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Construction and Special Projects
What will the Scottish Futures Trust look like ?
PPP Bulletin
November 2008
No news is not always good news. Since the SNP came to power in Scotland in 2007, we have been waiting with bated breath for the establishment of the Scottish Futures Trust (the “SFT”). Recent news of the development and incorporation of the Scottish Government’s flagship vehicle for procurement of infrastructure projects has therefore been greeted warmly by the industry, and the SFT is once again in the spotlight.
John Swinney recently announced that the SFT has been incorporated as a government owned limited company, and that Sir Angus Grossart has been appointed chairman. Although any progress is undoubtedly good news, have we got what was promised, or what we need?
The SFT as a concept originated out of an election promise. The SNP had significant concerns about uncapped private sector investor returns on large public projects and undertook to address this. Taxpayers were promised a procurement method so efficient it would eventually crowd the heavily criticised PFI out of the market. When the post election proposals were eventually published, the SFT had evolved into two separate entities. The first would sit in the public sector and provide advice and assistance to public authorities, whilst the second entity, to be set up at a later date, would act as an investor of risk capital and a conduit for securing better value funding.
What is evolving is, however, a slightly different animal.
John Swinney's recent announcement outlines the SFT’s role. Rather than being an alternative to PFI, it seems to be advisory only - a centre of expertise which the public sector can call on for help in procuring infrastructure projects.
No announcements have been made on the second entity, which was originally heralded as a new dawn in the world of project funding. The SNP originally advised that the SFT would issue bonds similar to the model used by some American states, however that proved unworkable. There is still discussion around the possibility of authorities acting together to issue municipal bonds, but this also raises some major issues. As time marches on, with no further details issued, the industry may well begin to question whether these proposals will ever yield any workable reality.
The Scottish Government sees the SFT at the heart of its future infrastructure investment programme, eventually becoming an integral part of all public projects. In the meantime, the Scottish Government has singled out two areas where it sees the SFT becoming involved imminently.
The first of these is the hub initiative. This initiative aims to bring together local authorities, health boards and other public sector bodies within a defined territorial area to deliver new community facilities. The hub initiative has been in development for some time and followers of its progress will be glad to hear that it is still a priority. Two hub pathfinder projects were originally expected to be announced in the autumn, however, it is understood that it is now likely to be spring before they will go out to the market.
The second area in which the Scottish Government envisages the SFT playing a role is the development of a programme of schools investment. A significant part of Scotland’s school estate is still in need of an upgrade. Following the way the latest spending review was structured, local authorities have been allocated funding directly for education projects and been given the responsibility of procuring these themselves. A number of local authorities have, however, indicated that they will need additional funding from the Scottish Government to invest in schools, and without this are unlikely to be able to make the required levels of financial commitment for the required period. It is clear that it is funding rather than advice that these authorities need from the SFT. Without this, it seems unlikely that there will be a pipeline of future projects.
The Scottish Government has also advised that the SFT will utilise Non Profit Distributing (“NPD”) principles and it is likely that any advice or assistance given to local authorities will fit around this. The NPD model is, in itself, not a new concept. It was developed under the previous administration; however, like its predecessor, there have been a number of criticisms of the model. A number of pathfinder projects have been run which has led to confusion and uncertainty in the market around certain aspects of the model, and further development of the NPD model by the SFT may help to address some of these issues. However, if the SFT and the Scottish Government want to attract high calibre investors to the Scottish market then any development of the NPD model will need to strike the right balance between meeting public sector concerns, whilst still incentivising the private sector to invest.
Although the SFT is not what we expected, it has the potential to improve delivery of projects in Scotland if structured properly.
The SFT is intended to pull together projects to create a unified approach to the procurement of large-scale infrastructure projects in the Scottish market. In the current economic climate a unified approach may create certainty in the market and that should be a good thing. The slowdown in the Scottish PPP/PFI market has led to some investors turning their back on the Scottish market and unless the Scottish Government acts now to address this issue Scotland will continue to lose out, as investors look to other European countries to do business, taking with them those with the knowledge and experience of procuring and running large-scale projects.
