Edinburgh’s schools are falling down
Falling down, falling down.
Edinburgh’s schools are falling down
Private Finance Initiative aka Public Private Partnerships aka Milking the Public Purse
Surely someone is responsible – who could it possibly be?
Let me take you back – if you have a moment – to 2001 when the then Scottish Executive signed a contract worth around £360 million with a private consortium to build and maintain schools in the capital. What could possibly go wrong?
Labour was in power back then – I know – it’s hard to believe. The Scottish Executive proudly announced plans to build or refurbish some 110 schools across Scotland at a cost of £2.3 billion. Many of the schools had stood since Victorian times and it was thought a good idea to modernise the sector but the projected figure of £2.3 billion was queried with fears that, one way or another, we the public would end up paying through the nose for the deal.
By BBC News Online’s Brian PonsonbyJack McConnell has committed the Scottish Labour Party to a programme of investment in public services which uses private finance as well as government cash.
The first minister told delegates at the party’s conference in Perth that he intended to “invest to build public services for the 21st century” with “public capital and sometimes with private capital”.
He also promised to build or modernise 100 schools under Public Private Partnerships (PPP) over the next four years.
We’ll work together to sort out how we give people the maximum return for every one of their pounds we are spending
His commitment sends out a clear message to the trade unions that he will not be deterred from using PPPs to boost public services.
Mr McConnell’s message was delivered just hours after Scottish Labour narrowly escaped a union-led defeat of a policy document which advocates use of private finance. (Sat 23 Feb 2002)
PPP/PFI arrangements tie in both parties for decades and it’s not just a case of paying off the initial investment but interest on the investment was added for all the years of the contract, naturally. PPP also meant oversight of public developments were transferred into private hands including scrutiny of standards of construction and bearing in mind profits and rewards for shareholders are always central to private capital institutions that should have raised concerns.
Of course many criticised the policy at the time, fearing for the quality of these PPP schools, but a spokesman for the Scottish Executive insisted:
“PPP is delivering real results for teachers and pupils and they do represent value for money.”
Who was that spokesman? Please get in touch and explain your definition of value for money.
The savings promised by PPP schemes were illusionary. Edinburgh’s schools are merely the latest evidence that in the end PPPs cost the public purse dear. As well as hidden expenses buried within contracts companies involved in PPPs have not infrequently been linked to offshore tax havens – for tax efficiency I think is the appropriate technical term.
Why don’t public bodies just borrow to build? You may well ask. I believe there is a limit on local authority borrowing but PPP has shown it was not a suitable alternative although similar schemes are still being undertaken.
Introduced into the UK by the Tories in 1992 as Private Finance Initiative the scheme was meant to reduce public borrowing and was enthusiastically seized upon by incoming Labour governments starting under the reign of Tony Blair. Despite outrageous claims promoting their benefits PFI/PPP were soon costing tax payers eye-watering amounts to maintain as budgets took on lives of their own and contracts were shown to be not so much written up as stitched up.
With many PPP project costs spiralling out of control authorities found it a whole lot harder to get out of them than make them in the first place; they had not noticed they had signed away their souls (our souls) to the devil. Anyone guilty of such misuse of public monies should be instantly sacked or jailed. They were not and will not be, of course.
PPP has been adopted world-wide and produced a legacy of unfulfilled contracts which have drained community resources. This is especially despicable in developing countries where promises of improvements to infrastructure fail to materialise at the expense of the poorest and most vulnerable.
As the PPP revolution became tarnished as tawdry profiteering other schemes have been set up in a cash and grab culture affecting public services and cash flows. Look no further than what’s happening with the NHS (in England and Wales at least) whereby this valuable asset is seen as ripe for plucking by businesses with an eye on a quick- and long-lasting buck. Contracting out is a massive con and it only requires a cursory glance at former government ministers who have taken up positions on boards of health-related companies to see how much self-serving and unscrupulous greed is at the heart of the UK government.
Twenty years ago was when many of us in Scotland had our eyes opened to this muddying of the roles separating private and public where public services and assets were concerned. In 1995 the Skye bridge was built through a funding arrangement with a North American company. Under the name Skye Bridge Ltd it financed and controlled the bridge which meant it charged people to cross – huge crippling tolls that hammered locals and local businesses who had little choice once the ferry was removed; the most expensive bridge crossing in Europe it was claimed with charges equivalent to £5.70 a mile. Well organised protests led to frequent attendances before the Dingwall sheriff who imposed fines and a few prison sentences in an attempt to damp down resistance. In 2007 under huge pressure from public opinion the Labour-Liberal administration at Holyrood was forced to end this unfair tax on bridge users and the bridge was purchased from Sky Bridge Ltd for £27 million. Given that the initial cost of its construction was a modest £15 million this amount looks steep but then the private financiers were enjoying a cash bonanza from crossing charges to the tune of £33.3 million – that is £33.3 million plus £27 million – and that’s what we know. Not a bad return given their operating costs were estimated at £3.5 million.
