Y Pwyllgor Cyllid - Y Bumed Senedd
Finance Committee - Fifth Senedd01/05/2019
Aelodau'r Pwyllgor a oedd yn bresennol
Committee Members in Attendance
|Alun Davies AM|
|Llyr Gruffydd AM||Cadeirydd y Pwyllgor|
|Mike Hedges AM|
|Neil Hamilton AM|
|Nick Ramsay AM|
|Rhianon Passmore AM|
|Rhun ap Iorwerth AM|
Y rhai eraill a oedd yn bresennol
Others in Attendance
|Dr Stanimira Milcheva||Athro Cyswllt mewn Cyllid Seilwaith ac Eiddo Tirol, Coleg Prifysgol Llundain|
|Associate Professor in Real Estate and Infrastructure Finance, University College London|
|Gerald Holtham||Athro Hodge mewn Economi Ranbarthol|
|Hodge Professor of Regional Economics|
|Peter Reekie||Scottish Futures Trust|
|Scottish Futures Trust|
Swyddogion y Senedd a oedd yn bresennol
Senedd Officials in Attendance
|Leanne Hatcher||Ail Glerc|
Cofnodir y trafodion yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir trawsgrifiad o’r cyfieithu ar y pryd. Lle mae cyfranwyr wedi darparu cywiriadau i’w tystiolaeth, nodir y rheini yn y trawsgrifiad.
The proceedings are reported in the language in which they were spoken in the committee. In addition, a transcription of the simultaneous interpretation is included. Where contributors have supplied corrections to their evidence, these are noted in the transcript.
Dechreuodd y cyfarfod am 09:31.
The meeting began at 09:31.
Bore da i chi i gyd, a chroeso i gyfarfod y Pwyllgor Cyllid yma yn y Cynulliad Cenedlaethol y bore yma. Gaf i eich atgoffa chi bod yna glustffonau ar gael ar gyfer y cyfieithu, a hefyd i addasu lefel y sain? A gaf i atgoffa Aelodau i ddiffodd y sain ar unrhyw ddyfeisiadau electronig sydd gennych chi? A hefyd, gaf i ofyn a oes gan unrhyw Aelodau unrhyw fuddiannau i'w datgan? Nac oes. Da iawn.
Good morning to you all, and welcome to the latest meeting of the Finance Committee here at the National Assembly for Wales. May I remind you that headsets are available to hear translation and to adjust the sound? And may I remind Members to put any electronic devices on silent? And also, may I ask any Members if they have any declarations of interest? No. Very well.
Wel, ymlaen â ni, felly, i'r ail eitem, i nodi'r papurau sydd ger ein bron ni. Fe welwch chi fod yna lythyr gan Brif Ysgrifennydd y Trysorlys a llythyr gan Ysgrifennydd Gwladol Cymru, ynghyd â set o gofnodion. Ydy Aelodau yn hapus i nodi'r rheini? Alun.
Well, on we go, then, to the second item, papers to note. You'll see that there's a letter from the Chief Secretary to the Treasury and a letter from the Secretary of State for Wales, as well as a set of minutes. Are Members happy to note those? Alun.
Sorry, can I just say I think these letters are really appalling? It's an appalling piece of correspondence from both the Chief Secretary and the Secretary of State. The Secretary of State is making a better case for the abolition of the Wales Office than I could ever make. We have, and I as a Minister have, given evidence to UK, to Westminster committees on numerous occasions. On numerous occasions, UK Ministers have given evidence to these committees and to committees in Scotland as well. There has been a well-established protocol that Ministers provide evidence to the democratic institutions of the United Kingdom in the different centres of governance in the United Kingdom, and this drives a coach and horses through that protocol and through that custom and practice. So, I think we should respond to this. I think we should also respond to the Presiding Officer, because I think it's a matter of institutional democracy, as well as about the individual Ministers concerned here, to ensure that we are able to provide democratic scrutiny of the governance of Wales, and that has always been the case, in my experience over the last 12 years, and it's something that we should defend.
If I may add also, this pretence in these letters that there is a concrete delineation between those lines of accountability, as we've just heard, does not tally with the experience since devolution, or how it should be, and in fact, we need to be able to push and question UK Government in order for us here to be able to hold Welsh Government to account properly in deciding if that relationship between Welsh Government and the UK Government is as effective as it could be.
Okay. Thank you for those comments. I'll certainly take that up further. We have expressed these frustrations in the past, but we'll do so again, forcefully. Of course, if this is the UK Government's approach from now on, then it's very difficult to see any circumstances under which they'll be appearing in front of our committees, particularly in relation to this kind of inquiry, which of course includes looking at some of the borrowing limits that have been set upon us by UK Government. Yes, Rhianon.
It's been said repeatedly, and I concur with what's already been stated, but I think the tone of this, as well, is quite disrespectful, just to add to that, please, Chair.
