 2. When PPP was first introduced, public sector organisations were encouraged not to be overly prescriptive about their requirements so that the private sector could be as innovative as possible with their proposals. This has led to some solutions that have not been sufficiently responsive to the needs of the public sector organisations. 3. The work done by the public sector prior to going to the market will determine whether it gets the facilities it needs, to the quality it desires, at the cost it can afford. Funds require to be made available by central government for authorities to carry out adequate preparatory work. 4. Doctors and teachers do not appreciate the consequences of their requirements, in terms of functionality and cost, until they start to see design solutions. Exemplar Designs prepared by the public sector prior to going to the market, which also set the minimum quality standards for bidders to achieve, are only part of standard public procurement policy in Northern Ireland, not the whole UK. 5. Multiple bidders have limited time to discuss their proposals with client representatives, sometimes leading to insensitive solutions that have to change later, with cost and time implications. Responding to multiple

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bidders is also expensive for the public sector body. Public sector Exemplar Designs focus stakeholders’ requirements and transmit them to bidders. They also flush out issues that would otherwise only become apparent at bidding stage. 6. Public sector bodies do not often commission large projects. Where they do not obtain appropriate external expertise or hire it in-house, the private sector partners gain the upper hand and poor deals result. 7. Good design solutions improve staff morale and have been demonstrated to contribute to better learning outcomes in schools and quicker recovery times in hospitals. Despite this, design has often not been high enough up the agenda, and the application of comparatively small sums in the likes of art in healthcare, has not been widespread. Northern Ireland apportions up to 1% of construction cost to artwork in community health buildings. 8. While there are change procedures built into long term contracts, there is little evidence to prove how well these work in practice. Regular alteration to meet changing practice is a feature of major hospital sites and is a problematic issue, no matter the procurement route. 9. Due to commercial confidentiality issues, there has been little specific information to gauge how much profit the private sector was making from individual PPP deals, and there is a suspicion that it may have been excessive, especially in early deals. However, bids have been priced competitively, and market levels of profits by builders, service providers and equity investors are now generally known.

Current Developments in Procurement Methodology

The biggest threat to PFI is currently Competitive Dialogue. From 2003 to 2006 in England, a number of large hospital projects floundered as bids were submitted that were unaffordable, and in their frustration to advance projects that were already behind programme, many Trusts selected a Preferred Bidder while a number of fundamental issues were outstanding. The public sector body knew that only a private sector partner could solve their problems and was keen to start negotiating with a single party as quickly as possible. This led to the suspicion by central government that the single bidder was exploiting the situation, and the affordability and delay problems sometimes got worse rather than better. The European Community’s concern was that a single bidder situation might lead to corruption between private sector bidders and public sector representatives.

It should be noted that affordability and delay problems have been less prevalent in Scotland, where central Government has had a closer relationship with local Boards. On projects like Ayrshire Maternity Hospital and Forth Valley Hospital the bids have been well defined prior to selection of Preferred Bidder, and the period from Preferred Bidder announcement to Financial Close have been faster than any in England for the size of these projects.

The UK introduced Competitive Dialogue in late 2006. This has the effect of requiring more information from bidders before a Preferred Bidder is selected.

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From the small number of projects advanced so far, it appears that bidder costs are rising from around 1% of capital cost to about 2%. With two of the three bidders losing their bid costs, but having to charge this to the public sector in bids they win, the result will be poorer value for money for the public sector; or bidders in a busy marketplace will simply not turn up for Competitive Dialogue.

Some Scottish Authorities are considering a Non Profit Distributing form of PPP. While having the admirable objective of diverting excess private sector profits to public sector charities, it does so by removing the equity and excluding dividends. There are therefore various questions being asked of it.

• If there is no equity to protect, in whose financial interests is it for the facility to be kept in good working order for the next 30 years? The public sector does not traditionally invest satisfactorily in maintenance. • If the public sector directors endeavour to divert as much money as possible to local charities, would this lead to a reduction in maintenance cost allocation, heralding a return to public buildings becoming prematurely decrepit? • If there is no equity in the project, where is the incentive to carry out ‘spend- to-save’ measures in the initial construction to ensure a long term, sustainable solution? • Would private investors be interested if there is no equity to earn dividends on? There is a misconception that the beneficiaries of PPP investments are wealthy individuals, but these long term, relatively stable investments are ideal for pension funds. Unison’s pension fund invests heavily in PFI. • Would private investors be interested if a public sector director could insist on carrying out a refunding exercise at short notice, providing uncertainty as to how long each private sector investment will be?

Details are also awaited on the proposed Scottish Futures Trust. This is believed to involve bond funding, a method often found better value in PPP projects over £100m in capital value because, while bond financing is often more competitive than bank borrowing, the fees required to ensure the bond is rated as investment grade are high.

Towards an Ideal Procurement Route

In the vast amount of public sector infrastructure renewal over the last 12 years, a number of alternative procurement routes have been tried in various parts of the UK. If we could take the best bits from all of these, and have the flexibility of approach to suit the individual project, we would obtain the best results. A results- focussed approach would be different from that adopted in many procurement methods, which have been dominated by the accountancy or legal/contractual framework set up to control them. The best interests of the children in schools or the patients in hospitals are often lost by the time a complicated procurement process has been pursued.

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At Newham Hospital in south London, two projects have been carried out in recent years, one with a traditional form of PFI and the other with ProCure 21, an open book form of public private partnership used on a number of hospital projects in England. The PFI design is no doubt an efficient healthcare facility, but its lacks the quality of the other, suggesting that commercial corners have been cut and the views of the clinical staff and patient representatives have been given minimal regard during a complicated competitive bid process. On the ProCure 21 scheme, the same public and private sector people, but working to a different procurement regime, have collaborated throughout the process within the affordability limits set at the beginning, using open book methods for obtaining package contractors and suppliers. They have provided the best possible solution for the price. The result is remarkable. The building is palpably the creation of the people who work there, to the benefit of the patients they treat.

Where We Might Go - An Open Book Partnering Model

In an Open Book Partnering Model, the private partner is selected as early as possible, providing advice throughout the project on project management, design, construction, procurement, asset management and funding. The public sector construction and procurement environment over the last 12 years has created a number of private sector UK organisations with world class, holistic procurement skills.

In an Open Book Partnering project, the private sector partner is chosen primarily on qualitative merit. Most private sector clients would do the same. It is important that the public sector obtains the best advice available for the enormous whole life, whole service investment it is intending to make, and that this advice comes from people with a demonstrable ability to deliver in tandem with the public sector. It is up front about ensuring that the private sector partner has a reasonable level of profit for providing the desired service. Otherwise it will not deliver.

The private partner’s first task is to confirm or challenge the public sector’s business case, so that both parties can set a realistic budget within which design options can be developed. The open book nature of the process ensures public scrutiny of the process. In the early days of PPP, when new procedures were often being advanced by trial and error, such scrutiny would not have been possible, but both the private and public sector sides are now more mature and the issues are better understood.

As the design is advanced, the budget will be market tested, the private partner eventually guaranteeing the capital cost on the basis of a series of open book tenders with major suppliers and subcontractors. To this is added whole life costs from facilities management companies, and funding arrangements from financial institutions. The Open Book Partnering method allows flexibility to pursue some elements of a large project with public money where appropriate, for example multi-storey car parks, while others will have private funding, decisions such as this

14 FI/S3/08/12/2 being made jointly by the public and private sector partners, and not imposed by one or other party.

At each stage the public sector partner has the ability to choose a better quality product or design as long as any cost increases are balanced within the overall budget. Inevitable public sector changes, for whatever reason, will be carefully managed in a similar way. The optimal, affordable solution for the public sector is arrived at. While the private sector partner will receive payments to progress the design, a major element of his financial package will be delivery within the cost and time set at the beginning of the project. This will provide an incentive to help manage the public sector decision making process, which is the biggest source of cost and budget overruns. Such a facility was not present in the Scottish Parliament Building project, the management contractor actually benefiting from delays and cost increases.

The elements of this form of procurement have been tested in ProCure 21 and Local Improvement Finance Trusts in England, some projects in Northern Ireland, and a few projects in Scotland because of particular circumstances, for example at Victoria Hospital in Kirkcaldy and at a health and community facility in Coatbridge. Hub will be a similar initiative in Scotland to LIFT. LIFT projects have an element of private funding, and ProCure 21 was originally intended to have the possibility of a funding competition, on an open book basis. The Open Book Partnering Model would have this, leaving the decision as to whether to use private funding for some elements of the project until part way through the design process, when value for money decisions can be better made.

The objectives would be those originally intended for Public Private Partnerships:

• each party contributing its own strengths, • each allocated the risks it is best able to manage, • with negotiations carried out in an open and honest fashion, • towards achieving the best quality, best value, whole life facilities, • for the benefit of staff and the public, • all this so that our country can prosper.

A Case Study – A Major Hospital Project

Procurement methods cannot be viewed in isolation, but must be considered in relation to the type of project on which they might be applied. Where projects are bundled together, for example a group of schools or primary care centres, there are established models for an open book or framework method of procurement, in which one or two buildings are tendered and used to form the basis of further negotiations for the full package of work. This case study therefore considers the application of an Open Book Partnering approach on single, large hospital projects.

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There are still a number of locations where pre-NHS and poor 1960s and 70s buildings are being used to deliver 21st century healthcare, buildings which are not fit for purpose. In England there is a view that perhaps no more large projects are required after Bristol, which is currently at bid stage. However, with outdated hospitals like Bradford Royal Infirmary still in existence, and the problems of many hospitals in the London area unresolved, this must be questioned. In Northern Ireland there is a programme of major hospital projects resulting from years of political vacuum when little happened. This programme has been slowed down by affordability concerns, and the experience of Competitive Dialogue on the first project launched at Enniskillen. In Scotland, the South Glasgow Hospital is looking to carry out a major redevelopment programme, currently thought to be between £600m and £800m in value. Aberdeen Royal Infirmary needs to spend in excess of £300m to bring it up to the standard of modern hospitals in Edinburgh, Lanarkshire and soon Forth Valley. Two major mental health projects are planned in Scotland and many of the buildings in the Glasgow Royal Infirmary are not fit for purpose. The need for large hospital developments is still there, and requires to be addressed urgently, before the world class private sector delivery mechanism that provided the 100 hospitals in 10 years turns its attention elsewhere and is lost.

This Open Book Partnering case study considers a major hospital project of perhaps £300m to £500m in value. The former is the current value of Forth Valley Hospital. There are four procurement routes that might be considered. (There is no information available at present on the Scottish Futures Trust to test this approach.)

A. Public Funding – Design and Construction Separate

This was the method used in the 1960s and 70s, where the hospital commissioned a full design and then obtained a price for construction. The problems with this method are well documented. Ninewells Hospital and Aberdeen Royal Infirmary took 15 and 16 years to design and build respectively, compared to the Royal Infirmary of Edinburgh’s 7 years under PFI. At the Queen Mother’s Hospital at Yorkhill in Glasgow, where, after many years of dispute, defects could not be apportioned to either the designer or the builder, the Health Board ended up paying more for repairs than the hospital cost in the first place. This procurement route is no longer used for large projects.

B. Public Funding – Integrating Design and Build

In this method, the contractor is responsible for providing both the design and construction. To ensure that the hospital gets the design it wishes, it often commissions an Exemplar Design to illustrate its requirements. This was the approach used on the recent Beatson Centre at Gartnavel in Glasgow, where the contractors were encouraged to stick closely to the Exemplar Design, and the project was delivered on time and to budget. Possible problems with this method are:

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a. the contractor and his designers do not have the opportunity to explore other, perhaps better value for money solutions; b. contractors may not wish to take on the risks of the public sector Exemplar Design as they are difficult to quantify (this is more likely the larger the project and the larger this risk); c. there is no incentive for the contractor to include ‘spend-to-save’ measures, or seriously consider ongoing maintenance issues, concentrating on cheapest capital cost to win the work; d. there is every incentive for the contractor to capitalise on inevitable client changes, and since he has to demonstrate delays caused by changes to justify additional costs, it is in his interest to exaggerate delays (this is more likely on larger and more complicated projects); e. since maintenance of the building is not part of the package and remains with the public sector, funds will not be allocated to adequately maintain the public asset in the future.

A large amount of design work is required during the bid period to be definitive on costs. Even with a public sector Exemplar Design, this could take more than a year. Abortive bid costs would deter potential bidders.

While the risk of delays caused by contractor claims for extension of time are less than in Option A, they are present. In such circumstances it is usually several months after construction has finished, if not years, before the final capital cost is agreed, and an assessment made of the consequent deleterious effects on the local healthcare economy. On PPP, the cost is guaranteed by the private sector partner before construction starts, subject to an agreed change control procedure which does not threaten delivery on time.

C. Private Funding – Current PPP, Integrating Design, Build, Facilities Management and Funding

PPP projects are currently being pursued using Competitive Dialogue. The bid costs for this are huge. Each unsuccessful bidder could lose 2% of construction cost, on a £500m project perhaps £10m. That is a lot of money to make up from profits on other projects. The small number of PPP bidders capable of carrying out a large hospital project might be more inclined to pursue less risky projects such as Building Schools for the Future and the Olympics in England, or foreign work for which UK skills built up over the last 15 years are much in demand. There is also a huge cost to the public sector side. On a large project, the hospital project team and clinical staff must spend two or three years negotiating, first with two or three bidders, and then with a Preferred Bidder. A solution to the problems brought about by Competitive Dialogue requires to be found if PPP is to be adopted, even with NPDO style variations.