Although the intention is to create a unified approach to procurement, the Scottish Government has not yet confirmed whether a procuring authority will be obliged to utilise the SFT when procuring a project. If it is not mandatory, the SFT will need to address the issue of how to incentivise the public sector to utilise its services. At the end of the day, authorities want roads, schools and hospitals. PFI gave them the money they needed to procure those projects. So far, this does not seem to be the approach that the Scottish Government plans to take with the SFT.
The traditional PFI model has developed significantly since its inception and many things would have been done differently if we were starting from a blank sheet. The SFT should incorporate these developments and the lessons learned along the way into the advice and assistance it offers the public sector. Development of the SFT also grants the Scottish Government an ideal opportunity to incorporate expertise and knowledge from foreign markets. Many countries now have very large and experienced PPP markets and innovation from those markets should be incorporated into the advice offered by the SFT.
A familiar criticism of PFI is that the project was built in line with the contractor’s vision rather than the authority’s. Even as an advisory body, the SFT could work to address this. The SFT should drive quality to the forefront of the procurement process. Exemplar designs should be used to far greater effect than is currently done in the Education and Health sectors, forcing bidders to innovate their designs to advance their bid.
The SFT should also address the choice of procurement used for infrastructure projects. NPD and PFI Projects have typically been procured under the Competitive Dialogue Procedure, which has led to extremely high bid costs, as typically two or three bidders develop their proposals to final tender stage. Use of the shorter, restricted procedure could bring bid costs down and shorten the overall timescales of procuring a project.
At the end of the day, the key concern for the private sector will be deal flow. This is also vital to the public sector, as a pipeline of future projects would almost certainly bring high quality investors to the Scottish market. This would lead to greater competition, which should in turn mean better value for money for the Scottish Government, and ultimately the taxpayer. The current market offers the Scottish Government an ideal opportunity to run a pathfinder now, as the private sector will be extremely keen to be involved in any projects procured with the SFT on board. If the Scottish Government does not act now, the danger is that the market would recover and the contractors and expertise will be elsewhere - making it much more difficult for the public sector to secure optimum value for money.
John Swinney's recent announcement is not the miracle procurement method that was promised by the SNP. However, if structured properly the SFT could still drive improvements in the way projects are delivered in Scotland. Above all, one thing is clear - there is a real need for the SFT to hit the ground running and begin delivering projects now.
Euan Murray is a Solicitor in the Projects Division at leading UK law firm Shepherd and Wedderburn.
John Swinney recently announced that the SFT has been incorporated as a government owned limited company, and that Sir Angus Grossart has been appointed chairman. Although any progress is undoubtedly good news, have we got what was promised, or what we need?
The SFT as a concept originated out of an election promise. The SNP had significant concerns about uncapped private sector investor returns on large public projects and undertook to address this. Taxpayers were promised a procurement method so efficient it would eventually crowd the heavily criticised PFI out of the market. When the post election proposals were eventually published, the SFT had evolved into two separate entities. The first would sit in the public sector and provide advice and assistance to public authorities, whilst the second entity, to be set up at a later date, would act as an investor of risk capital and a conduit for securing better value funding.
What is evolving is, however, a slightly different animal.
John Swinney's recent announcement outlines the SFT’s role. Rather than being an alternative to PFI, it seems to be advisory only - a centre of expertise which the public sector can call on for help in procuring infrastructure projects.
No announcements have been made on the second entity, which was originally heralded as a new dawn in the world of project funding. The SNP originally advised that the SFT would issue bonds similar to the model used by some American states, however that proved unworkable. There is still discussion around the possibility of authorities acting together to issue municipal bonds, but this also raises some major issues. As time marches on, with no further details issued, the industry may well begin to question whether these proposals will ever yield any workable reality.
The Scottish Government sees the SFT at the heart of its future infrastructure investment programme, eventually becoming an integral part of all public projects. In the meantime, the Scottish Government has singled out two areas where it sees the SFT becoming involved imminently.
The first of these is the hub initiative. This initiative aims to bring together local authorities, health boards and other public sector bodies within a defined territorial area to deliver new community facilities. The hub initiative has been in development for some time and followers of its progress will be glad to hear that it is still a priority. Two hub pathfinder projects were originally expected to be announced in the autumn, however, it is understood that it is now likely to be spring before they will go out to the market.