And can I complete the jigsaw and concur with those who have spoken so far? I think it's outrageous that the Secretary of State for Wales refuses to come to the National Assembly for Wales, whether you agree with his existence or not. If you had the responsibility in the Cabinet that he has, I think it's one of his overriding duties, actually, to communicate with us as freely and as transparently as he possibly can. Certainly, in the unlikely event that I should ever become the Secretary of State for Wales then I would take a very different view from Alun Cairns. Like Alun, I've given evidence to select committees in the House of Commons and the House of Lords, and I can see—well, if I were Alun Cairns, possibly I could see dangers in doing that, but that's a personal reflection on him rather than on the office.
There we are. Well, the message is clear on the record, and I will convey that as well as Chair once more and see where we get to. Diolch yn fawr.
Right, we move on to the next item, which is to begin our inquiry into the Welsh Government's capital funding sources, and I'd like to welcome Gerald Holtham, Hodge professor of regional economics, and Dr Stanimira Milcheva, who is associate professor in real estate and infrastructure finance at University College London. Welcome to you both. If you're happy, we'll go straight into questions, I think, because we can pick up on any issues in that way, but, if you do want to make any statements or add anything, clearly you can do so as we go along. So, I'll kick off, if I may. Given that the new fiscal powers have been devolved to Wales now, do you believe that the Welsh Government has the necessary mix of capital funding sources to deliver an effective planning strategy? That's a nice starter for 10.
Well, thank you, Chair. Thank you for the invitation to speak. Yes, as far as I can see, they do. They may not have very extensive access to borrowing via the Debt Management Office and the gilt market. I think you could make a case that there should be a more generous allocation there, but, in principle, they do have that access and they have the access to private finance as well. So, I do think that there is the possibility to plan an investment programme.
And do you share that view? There's no need to press the button; it's all automatic. Thank you.
I think it is important to have a mix, definitely. I think what is very important is probably to try to have an in-house expertise regarding the project management and the financial management, because we can see from private equity funds, for example, that having a very good understanding of the projects, the infrastructure projects, is very important, and it's not a straightforward thing. Having a big mix means more complexities, and trying to co-ordinate the different types of financing would probably require getting experts on those different types of vehicles. Thank you.
In terms of capacity, I'm not sure how familiar you are with the situation, but do you believe that the Government has that capacity and that expertise to be able to maximise those sorts of opportunities that are out there?
I think that, from our previous research, speaking to different stakeholders, most institutional investors—. It seems that institutional investors think that probably the Government or the public sector in general—I'm not speaking about the Welsh Government here—does not understand the position of institutional investors and how they approach investing or financing such projects and how they view them. I think it is important that this gap between the public and the private sectors, especially in public-private partnership-type structures, is closed through expertise, more so than other things.
Is that your experience?
Yes, I'm not entirely up to date here. The Welsh Government's been on a long learning course, shall we say. When I was closely involved in 2012, they certainly did not have the capacity to manage—well, to manage a coconut shy, really, in terms of planning an investment programme, but they have been working at it. There are a couple of people in the finance department who've spent the last five years or so building up expertise in the area, and they have strengthened the team. So, I can't be 100 per cent confident that they've got everything required, but they've certainly come a long way since 2012. I think the work they've done in trying to find a form of private finance that protects you against being ripped off, while being consistent with European rules, is quite—. Well, they've done quite a lot of work on that. So, I think you can never have too much expertise. It may well be the case that they should strengthen the team further, but I think they are—they're heading in the right direction, I'd say.
Okay. Thank you. Alun, you want to come in on this.
Yes. I'm interested in what you say there, in making the comparison between 2012 and today. In your paper, you make the comparison between the plan that was published in 2012 and the interim plan, which was published, I think, last year. And you're generally very supportive of the work that the Welsh Government has done in order to develop that. But I was interested in what you said at the end of the final paragraph under the 'Need for a proper plan' section of that, when you say:
'One might have hoped that after seven years they would be established procedures rather than good intentions'.
And I was just wondering if you could explain what you meant by that, in terms of the way in which the Welsh Government is developing its approach.
Well, I'm dependent very much on what's been published, and, in the interim report proposed in 2018, there were a lot of statements about what they intended to do, rather than statements saying, 'This is what we are doing and we've been doing it for some time.' So, it wasn't entirely clear how far the aspirations, for example, to get Cabinet-level decisions on a strict priority ordering of projects, which certainly didn't exist in 2012, and how far they'd developed the projection expertise to have some reasonable projections and revenue beyond the three-year horizon—. It wasn't clear how far—to me, anyway, it wasn't clear how far these were accomplishments and how far they were aspirations and work in progress. So, that's all I meant. If they're not accomplishments, we're learning, but, gosh, it's 20 years since devolution and you'd have thought that investment planning was a pretty basic part of government—so, heading the right way, but not necessarily at breakneck speed, I'd have said.
Okay. Thank you. You mentioned ordering of projects, and I'm interested, really, in knowing how you think infrastructure projects could be prioritised for conventional capital funding so that we can maximise capital investment.
Yes, I think that would be what you'd—that's what you'd want to do. The statement of the Welsh Government is, 'Well, you'll see we use the cheap finance first.' If you don't have a plan, that's entirely sensible—what else would you do? But, if you do have a plan, and you know that you're going to be borrowing more than the capital budget plus your borrowing allocation [correction: your public borrowing allocation] allows, then you are in a position to say, 'Well, how do we match the finance with the projects?' But, of course, it's a pre-condition of being able to do that that you've got that plan; you've got that priority ordering and you've made your plans some way into the future. You can't be limited by the three-year Barnett cycle; you have to have projections going further out. So, I think that was the main point I wanted to make—that, in order to be able to do that [correction: to match projects and finance], you have to have a fairly comprehensive plan.