D. Open Book Partnering

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The principles of this procurement method have been outlined above.

In the programme comparisons below, timescales are measured in quarters of years. Cost and timescale are linked, delays leading to increased costs and opportunities for more delay events, often in an exponential way.

Activity Option Option Option Option A B C D 1 Select public sector advisory team 1 1 1 1 2 Pre-bid activities (contract documents, 10 3 2 2 specifications, exemplar design in Option B) 3 Select private sector partner 4 6 6 1 4 Risk allowance for delay in selecting 3 2 2 0 private sector partner 5 Pre construction activities (full design 0 and tender documentation for Option A included in Item 2) 6 Pre construction activities (sufficient 6 6 8 contractor design in other options, incl. Preferred Bidder Period for Option C) 7 Risk allowance for delay in pre 4 2 3 2 construction activities 8 Construction period 12 12 12 12 9 Risk allowance for delay in 6 4 0 0 construction period

Total Timescale in Quarters 40 36 32 26 Total Timescale in Years 10 9 years 8 years 6.5 years years

The timescale for Option A was experienced in large hospitals in the 1960s and 70s, and in the examples given above at Dundee and Aberdeen, political and economic uncertainty increased the delays by 50%. There is no experience of a large hospital being procured under Option B to confirm the assumptions made in the table. The largest hospitals delivered by this method in Scotland have been extensions to Queen Margaret Hospital in Dunfermline, Ninewells Hospital in Dundee and Edinburgh Western General Hospital in the 1990s, all less than £60m in value. Several hospitals of this size have been delivered under Option C in recent years with similar timescales. The biggest concern to the suitability of this option at present is the ability to attract sufficient bidders, because of the cost of Competitive Dialogue. Option D has less risk of delay, although as a new procurement route for this size of building, more work would be required on the protocols. However, the experience of PPP hospitals in Spain and other parts of

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Europe suggests that competitive bidding periods can be reduced to weeks where in the UK they are currently months or even years.

Finally - Affordability

An ongoing barrier to any whole life option is the burden of service payments over 30 years in relation to Board revenue. If a Board or Trust cannot even afford to maintain its current building stock from the income central government gives it, how can it afford the loan on a major capital spend, or commit to a PPP contract that properly contains a maintenance budget? The will of central government to cover such affordability gaps, which has been present for the last 10 years, appears to be weakening. The result could be a return to procurement which ignores future planned maintenance, and places the risk and consequences of prematurely disintegrating buildings on future generations.

David Stark Managing Director, Keppie Design 6 December 2007

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SUBMISSION FROM MOTT MACDONALD

See PDF below.

20 Scottish Parliament Finance Committee

Inquiry into methods of funding capital investment

Mott MacDonald briefing paper prepared in connection with Session 4 of the oral evidence programme 

April 2008 SCOTTISH PARLIAMENT FINANCE COMMITTEE Inquiry into methods of funding capital investment projects

1. Executive Summary 1.1 An appropriate balance will be needed between public and private sector funding To meet society’s needs an The number of projects that can be delivered by public sector funding is limited by the appropriate balance will need availability of funds and the ability of the public sector to service its debt. Private sector to be achieved between funding enables public bodies to overcome spending restrictions but this comes at the public and private sector cost of a commitment to future long-term private sector revenues. This can be offset by funding private sector efficiencies, to an extent, where over-intrusive governance can be avoided. 1.2 There is no panacea for all funding and procurement problems A wide variety of methods is available for the funding and procurement of public sector capital investment projects. The various models described in Appendix A seek to address different issues and demonstrate that, whilst each new initiative seeks to improve on the last, no single solution has yet been found that meets the individual requirements of each project. 1.3 Strong management discipline is needed to deliver value-for-money To achieve value-for-money, both public sector and private sector funded projects require the same rigorous management discipline. This discipline is imposed by PFI / PPP funding which forces consideration of not only the initial capital cost but also effective asset management. In practice, this is sometimes lacking during the delivery of public sector funded projects. Also, assets delivered by public sector funding are sometimes not managed effectively following project completion e.g. short-term budget cuts can affect maintenance. To deliver value-for-money, public sector funding requires Mott MacDonald considers that Achieving Excellence in Construction issued by the Office the same management of Government Commerce (OGC) represents good practice in sponsorship and project discipline as PFI / PPP and programme management. Furthermore, to deliver value-for-money, we think it is important for public sector clients to:- • consider the operational / maintenance phase from the outset; • adopt a systematic approach to risk management; • adopt a process to balance stakeholders’ aspirations; set clear objectives and project requirements; identify and evaluate options; optimise solutions; define scope; develop design; plan the execution; and execute the plan; and • freeze outputs at the end of each stage. 1.4 Risk should be allocated to the party best able to manage it Transferring unmanageable We consider that risk allocation is a key issue that needs to be addressed in defining risk will produce appropriate project funding and procurement strategies. In our view risk should be unsatisfactory outcomes allocated to the party best able to manage it. An effective response plan will also be which ever method is used needed for all risk retained by the client. 1.5 Public sector clients should be realistic A consistent under-estimation of project costs was identified in Mott MacDonald’s Review of Large Public Procurement carried out for HM Treasury on 2002 which resulted in the development of the concept of Optimism Bias. Public sector clients need to balance political pressures with the realities of major project delivery. This means identifying stakeholder aspirations, balancing them with the available budget, producing an agreed set of project objectives and sticking to them.

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1 Background This paper provides members of the Finance Committee with an overview of the contribution Mott MacDonald proposes to make to Session 4 of the oral evidence programme relating to the Committee’s inquiry into the methods of funding capital investment projects in Scotland. A glossary of terms used in this paper is included in Appendix B. Mott MacDonald is a management, engineering and development consultancy serving the public and private sectors in Scotland, elsewhere in the UK and around the world. We operate in all the main market sectors including buildings, urban development, industry, environment, health, education, communications, energy, water and transportation. We are involved with investment planning, project development, programme management, project management, cost management, design and procurement of capital investment projects funded by both the public and private sectors and delivered through a variety of procurement routes. 2 Capital investment trends The Traditional method of funding and procuring construction projects evolved during the 19th century and remained largely the same in Scotland and elsewhere in the UK until the 1970s and 80s. Since then several new approaches to the funding and procurement of capital investment projects have emerged to address different issues. These are set out in the table included in Appendix A. PFI / PPP options have been included in Appendix A although recent developments in alternative funding sources such as the following are considered to fall outside the scope of this paper. 3 How projects are delivered in practice

3.1 Public sector funding is still used for about 85% of public sector investment Public sector funding is Public sector funding includes the use of Own Capital Resources, Treasury Grant, Capital limited by the availability of and Prudential Borrowing and other alternative sources of funding. funds and the ability to service debt Several derivations of both Traditional and Design & Build (D&B) procurement methods are widely in use in the public sector according to the needs of individual clients and projects but a detailed discourse on these methods is considered beyond the scope of the paper. D&B has grown considerably in popularity as a means of integrating design and construction and is, for example, commonly used in the roads sector. The Develop & Construct method is commonly used to enable the client to develop a preliminary design in order to secure powers and consents, assure quality and mitigate A multiplicity of funding and risk. procurement methods are used to address individual Construction Management and Management Contracting methods do not tend to be used client need but there is no in the public sector because of cost uncertainty and the high level of risk retained by the “magic bullet” client. Other management-based procurement methods commonly used worldwide in the

energy sector include Turnkey, Engineer-Procure-Construct (EPC) and Engineer-Procure- Construction Management (EPCM).

For Partnering to be effective, Today, Partnering is used extensively by clients with large investment portfolios in health, a collaborative culture must rail, highways, aviation, defence, water and commercial property and substantial benefits be embraced at the very top have been derived in terms of delivery timescales and project costs. BAA is commonly of the client’s organisation perceived as being at the leading edge in this area. On Terminal 5, traditional

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boundaries between client, designers, main contractor, subcontractors and suppliers were deliberately broken down and replaced by loyalty to an integrated team. Prime Contracting is a form of Partnering developed by Defence Estates (DE) in response to the Latham Report following a number of trial projects executed under an initiative called Building Down Barriers. DE has let a number of very substantial contracts under Prime Contracting including that for the restructuring of the defence estate in Scotland. Other such projects include the highly regarded £1bn Project SLAM which is progressively upgrading the Services living accommodation. Early Contractor Involvement is a recent initiative aimed at using the contractor’s expertise to build “constructability” into the design, review value engineering and reduce overall timescales by obtaining early familiarity with the project and securing key resources. To minimise procurement costs and project timescales, clients with a regular portfolio of projects are increasingly using Framework Agreements. One such approach is the Department of Health ProCure21 procurement method under which NHS Trusts in England can select partners from the Department’s ProCure21 framework for the planning, design and construction of schemes to work with the Trust in a Partnering relationship. Similar frameworks are currently being developed for NHS Boards in Scotland. External Project Managers are commonly used by inexperienced clients and on more complex projects where insufficient experience is available in-house. Programme Management is increasingly used on large infrastructure (and change management) programmes where individual projects share or compete for resources. Both are strongly promoted by OGC. Pricing mechanisms include Price-Based, Cost-Based and Target Cost methods. Lump Sum and Guaranteed Maximum Price are also used to provide greater cost certainty. Measure & Value methods are less popular for fast-track projects than they were.

3.2 Project finance is used widely for collaboration between the public and private sector to deliver policies, services and infrastructure The use of private sector funding enables public bodies to deliver more capital projects than would be possible using their own financial resources but at the cost of a commitment to future long-term private sector revenues although this can be offset to an extent by whole-life cost savings where the private sector is able to avoid over-intrusive governance.

The use of private finance Project finance is not new and can be traced back to the first turnpike trust created in can be traced back to the 18th 1706 to enable local business people to charge a toll for using a road and use the money century for its maintenance. In 1991, a plan for the first turnpike road to be built in the UK since the 18th century was announced: the Birmingham Northern Relief Road. Over 790 PFI projects with a capital value of over £54bn have been signed since the UK Conservative Government introduced the Private Finance Initiative in 1992. PFI projects include hospitals, schools, roads, public buildings, social housing, waste projects, street lighting, police and fire stations, and major defence equipment, accommodation and training deals. PFI has generally been successful but there are exceptions such as the Metronet PPP which is referred to below. A number of the failures may be a result of inadequate definition of the output specification, disruptive operational interfaces, transfer of unmanageable risk and high degree of client change.

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Scottish Water’s PFI Scottish public sector water authorities pioneered the use of PFI in wastewater treatment contractors are understood to and Scottish Water has subsequently further developed its approach by establishing an have achieved credit ratings SPV in which both ownership and the success or failure of achieving regulatory outputs similar to local authorities are shared by the public and private sectors. The PFI market is now becoming more mature and lessons have been learned from some of the early PFI contracts. For instance, the public sector can now normally benefit from any re-financing during the life of the contract. The Future Strategic Tanker Aircraft project, the largest PFI that has so far come into the defence market, successfully employed a strategy of delaying funder involvement. The finalisation of the technical solution and key commercial terms before a funding competition was held presented funders with a clearly defined commercial risk profile against which to bid and satisfactorily resolved all lender risk issues. London Underground pioneered the UK Labour Government’s PPP initiative with the award of three contracts for the maintenance, renewal and upgrading of its infrastructure. However, Metronet, to whom two out of the three PPP contracts were awarded, has gone into administration and its business has had to be transferred into Transport for London in order to maintain the delivery of essential public services. A significant number of health sector and education sector PPP projects have been let in Scotland including Edinburgh Royal Infirmary and the recently signed Forth Valley Acute Hospital, Larbet. In the UK energy sector, performance-based project-financed deals are successfully used on projects such as power plants where there is limited government regulation, outputs are easily measured and there is limited stakeholder involvement. Internationally, BOO and BOT contracts are used in a variety of spheres with mixed success. Private finance is widely used in transport infrastructure projects in Scotland and elsewhere the UK including the Manchester Metro and Croydon Tramlink projects which are entirely funded from some form of user charging. Shadow Tolling and level of service payments have been used by the Highways Agency. The City of Portsmouth pioneered the use of private finance to rehabilitate the city’s road network and operate and maintain it for 25 years and the same model is being used as the basis for the Birmingham, Sheffield and Isle of Wight Highways PFIs. Other forms of private finance have not been addressed in this paper for the sake of brevity.

