Watchdogs say Scottish PFI schemes weren't properly scrutinised

The Scottish government failed to properly monitor and evaluate billions of pounds’ worth of privately financed contracts to build roads, schools and hospitals, two public spending watchdogs have said.

In a damning report issued on Tuesday, Audit Scotland and the Accounts Commission found that the Scottish government had signed off on £9bn worth of privately built and financed construction projects without fully understanding how they worked.

Scottish ministers failed to predict how much profit the builders and lenders would make over the 25- to 30-year lifespan of the contracts, their joint report concluded. It was also unclear why private financing was used in some projects but not others.

Ministers did not realise that large profits could be made by selling off debts from these contracts to other investors without any consultation with the public body using that asset. That reduced transparency and accountability, and increased risks for the public sector, the report found.

In some cases, parcels of debt for these contracts had interest rates as high as 14.5%, while the investors enjoyed returns on their money that were nearly 6% higher than if councils had borrowed money from the Treasury.

Those projects included the Aberdeen western peripheral route, a 36-mile long bypass, new hospitals, colleges and schools, which were built using a revised version of the private finance initiative (PFI) known as the non-profit distribution (NPD) model.

Aberdeen Western Peripheral Route

A 36-mile long bypass around Aberdeen, the Aberdeen Western Peripheral Route has a construction cost of £469m but its owners will earn £1.4bn from a contract that ends in 2048. The building company Carillion partly blamed delays with the AWPR contract for its collapse in 2018.

City of Glasgow College

On two award-winning campuses in central Glasgow, it cost £193m to build but its owners will earn £603m by the time their contract ends in 2042. The Audit Scotland/Accounts Commission report said the builders' professional fees will be paid for over the lifetime of the contract, attracting interest.

Royal hospital for sick children

The contractors for this new hospital on the outskirts of Edinburgh are embroiled in a bitter dispute with the NHS after serious design flaws emerged days before it was due to open last year. No new opening date has been set. It cost £150m to build but its total contract value will be £416m.

Dumfries acute services hospital

This new emergency hospital in south-west Scotland opened on time, and cost £213m, but it emerged that its owners will earn £138m in interest payments by the time the 25-year contract is complete in 2043, at a total cost to the taxpayer of £525m. Severin Carrell

Overseen by the Scottish Futures Trust (SFT), a quango set up by the then first minister Alex Salmond in 2010, Audit Scotland and the Accounts Commission found the lifetime cost of those projects was nearly twice as much as building them with construction grants from the government.

In some cases, they were 50% more expensive than the route open to local authorities: borrowing from the Treasury-funded public works loan board.

The report said councils agreed to the new privately-financed schemes partly because they felt the Scottish government gave them little choice, and often without considering other options.

The report confirmed the findings of investigations by the Guardian that the firms that built and financed these projects were making significant profits from the debt and maintenance costs over the lifetimes of the contracts, which last 25 or 30 years.

While private firms and investors spent £2.3bn on the construction costs, with the public sector contributing £1bn, the total lifetime costs for the 56 contracts overseen by the SFT and Scottish government would be £9bn, including maintenance.

As a result, the total cost for all PFI-type projects in Scotland had grown to £40bn under the Scottish National party, which first won power in Edinburgh’s devolved parliament in 2007 partly due to Salmond’s attacks on the hefty profits made from PFI projects agreed by previous Labour governments.

Scottish Labour said the report added weight to their calls for the Scottish government to halt the private financing of public buildings. The Conservatives said the report showed Salmond was guilty of hypocrisy for attacking PFI in the past but then embracing the policy once in power.

The Scottish parliament’s public audit committee will question Scotland’s auditor general, Caroline Gardner, on its findings next month. Jenny Marra, the committee’s convenor, said MSPs “will certainly want to know how these funding decisions were made, and whether they represents value for taxpayers’ money”, she said.

The report said there were some benefits from the NPD system. It prevented builders and lenders from making the huge profits seen during the first years of PFI, introduced in the early 1990s by the Tories.

The Scottish government’s borrowing powers and capital spending grants were also restricted by the Treasury ten years ago, and were only gradually extended. This decreased the Scottish government’s options for funding new public projects.

The SFT had also succeeded in attracting support for some projects from the European Investment Bank (EIB), a European Union-owned institution which charged lower interest rates than private lenders. That helped reduced debt and annual financing costs to the public sector.

Even so, there were significant questions about how the NPD system worked, the two spending watchdogs said, as well a decision by the SFT to introduce a streamlined project commissioning system known as hub.

The hub programme involved bundling together 54 similar projects, including 28 schools and 13 health centres, into single contracts. The contracts were modelled on the NPD system and shared out around the country by five regional hub companies called hubcos.

Although the hub system was apparently simple to use, its decision-making was very opaque. Each hubco is controlled by two primary contractors, who appointed other contractors, which decreased competition and choice.

Audit Scotland and the Accounts Commission, the quango that polices local government financing in Scotland, said there were doubts too about the SFT’s claims that its approach saved money. Public bodies “often had difficulty understanding how the SFT’s savings figures relate to the projects they are delivering”.

Gardner, the auditor general, said Scottish ministers had to learn lessons from these experiences before they rolled out a new private financing system called the mutual investment model, which includes many features of the PFI and NPD systems.

A Scottish government spokesman said it would consider the report in detail, but defended private financing. Infrastructure investment “goes beyond the physical homes, schools and hospitals [which are built]. It has the capacity to unlock economic potential, support jobs, and enable our businesses and communities to grow,” the spokesman said.