Okay. Thank you. Mike.
Can I carry on from there, which is that I'm still not convinced why you wouldn't use the cheapest form of capital or exhaust that first? We know with capital projects that two things happen: overspends and slippage, so that—. We've seen examples of that fairly recently with the Heads of the Valleys road, for example, where we've had both, and that's not abnormal for major capital schemes. So, why wouldn't you exhaust the cheapest first, and then go after others, because you might actually have either overspends or slippage, which would mean that you would be borrowing money that you wouldn't need to use?
That's a fair point, but it does come down to numbers. If the plan that you have entails quite a lot of borrowing above and beyond that which is available through the Debt Management Office, I think then you're in my country. If your expenditure plan is only a bit more, then you're in your country, I think. It does depend, really, just on the numbers. If you can borrow £1 billion and your plans are for £1.1 billion, you're probably right. If they're for £2 billion, then I think you're supposed to think about how you do it.
We could keep this going for hours, but—. [Laughter.] The other question I've got is: we've had a lot of transaction capital coming in, as opposed to normal capital, and my understanding of transaction capital is that, firstly, you have to pay most of it, although not all of it, back and, secondly, you can only use it for private sector investment; you can't use it for building roads and schools. Assuming I'm right on that, could the Welsh Government use transaction capital to support economic things that are currently being funded through the economic development portfolio in such a way that they could then release money for use in other areas?
Well, I think this obviously is a source of capital that is not quite as straitened, not quite as tight, as others, so there's a strong incentive to use it as intelligently as you can. To be honest, I can't really answer your question; I don't know how they're handling that at the moment within the finance department. One can make the general, not perhaps very useful, statement that, yes, you should use it and you should use it as extensively and as intelligently as you can, but I don't know what they're doing about that, to be honest.
So, you could finance social infrastructure as well. You could potentially finance schools and hospitals with private money. It's not excluded.
I was talking about the transaction capital, which comes with strings.
Yes. In terms of—. I agree that schools and hospitals don't have very clear revenue streams in terms of returning the money back to the Government, but it is possible to create a vehicle that could potentially use that money, that capital.
So, you're actually saying that transaction capital can be used for public sector development; it can't only be used for private sector. Because that's opposite to what we've been told in the past, so thank you very much.
I think there are state functions for which it could be used—business support, for example. It seems to me that it may be possible to take things off the public budget and get them done by the development bank or somebody like that using transaction capital.
Which was the first question I asked on it—using it as replacement.
Yes. But one has to look at the functions that could be transferred in that way. They do exist. I don't know how extensive they would be.
Okay, thank you. Nick.
I've had many conversations with Mike Hedges about transaction capital over the months, so it's good to hear that argument again.
Morning, Professor. In terms of the capital borrowing powers, can you explain the advantages and the disadvantages of borrowing from the national loans fund?
Well, relative to other forms of borrowing, there are no disadvantages that I can see. It's going to be the cheapest form of capital and you know what the costs are. So, like any borrowing, you've got to pay it back, so it is borrowing, they're not giving you anything, but it is by far the cheapest source. So, I understand the instinct to say, 'Well, look, let's use that first because it is the cheapest'. There's no question that private finance—because you're supposed to be shifting risk onto the supplier of the finance, they're going to charge you for that risk. And, of course, the irritating aspect is that you can't really shift the risk, you know, you've got to provide the hospital services or the road at the end of the day and, if the guy goes bankrupt, you've still got to provide the stuff. So, there is an irritation involved, but, on the other hand, it's fair enough, they are carrying a construction and operational risk and they're going to charge you for it. So, in an ideal world, you would be able to unbundle that and say, 'Look, you're providing services for which we will contract at a fair price, but, as far as the borrowing's concerned, we'll do it through the Treasury because it's cheaper', and we won't bundle the provision of the service and the expertise that we need to get from the private sector up with the mere fact of raising capital. But, you know, that's not where we are, so—.
And also at a fixed rate: if they're lending at 2.5 per cent, they're not going to increase it to 5 per cent on that loan in the lifetime of the loan.
No, and you can borrow for 50 years.
Yes, at a fixed rate.
The only risk with this is, in the past, we've seen very high interest rates. If the rate is fixed and then it falls, then you're in trouble, actually. Right now it's great to borrow because the rates are so low they'll probably only go up, or slightly down. But, if we are in a scenario where interest rates are high and you borrowed fixed, then I would say that then you probably have to think the other way.
[Inaudible.]—you can pay it off.
The other thing to say is the Debt Management Office is extremely flexible. If you want to borrow at seven and a half years, they will let you borrow at seven and a half years. They will then have to go out and issue gilts in packets of five and 10 [correction: five year and 10 year] to make it equal to seven and a half, but they'll take on that job, and if you want to borrow at a floating rate, they'll lend to you at a floating rate. They'll do anything you like, more or less. They won't borrow in foreign currency, that's all. As long as it's sterling, then you can do what you like. So it is by far the cheapest means of borrowing. Just to be clear, you should exhaust that in the course of a borrowing programme.