3.3 Both client and private finance routes each have their strengths and weaknesses As can be seen from the table included in Appendix A, there are advantages and disadvantages associated with both public and private funding routes and neither is a panacea for all problems relating to public sector capital investment. 3.4 A strong management discipline is needed to deliver value-for-money At a transactional level, both funding routes require the same management discipline in terms of strategic focus, project ownership, definition, stakeholder engagement, focus on whole-life costs and long-term value-for-money, effective risk management and an understanding of the construction industry. In practice, PFI / PPP funding imposes this discipline and forces consideration of not only the initial capital cost but also effective asset management. On the other hand, with public sector funding the above discipline is sometimes lacking during the delivery process as can be seen from the reference to Optimism Bias in section

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1.5 above. Furthermore, assets delivered by public sector funding are sometimes not managed effectively once completed e.g. short-term budget cuts affecting maintenance. 4 Key features relating to different procurement and funding options 4.1 The client buys services not assets under private sector funding options PFI contracts are often seen Under private sector funding options, the private sector funds the capital cost, as a catalyst for improving maintenance and operation of assets and the public sector essentially buys performance efficiency in the delivery of outputs and services rather than assets in return for long-term commitments to pay private public services sector revenues. 4.2 The public sector pays for the cost, maintenance and operation of the assets under public sector funding options Under public sector funding options the public sector funds the full cost of design and delivery of the project and the cost of maintaining and operating the facilities. The key features of the most commonly used procurement routes are indicated in Appendix A. 5 What the public sector needs to do to deliver value-for-money Mott MacDonald considers that best practice for public sector procurement is embodied in OGC’s Achieving Excellence in Construction which should avoid the common causes of project failure set out in Figure 1 below. Mott MacDonald’s view is that it is important for the client to:- • consider the operational / maintenance phase from the outset; • adopt a systematic approach to risk management; • adopt a stage-gate process to: systematically identify internal and external stakeholders’ aspirations and balance these with the available budget; agree clear objectives and project requirements; identify, evaluate options and optimise solutions; define scope; develop design; plan the execution; and execute the plan: and • freeze outputs at the end of each stage or otherwise establish mitigation plans to manage the risk. The table included in Appendix A sets out our views on major issues clients need to address in order to obtain benefits from the various funding and procurement methods listed.

Common causes of project failure • Lack of clear link between the project and the organisation’s key strategic priorities, including measures of success • Lack of clear senior management and Ministerial ownership and leadership • Lack of effective engagement with stakeholders • Lack of skills and proven approach to project management and risk management • Too little attention to breaking development and implementation into manageable steps • Evaluation of proposals driven by initial price rather than long-term value-for-money (especially securing delivery of business benefits) • Lack of understanding of and contact with the supply industry at senior levels in the organisation • Lack of effective project team integration between clients, the supplier team and the supply chain Figure 1: NAO / OGC Agreed List of Common Causes of Project Failure. Addressing these key issues will enable public sector clients to successfully deliver long-term value-for-money from their capital projects.

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Appendix A: Funding and procurement methods Funding and procurement method Purpose Enables the client to… Requires to client to… Traditional • Public sector funding • Procure assets • Access cheaper finance from Central • Address spending constraints through • Fund capital investment within prudent Government, Prudential Borrowing, bond prioritisation expenditure limits issues, etc. • Implement rigorous management process • More readily modify assets in operational to avoid cost overruns and delay phase as needs change • Focus on clear service delivery objectives • Integrate with supply chain • Traditional procurement • Deliver projects to budget and schedule • Obtain degree of cost certainty if • Manage delivery process and interfaces or requirements, scope, access and employ project / programme management operational interfaces can be defined consultant to do so before award • Adopt a rigorous approach to the • Participate in and control design to ensure progressive definition and freezing of it best fits his needs requirements, scope, design, access and • Incorporate controllable change operational interface to avoid cost and schedule overrun Initiatives in the last 30 years • Private Finance Initiative (PFI), Public • Enable a greater number of capital • Circumvent capital rationing and deliver • Act as intelligent client Private Partnerships (PPPs), BOO, BOT, projects to be undertaken for the level of more investment than provided for in UK • Define and freeze long-term output etc. public expenditure made available Government Spending Reviews requirements in terms of assets and • Can be used as a catalyst for improving • Realise investment benefits by engaging services efficiency of public services with others to build, operate and maintain • Accept potentially higher finance costs • Can be used to ensure there is a life-cycle assets • Accept higher long-term cost of services in approach to provision and operation of • Procure optimal whole-life solutions which return for avoiding capital cost public assets meet specified outputs and integrate • Accept less influence on the design and design, build and maintenance elements lack of direct control over operations assessing associated risks • Accept that the structure of the contracts • Transfer risk best managed by private make subsequent client changes more sector complex • Account for assets ‘off the balance sheet’ • Consider higher impact of retained difficult where significant risk transfer can be risks e.g. demand forecasting and usage demonstrated in accordance with UK • Consider impact of transferring public adopted accounting practices assets into the private sector • Manage risk of perverse incentives • Accept higher transaction costs • Consider greater impacts and reputational risk of allowing project to fail

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Funding and procurement method Purpose Enables the client to… Requires to client to… Initiatives in the last 30 years (cont’d) • Construction Management and • Reduce construction timescales • Overlap design, procurement and • Accept higher risk, higher cost and lower Management Contracting construction cost certainty • Change requirements and design • Accept lower contractor-side contractual liabilities • Properly manage change • D&B • Reduce construction timescales and • Transfer design / construction integration • Act as intelligent client or employ technical provide cost certainty risk advisor • Engage with a single point of contact for • Obtain greater cost certainty and reduce • Define and freeze requirements before delivery costs award • Overlap design and construction • Accept less involvement in design • Incorporate constructability in design • Develop & Construct • Reduce construction timescales and • Mitigate key risks relating to powers and • Manage project development processes provide cost certainty consents and interfaces or employ project / • Control concept and scheme design • Develop robust business case at an early programme management consultant to do stage so • Ensure quality is reflected in both concept and scheme design • Design & Manage, EPC and EPCM • Reduce construction timescales • Deploy small client team • Act as intelligent client • Engage with a single point of contact for • Mitigate key delivery risks • Freeze requirements, scope, access and delivery • Transfer design and construction interface operational interfaces before award risks (EPC) • Accept being shut out of design and • Incentivise management of design and decision-making construction interfaces (EPCM) • Accept higher cost (EPC) or less cost certainty (EPCM) • Accept less flexibility to introduce change • Accept less emphasis on whole-life costs • Pay a premium for transferred risk • Retain most commercial risk (EPCM) • Partnering and Prime Contracting • Save time and money by improving • Improve integration between client, • Accept partnering culture at the highest collaboration and integration through the designers, contractor and suppliers level in the client organisation establishment of a new commercial, • Reduce delivery timescales and costs • Accept less contractual “muscle” contractual and organisational framework • Participate in and control design • Accept higher risk and less cost certainty • Incorporate controllable change

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• Early Contractor Involvement • Mitigate cost and schedule risk • Incorporate “constructability” into project • Accept additional cost during development • Optimise value management and value designs and control design phase engineering • Improve integration, obtain familiarisation • Accept early cost uncertainty • Reduce project development and and advanced planning • Accept two-stage tendering and negotiated procurement timelines • Secure key resources contracts • Reduce delivery timescales and costs • Framework Agreements • Reduce procurement timescales and costs • Minimise procurement costs and • Focus on strategic procurement on large programmes or regular portfolio timescales requirements of projects • Call-off individual contracts • Manage procurement at both strategic and transactional levels Management techniques • Project Management • Manage design and construction • Secure knowledge and experience of • Deploy in-house personnel or employ interfaces design and construction and improve consultant • Mitigate delivery risks integration • Focus on project objectives • Improve customer satisfaction • Programme Management • Deliver long-term strategic objectives • Manage a portfolio of inter-dependent and • Deploy in-house personnel or employ simultaneous or overlapping projects consultant • Optimise use of resources • Focus on strategic objectives • Incentivisation • Encourage improved contractor • Reduce construction timescales • Understand what is of value performance to achieve successful • Reduce costs • Identify enablers of good performance outcomes • Implement pain / gain regimes • Accept less cost certainty • Manage risk of perverse incentives

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Appendix B: Glossary of terms Build-Own-Operate: The client employs a contractor to design, build, operate and maintain a facility to meet (BOO) specified performance outputs. Build-Own-Transfer: The client employs a contractor to design, build, operate and maintain a facility to meet (BOT) specified performance outputs for a predetermined duration whereupon ownership of the facility is transferred to the client. Construction A fee-based specialist construction manager or contractor provides a service to act as the Management : client’s agent, provides common site services and manages construction activities with construction works being packaged by engineering discipline and / or geography and works contracts let directly by the Client. Cost-based: The contractor’s remuneration is based on the actual costs he incurs. Methods include cost plus fixed fee or percentage fee or reimbursement of notional costs based on costing rates. Design & Build: (D&B) One contracting organisation takes sole responsibility for the design and construction of a client’s project using in-house and external resources; Design & Manage : A single organisation carries out the design, provides site establishment and common site services and manages construction for a fee using works contractors with the actual cost of construction being passed through to the client. Develop & Construct: The client employs consultants to carry out concept and scheme design and a D&B contractor develops detailed design and carries out construction; under which a preliminary design is developed with a contractor subsequently being employed to complete the detailed design and carry out construction Early Contractor The client selects the contractor on the basis of rates or indicative prices and awards an initial Involvement: reimbursable services agreement in advance of the construction contract. Engineer-Procure- This is essentially Contractor-Led Design & Manage with works contracts being let by the EPC Construct: (EPC) contractor who is also responsible for centralised procurement and issue of bulk / long-lead materials to works contractors.) Engineer-Procure- This is essentially Consultant -Led Design & Manage with works contracts being let by the Construction Client and the EPCM contractor being responsible for centralised procurement and issue of Management: (EPCM) long-lead and bulk materials to works contractors.) Framework This enables contracts for individual projects to “drawn off” from the framework or mini Agreements: competitions to be held amongst framework contractors without the need for full pre- qualification, tendering and contract negotiation. Guaranteed Maximum Tenderers offer fixed ceilings to reimbursable costs beyond which the liability lies with the Price: (GMP) contractor. Incentivisation: “Painshare” / “Gainshare” arrangements are established based to encourage contractor performance to achieve desired outcomes in terms of cost and schedule or other criteria. Lump Sum: Fixed or firm price for elements of design, management or construction either pure, analysed or quantified. Management A fee-based specialist construction manager provides professional advice to the client Contracting: relating to construction, provides site establishment and common site services and employs works contractors to carry out construction the cost of which is passed through to the Client at cost. Measure & Value The contractor’s remuneration is based on measurement of work items in the post-contract stage priced at tendered (Price-Based) unit prices. Partnering: A co-operative contractual, commercial and organisational framework is established based on aligned objectives, trust, open communication, continuous improvement, joint decision-making and shared success.

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Performance-based: The contractor is required to deliver and his remuneration is linked to specified output performance criteria. Private Finance PFI was part of a range of policies introduced by the UK Conservative Government to increase Initiative: (PFI) the involvement of the private sector in the provision of public services. Clients procure services from the private sector instead of paying for assets and avoid having to fund the capital cost of projects in return for a commitment to private sector revenue streams for the services provided over the lifetime of the contract. Clients are obliged to define their requirements up front for the duration of the contract. Price-Based: The contractor’s remuneration is based on the tendered Price-Based rates. Prime Contracting: Developed by Defence Estates in response to the Latham and Egan reports. It involves the establishment of an Integrated Project Team (IPT) comprising the client, contractor, designers and key members of the supply chain. The IPT allocates tasks according to the 'best man for the job' so as to encourage collaborative working. Programme A fee-based consultant delivers intended business benefits across several projects with Management: different timescales and levels of definition by integrating, resolving conflict and managing the procurement and administration of project management, design and construction contracts let directly by the Client. Project Management: The Client appoints a specialist fee-based Project Manager to provide knowledge and experience of design and construction; help appoint the design team; capture requirements; integrate scope definition, design, procurement and works supervision; and administer construction contracts. Public Private A PFI project aimed at increasing the partnership between the public and private sectors. Partnership: (PPP) Special Purpose A limited company established to secure funding and deliver private finance projects. Vehicle: (SPV) Target Cost: An agreed target cost against which the contractor’s actual costs are compared for the purpose of determining Incentivisation payments. Traditional: The client employs consultants to manage project, manage costs and develop design and construction work is undertaken by main contractor with subcontractors; Build-Transfer or The client employs a single contractor to finance, design and build the project and transfer the Turnkey: (BT) assets to the client on completion. Two-stage tendering Project timescales are reduced to improve value-for-money by awarding the construction contract during the design phase on the basis of tendered rates and prices, and the contract price is subsequently negotiated in a non-competitive environment on the basis of these prices when the design is sufficiently developed.

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SUBMISSION FROM OGILVIE GROUP

This evidence is provided by the Ogilvie Group who are engaged in the procurement of a number of PPP projects and other public capital investment projects in Scotland.

Ogilvie is a medium sized Scottish family business that has seen recent significant growth both in financial turnover and increasing number of staff employed. This growth in our business is partially as a result of our participation in this sector.

These representations do not directly consider the various funding models referred to in the Scoping Paper for Capital Investment Inquiry, rather we wish to draw to the Committee’s attention some relevant issues relating to the procurement methodology and the impacts that current and future processes have on the on-going participation of medium sized Scottish firms and the potential impact for the cost of delivering such Capital Investment Projects.

Our main concern is the increasingly onerous speculation required by public bodies when competing for projects. This is having a material impact on participation particularly from Scottish based medium sized companies. Such an observation is not only prevalent from the private sector but public procurement officials have recorded their views about the lowering of private interest in public projects.

The move from project delivery by way of an “Invitation to Negotiate” to a “Competitive Dialogue” is prohibitive particularly for smaller and medium sized Scottish organisations. This change has substantially increased the scale of speculative risk and investment which, we believe, will have a detrimental impact on national competitiveness. The danger is that such conditions are more prejudicial to Scottish companies than they are for larger more international corporate style operations.

By creating such conditions there is a risk to the Scottish Government and other public organisations that smaller and medium sized Scottish companies are not geared to speculate to such a scale and will withdraw from the process leaving larger companies to dominate the sector. Simple economics suggest that removing a section of the supply (particularly Scottish) could ultimately have an adverse impact on the cost of investing in projects in the future and will not assist the Scottish Government’s strategy for economic growth.