The second area in which the Scottish Government envisages the SFT playing a role is the development of a programme of schools investment. A significant part of Scotland’s school estate is still in need of an upgrade. Following the way the latest spending review was structured, local authorities have been allocated funding directly for education projects and been given the responsibility of procuring these themselves. A number of local authorities have, however, indicated that they will need additional funding from the Scottish Government to invest in schools, and without this are unlikely to be able to make the required levels of financial commitment for the required period. It is clear that it is funding rather than advice that these authorities need from the SFT. Without this, it seems unlikely that there will be a pipeline of future projects.
The Scottish Government has also advised that the SFT will utilise Non Profit Distributing (“NPD”) principles and it is likely that any advice or assistance given to local authorities will fit around this. The NPD model is, in itself, not a new concept. It was developed under the previous administration; however, like its predecessor, there have been a number of criticisms of the model. A number of pathfinder projects have been run which has led to confusion and uncertainty in the market around certain aspects of the model, and further development of the NPD model by the SFT may help to address some of these issues. However, if the SFT and the Scottish Government want to attract high calibre investors to the Scottish market then any development of the NPD model will need to strike the right balance between meeting public sector concerns, whilst still incentivising the private sector to invest.
Although the SFT is not what we expected, it has the potential to improve delivery of projects in Scotland if structured properly.
The SFT is intended to pull together projects to create a unified approach to the procurement of large-scale infrastructure projects in the Scottish market. In the current economic climate a unified approach may create certainty in the market and that should be a good thing. The slowdown in the Scottish PPP/PFI market has led to some investors turning their back on the Scottish market and unless the Scottish Government acts now to address this issue Scotland will continue to lose out, as investors look to other European countries to do business, taking with them those with the knowledge and experience of procuring and running large-scale projects.
Although the intention is to create a unified approach to procurement, the Scottish Government has not yet confirmed whether a procuring authority will be obliged to utilise the SFT when procuring a project. If it is not mandatory, the SFT will need to address the issue of how to incentivise the public sector to utilise its services. At the end of the day, authorities want roads, schools and hospitals. PFI gave them the money they needed to procure those projects. So far, this does not seem to be the approach that the Scottish Government plans to take with the SFT.
The traditional PFI model has developed significantly since its inception and many things would have been done differently if we were starting from a blank sheet. The SFT should incorporate these developments and the lessons learned along the way into the advice and assistance it offers the public sector. Development of the SFT also grants the Scottish Government an ideal opportunity to incorporate expertise and knowledge from foreign markets. Many countries now have very large and experienced PPP markets and innovation from those markets should be incorporated into the advice offered by the SFT.
A familiar criticism of PFI is that the project was built in line with the contractor’s vision rather than the authority’s. Even as an advisory body, the SFT could work to address this. The SFT should drive quality to the forefront of the procurement process. Exemplar designs should be used to far greater effect than is currently done in the Education and Health sectors, forcing bidders to innovate their designs to advance their bid.
The SFT should also address the choice of procurement used for infrastructure projects. NPD and PFI Projects have typically been procured under the Competitive Dialogue Procedure, which has led to extremely high bid costs, as typically two or three bidders develop their proposals to final tender stage. Use of the shorter, restricted procedure could bring bid costs down and shorten the overall timescales of procuring a project.
At the end of the day, the key concern for the private sector will be deal flow. This is also vital to the public sector, as a pipeline of future projects would almost certainly bring high quality investors to the Scottish market. This would lead to greater competition, which should in turn mean better value for money for the Scottish Government, and ultimately the taxpayer. The current market offers the Scottish Government an ideal opportunity to run a pathfinder now, as the private sector will be extremely keen to be involved in any projects procured with the SFT on board. If the Scottish Government does not act now, the danger is that the market would recover and the contractors and expertise will be elsewhere - making it much more difficult for the public sector to secure optimum value for money.
John Swinney's recent announcement is not the miracle procurement method that was promised by the SNP. However, if structured properly the SFT could still drive improvements in the way projects are delivered in Scotland. Above all, one thing is clear - there is a real need for the SFT to hit the ground running and begin delivering projects now.
Euan Murray is a Solicitor in the Projects Division at leading UK law firm Shepherd and Wedderburn.
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