Former Labour health minister Susan Deacon (partner of BBC’s John Boothman) proudly opened a new psychiatric hospital in Inverness in 2000. It cost £14 million. That is £14 million for starters. In fact you and me and just about everyone in the UK, except the mega rich who salt away their cash, ended up paying an eye-watering £106 million for this modest building and the contract agreed by the Scottish Executive had handed over the land it stood on to the financiers until the 22nd century unless NHS Highland coughed up to buy them out. Who could possibly have agreed a contract like that?
I would love to hear Susan Deacon’s opinion on how this was value-for-money for taxpayers.
In 2008 alarm bells rang out when 3i Infrastructure Ltd, registered in Jersey, became a major shareholder in planned refurbishment of schools in the Highlands. As the Herald explained at the time, before we all became experts on the practice, off-shore registered companies pay no UK tax on profits – so – whatever they earned from this school project they would not be contributing to- er, schools and education in this country in quite the way the rest of us do through being taxed at source. As long as we are all clear on that I’ll carry on.
Inverness Airport was another Highland PPP financed project. Agreed in 1998 as a £9.6 million deal it promised a new terminal at no cost to the public purse initially. In this arrangement the private financiers, Inverness Air Terminal, were paid £3.50 for every passenger travelling through the airport. Within six years the cost of the project had been met BUT the contract was not due to end until 2024 – I’ll leave you to calculate how much the remaining contract could have earned them?
Amidst huge criticism Scottish Executive ministers decided to buy back the lease from IAT for what is thought to have been £36 million – and all for a project that was to cost £9.6 million. It was good news for IAT, however, who recouped their initial investment plus £36 million.
You would have thought someone at Labour HQ might have twigged. Ach well, there’s public money to get them out of a jam so what did it matter?
Which brings me back to Edinburgh’s great schools initiative involving Equion, Miller, Bank of Scotland and Quayle Munro. Step up then Edinburgh Labour Council leader Rev Ewan Aitken:
“We have been on a tremendous journey over the past few years and today marks an important milestone for our Smart Schools initiative…
Over the past three years as I’ve visited our new schools, the one thing that strikes you as soon as you walk through the doors is how the pupils, parents and staff have great pride in their new surroundings.”
Sometimes pride is short-lived, Rev.
“This is not just an investment in bricks and mortar but an investment in the future of Edinburgh’s pupils, both current and in generations to come.” he continued.
I suppose future is a moveable feast.
In old London town in 2002 there was an internal Labour Party spat going on between Gordon Brown, Alastair Darling and then Mayor of London, Ken Livingstone ,who objected to proposed PPP funding of improvements to London transport. It did not take long before the London Underground venture was being described as “one of the great scandals of the decade” – join the queue.
“Dismissing advice from experts and ignoring mounting problems over the contracts Chancellor Gordon Brown insisted they were pushed through because he did not want London Underground to be responsible for the much needed upgrade of the system.”
“Earlier this month Alistair Darling, the Transport Secretary, effectively blocked a fresh legal challenge from Mr Livingstone by indemnifying the consortia against any effect of any court action.
Under the PPP deal, Mr Darling is due to hand over London Underground to Mr Livingstone’s Transport for London (Tfl) body. But Mr Darling has said he will not do this if any court action was going ahead.
Just before Christmas, Mr Darling told MPs that the start-up costs for PPP, including such items as legal fees, had been around £500 million – a figure that was widely condemned by PPP opponents.
Mr Darling said today: “I welcome the news that London Underground has completed the deal with Tube Lines.
“This is good news for Londoners, at long last marking the start of the biggest improvement programme the Tube has ever seen.”
Tom Brake, the Liberal Democrat transport spokesman, said: “PPP is a monument to the stubbornness of Gordon Brown who is the only supporter of the part-privatisation of the Tube.”
(Telegraph 31 Dec 2002)
Labour MP Margaret Hodge talked to the Independent about her party’s dalliance with PPP.
The Labour MP acknowledged that many of the worst PFI and PPP cases were negotiated by the Labour government under Tony Blair and Gordon Brown, saying:
“I’m afraid we got it wrong. I was a supporter at the time but I have completely gone off the whole concept. We got seduced by PFI.” (Margaret Hodge MP 2014)
And of particular interest post-Panama Papers:
She added that it was especially “scandalous” that many of the funds that are buying up the contracts are based in tax havens. One of the early arguments in favour of PFIs was that taxpayers would benefit from contractors’ profits due to the corporation taxes they would pay. “But now the profits are going offshore and to shareholders,” she said.