We therefore believe that the move to “Competitive Dialogue” is at variance with Scottish Government’s economic strategy of supporting Scottish businesses and creating the right conditions for such businesses to thrive.

Also a number of recent regeneration competitions have been run on PPP style procurement mechanisms. These speculative competitions are process driven, time consuming and expensive. Like PPP projects companies that compete in this sector need to have a success rate of around 1:3 to justify the speculative cost and time that is required. Large scale regeneration projects carry

21 FI/S3/08/12/2 substantial speculative costs that can’t be sustained in the medium term by small and medium sized Scottish companies. Therefore like the PPP projects there is a danger that Scottish business will not participate leaving more corporate global companies to supply this sector.

Furthermore, most competing companies look to recover abortive costs in competitions where they have failed. Therefore future projects are at risk of attracting additional charges to recover such earlier losses thereby driving up the cost of projects.

Therefore, we respectfully submit that the complicated and unfair procurement processes should be re-assessed with the objective of making competitions simpler and fairer while maintaining an ability to obtain best value for the public sector. This suggestion is wholly consistent with the Scottish Government’s Economic Strategy commitment to operate “Effective Government” by “streamlining the Scottish Government's direct dealings with business, including better regulation and more efficient procurement practices”.

We believe that such action would have a significant impact on the Funding of Capital Investment Projects and their delivery programme together with helping Scottish businesses to contribute to the Government’s growth agenda. Our Company is committed to assisting in finding more efficient and fairer processes and we look forward to having the opportunity to contribute to the “evidence hearings” as part of the Inquiry.

Steven Tolson Director, Ogilvie Group Developments Ltd 7 December 2007

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SUPPLEMENTARY SUBMISSION FROM OGILVIE GROUP

Procurement Process

The competitive process is accepted. However, some public bodies are being overly fastidious in their interpretation of the process and exercising an unnecessary complicated procurement methodology.

Competitions are lengthy tying up considerable public and private sector overheads.

The lengthy competition time brings about historic costs that often need reassessment and renegotiation between preferred bidder and financial close. Re-negotiation brings about uncertainty and further time delays.

Public bodies appear to “re-invent the wheel” and rarely have experts with appropriate experience. Consequently experienced consultants are engaged to cover the lack of expertise rather than utilising a public sector core of experts.

Competition Costs

Competition costs are high with total bidding costs often into the millions. It is estimated that the competition costs represent some 2% to 3% of the capital project cost which is broadly around the net contractor’s profit. Unsuccessful bidders look to recover abortive costs by including in subsequent projects. Thereby increasing the cost of future projects. Typically abortive costs can be in excess of £1 million. This level of competition cost can not be sustained by medium sized Scottish companies. By reducing the level of participants the public sector is at risk of reducing the level of competitiveness and limiting the contribution to Scotland’s growth strategy.

Resource Efficiency

A more reasonable and appropriate approach is to develop a less complicated process that will reduce bidding costs and consequently project costs.

Such conditions will reduce abortive costs that typically can be in excess of £1 million per project. We submit that it is more productive for the growth of the Scottish Economy to have such millions invested in positive uses rather than wasting them on non-productive short term and expensive selection processes.

Changes of rules from Invitation to Negotiate to “Competitive Dialogue” have significantly increased competition costs and risk.

It is understood that Competitive Dialogue emerged from EU requirements. If this has to be exercised then public sector clients need to develop more detailed briefs and agree such briefs with all of their stakeholders. A clear and precise brief that is fully agreed will minimise or preferably remove subsequent client changes. In our experience significant costs increases have occurred due

23 FI/S3/08/12/2 to public clients changing their minds too often and at too late a stage in the process.

Following each stage submission there should be a reduction in the number of candidates remaining in the competitive dialogue.

The above suggestions would go some way to mitigating the additional burdens brought about by the move to Competitive Dialogue.

If such burdens are not recognised there is a significant risk that the new requirements will lead to lower participation and possibly higher project costs through a lack of competing participants. The current competition process tends to favour larger scale corporate style international organisations rather than small and medium sized Scottish companies. This is prejudicial to growing the Scottish economy.

Risk Transfer & Value for Money

From our experience some public organisations can misjudge the principles of Risk Transfer. The passing of risk should be balanced against the saved liability costs. Transferring risk means transferring control. Loss of control implies higher costs for the public sector.

Risks that are a matter for the public sector should be retained rather than transferred. Partnership should mean contributions from both parties rather than a client / provider relationship dressed as a partnership.

It is wholly reasonable for the private sector to seek additional returns where there is increased risk and uncertainty. We are not aware of risk and uncertainty being properly evaluated.

Programme

The obtaining of statutory consents and utility approvals is hugely time consuming. More pre-competition work is required before finalising Project Briefs. The contents of the Project Brief should be sufficiently assessed for technical competence rather than waiting for competitors to duplicate inputs and time and thereby leaving scope for additional uncertainty and risk.

A Way Forward

1. The public parties should do more up front with the development of better quality Competition Briefs that commits public bodies to detail. Thereafter there should be little or no scope for the changing of minds.

2. The Competition and Post Bid process should be streamlined with the objective of achieving contract agreement much quicker. This provides less opportunity for changing minds and posturing on both sides. This will almost certainly lead to a cheaper solution.

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3. “Buy in” and commitment should be achieved from all those responsible for granting consents.

4. A substantial improvement is needed in the Interpretation of process rules. Sensible, clear and simple processes are the ingredients that allow a greater number of competition participants.

5. Achieve high levels of meaningful communication between the participants.

6. Create and stick to a prescribed programme.

7. Appoint a Central Government Board of Procurement experts who participate in all competitions. This will bring consistency, avoid re-inventing the wheel and importantly have public sector people who are skilled and experienced in the process. This will significantly contribute to a quicker and inevitably cheaper process.

8. In connection with the above, introduce greater levels of training and secondment initiatives to improve skills both in the procurement process and how best to engage and energise private sector participation. Such an approach should work the other way with private participants being encouraged through secondment and other collaborations to understand challenges in the public sector.

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SUBMISSION FROM BALFOUR BEATTY CAPITAL

Balfour Beatty Group Balfour Beatty Group is a leading engineering, construction, services and investment business in the UK.

Our activities cover the creation and delivery of essential assets such as hospitals, schools, roads, rail, utilities and major projects across the UK, USA, Europe and the Far East.

The following Balfour Beatty Group companies have operated in the Scottish market for many years and are long established employers with offices in Scotland:

• Balfour Beatty Capital • Balfour Beatty Civil Engineering • Balfour Beatty Construction • Balfour Kilpatrick • Haden Building Management • Haden Young • Balfour Beatty Infrastructure Services • Raynesway Construction • Mansell • Balfour Beatty Ground Engineering (Stent) • Balfour Beatty Plant and Fleet Services • Balfour Beatty Management • Balfour Beatty Rail Systems & Solutions

Balfour Beatty Capital

Balfour Beatty Capital (BBCap) procures and manages capital investments on behalf of the BB Group and is one of the UK’s leading private sector investors in healthcare, education, roads and infrastructure. BBCap currently has equity investments of £330m in 26 projects around the UK.

Balfour Beatty Capital was established in the mid 1990’s following the creation of the UK Government’s Private Finance Initiative (PFI) which provides a means for the private sector to invest in assets traditionally funded by the public sector.

BBCap currently has four operational concessions in Scotland and is the preferred bidder on the Fife Hospital project in Kirkcaldy.

Details of our Scottish PFIs are noted below together with some key infrastructure projects completed by Balfour Beatty Group companies which are listed later in this paper.

BBCap’s business principally revolves around the PFI market and we have experience of arranging private finance through commercial bank debt and the provision of bond finance through the capital markets. We also took part in the

26 FI/S3/08/12/2 competition for the Aberdeen City Schools 3Rs project which required bidders to engage in a Non Profit Distribution Organisation (NPDO) structure.

Other variations of the PFI model are being encountered in our German and USA businesses, as well as Singapore where we have recently been appointed as preferred bidder for the new Institute of Technical Education College West PFI.

We have also recently submitted our Final Tender to Transport Scotland for the M80 Stepps to Haggs DBFO roads project and this project is the first of its kind to be procured in Scotland under the new Competitive Dialogue procedures.

Balfour Beatty Capital PFI Projects in Scotland

• Aberdeen Environmental Services – delivering water treatment to the north east of Scotland • New Royal Infirmary of Edinburgh – new 872 bed acute hospital • M77/Glasgow Southern Orbital – new motorway and trunk road • North Lanarkshire Schools 2010 PFI – providing 24 new primary and secondary schools to North Lanarkshire Council

Key benefits of PFI

Construction cost certainty The private sector takes the risk associated with the construction price and design. It is best placed to manage these risks and has the necessary experience, supply chain partners and level of skilled persons to deliver the project.

Operation and maintenance The private sector also accepts and manages the risk associated with the delivery of services in relation to the maintenance and, typically, some limited operational aspects of the asset, for a 25 to 30 year concession period.

Whole life costs The requirement for the PFI contractor to provide ongoing operation and maintenance of the assets for the concession period influences decisions taken with regard to quality of materials and design adopted.

This long term approach requires long term strategy and planning which commences at the design and specification stage and continues to be reviewed throughout the life of the concession.

Agreed standard of delivery Responsibility for delivery of the facilities is often supported by incentives to perform to the required standards.

The Contractor has, therefore, to assume the risks attaching to a failure to deliver services to agreed standards and also in relation to availability of the asset.

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Risk vs cost of money One criticism often levelled at PFI is the higher cost of private finance but this has to be fully understood as a balanced trade off with the transfer of risk to the private sector. PFI brings the certainty of delivery of the asset on time and to budget, high service delivery and availability levels together with whole life cost responsibility. The value attaching to these risk transfers almost always outweigh the higher cost of finance.

Due diligence Privately financed projects undergo an increased level of due diligence to assist the funding providers to assess the level of risk to which they will be exposed. This process not only assists the funders but is also made available to the public sector client to give added comfort as to the robustness of the private sector’s proposals.

Private sector returns The PFI model has now become established in the marketplace and this has led to a clearer understanding of the risks involved. This in turn has led to a reduction in funding terms and risk perception with the benefit to the public sector that the high returns seen in early PFI deals are no longer available.

Established documentation Established, standardised contract documentation and templates have been developed, eg Scottish Schools Standard Contract (SSSC) which is also leading to a better understanding of the risks associated with the project and limits the upside to the private sector. This will also lead to a reduction in the tendering period with a commensurate reduction in bid costs and time.

Performance incentives The private sector company has financial drivers to deliver as failure can result in losses being incurred in the capital works. Losses can also be incurred by the company if it fails to deliver to the required service standards and availability levels throughout the 30 year life of the concession.

PFI model established Both the public and private sectors now have a clear understanding of the process, finance structures, contractual documentation, skills required, services to be delivered and the requirement for a clearly defined scope for any project.

Current projects have benefited from the lessons learned across many projects and the extensive due diligence carried out to date leads us to conclude that future procurement should be based on current knowledge and developed according to the specific needs of the project and procuring body.

Performance of PFI Some published findings give an insight to the perceived performance of PFI projects and partnerships.

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National Audit Office data suggests over 70% of traditional publicly procured projects were over budget and late, compared with just over 20% of PFI projects. According to recent research by Partnerships UK on the performance of operational PFI projects, key conclusions are:

• PFI is meeting the expectations of users. Public sector contract managers report that 96% of projects are performing at least satisfactorily with 66% performing to a very good or good standard. • 83% of contracts are described as always or almost always accurately specifying the services required. • 97% of public sector contract managers rated the relationship with their private sector counterpart as satisfactory or better with 72% rating it as good or very good.

Experience The private sector has the experience and skills to manage and deliver complex projects together with the freedom and ability to integrate the construction, design, financial, commercial, contractual, operational and maintenance resources necessary to deliver the asset and services together with its embedded risks.

Relationships PFI projects have specifically focussed and dedicated management teams. This has led to the evolution of improved relationships which, in turn, have developed into non adversarial partnerships. This partnership approach leads to open management and provides a platform for the sharing of ideas and innovation.

Bid process The bidding process can be lengthy and requires a thorough understanding of the contract scope and deliverables by all parties to ensure cost certainty. However, the new Current Competitive Dialogue process has brought benefits in terms of certainty of cost and commercial terms.

Commitment to Scotland The Balfour Beatty Group has been and continues to be committed to the Scottish capital projects market and through our group wide specialist companies has the experience and expertise to deliver such projects to a variety of procurement routes.

It is certainly clear that no one single solution is suitable to all types of projects and we look forward to participation in the Scottish Parliament’s Inquiry process together with further details on the development of the structure for the Scottish Futures Trust.

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Major Projects in Scotland

Balfour Beatty Group companies have been responsible for delivery of the following major projects in Scotland:

Healthcare sector:

• Victoria Infirmary (ACAD), Glasgow • Stobhill Hospital (ACAD), Glasgow • Lochgilphead Hospital, Argyll & Bute • Stobhill Hospital, Psychiatric Unit, Glasgow • Edinburgh Royal Infirmary • Fife Hospital, Kirkcaldy (preferred bidder) Education Sector

• North Lanarkshire Schools 2010 PFI • Argyll & Bute Schools PFI • Saltire Centre, Caledonian University, Glasgow • Primary Schools Projects, Glasgow • Edinburgh University • Langside College

Roads/Rail/Water sectors

• M77/Glasgow Southern Orbital • M74 Completion (JV partner) • Forth Rail Bridge refurbishment • Management and maintenance of trunk road network in North West Scotland • Aberdeen, Stonehaven, Peterhead, Fraserburgh waste water scheme • Road schemes on A8, M8, A9, A90, A1

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SUBMISSION FROM QUAYLE MUNRO

This note outlines Quayle Munro’s position in PFI in Scotland and makes some observations based on our experience of running PFI projects in the operational phase.