I've got an uncanny knack of fixing mortgages just as the rates fall, so if the Welsh Government want to use me as a barometer, I'm happy to volunteer my services. So, just to sum up the answer to the last question, basically you might as well use the national loans fund. There's no reason at this moment to look at other avenues, because that's going to give you the cheapest rates. So, there's no point looking at alternatives to that.
Well, it depends how much borrowing you want to do. They're only going to let you do a certain amount. If you have an ambitious infrastructure programme, for example, you've got to use other forms of finance because they won't let you borrow enough.
But in the first instance the national loans fund should be the first port of call.
This is the discussion I was having with Mr Hedges. If you're going to borrow a lot more than the allocation that they let you borrow from the gilt office, then you know you're going to have to use other sources of finance. At that point, in my opinion, it makes sense to look at the range of projects and say, 'Should we be matching certain sorts of finance to certain sorts of project?' because the point about the gilt market is, whatever you use it for, they're going to charge you the same. You could be blowing it on the 15:30 at Kempton Park or you could be building a hospital; it doesn't matter, they're going charge you 2.5 per cent [correction: 2.5 per cent or whatever].
If you're using private finance, they're going to look at what you're doing and they're going to charge you depending on their assessment of the risk involved in the project. That being so, you don't want to use private finance for extremely risky and innovative projects, because they'll take your eyes out. You basically want to be using the private finance for things that the private sector is used to doing and is comfortable with and won't charge you too much for and keep the gilt finance for anything that is more expensive.
Now, this only arises in a situation where you've got an ambitious programme that goes far beyond what you can borrow from the gilt market. If you can fulfil your programme, or nearly all your programme, through the gilt market, yes, okay, just use the gilts first. But it depends on the scale of your ambition, really.
Rhun would like to come in on this.
You make that point very, very clearly in the brief paper that you gave us, and thanks for it—it's very, very useful. Are you seeing signs that the Government is becoming more effective in deciding which source of money it goes for depending on the risk, and going private for the least risky ones?
I think they're aware of the argument. Certainly officials in the finance department are aware of the argument. I don't know that they are clear enough about how far the investment plan is going to be pushed. The point about the plan is you can look at those projects and if you say we're going to take 30 years to do it, you don't need to borrow at all. You're getting £1.5 billion a year coming in in capital budget. If you take long enough you can do them all without borrowing, and if you want to do them all in five years, you've got a lot of borrowing to do. So I'm not sure the officials, at least the last time I was in touch with them, were clear enough about just how ambitious we were in terms of delivering the programme, and therefore I don't think we're in a position to start allocating projects to particular forms of finance.
That can change, and you can refinance and reborrow as you decide that the risk profile of a particular project changes over time. You can shift that into the private sector or you can opt for other borrowing methods.
It's quite difficult. If you're doing private finance, you can write a contract to do anything. I mean, you could say, 'Okay, we have the right to refinance this after X years' or something—that'll be in the contract. But they'll charge you for it.
It's contractual more than financial.
Do we know if much of that has happened previously in the—?
No, I don't think so. There's not been that—. As you know, in the original infrastructure investment plan, there were two projects, and now it's become three, that are using private finance—the so-called mutual investment method. Before that, it was quite some time since they used a private finance initiative, when they did sign some very expensive contracts in the early days.
Okay. Alun. Sorry, was there anything else you wanted to pick up?
I was just going to say, would there be any other advice you'd give to the Welsh officials to make sure that they can better balance the risks of borrowing with other costs?
I think the issues really are political. You know, you need to have political priorities established. The officials can't tell the Government how ambitious to be when it comes to investment or how much to borrow and not to borrow; these are essentially political decisions. So, we have—as I was saying, I think we are building up competence at the official level, but at the end of the day, it's political direction that's required.
I think it is important, also, in terms of advice, to understand that, if you are borrowing from the private markets, capital markets, the different types of capital providers would have different risk attitudes and will charge different prices. So, trying to understand where they are coming from is essential. Because if you are partnering with, let's say, a defined benefit public pension fund, then you may have more leeway in getting this finance cheaper. If you go to a private fund, like Blackstone, they would charge you more. So, understanding what they're interested in and picking the right type of partners is, I think, key to getting the financing cheaper.
That's one of the things they were trying to do, and it remains to be seen whether they've been successful with this mutual investment model. Because, as Dr Milcheva says, normally—. For example, with a construction project, the pension funds like to come in when construction risk has been defrayed, if you like—when it has actually happened and the thing is there. There's then a fairly reliable stream of revenue stretching out into the future and not too much risk. At that point, they're very happy to come in, which is why you often get a situation where the original provider of finance can refinance after the construction period at a much cheaper rate and achieve a capital gain from doing so. The idea of the mutual investment plan is that the state gets at least a small proportion of any gain there is. They also were putting a clause in to try and encourage long-term investors in at an early stage so that, in other words, when they're doing the contract with Blackstone or whatever, they reserve some capital, competitive capital, which they can tender separately from the main source of capital in order to see whether they can lure in the pension fund at an earlier stage. I think this is new and I don't think anybody has any idea whether it'll work or not.