PFI/PPP was another Tory policy Labour couldn’t adopt quickly enough. Building projects made them look like they were doing something – they were – and soon we were all paying for the madness that allowed private investment companies to name a number and get contractors to agree to add on several 000s to boost guaranteed colossal profits before sailing off into the sunset to we know where – some of them at least.
Have lessons been learned? Aberdeen Labour-led administration recently signed up to a misbegotten and hugely unpopular Marischal Square (not a square lest you imagine it is) project. It’s complicated so I have copied this description of the scheme from Aberdeen City Council’s website:
The preferred bid as approved at Council was with Muse Developments Limited and AVIVA Investors Realm Commercial Assets LP (Aviva). The overall agreement is made up of a number of parts and separate contracts between the parties. This is a commercial agreement between the Council and other parties and the full details of the scheme are commercially sensitive. However, the general basis of the agreement can be described as follows:-
ACC sold the site (excluding Provost Skene’s House) to Aviva (December 2014).The council has received £1million up front with the balance of £9million payable at completion in two years time
ACC entered into a lease with Aviva for the site, and will pay a rental from the completion of the development for a 35 year period
The Council’s annual rental payment realises a capital sum to undertake the development
Muse is obliged to build the scheme for Aviva to create a range of development space and in turn an income stream to the council
Muse are contracted to identify and tie in a Hotel operator. This is in place with the Hotel element trading as a Marriot Residence Inn
Muse are contracted to let the office, restaurant and additional space within the development on behalf of the Council
The capital sum above pays for the construction costs to build the development, the purchase price paid for the land, a profit account to be shared between the three parties, and a contingency fund to cover vacant periods and other costs. Further monies are set-aside for upgrading works to Provost Skene’s House and public realm works within and outwith the scheme
After the 35 year lease period the Council can choose to buy the development in its entirety (including the land) for £1
The council is liable for the annual rental and will carry the risk should the hotel and development not realise the income projected. The projected income on a fully let scheme is however significantly above the rental payment £100m Cancellation Fee for the ACC/Muse contract.
7.1 How is the £100m penalty/termination cost of cancellation of the contract, as mentioned by Willie Young, calculated?
7.2 Why have we not seen the contract yet Willie Young is able to tweet and disclose details of the contract. Has ACC/Muse authorised him to disclose?
7.3 Is the £100m penalty contingent upon the ownership of the land resting with ACC (i.e. prior to being transferred to Muse)?
There is no penalty or cancellation clause in the contract however as the council has previously stated there would be a loss in income of approximately £100million if the project were not to proceed. In addition, the Council would almost certainly have to pay damages arising from breach of contract. As is standard practice in the public sector such contracts are commercially sensitive and are not published.
7.4 Under planning legislation, ACC can cancel the contract. What is the cost of contract cancellation and how is it calculated? [Loss of profit should not be included.]
The transaction is a commercial transaction. The Council is not aware of any such planning legislation that could allow the cancellation of the contract.
Calculation of the £100m Profit
8.1 How does ACC calculate the claimed £100m profit? Is this £100m profit contingent on a minimum level of occupancy?
The Council will receive £10 million for the site – £1million now and a further £9 million on completion in two years, an equal share of the development profit, the difference between the lease cost to Aviva and the income generated by the development for 35 years and the value of the development in 35 years’ time. Money is also available for works to upgrade Provost Skene’s House, Broad Street and create the gardens and other public areas within the scheme. In all this benefit could be worth more than £100 million.
8.2 Why has the public not been alerted to the potential liability, rather, only the upside (which is not described as potential)?
The project was fully presented to the committee when a decision was made to appoint Muse as preferred bidder. This is a commercial contract. The council or any other organisation would not normally alert any other parties to the liabilities on any transaction. The council has always stated, since the decision was made to appoint Muse that the commercial agreement would include a head lease over the development site.
8.3 Has ACC assumed any value of the Marischal Square buildings as at 2050 when calculating Jenny Laing’s claim of a £100m profit over 35 years? 
In assessing bids of this nature it is normal to account for some degree of value in the site at the end of the lease. This would normally be site value or by comparison the value of other similarly aged buildings.
1 “Not only is it right in terms of bringing a much needed hotel and leisure facilities to our city centre it is right in terms of looking after the public purse by raising £100m over 35 years.” Jenny Laing, Evening Express, 5 February 2015
It’s all been done in the best possible taste and it’s all so out-in-the-open. Maybe.
I hope Edinburgh can patch up its schools quickly. Someone will have to bear that financial burden and I wonder who that someone might be? And those old Victorian schools? well most of them are still standing.
Oh, and here’s a handy wee list of who was behind public spending in the relevant years between 1999 and 2007.
Scottish Executive as it was then:
1999 -2003 Labour under Donald Dewar; Henry McLeish; Jack McConnell.
2003 – 2007 Labour under McConnell.