Jo Elliot has been a director of Quayle Munro since 1988, was chief executive 2002 – 2007 and is now deputy chief executive of the Group. In total, he has been a director of some 25 project companies, although these responsibilities are now shared with other colleagues at QM. Over half of these are in Scotland.

Background to Quayle Munro

Quayle Munro is an Edinburgh based investment banking group which has made a speciality of PFI since the inception of the initiative. Following recent acquisitions it now also includes a substantial, London-based corporate finance practice. QM has worked extensively on the public and the private side of transactions, mostly in the health and education sectors.

A significant milestone was in providing financial advice to the successful bidder for the first Falkirk Schools project in 1998, which was the first local authority scheme in Scotland and the first bundled schools scheme in the UK. Quayle Munro took a shareholding in the project company in its own name, and its connection with the project was maintained through the construction commissioning and early operational phases as Jo Elliot served as a director on the SPV board and QM had the responsibility for financial management of the SPV.

A similar pattern was followed on later projects where QM had a private sector responsibility, covering financial modelling and capital raising during the bid phase; investment either on its own account or through its managed fund, The PFI Infrastructure Company PLC (PFI Co); financial management of the SPV; and representing the interests of shareholders on the SPV board.

Operation of PFI project companies (Special Purpose Vehicles or SPVs)

SPVs have both differences and similarities to normal trading companies. The difference is that SPVs have most of their revenues and costs contractually pre- determined for the whole of the project lifetime – the revenue being the unitary charge from the public authority as adjusted periodically for inflation; and the costs being the costs of servicing debt and paying the subcontractors. As a reflection of this high degree of certainty, SPVs can be financed mostly with debt, the cheapest form of financing. In all these respects, a project company differs from its commercial equivalent, where trading uncertainties are very much greater, projections beyond a few years are almost meaningless and the funding mix requires substantial equity.

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Nevertheless, there are instructive similarities between PFI project companies and normal trading companies.

The first is that project companies are still at the mercy of events. In practice, construction contracts do not always go smoothly and there may be delays or quality issues. Fire, storm and flood are hazards. The job of the SPV board is to manage the company’s affairs firstly, to ensure continuity of service to the public authority, through continued availability of the premises at the prescribed standard; and secondly to enforce the terms of the contractual matrix which is designed to pass down most risks to the SPV’s subcontractors.

Secondly, the SPV retains the front line responsibility for the quality and the cost of maintenance of the PFI facilities. The maintenance responsibility is passed down subcontractors but the SPV board has to monitor performance and make sure that robust systems are in place to flag up any deviation. The payment mechanism, providing for deductions for poor standards in favour of the Council is one such mechanism. The financial responsibility for lifecycle maintenance is often retained by the SPV and periodic advice taken by the SPV and by its lenders is designed to ensure that premises are kept up the contractual standard right up to the end of the concession.

Thirdly, like any normal company, an SPV must manage its insurances, making sure that it retains adequate cover at economic premia.

Quayle Munro’s experience is that most of its PFI projects operate smoothly for most of the time. The point of maximum stress is at commissioning, where responsibility for the building is handed over from the construction contractor to the facilities manager, and simultaneously the client moves in. Typically, snagging works and external works still have to be completed. The PFI structure is designed to pass the entire responsibility for managing this interface from the public authority to the PFI project company. The system general works well, in that the SPV has very real financial incentives to sort out any issues without delay.

More generally, this general smooth running of projects does not mean that the job done by the SPV is easy; it is rather a reflection of the work which it puts in, with this subcontractors, in forestalling problems and curing them when they do arise.

Contract Variations

Service delivery by PFI project companies is based around the output specification in the Project Agreement. If the public authority’s requirements change, the output specification must be changed, typically involving works to alter the building. A sensible SPV will deal with such change requests in the spirit of a supplier seeking to give good service to its customer. The majority of change requests are relatively trivial and uncontroversial but the tight contractual PFI framework makes sure that nothing is done without considering

32 FI/S3/08/12/2 the short and longer term implications for maintenance of the building and service delivery within it.

It must be recognised, however, that PFI procurement best suits service provision which will remain relatively stable over the 25/30 year project lifetime. The structure is not well suited to situations where major capital expenditure is required as the costs of procuring finance on an incremental basis and of the legal work in amending the project documentation may be disproportionate.

Portfolio Benefits

Over 700 PFI projects have now reached financial close in the UK, and a number of investors have built up substantial portfolios through secondary purchases from the original project promoters. This gives them access to useful benefits of scale, both for the owners and for the public authorities. Both sides benefit from this broadening and deepening of expertise, as lessons learned in one project can be applied in others – particularly in heading off problems before they arise. The larger portfolio owners have built up their own expertise in such specialisms as insurance and lifecycle maintenance. The trend is for the management of PFI projects to be seen as a sub-set of the much larger business of out-sourced property management, which delivers well-recognised benefits across many parts of the private sector as well as the public sector.

Conclusions

Over the last 10 years PFI has become a seasoned structure for the efficient procurement of public assets using private sector money and management. Much attention focuses on these two aspects during the planning and construction phase, where the advantages of PFI in controlling and implementing ambitious and widely delegated procurement programmes (such as the Scottish Schools) are well established. Less noticed perhaps are the benefits of PFI’s single point responsibility in assuring a uniformly high standard of building maintenance and service delivery through the entire contract life.

JCE Quayle Munro April 2008

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SUBMISSION FROM CANMORE PARTNERSHIP LTD.

Introduction

Based in Scotland, Canmore Partnership Limited (“Canmore”) is a specialist promoter of public use infrastructure projects across the UK. This paper builds upon our earlier responses to the SNP’s invitation to give our views on the future role of the private sector in providing public use infrastructure in Scotland, responding in particular to “The Scottish Futures Trust: a better deal with Scottish Futures Bonds” (August 2006) and “Let Scotland Flourish 2007”. It also reflects much of the evidence which we gave to the Finance Committee’s previous enquiry. We offer this revised paper as a contribution towards building a broad-based political and public consensus on the future role of the private sector in Scottish Infrastructure Partnerships.

Scotland now has a mixed economy of public use infrastructure provision. Broadly this falls into three categories:

(a) services paid for by users and provided by the public sector (eg water and sewerage); (b) services paid for by the public sector on behalf of users and provided by the private sector (eg elements of health provision such as GPs); and (c) services provided by the private sector to users who pay for them directly within a public sector regulatory framework (eg electricity, gas and telecommunications).

Canmore’s main focus, and so the focus of our contribution to this debate, is on providing public use infrastructure in which the public sector continues to provide the core service (eg hospitals, colleges and schools). As such our model falls short of the full privatisation historically implicit in category (c) and is more akin to the support role played by the private sector in category (b).

The historical perspective

Many of Scotland’s current infrastructure problems are the direct result of insufficient investment and inadequate regulation. Working together, the public and private sectors can address these issues.

The introduction to the SNP’s August 2006 policy paper refers to Scotland’s “engineering miracles” – the Caledonian Canal and the Forth Rail Bridge – one procured by the public sector and one initially procured by the private sector. Fifty years ago it was indeed the public sector Hydro Board which commissioned Scotland’s hydro-electric dams, although it was also the public sector which later was responsible for a number of safety failures in Scotland’s nuclear power plants.

Debate on the role of the private sector is often derailed by dogmatic and selective historical references and inaccurate anecdotes. We need first to learn the lessons of the past if we are to harness all Scotland’s potential. We start from the proposition that there is nothing inherently good or bad about the

34 FI/S3/08/12/2 provision of public use infrastructure or wider public services by either the private or public sectors. We suggest that the optimum delivery model is that which works best, whether it be public, private or a mixture of both. What works best should be judged primarily in terms of overall value for money, not just cost but also quality. Provided that a true value for money solution results, we should not grudge the making of profit by the private sector as a consequence.

“The problem with PFI/PPP”

Below we first discuss the possible role of Scottish Futures Bonds and then discuss some of the other separate but linked issues raised. We shall probably never know the real motivations of the Conservative Government when PFI was launched. Was it really an accounting device intended to remove much needed investment from the public accounts? If so, both public and private sector auditors have made it increasingly difficult for the Government not to acknowledge its PFI obligations. Or was it, at least to some significant degree, a logical successor to privatisation which mirrored the contracting out of support functions similar to the out-sourcing procurement strategies employed by many companies in support of their businesses?

A number of criticisms have been made about PFI/PPP, including the following:

• excessive borrowing costs and “unnecessary private profit”;

• poor project prioritization;

• poor project preparation, briefing and design;

• low service levels, reduced facilities and poorer quality;

• inflexibility; and

• excessive charges for direct services (eg telephones, parking, community use etc).

These criticisms reflect a widespread public discomfort and lack of understanding about the private sector’s role. Whether we agree with the criticisms or not, we must acknowledge that such discomfort and misunderstanding exist and seek to answers the underlying criticisms and concerns.

The SNP’s proposed solution is the Scottish Futures Trust which will both prioritise projects and reduce their costs through the issuing of Scottish Futures Bonds. In our original response to the SNP we expressed our surprise at the apparent suggestion that this Trust, rather than Scotland’s elected government, should prioritise projects “through a public market testing of ideas”. That suggestion appeared to reflect the Conservative Government’s assertions in the early days of PFI that the market should decide upon which public use infrastructure projects should proceed. The SNP’s paper suggested that: “If someone wants to invest in a Scotland-wide wireless internet network or urgent

35 FI/S3/08/12/2 water and sewerage infrastructure modernization……they should be able to do so by putting forward a proposal through the Trust.” Unless the core obstruction to progress for such projects is funding - and we suggest that is not the primary obstruction for either of these illustrations - then how will the Trust help? Will the Trust then have the power to over-ride the relevant planning authorities and utility regulators?

We do not say that changes are not required, but it is as yet unclear exactly what changes are being proposed. Is the Trust to be at heart a national investment bank, or is it also to take on roles from national and local government, and if this wider role is the objective, then how and to whom will it be held accountable?

Scottish Futures Bonds

It is in our view a mistake to concentrate debate solely or even primarily upon funding mechanisms; private provision of public use infrastructure should embrace much wider issues. When risk adjustment is included in the equation, private finance is actually much less expensive when compared to “Treasury” funding than is often stated. PPP funders take a real, not theoretical, risk on project failure on top of the simple state or semi-state borrower covenant risk. However, we welcome a debate on funding mechanisms as part of a wider debate.

It is also unclear exactly what is proposed in respect of Scottish Futures Bonds. We understand that income from these bonds would be free of corporate and personal tax. First, we queried whether Westminster would permit such a scheme which would in effect boost expenditure in Scotland at the cost of UK revenues, and so we assumed that it would require fiscal autonomy for Scotland. Press reports of the Treasury’s position suggest that we were correct in our understanding. In any case, calculation of the relative benefits of tax- exempt bonds must include the resulting loss of tax revenue; the SNP’s paper appears to ignore this element in its calculations.

We understand that the proposed Scottish Futures Trust would issue these bonds. That role has been compared inter alia to the issuing of bonds by even relatively small states and provinces in the USA and Canada. However, we question whether the market will, at least initially, consider that a free-standing trust has a covenant equivalent to a government entity. This argument goes to the very heart of whether Holyrood would eventually rescue a failing Scottish Futures Trust (thus jeopardizing its off-balance sheet status?), whereas it is generally assumed that governments, even local governments, “cannot go bust”.

In summary we question the ability of a new organisation to raise funds and disburse them as cheaply and effectively as has to date been suggested. Experience shows that, whatever their shortcomings, private sector banks and investors are generally better at assessing risks and funding projects than quangos and national investment banks. Private sector institutions can be effective delivery channels for government facilities (eg ISAs, loan guarantee

36 FI/S3/08/12/2 schemes etc). We therefore suggest that consideration could be given to whether Scottish Futures Bonds could and should be issued by the private sector, perhaps initially as a refinancing mechanism for existing public use infrastructure projects or as a co-financing mechanism for new projects similar to that of the European Investment Bank.

It is also important to accept that projects can and do go wrong sometimes; that is what risk transfer to private providers means. In those circumstances it is investors and lenders who are usually required to provide expertise and additional funding to rescue them. Critics of PPP/PFI tend to focus on projects where investors are thought to have made excessive profit, often without consideration of whether, despite that profit, those projects still were judged to have been better value for money than conventional direct procurement. This judgement is also usually made without consideration of losses sustained on other projects. A recent study published by KPMG suggests that 17% of PFI contracts are unprofitable and 38% are less profitable than expected (ie 55% of PFI projects generate returns lower than expectations). This is a very different picture from that normally painted by critics.