Thank you. In terms of taking this forward, we're aware that the command paper published alongside the Wales Bill in 2014 discussed the increasing of capital borrowing powers at every spending review. We're also aware that the Chancellor of the Exchequer mentioned a potential increase in capital borrowing during the last United Kingdom budget. In that case, he suggested that the borrowing cap be increased by up to £300 million to help finance any potential new M4 relief road. So, he was linking borrowing powers with expenditure, which I'm not sure is completely in tune with the spirit or approach of devolution, but we'll put that to one side. You spoke, Professor Holtham, in an earlier answer, about the range of powers available to the Welsh Government, and you said they were generally okay in terms of where they sit at the moment. How do you feel about the extent of those powers and the range of borrowing? Do you believe there's a case at the moment for an increase in the borrowing cap?
If you can borrow £1 billion at fixed interest, then your debt servicing is going to be no more than £20 million or £30 million or something. And that's a very low proportion of the Welsh Government's budget and revenue. The way I always look at it is to say, 'What is a reasonable amount of money that you have to devote to debt service?' The Scots are up to 5 per cent. If we said 5 per cent of the Welsh budget—now, this is going to test my mental arithmetic—you're looking then at £750 million, or something, a year. Well, even if you have private finance and you're paying 6 per cent—if you multiply £750 million by 16, or something, that's quite a few billion pounds, and we're nowhere near that in terms of what we're allowed to borrow.
So if you look at it that way—what is the maximum carrying capacity of your budget—I don't suggest you go as far as 5 per cent, necessarily, but you'd think, 'Okay, 2 per cent', and then you can work out the capital sum you're allowed to borrow, and it's higher than we've currently got. So I think there is a perfectly fair argument that says: money's constrained at the moment, we don't assume it's going to be constrained forever, interest rates are very low, it's a reasonable time to be borrowing, and we're nowhere near being allowed to borrow as much as even a prudent carrying cost rule would imply. So, yes, we should be able to borrow more.
Okay. I'm happy with that.
Do you share that view?
Yes, I do share it. Now is the time to borrow in general, plus there is huge demand for investing in infrastructure. There is a lot of private money lying around that is definitely looking for suitable projects. There is the potential to build much more infrastructure if the conditions are right.
Neil, did you want to come in?
There are two accounting elements in this, aren't there, because the Treasury, at the UK level, is ultimately responsible for overall debt management and financing, and the reason that the Treasury wants to keep its controls on the Welsh Government's borrowing is because of its own incontinence over recent years and the difficulties that they might have in financing that in the foreseeable future, if interest rates were to rise. So, I would agree with you at a Welsh level, if Wales was wholly in charge of its own currency and its debt-raising powers, but that isn't the case, is it, so there's going to have to be a compromise somewhere between those.
Well, indeed. That's the argument for having any rules at all. The Welsh Government isn't sovereign in the sense that it has to comply with rules imposed by the UK Treasury. And I absolutely take the point that they have to be concerned about the debt-to-GDP ratio for the UK as a whole. When you consider the size of Wales in relation to the UK economy, we're not even talking a rounding error if they said, 'You can borrow £3 billion, not £1 billion.' I can't remember what national debt is at the moment, but we're talking trillions.
Okay. Thank you. Rhun.
Can we talk about bonds and where the issuing of Government bonds could come in useful? What are your thoughts in general terms on when—? And remembering, of course, that they count towards borrowing limits. Who's going to go first?
I'm not aware that the Welsh Government, unlike local authorities, has the right to issue its own bonds. I think it's supposed to access the debt market through the national loans fund. The only advantage of having the ability to issue your own bonds is that it keeps the Debt Management Office honest. That's the only—. There was a period, for example, a few years back, when the Public Works Loan Board was increasing the premium that it was charging local authorities over the gilt rate, and it got to the point where you'd think, 'Well, hang on, we could issue our own debt and the mark-up over gilt would not be any more than the Public Works Loan Board is trying to charge us.' So, local government started talking about issuing their own debt, which they hadn't done for years, and lo and behold, mysteriously, the premium came back down. So, I think there's a case for having the right to do it, but you wouldn't do it, I don't think.
This is the most recent element of the borrowing powers, isn't it, introduced towards the end of last year?
Okay. I don't see why you'd ever do it, because you will pay—. When I was talking to people in the City, they said 'If the Welsh Government issued bonds, it would pay 45 basis points over gilt.' So, why do you want to do that? It's just a way, as I say, to keep the Debt Management Office honest, but it will be more expensive. So, there's no financial reason for doing it. There may be some sort of symbolic reason you'd want to have Welsh bonds out there in the market, but as a hard-nosed economist, I would have to say there's no point.
And especially in the context that it counts towards your borrowing limit anyway.
Therefore, you're better off going to the NLF.
Exactly so. If they said to you, 'Oh, by the way, if you issue your own bonds, you can borrow another bit', well, that's different. But given that, no, it's all within the same envelope, there's really no point in doing it.
