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Profit-limited infrastructure schemes offer opportunity

A limited-profit contract model that was used for a £500 million tender notice last week will form the basis for £2.5 billion in public sector procurement in Scotland.

The non-profit distributing model is a public private partnership approach which caps private sector profits and redistributes the surplus to the public purse.

It was used for a £500m, 10-year facilities building services framework last week, and is being promoted by procurement agency the Scottish Futures Trust. This was set up by the government in 2008 to improve value for money across public infrastructure investment.

Chief executive Barry White said NPD allowed greater infrastructure planning. “What we are doing [in Scotland] stands as the leading, potentially biggest schemes in Europe over and above traditional capital budgets.

“The only other country I can compare it with is France and the work they are doing on their Pentagon [defence ministry] and high speed rail,” he said.

“It is an opportunity to protect jobs and keep investment going that is massive compared with other parts of Europe.”

The NPD model has already been used for several Scottish schools and is the base for which the SFT will procure £2.5 billion worth of infrastructure projects.

These will include the £290 million Borders Rail project, the £400m Aberdeen Western Peripheral Route and college projects in Inverness, Kilmarnock and Glasgow.

Mr White said: “On PFI, private sector consortium-owned special purpose vehicles were making large profits and there were questions about whether they were proportionate to the risk they took. There was a lack of flexibility there too.

“We’re not seeking a utopia - it’s an attitude shift. The reality is there is a lot less money so we have to look at projects and see where we can add value. People are responding to that challenge now.”

Unlike PFI, equity profits are capped and surpluses are returned to the public purse. An SFT nominee is appointed to the board of the SPV as a public interest director to monitor its compliance with NPD principles.

The model has been used before in Scotland but due to the relative excesses of PFI previously, there had been less interest from the private sector. Mr White said there is greater interest now, in particular contractors are willing to negotiate due to the value of future NPD schemes.

But an article written in April by authors from Edinburgh’s Centre for International Public Health Policy found that the NPD model needs greater competition at the finance stage as the “current procurement process is designed in such a way as to allow the private sector to pursue monopoly pricing”.

Mr White insisted that the current challenges in the market meant there was likely to be more interest today than five years ago.

He said: “There is huge market interest now because if you look at the projects involved they are hugely valuable for the building industry, so now we can get better value as well as really strong project bids.”

The SFT says it saved the public purse £129m last year and aims to offer up to £150m in further savings each year despite capital infrastructure spending being slashed.

It has started a hub programme whereby local authorities, NHS boards, other public sector bodies and the private sector join in five community partnerships, ‘hubcos’, across Scotland which will invest more than £1bn over 10 years.

Each of the hubcos will have key performance indicators relating to local training and employment and SFT is working with Construction Skills Scotland to determine how those KPIs are measured and monitored.

Mr White said: “We are really keen to see contractors who add value and work in a fresh way, to ask ‘can they maintain quality?’ but we also want greater flexibility with those who come forward to get things done in a quick and simple way.”

SFT is also managing the Scottish government’s £1.25bn programme to build 55 schools across local authority areas with construction under way on several schools and at least six more schools expected to start construction this year.

The new National Housing Trust initiative is also beginning to see construction projects start. Local authorities provide debt backed by a Scottish government guarantee, alongside private sector funding and resources in a partnership approach.

 

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