It is generally agreed that windfall profits resulting from refinancing are unacceptable; measures are now in place to prevent this happening. Some authorities have attempted to avoid charges of permitting “excessive profits” from operations by introducing the variant not-profit-distributing “NPD” model of PPP procurement. Critics of that model observe that, compared to “traditional” PFI, it does not deliver enhanced value for money (ie its caps investors’ returns but does not actually cost less) and may leave the public sector more at risk if projects go wrong. Why then is it better? Does it simply meet a political imperative of reducing what may be seen as excess profit? We suggest that a candid review of the relative value for money and risk transfer of those NPD projects now signed would be helpful in taking this debate forward based on facts and not merely assertions.

Building upon what works

Whatever the faults and shortcomings, much good has come from the delivery of public use infrastructure and services by the private sector. Although there is undoubtedly a high degree of public concern about the PFI/PPP model, we query whether much of this may derive from misconceptions about what this model has actually delivered. The KPMG study cited above also concluded that 85% of operational PFI projects were delivering “good” or “very good” performance. We contend that the public are much less concerned about who provides services than who pays for them, their quality and their cost. Any rational and pragmatic review of public infrastructure provision must acknowledge that reality. We need to identify what has gone well and do more of it, identifying and spreading best practice.

Whether or not “soft” services (eg cleaning, catering etc) should be included in projects is even now sometimes justified, usually incorrectly, by reference to balance sheet treatment. It is now clear, and has been for some time, that auditors should disregard any such services which can be separately

37 FI/S3/08/12/2 terminated when considering balance sheet treatment. Moreover, the provision of facilities on a Design, Build and Maintain basis ensures sufficient risk transfer for projects to be regarded as “off balance sheet”.

We argue that the presumption should be that additional “soft” services should be provided as part of a package by the private sector facilities provider only if that is consistent with the procuring authority’s overall procurement policy (ie how these soft services are procured in similar facilities by that authority) and, of course, only if private provision is value for money. Canmore has led the way in combining private sector provided “hard” services (ie the buildings and their maintenance) with “soft” services provided by or for our public sector clients – our one-stop integrated helpdesks at the New Victoria and Stobhill Hospitals in Glasgow is a practical example of this approach.

Maintenance and life cycle replacement costs cannot be ignored when judging relative value for money. One of the main benefits of the PPP-type provision of public use infrastructure has been the whole-life integration of design, building, maintenance and life cycle cots. This correctly incentivises developers to invest in quality facilities at the outset, thus also increasing the availability of those facilities. At the end of a typical PPP concession the public sector will inherit assets which have been properly maintained. Any move to disaggregate the procurement of these elements would be a major error. Procurement of all these elements should, in our view, be at the core of any PPP-type procurement.

Identifying and addressing failures

Any failures must be addressed, but first alleged failures must be identified and analysed correctly. There is an often repeated assertion that PPP projects result in reduced facilities, lower service levels and poorer quality; that is not our experience in those projects where we have been involved. Moreover, although not all PPP design has been as good as it might have been - and measures are in hand to address this - there is no evidence to suggest that PPP design generally compares unfavourably with the designs used in direct, traditional procurement. None of our projects have resulted in facilities smaller or less flexible than their public sector comparators (and one London hospital actually has more beds). Two of them have won design awards. They all have levels of service and quality at least as high as the equivalent direct public provision and the relevant project companies are each held accountable for performance through measurable outcomes.

The KPMG study is the most recent to suggest that PPP/PFI projects are actually delivering well: 85% of operational projects were considered to be “good” or “very good” in terms of operational delivery.

As always the public sector needs to provide the right brief if it is to receive the right facilities. Arguably PPP-type procurement, by explicitly acknowledging the ongoing costs of initial building decisions, makes the initial briefing of facilities (which is crucial if the right facilities are to be procured) far more transparent. Critics of PPP often appear to ignore the historic costs of incorrect direct

38 FI/S3/08/12/2 investment decisions. If public bodies realise that they will remain responsible for those decisions, as is the case in PPP procurement, then that increases the incentive for proper planning at the outset.

The SNP’s paper reflected considerable public criticism of excessive charging for patients’ telephone calls, parking and community use of PPP facilities “out of hours”. Our view on each of these issues is clear:

• Any direct charges to users for monopoly services (eg telephones) must be regulated to ensure fair pricing. In this context it is worth noting that some of the most excessive charging has been via Patientline which has been contracted to supply patient telecommunications in many directly procured and managed NHS hospitals in the UK. (Patientline is anyway an example of contracting out a service rather than full PFI provision.)

• Re car parking, we understand that NHS Boards in Scotland are now obliged not to profit from car parking, whether car parks are provided privately or not. This policy has been followed in all our NHS projects.

• Encouraging community use can enhance overall value for money from the investment in facilities by increasing their use. However we believe that historically there have often been unrealistic expectations of Third Party Revenues in PPP projects. Our policy on such provision is that costs must be transparently and fairly reimbursed to the private operator, but that charges to third parties for community use should be set by the public sector.

Conclusion & recommendations

In 1995 the Conservative Chancellor of the Exchequer said: “We are changing the role of government…to being a provider of private investment opportunities and a purchaser of services, not always a direct investor and service provider.” His Labour Shadow, now the Prime Minister, said: “We aim to be an enabler…doing rather more steering than rowing.” We argue that this fundamental policy shift was correct and has on balance been beneficial to the public. Scotland’s challenge is to correct any mistakes made along the way, and to identify and spread best practice and so reinvigorate the process of public infrastructure provision by the private sector. Whether under current constitutional arrangements or under a different settlement, Scotland must compete for the best private service providers, and we should not be afraid to innovate whilst building upon progress to date. Accordingly we suggested that an incoming Holyrood administration should consider the following action points:

• a national debate on alternative funding models, including the option for tax-exempt funding mechanisms issued by either the private or public sector. So we welcome the Finance Committee’s initiative;

• the establishment of a public/private forum (either under the auspices of The Scottish Executive or possibly under an umbrella Scottish Futures

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Trust, possibly also involving stakeholder representatives from bodies like the Scottish Council for Development and Industry or the David Hume Institute) to debate Scotland’s future infrastructure requirements and how those requirements can best be met, either directly by the public sector or else through a revitalised programme of Scottish Infrastructure Partnerships; and

• when the public sector is a direct service provider of services sometimes provided by the private sector under PPP-type arrangements, then that direct public sector provision should be measured in a manner similar to private sector providers so that informed comparisons of performance can be made, which could inform

• a more transparent, dispassionate and well-informed analysis of public service provision by both the public and private sectors.

Andrew J Gordon Chief Executive, Canmore Partnership Limited 4 December 2007

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SUBMISSION FROM CANMORE PARTNERSHIP LTD TO THE SCOTTISH GOVERNMENT’S SFT CONSULTATION

Our response builds upon our Scottish Infrastructure Partnerships paper submitted to the Parliament’s Finance Committee in December 2007 (see Appendix 1). Our response is in the form of a commentary on the consultation paper followed by responses to the specific questions posed.

What exactly is the SFT concept?

The consultation covers a number of separate but overlapping subjects. As we see it, there are at least nine potential SFT roles covered in the consultation, namely:

1. delivering NPD as an immediate alternative to standard PFI; 2. further alternative forms of finance (eg SFT bonds); 3. the aggregation of funding and debt management; 4. the aggregation of services such as insurance; 5. provision to public authorities by the SFT itself of new infrastructure on a DBFO basis; 6. spreading of best practice and provision of support to the public sector, and other consultancy services; 7. co-ordination and support of shared infrastructure; 8. providing a forum for public and private engagement; and 9. planning local and national infrastructure.

We suggest that only by separating some of these subject strands can a view be taken on how any new SFT organisation(s) should be structured. We suggest that only four of these nine roles – numbered 2 to 5 above – actually require a new body structured outwith the public sector as suggested in the consultation paper because bodies already exist which either already provide, or else could perform, the other five roles. Although it may be considered desirable to form a new body to undertake these other five functions, it could be a public sector organisation (ie the “off balance sheet” considerations resulting from fund-raising functions, which appear to drive the suggested ownership structure, do not apply to the other functions).

The role of the private sector

We welcome the Scottish Government’s recognition of the role played by the private sector in providing public use infrastructure, specifically:

• private sector know-how, • due diligence of projects and • additional investment.

We note the Government’s concern that standard PFI procurement is expensive and that private sector equity returns are excessive. However, it should also be recognised that the public sector’s own analyses indicate that PPP/PFI projects signed to date were each calculated at the outset to offer

41 FI/S3/08/12/2 savings over conventional direct procurement; it may be in retrospect that the public sector could have negotiated better Value for Money (“VFM”) in some PPP/PFI deals, but that does not necessarily make them bad deals. At a UK level, refinancing gains and property disposals - the two main sources of “excessive profits” - have already been addressed. Lessons have been learned.

The importance and advantages of risk transfer to the private sector should also be recognised. We believe that the private sector is usually in the best position to manage such risks. Those risks will not go away if they are assumed by a Scottish Futures Trust and we query how the SFT will acquire the skills to manage them (and where it would get the funds to inject additional support into problem projects).

The NPD model

Although there is as yet no evidence to show that the NPD model is actually any better VFM than traditional PFI, we see the model as an alternative which captures private sector project delivery expertise, transfers risk and meets the Government’s political objective of capping investors’ returns. Moreover, it may lead to more refinancings and so enhance VFM. However, we believe that the consultation paper overstates the current level of private sector acceptance of the NPD concept. We have no doubt that NPD can be made to work, but the Scottish Government needs to recognise that it operates in a UK and international procurement market; Scotland deserves the best private sector bidders and must remain prepared to attract them.

The case for a new institution

The NPD model requires no new body; it is already being implemented. Originally the core purpose of a new SFT body was to provide cheaper sources of funding. As discussed in our Scottish Infrastructure Partnerships paper, we remain sceptical about the SFT’s ability to raise cheaper funding at all, but arguably “we won’t know unless we try”. Is the Government proposing that securing such funding is the SFT’s primary and initial objective? We understand that there is no foreseeable prospect of Westminster permitting the SFT to issue of tax exempt bonds. So, if tax exempt bonds are the proposed solution, is not fiscal autonomy for Scotland a necessary precursor? (In any case, calculation of the relative benefits of tax-exempt bond financing needs also to factor in the loss of tax revenue to a fiscally independent Scotland.) Simply aggregating demand for private sector finance is, in our view, unlikely to result in particularly significant savings given the low margins already available.

If it was shown that cheaper funding could be obtained, there would be scope for adding services such as insurance or even considering DBFO provision of infrastructure assets by the SFT itself (although we are aware of no evidence that suggests that the SFT could carry out either role better than existing alternatives).

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If the new body is to concentrate upon alternative funding sources, then we agree with the Government’s analysis of and suggestions for its ownership structure. However, we do not believe that a private sector company, even one with the public interest at its heart, is the optimum delivery vehicle for the remaining five roles. That suggests some kind of dual but linked structure, with only funding and related functions being carried out by a vehicle outwith the public sector for balance sheet reasons.

We do not know what future role the Scottish Government sees for Partnerships UK, but two of the remaining roles could be undertaken by the SFT or could be sponsored by existing bodies (with or without PUK’s assistance), for example:

• spreading of best practice and provision of support to the public sector: the Financial Partnerships Unit; and • co-ordination and support of shared infrastructure: existing partnership arrangements (eg between Local Authorities and Health Boards), “Hub” etc.

In our previous submissions we have called for the establishment of a public/private stakeholder forum for public use infrastructure. That could either be formed by the SFT or under the umbrella of a number of bodies; first agreement on its role and remit is required.

Planning local and national infrastructure – we believe that local planning is best delivered locally and that the institutions already exist to do this. However, we suggest that there may be a need for a small, apolitical, strategic national planning body to advise Scottish Ministers on public use infrastructure priorities for projects of national importance.

Scottish solutions for Scotland

Canmore operates in both Scotland and England. Whatever the criticism of PFI/PPP in Scotland, we believe that projects are generally managed better in Scotland than in England. We welcome UK-wide standardisation of contractual documentation but we strongly recommend that Scotland should not emulate England in setting up centralised procurement structures which run counter to the Scottish Government’s decentralising of power to Local Authorities and Health Boards. English models such as Building Schools for the Future and Partnerships for Health are arguably not particularly successful in England and we believe that they are certainly inappropriate for Scotland.

SFT QUESTIONS

1. How would the availability of expertise and support from SFT change the way public bodies handle infrastructure investments?

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Is such support not already available? Would SFT be in addition to that support or instead of it? Would it be mandatory to take its advice? Who would pay for it?

2. What are the advantages and disadvantages in setting up SFT to generate surpluses to invest in further projects?

We see no disadvantage in setting up SFT to do this but we query whether SFT would in fact achieve any such surpluses (except as a result of profit from surplus property disposals). Could these benefits already be captured elsewhere within the public sector?

3. What are the advantages and disadvantages in public authorities entering into agreements with SFT for the use of facilities?

First we query the ability of SFT to provide such facilities better than existing options (eg NPD or direct procurement by the occupying authorities).

4. What would be the advantages and disadvantages of using a greater degree of standardisation based on exemplar, energy efficient, sustainable designs to meet public authority requirements?

We are wholly opposed to the imposition of standardised design in any sector. However, we support the development of exemplar best practice models. Our response to the recent RIBA consultation is attached as Appendix 2.

5. Are there any difficulties envisaged in transferring/selling public owned sites to the SFT investment vehicle for use in providing the new facility?

Please clarify the objective of such transfers. Is this an attempt to capture the upside of redevelopment gains? If so, would the SFT be better able to maximise and capture this upside than existing arrangements?