But the keeping others honest makes it a useful tool. What are your thoughts?
It depends how you structure it. What is very popular right now are those impact bonds or green bonds, which are not the same as, obviously, the Government bonds. This is another way of looking to get additional funding, but it's a different type of bond, which you may be able to sell fairly cheaply because there are quite a lot of demands out there for environmental, social and governance type of bonds.
Now, that's a fair point. If there's a particular market where people are prepared—[correction: prepared to lend more cheaply]. Because they themselves are obliged to do something by their own mandate, the bond has to have a certain characteristic. The fact that you've then got the ability to issue means that, 'Okay, if we promise to do X, Y and Z with this money, can we get it cheaper than the gilt?' It's unlikely, but it's worth keeping an eye on.
If a pension fund is looking in particular to invest in Wales, for example—I don't know.
Yes, that's a bit like a unicorn, I find. [Laughter.] It's hard to find those, but if somebody has to do something green, for example, and by making the bond explicitly green they will buy it at a higher price, then that's an interesting thought, but it's going to be quite unusual.
Mike would like to just come in.
Just two quick questions. One is a comment: I think you're absolutely right; the national loans board has always been historically the cheapest, and bonds help keep it honest. We do know, however, don't we, that Transport for London borrowed a substantial sum for bonds on the bond market?
Yes, and local authorities used to do it quite a lot.
Yes, but it's so much cheaper now not to.
This is a bit of a diversion, possibly—the UK is unusual, in that it did centralise all public sector borrowing through gilts. In most countries, if there was a state railway, or a state electricity company or whatever, they would issue their own bonds and they would pay a premium for doing so over central Government bonds or general Government bonds. The UK spotted this and centralised everything through the gilt market. So, we have this thing called the public sector borrowing requirement. What then happened, though, very perversely, was that the public sector borrowing requirement became a fiscal target, which meant that you started to constrain the investment of bodies. They've all been privatised now, so it doesn't matter so much, but in the old days, you had a situation where you were inhibiting the investment in your railway, for example, which would have been financed off the railway's own balance sheet by its own revenue from customers, because you'd bound that up in the Government's fiscal target. The whole point about the fiscal target is this is stuff that has got to be financed from taxes in future. The reason I don't want my debt to be too big is it's too much of a claim on future taxpayers. Well, if it's not a claim on future taxpayers, because it's going to be paid for by people buying railway tickets, I don't care. It's like Marks and Spencer's wants to borrow—well, let them borrow. And so, having the PSBR as your fiscal target, rather than the general Government's own deficit—well, of course, it was a handy excuse for privatising everything, but it didn't make a lot of sense.
Rhun, did you want to come in?
On another issue, on capital receipts from what could be termed 'selling off the family silver', I think the UK Government has raised some £2 billion over the past five years from selling off fixed assets. Given the number of well-publicised examples of Welsh Government selling off some assets at what turned out to be substantially less than what should have been their market value, can selling off assets ever be, or should it ever be seen as part of a strategy on raising money for capital spending?
Yes. You sort of end up in the position of saying, 'Do the right thing'—I don't know how informative I can be. But, obviously, if you've got assets that are worth more to somebody else than they are to you, you may as well sell them and get the money. If they're worth more to you than to anybody else, you don't want to do that. So, it's a question of having the expertise in-house to be able to manage your real estate—or land, or whatever it is—portfolio, and to be sensitive to when there are opportunities. But, obviously, it's not a good thing to sell things that are worth more to you than they are to the person buying them. And I think it's true to say that one of the—there was a land authority in Wales, which then got folded into the Welsh Development Agency, and I don't think all of that expertise was maintained when the WDA was brought in-house. I think a lot of people who knew what they were doing then probably left. And I think, again, we had a 10-year hiatus before the Welsh Government realised that we need to develop some more concentrated expertise in this area and manage our estate better. So, I think they've started moving in the right direction, but we did have this dip, I think.
I wouldn't have a very clear answer—it depends, because, of course, this is so interconnected. If you're selling some assets, you may then affect affordability—housing affordability, you may affect the environment in single, local authorities. So, it has a lot—in urban economics, there's a lot of research that talks about this knock-on effect of unaffordability. For example, in Transport for London, selling the arcades under the bridges may have a negative knock-on effect on rents for the businesses who are using those arcades, and it may change the whole dynamic in the proper local authority. So, it is worth thinking about those complexities, because then you may have some negative externalities that you then need to tackle, and it may be counterproductive. So, it's good to think about what will be the implications of selling public land to the private sector, because that would definitely raise rents.
Okay, thank you. Interesting. Rhianon.
Thank you. With regard to the earlier comments, I would presume that Welsh Government would feel that they are living hand to mouth, and in terms of therefore being ambitious and aspirational, obviously that is always mitigated with the climate that we are in around Brexit and austerity, which has done a lot, hasn't it, for the deficit? So, to my question: with regard to the mutual investment model, and the efficacy of a public-private partnership independent borrowing, as you are aware, that's being highlighted now within Geneva, within the UN, in terms of that being innovative practice. So, in that regard, what is your view around the public interest safeguards that have been predicated on the development of that model, and how efficient do you think that is in terms of reaching a more safeguarded public purse?