Andrew J Gordon Chief Executive

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SUBMISSION FROM FORTH ELECTRICAL SERVICES LTD.

This paper sets out FES Ltd’s position within Scotland and its involvement in capital investment in Scotland. This covers both traditional procurement and PPP/PFI.

Dylan Fletcher, who has been called to provide evidence in person, has been a Director with FES Ltd and Forth Holdings since 2000 and before then worked as a consultant advising the public and private sector within construction projects and also PPP/PFI projects.

Forth Holdings

The two largest companies within the Forth Holding’s group are FES Ltd and FESFM Ltd. We directly employ over 1450 personnel and turnover approximately £145M per annum. We have regional offices in Glasgow, Edinburgh, Oban, Aberdeen, London, Manchester, with our head office in Stirling.

Our main areas of business are building services within the Construction Industry. This includes mechanical, electrical and plumbing type installations to commercial, industrial, retail and education type projects.

A further area of our business is Facility Management (FM) where we provide maintenance, cleaning, catering and janitorial type functions in approx 5 million square feet of buildings.

Views on current PPP/PFI

As a company we have been involved in 22 education projects and 9 health projects procured under this type of funding. We have invested sub-debt/equity in 6 projects and we currently provide FM services on 9 projects.

We only provide equity/sub debt into the projects that we shall perform the FM contract.

This has obviously provided a steady state of business over the last 7 to 8 years however we are now entering into a phase whereby we are seeking other areas of business. This is due to the downturn in the deal flow of construction projects being procured within the public sector.

We are not alone in this thinking and there is a real danger that what Scotland has developed over the years into a mature PPP/PFI market, shall erode and become less efficient.

As far as it can be understood, the concerns over using PPP/PFI funded projects, relates to the use of equity and sub debt and how this is more expensive than traditional routes. There are no indications that the construction or FM prices procured under PPP/PFI are any different to traditional methods in fact most views are that the

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PPP/PFI projects are completed on time, in budget and to a design that satisfies the criteria.

Another concern with PPP/PFI going forward is the use of the NPD model. The use of NPD model and particularly the most recent at Falkirk Council’s schools project, does not represent a fair deal on risk and reward, namely the forced re- financing and the method of sharing re-financing gains.

The use of competitive dialogue is also causing concerns and holding two or three bidders for longer periods before announcing a preferred bidder is causing unnecessary additional cost to the process.

Views on Scottish Future Trust (SFT)

The first concern is that the SFT is taking quite long time to come to fruition and it is likely to impact upon the current markets in Scotland. We are aware of many consultants and firms now working in England, Northern Ireland, Eire and parts of Europe under PPP/PFI type projects.

Furthermore from an operational point of view, any projects coming to market under this model, is probably 2 years away from becoming a construction project and 3 years from becoming a FM contract.

FES has no real issue on the type of funding provided, as it is first and foremost a construction and FM firm and its greatest concern is a steady deal flow, being procured fairly.

Views on Construction Industry in Scotland

About four years ago the Scottish Executive invited Trusts and Local Authorities to submit business cases for capital investment and the successful ones were communicated very well to the market. Once these started to come to site, the industry was already very busy and in my opinion the market was overheated for about 2 years. This started to taper off last year and today there is more operatives and staff resources available than there has been for over 5 years. From approximately 2nd quarter 2007 there has been a high number of contractors selling their businesses or going into administration.

The downturn in the Scottish market is being fuelled by the downturn of workloads in England and the housing market, whereby many firms which had traditionally worked work in these areas, now have very little and they are all returning to main stream contracting in Scotland.

The public purse provides a large contribution to the construction industry, but it would appear that the way the projects come to market are feast and famine.

Conclusion

The last 10 years of using PPP/PFI has come under due criticism, however an adaptation of this model along the lines of the NPD could provide the answer.

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The construction and operational markets require steady deal flow and continuous investment, otherwise the skills developed shall erode and the already mature market shall have to start over.

Trusts and Local Authorities require an understanding of the way the public purse is to be expended.

Forth Electrical Services April 2008

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Finance Committee

Inquiry into methods of funding capital investment projects

Submission from Robertson Capital Projects

Robertson Capital Projects has secured 17 PPP projects to date with a combined capital value in excess of £600M, involving a development portfolio exceeding 300,000 square metres of serviced accommodation. The company is responsible (as primary developer and investor only roles) for developing a portfolio comprising:-

• 40 Nursery, primary and secondary schools serving a pupil population of 25,000 • 10 primary care hospitals providing over 900 in-patient beds • 9 primary / social care properties as part of the company’s LIFT programme

1. Introduction

Alan Fordyce is the Managing Director of Robertson Capital Projects (RCP). Alan is a director of 12 Robertson led Special Purpose Company Boards, sitting on both the holding company and respective project company board of directors on each project.

Operating from a head office in Stirling with regional offices in Elgin, Inverness, Aberdeen, Newcastle and Belfast, RCP is a specialist investment and project management company dedicated to developing Public Private Partnerships (PPP) in the UK.

RCP was one of the early pioneers of PPP and has created an elite team of over 30 full time employees specialising in bid management, construction phase project management, investments, business development/marketing and project/financial administration as well as access to over 300 operational FM staff. The company currently works on a wide spectrum of health care, social care and education projects across Scotland and England, procured using PFI, PPP, LIFT and BSF partnering relationships.

Robertson Group, the parent company of RCP, is one of the largest privately owned construction, development and services companies in Scotland with a turnover of £200M and annual profits of £14M in the year to November 2006. The group employs approximately 1000 people in Scotland in 6 separate trading companies.

2. Robertson Capital Projects Ltd: Experience

With more than a decade of experience in delivering PPP contracts, RCP has been responsible for securing 4 Scottish Schools PPP contracts, comprising: • £22M Aberdeenshire Schools PPP Phase 1 • £50M Aberdeenshire Schools PPP Phase 2

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• £100M Dundee Schools PPP • £50M Forfar/Carnoustie Schools PPP

In addition, RCP has secured 6 primary care PFI contracts, comprising: • £4M Findlay House Continuing Care Unit PFI, Edinburgh • £16M New Craigs Hospital PFI, Inverness • £9M County Hospital PFI, Invergordon • £14M Whitehills Health and Community Care Centre PFI, Forfar • £19 Gartnavel Royal Hospital PFI, Glasgow • £21 Clackmananshire Community Health Services PFI

Current bids in Scotland include: • £100M Tayside Mental Health Developments NPD • £19M Midlothian Community Hospital PFI, Edinburgh

Outwith Scotland, RCP has secured a further 6 projects: • £12M Chester le Street Community Hospital PFI, Newcastle • £30M St Georges Park Hospital PFI, Morpeth • £50M Redcar and Cleveland Grouped Schools PFI • £12M Ingelby Barwick Education Campus, Stockton • £45M Newcastle NHS LIFT (Local Improvement Finance Trust) • £200M Newcastle BSF (Building Schools for the Future)

Working in partnership with NHS and Local Authority clients in Scotland, RCP has entered into 16 long term partnership relationships which deliver: • Fixed price costs based on contractual programmes, with the risk of both cost and programme overrun borne by the private sector • Performance based payments ensuring high quality service delivery • Fully maintained buildings based on 25/30 year concession periods • Integrated design, construction and operational FM solutions • Local partnerships with soft FM providers, including direct and indirect contracts

3. Robertson Capital Projects Ltd: Finance Committee Comments

RCP has prepared the following comments in advance of the meeting scheduled to take place on Tuesday 6th May 2008. These comments reflect the opinion of RCP and are based on our comprehensive experience of PFI/PPP procurement in the Scottish and UK markets.

3.1 Value for Money (VFM)

A considerable amount of debate has recently taken place around VFM principles. RCP believes that one of the fundamental areas of VFM which is often overlooked is the issue of “cost certainty”. In any PPP contract, the public sector secures cost certainty on construction costs, future lifecycle maintenance costs and the operational costs associated with the new facility. This certainty of cost for a 25-30 year period must be considered a key

49 FI/S3/08/12/2 element in any financial planning either within Local Authorities or within Central Government.

One of the best examples of the benefits inherent in this cost risk transfer process can be found in the East Lothian Schools PPP project which went into difficulties after the building contractor went into administration, which in turn required a rescue refinancing package to be assembled by the private sector. This refinancing package was entirely put in place by the private sector at an estimated cost of over £10M, with risk capital being used to deal with the increased costs associated with the appointment of a new building contractor. It is unclear as to whether there is sufficient risk capital available from the private sector under NPD or SFT forms of procurement to allow such a rescue re-financing package to be delivered in the future.

As an added point on the subject of value for money, The Scottish Government should not disregard the whole life cost solutions that traditional PPP projects deliver and the risk on the private sector to maintain and operate these facilities to a high level of contractual performance standards. It is worth noting that the levels of Service to be provided on day 1 in a brand new PPP building is exactly the same as year 29/30. This leads to certainty of service delivery as well as cost certainty.

3.2 Types of Procurement

Robertson has been and is currently involved in most procurement models with regards to Public Sector work including:-

1. Private Finance – 14 projects to date 2. NPD – currently bidding Tayside Mental Health Project 3. Building Schools for the Future (BSF) – Delivering Newcastle Schools 4. Local Improvement Finance Trust (LIFT) – Delivering Newcastle & North Tyneside 5. Tradition Design & Build - Various 6. Framework and Partnering Agreements- Various

In delivering both construction projects and facilities management services throughout Scotland we have undergone a steep learning curve, with those learning’s continuing on an almost daily basis.

The standard PPP/PFI market has evolved significantly over the 10 years, with both the public and private sectors in Scotland developing cutting edge expertise in contract negotiations. .

It is worth noting that the Scottish Government, predominantly via the Financial Partnerships Unit, is recognised throughout Europe as a leader in delivering PPP solutions. Robertson has been involved in several trade delegations throughout Europe and was invited to form part of a delegation from the Scottish Government exporting PPP knowledge throughout Eastern Europe.

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The two main issues as we perceive them in the market place at present are Competitive Dialogue and Non Profit Distributing vehicles.

Competitive Dialogue (CD) has been widely criticised for the substantial increase in bid costs which has followed its introduction. RCP has seen its project bid costs increase dramatically as a result of CD, from an average bid cost of £400k to over £1.5M. This is a far greater risk than we believe is necessary and will ultimately impact on a reduction in potential bidders, or the public sector requiring to assume some of these abort costs in future successful bids.

The introduction of the Non Profit Distributing (NPD) model, which in essence transfers more risk to the private sector for less reward, is a significant contributory factor in making bidding for projects in Scotland less favourable than elsewhere.

RCP would like to highlight a major area of concern which is central to NPD procurement – that is the forced refinancing of both Senior and Junior debt 1- 3 years after the facility has been completed. This will effectively result in the majority of Scotland’s infrastructure projects which utilise NPD procurement principles being owned by the UK financial community. We do not believe this is the intention behind NPD, but is the ultimate conclusion.

PPP organisations such as Robertson who are long term partners of both Educational and Health projects through construction and FM activity would be forced to exit the project – a fundamental aspect of NPD procurement which we believe is to the detriment of any partnership approach.

This does not bode well for developing a partnership ethos in the Scottish infrastructure economy.

3.3 Pipeline

Robertson has developed a sophisticated approach to public sector procurement, working in partnership with a number of Scottish businesses providing a substantial locally based supply chain. Our business has been developed over the previous decade on the back of long term business planning and strategic views on the market. One key element to our growth has been our view on long term partnering contracts which to date have been transparent in the form of an identified pipeline of future partnering opportunities. The whole debate on SFT and on the lack of clarity from the current Administration’s view of the future is generating a culture of disappointment and frustration. This frustration is not wholly from the private sector but also from the public sector clients, many of whom have long term relationships with RCP.

It is essential that The Scottish Government identifies a pipeline of projects, a realistic delivery programme; and the type of procurement for each project with an indication on the source of funding.

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3.4 International Market

The development of the PPP procurement model was originated in the UK. However it is worth noting that over the last 12 months a substantial volume of project activity has taken place using this procurement model outside of the UK.

RCP is conscious that the vast majority of our competitors are now involved in a much wider European/International market where governments are keen to access the PPP skills established in Scotland and the UK. In responding to the disappointing market conditions in Scotland we have within the last 6 months commenced operations in both England and Ireland. Our business plan for the next 5 years has been developed on the basis that the majority of our business will be outside of Scotland.

This is in part due to lack of clarity over pipeline, the excessive costs on the competitive dialogue procedure and the lower value inherent within the NPD model.

3.5 Project Finance Arrangements

RCP is not an expert in alternative forms of project finance, but would note that various discussions with our clients have confirmed the belief that PPP offers value for money in relation to the development of major projects. Recent feedback from Dundee City Council indicates that they believe that the financial package offered through RCP’s PPP solution was cheaper than they could achieve through Prudential borrowing.

It would appear reasonable and logical that each project should be analysed from different angles to determine the best procurement route for that particular project.

We do not believe that there is a one size fits all solution to projects, and that either Local or Central Government should use a balanced objective approach to procurement rather than decide one route is bad and another good for purely political reasons.

3.6 Conclusion

In summary, the main issues RCP would like to highlight are:-

1. Value for Money – This must include an analysis of the risks being transferred, whole life cost approach with contractual maintenance obligations and also the added value of cost certainty over the life of the project. 2. Competitive Dialogue – This is a lengthy and expensive process for both Private and Public sector and we would suggest that either the “Invitation to Negotiate” or the “Restricted Procedure” would be more appropriate. 3. NPD – Most elements of this model are a logical progression of the PPP model and would be accepted by the majority of the market. The

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exception to this is the “forced refinancing” clause which makes this form of procurement less valuable to the Private sector with no increase in value to the Public sector. 4. Pipeline – In order for businesses to survive and grow in the Scottish context a clear and deliverable pipeline of projects must be identified. 5. International Market – Scotland must make Public sector procurement attractive to the wider market and demonstrate our forward thinking global approach to delivery.

Alan Fordyce Managing Director, Robertson Capital Projects 2 May 2008

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Finance Committee

12th Meeting 2008 – Tuesday 6 May 2008

Finance Committee Annual Report 2007-08

1. The Committee is required to publish its annual report for the parliamentary year 9 May 2007 to 8 May 2008. The style and length of reports has been determined by the Conveners’ Group in order to maintain consistency across committees.

2. The Committee is invited to consider and agree the attached draft report.

Susan Duffy Clerk to the Committee

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Finance Committee

Annual Report of the Finance Committee for the parliamentary year 9 May 2007 to 8 May 2008

The Committee reports to the Parliament as follows—

Introduction

1. The Committee has had a busy work programme in the first year of the new parliamentary session. The Committee’s main area of work is the annual budget process. In addition to its budget scrutiny, the Committee has considered seven financial memoranda and has begun taking evidence on a major inquiry into the methods of funding of capital investment projects. The Committee has also launched a review of the budget process, and will begin a programme of evidence in the forthcoming parliamentary year.

Inquiries and Reports

Budget Process 2008-09 2. The principal role of the Finance Committee is to lead the Parliament’s response to the Scottish Government’s spending proposals through the annual budget process. Although the process this year was particularly time-pressured, the Committee protected time for parliamentary scrutiny by agreeing a revised timetable with the Scottish Government.

3. As well as examining the overall budget, the Committee decided to focus its scrutiny on the impact of the budget on local government and on sustainability, holding an evidence session on 11 December 2007 with representatives of COSLA and experts on sustainability. In order to gauge local views on the budget, the Committee held an external meeting at Discovery Point in Dundee on 10 December 2007.

4. The Committee’s report was published on 16 January 2008. Alongside a series of recommendations on the provision of budgetary information, the Committee recommended that the Scottish Government examine ways to increase police numbers and, by division, to accelerate proposed cuts in business rates. The proposals were accepted by the Scottish Government, and amendments to the Budget Bill were subsequently agreed by the Parliament.

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Inquiry into the methods of funding capital investment projects 5. The Committee launched an inquiry into the methods of funding capital investment projects in 2007 and, after gathering substantial written evidence, it is currently taking oral evidence from a wide variety of organisations and individuals.

Review of the Budget Process 6. The Committee launched a review of the annual budget process in March 2008 and published a detailed consultation paper. The Committee will begin taking evidence in June.

One-off evidence sessions 7. The Committee agreed to continue the work of the previous Finance Committee in monitoring specific Scottish Government initiatives, and has held a number of one-off evidence sessions on issues such as the relocation of public sector jobs, the Independent Review of Scrutiny (“the Crerar Review”), and the Report of the Budget Review Group (“the Howat Report”).

Bills

The Committee has adopted its predecessor Committee’s three level system for scrutinising Financial Memoranda of Bills. Level 1 involves sending a standard questionnaire to affected bodies. Level 2 involves taking written evidence from affected bodies and oral evidence from the Scottish Government. Level 3 involves the same steps as level 2, plus oral evidence from affected bodies. This year, three Financial Memoranda have been scrutinised at level 1, two at level 2, and two at level 3, which has resulted in four reports to lead committees at Stage 1

Subordinate Legislation

8. The Committee has considered and reported on two affirmative and two negative Scottish Statutory Instruments.

Innovations

9. As part of its 2008-09 budget scrutiny the Committee held an external meeting in Dundee. Prior to the meeting the Committee held workshops with selected representatives from businesses and organisations from within the local community. Participants were chosen to represent a wide range of views, including a number of contributors from environmental groups. Issues arising from these workshops were then raised with the Cabinet Secretary for Finance and Sustainable Growth during a formal evidence session.

10. Members of the Committee also met with students from local schools in Dundee for a series of informal question and answer sessions. Students were also given the opportunity to attend the Committee’s evidence session with the Cabinet Secretary.

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Mainstreaming equal opportunities

11. In its preparatory work for the external meeting the Committee sought to ensure that the venue was accessible to disabled people and had good transport links with the local area to allow the highest possible participation.

12. The Committee’s budget adviser has also met with members of a working group investigating ways to equality-proof the annual budget. In addition, the Committee made a number of recommendations in its report on the 2008-09 Draft Budget on how equalities information could be improved.

Meetings

13. The Finance Committee met 25 times between 19 June 2007 and 6 May 2008. Of these, 10 were held entirely in public, 13 were held partly in private and two were held totally in private. The purpose of the majority of private items was to consider Committee reports.

14. All Committee meetings were held in Edinburgh, with the exception of its meeting in Dundee on 10 December 2007.

4 FI/S3/08/12/5 Europe, External Affairs and Cultu re Dire cto ra te Cultu re and Gaelic Division

T: 0131-244 0749 F: 0131-244 0353 E: [email protected] abcdefghijklmnopqrstu

Allan Campbell Assistant Clerk Finance Committee Room T3.60 The Scottish Parliament Room T3.60 Edinburgh EH99 1SP

___

30 April 2008

Dear Allan,

CREATIVE SCOTLAND BILL: FINANCIAL MEMORANDUM – FURTHER INFORMATION

Thank you for your email of 23 April, which seeks information further to that included in the Financial Memorandum for the Creative Scotland Bill. You seek in particular information about the one off transition costs associated with the implementation of the Bill, which I offer below. I would wish to emphasise that estimates and ranges of estimates noted below are offered prior to a decision of the joint board of the Scottish Arts Council and Scottish Screen and Ministers about the structure of the proposed organisation, and – as a consequence – represent neither the policy of the Scottish Government nor a decision of the joint board. The exception to this is the running cost of the transition project team in this financial year, which is confirmed.

The joint board expects to consider a detailed plan for transition implementation, including a budget, by September, and for implementation to begin thereafter. Such implementation will have regard to any substantive amendments relating to the functions and operations of Creative Scotland that may be made during the course of the Parliament’s consideration of the Bill.

Transition costs

At present, it is expected that transition costs may arise in the following general categories:

• Staff and other costs of transition team; • Professional and legal fees; • Policy and systems’ development and implementation; • Arrangements for voluntary redundancies; • Recruitment of chief executive and board members; • Arrangements for pensions; and, • Premises (relocation) costs.

Victoria Quay, Edinburgh EH 6 6QQ www.scotland.gov.uk abcdefghij abcde abc a

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Following further discussion with the two organisations, provision for general staff training and recruitment have been removed from estimates of one off transition costs (except insofar as they relate to the recruitment of a chief executive). The organisations are content that they will meet the costs for these activities from their operational budgets.

Estimates of possible costs

The estimate offered in the financial memorandum was the result of initial discussions with the newly appointed transition team for Creative Scotland, based on their first consideration of possible costs. Following further analysis, and consideration, we are now able to offer further developed costings and some breakdown of categories. Work on this continues as a transition plan is finalised.

The table at the annex notes a number of estimates and, in some cases, ranges of possible estimates in categories of expenditure over this and the next financial year. If the organisation is to be established early in the next financial year, it is anticipated that the greater part of the costs identified in the annex will likely be incurred in the present financial year, although precise timings are yet to be confirmed.

We are aware that the ‘twin track’ approach to this process, with the legislation and the transition planning progressing at the same time is an ambitious undertaking. Ministers wish us to proceed in this accelerated fashion taking account of the wishes of the cultural sector and others to bring to a conclusion an extended process of debate and reform that has been continuing since around the time of the establishment of the Cultural Commission, in 2004.

The table also includes some background information.

In three categories of expenditure we are not presently able to offer an analysis of possible costs. These are as follows:

• Estimates are included at the annex in relation to the design of new systems, including IT and other administrative systems. As the operational remit of Creative Scotland is still in development and the requirements with regard to systems are still to be clarified it is at present not possible to offer an estimate for system implementation costs, reflecting the potential retention of current systems and development of new; • In relation to staffing costs, the process of commissioning actuarial advice about pensions is under way but no estimates of one off costs necessary for future arrangements are yet available. In relation to costs associated with any voluntary redundancies, it is not possible at present to offer an estimate of overall cost, as no proposed organisation structure yet exists for Creative Scotland; and, • In relation to premises costs, initial work has been undertaken to identify potential liabilities and relocation costs. This work is to be further developed and will benefit from preparatory work undertaken in a location study that began in 2006 under the terms of the previous administration’s policy on the location of public bodies. The decision regarding premises requirements will be subject to the identification of the requirements of Creative Scotland and relevant financial restraints.

Victoria Quay, Edinburgh EH 6 6QQ www.scotland.gov.uk abcdefghij abcde abc a

FI/S3/08/12/5 Timing

We have to date worked on a general planning assumption that Creative Scotland may be established at the beginning of financial year 2009/10, or shortly thereafter. Accordingly, we have assumed that one off transition costs will fall principally in 2008/09 and 2009/10. As noted above, however, the transition team is preparing an implementation plan, which will set out time tables and will clarify what can be achieved in this financial year and what elements might form part of a longer term transition phase. When this plan is available, it will be possible to offer a more precise view on when exactly costs will be incurred. For the time being, therefore, we offer estimates over two years, with the greater part of costs anticipated to be incurred in 2008/09.

Funds for transition

In your email of 23 April you note that the financial memorandum states that “all costs associated with transition will be met from the 2 per cent efficiency savings that are required by the Scottish Government”. That is not an accurate interpretation and perhaps I can provide some clarification.

The financial memorandum states:

“These costs will be met from savings from the two organisations’ grant in aid which is required from the Scottish Government”

In common with all Scottish public bodies, the Scottish Arts Council and Scottish Screen are, during the period of the present spending review, seeking 2 per cent annual cash releasing efficiency savings. The Scottish Government is working closely with the Scottish Arts Council and Scottish Screen to pursue these targets. When information is available about efficiencies achieved in relation to the present target, it will be published. It is not the case, however, that the Creative Scotland transition project is being funded from cash releasing efficiency savings. The Government’s policy is that monies released from such savings should be recycled into other core activities. This will apply to the Scottish Arts Council and Scottish Screen as it does to other bodies.

The policy of the Government is that one off transition costs should continue to be met from grant in aid. The allocation of such funds, other than funds provided on a restricted basis (such as those provided for the Youth Music Initiative), is a matter for the joint board (and, in due course, the board of Creative Scotland). Consequent upon this, the joint board has agreed, at the end of March, to retain a contingency for transition costs of £1,003,000 across both organisations, and this will be reflected in their published operating plans. This amount is approximately 2 per cent of their combined grant in aid. As noted, above, however, no decision has yet been taken by the joint board about how to distribute these funds to different tasks associated with the transition, nor whether the contingency is sufficient to cover all costs. In the event that a request for additional funds is made, the Government will of course consider and scrutinise any such request.

Staffing costs

In the course of the evidence session on 22nd April we were asked to provide figures for staffing costs for the two organisations in financial year 2008/09. In relation to the Scottish Arts Council, the budgeted figure is £3.975 million. For Scottish Screen, the budgeted figure is £1.351 million. Both figures are based on a range of assumptions regarding staffing levels and present Scottish Government pay remit guidance.

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Also, for completeness, we said in the course of our evidence that there are 30 people employed at Scottish Screen. There are in fact 36 full time equivalent posts; but a total of 39 individuals working full and part time, and on a job share basis.

In the course of this morning’s evidence session before the subject committee, I was asked whether we would be willing to offer the information here also to that committee and for that information to be made public. In a spirit of helpfulness, I assented to those requests.

On reflection, I can see that these decisions are essentially a matter for the Convenor of your committee. We would be grateful if you could let us know of the Convenor’s view on this, and presume that you will liaise in this with the Clerk of the subject committee. We are conscious that there was discussion at the Finance Committtee about whether all the information here should be made public, due to senstivities around staffing issues. We expect too to be asked for information from the subject committee and will liaise with you about this.

I hope this additional information is useful to the Committee, and will provide further information when it becomes available.

Yours sincerely,

GREIG CHALMERS Head of Creative Scotland and broadcasting team

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FI/S3/08/12/5 Annex

Transition to Creative Scotland: estimates of costs 2008-2010

Category Estimates Notes (inclusive of VAT) Transition team £410,000 Includes salaries, travel and accommodation, office costs, running costs events, advisory consultants and connected services. Transition project is scheduled to complete at the end of 2008/09, but this figure includes a contingency for ‘spill-over’ into 2009/10. Legal and £280,000 Estimate based on previous business practice. Includes professional fees provision for advice and services connected to HR, tax, property, intellectual property, business transfer and general financial and legal advice. Policy and £240,000 Includes provision for 3 policy and strategy development systems’ projects. Also includes provision for Creative Scotland website; development design of electronic administration systems; and, communication for new organisations. Board and chief £150,000 Costs based on cost of equivalent 2004 recruitment exercises, executive plus inflation. recruitment

Victoria Quay, Edinburgh EH 6 6QQ www.scotland.gov.uk abcdefghij abcde abc a