I think in principle they're good. You still, at the end of the day, have to write a contract that you can maintain if challenged in court. Unfortunately, it doesn't remove the need for legal and other expertise in actually drawing these things up. But I think, as far as it goes, it draws on the Scottish experience and that, I think, is a good thing.
So, in that regard, going back to your earlier comments, to me, that would pinpoint the fact that we are moving in a direction of travel that is protecting the public purse whilst being aspirational, and that has been picked up outside of Wales. I think that's innovative. I don't know if you would agree with that or if you feel there are concerns around the mutual investment model. It's really an opportunity for me to understand your view on that. I don't know if you can comment.
So, we had recently a session with the finance institutional investors. We were discussing that the Government had announced that the PFI 2 would not go forward and we were asking them what they think should happen, and they said, 'That will not disappear; what will happen is the name will change, but the whole concept will remain', because, overall, the UK Government is not willing to substantially increase borrowing as a whole. I agree that it's a more expensive way to finance infrastructure. It's also a more complex way because there are many different stakeholders in this special-purpose vehicle—in the project company. It's financed through project loans. Project loans are much more expensive than standardised loans, because they are done on an asset-by-asset basis and project by project. You can't really generalise and even compare schools with schools or nuclear power plants with nuclear power plants. It varies from asset to asset. You have several different financiers: you have the senior financiers, the banks and then you'd have mezzanine finance, which is more junior finance, which is even more expensive. So, you need to see how you structure that vehicle, which means you need to have expertise also from the Government—the more expertise there is, the more understanding there'll be. But it all boils down to how you write the contracts and you obviously have to foresee things.
I've read that the MIM model proposes that the Welsh Government would have a stake—would be a shareholder, essentially, so will have some equity in that project, which exposes you to upside risks or to benefits, but also to downside risks, so if there are some losses to the project. I think it is important to look at it project by project and it also depends on forecasting or predicting the revenue—the cashflows—accurately. I don't know whether the Government would have this capacity or would have better foresight than the private sector. So, I think it is a more complex way of financing infrastructure, but if it's done properly, it can work. I can't really comment on the MIM model specifically, because I really need to look into it. I've only seen that very different assets have been financed through it, which, for example, I was a bit surprised about—
Can you outline what?
I've seen that one is a school, the other is something else, so they are not really comparable things. From what we hear from institutional investors, especially from private funds, they think that PFIs in the UK are not worth the money. They think that they're overpriced and the risks actually are high. So, they can see that—I was talking to Gerald before—it is a low-return, high-risk investment, simply because the risks are not manageable by the manager in the sense that it's not a construction risk, it's not a revenue risk where you can go and intervene and try to do something about it if you have the expertise; it's big market risk, regulatory risks, political risks—
To interrupt, in Wales, we have moved away strategically from PFI. In terms of the mutual investment model, we are trying to work our way around that in terms of protecting that public interest. So, that will be additionally an extra £1 billion around investment for us. So, in terms of our projects, which are outlined, as you said—twenty-first century schools, which is a major investment programme across Wales—we are looking to do this strategically but also in terms of safeguarding public interest. So, I'm more interested in your view on the mutual investment model rather than the PFI, because we're all aware of the risks around that and Wales has strategically moved or tried to get away from that. I don't know if Gerald has got any view on the mutual investment model.
The thing about it is, what you're doing essentially is taking up to 20 per cent in the project company and [correction: or] the special purpose vehicle that's set up to build and own the asset. If you like, you can see that as a belief that the private sector is likely to drive a better bargain than you are. If you've put them right on the edge, as it were, why would you want a piece of the action? So, you're actually assuming that, really, they've been able to do themselves a pretty good deal. So, the way to mitigate that risk is, 'We'll take a piece of it', and that's essentially what it's doing. You're just saying, 'If you have written a really good deal and you are going to make supernormal profits, at least we'll get some of that back just by virtue of having an equity investment.'
But, as Dr Milcheva says, if actually you've driven too tight a deal with them that they're going to lose money, then taking the equity risk exposes you to that. So, taking the equity indicates that you think that the chances are that they've driven a pretty good deal on their own account and you may as well have a piece of it, which is fair enough, I suppose. That's how you're mitigating the risk. Because the original effort under the Scottish system of non-profit distribution was to actually try and cap their return, and that was what was declared to be inadmissible and would turn it into a public project. So, you can't cap it, so we'll just take a share of it—and a minority share of course; you can't own a majority.
Sorry, can I just ask one? So, in regard to the invitation from the UN to discuss what we're doing here in Wales, why do you think that they have asked us to outline this model in Geneva?
Because I think there's genuine concern. The effort to develop it reflects a genuine concern that, historically, as everybody has been saying, PFI deals turn out to be very expensive. A lot of supernormal profits were made in the early days. You're always going to be having Government officials—. Putting this brutally, you've got a Government official being paid £50,000 and he's negotiating with some smart lawyer who's being paid £500,000, and guess who's going to win that one. So, there's a systemic issue of how you get the deal put on a more balanced basis while it remains a private finance deal, without taking it entirely in-house. That's a genuine issue. I think the mutual investment model is an attempt to address that issue. That's why it's interesting to people internationally.
Thank you. Neil.
I think you encapsulate the conundrum exactly in what you've just said. It may be too early for us to draw any conclusions as to whether MIMs offer better value for money than the conventional PFIs, but do you have any inkling as to whether it is the case the MIMs will offer better value for money than PFIs? I imagine, in terms of PFIs, the early disastrous experience of those has taught some lessons to Government. Even PFIs are better than they were when they started out. If we're able, therefore, to compare MIMs with the current state of PFI finance, can we draw any conclusion about whether this is an improvement or not?
My own suspicion is I think what you're hinting at is that probably the main advantage is coming just from the accumulation of experience. If you've been diddled once, you've got a better chance of avoiding it the second time. So, I think the accumulation experience in writing contracts, in being aware of where the issues might arise, is probably the most important thing.
Having said that, I think one of the aspects of MIM is that you're trying to create a template so that the poor official isn't reinventing the wheel every time something comes up. And so, you have certain elements like the equity share, which are part of the template, and I think that's perfectly sensible. You're trying to create a template so that we don't have to just think everything through anew every time. But I do think it's the accumulation of experience that is the main hope that you're going to get a better deal than you have in the past.
And a related question: again, it may be too early to say, because we haven't seen enough projects financed in this way to draw hard and fast conclusions, but are there any aspects of the current model that you think can be improved?
I don't know. I'm intrigued by this piece that's created the most concern, I think, among private financiers where, quite apart from the state's own ability to take the up to 20 per cent share in the project company, they've got this clause or this condition that they can also reserve part of the finance—20 per cent, 30 per cent, or something—and offer it competitively to other sources of finance. Now, that adds a layer of complexity, and a lot of companies in the PFI world don't like that. But it is an attempt to see if you can't bring in long-run investors at an earlier stage and limit the possible refinancing gains, for example. I've no idea how that would work, but I think that is an area of work that will either get dropped or it will become an extremely interesting and important part of the process, and I don't know which is likely to happen.
Mike would just like to come in.
Briefly, Llyr. We know the Public Works Loan Board isn't the cheapest place to borrow, and we know that local authorities have an ability to undertake prudential borrowing. So, returning to that school, why is it better to use the mutual investment model to fund a school, or partly fund the borrowing for a school, rather than supporting local authorities to borrow from the Public Works Loan Board, which you've already said is cheaper?
Very good question, and I don't—. When I was involved in this, as a consultant, that is exactly what we did. We went to the local authorities and said, 'Why don't you go to the Public Works Loan Board and borrow a load of money and build these schools?' and the answer was, 'Well, because we don't want to take on that debt.' I actually went to talk to the auditor general and said, 'Look, if the Government—. What the Welsh Government can't do is say, 'You go and borrow off the Public Works Loan Board'—Blaenau Gwent or whatever—'and we'll pay your debt for you', because the Treasury will come down like a ton of bricks and say, 'Come on, you've got £1 billion to borrow. You're not allowed to use this as a back door to increase your borrowing requirement.' So, you have to be fairly deft.
If it's something for which the local authorities have responsibility, like schools, why can't you just fix the formula that is used to support local authority revenue? You just say, 'Look, we decide that you have an infrastructure requirement, which means that, on the needs-based formula, you get a bit more money' and that, in effect, finances the debt. That was how the second phase of twenty-first century schools was being done, and the truth is I don't know why that turned out to be a problem and why they've switched to the MIM. It's a very good question.
It used to be the way that local government was funded. They'd have a debt proportion of their standard spending assessment that was based on the actual debt, which would feed in before anything else. So, that was in the days before we had prudential borrowing, when we had the different forms of borrowing that existed—supplementary credit approvals and credit approvals.
I suppose you do need the co-operation of the local authorities. If that becomes onerous or difficult, then that may be a limitation. As I say, you have to be pretty deft in the way that you provide the additional support that makes them ready to do it so that it remains outside the Treasury's prohibitions. So, I think there are some complexities involved in doing it, but it would have been my first port of call, certainly. But what you couldn't do is get them to borrow for something if it isn't a local authority responsibility.
That's why you could use it for schools specifically.
Schools would be an excellent example, wouldn't it? Okay. Any further questions?
Yes. Your paper identifies the central artificiality of transfer of risk in many Government infrastructure projects, given that the Government has to deliver the service that is going to be the product of the capital construction that is going to be financed. There's an artificiality over many of these things—it's a bit like sharia financing, disguising interest as something else. Ultimately, the reality of this underneath is much the same as things always were. But can we say how MIMs will ensure that project costs reflect the transfer of risk to the private sector, or is this another form of necromancy, really?
I think one of the consequences of this is that you can only do business with companies that are in an extremely strong financial position, and so you've got to ensure that they are. You don't want them going bust on you, as has happened recently, because you can only transfer risk to the point where your counterpart is able to carry it. That's often overlooked. It's very difficult to use a small mom-and-pop company to do something if you're trying to transfer a risk they simply can't bear, because if the risk eventuates, they can't carry it, they have to declare bankruptcy and it's back on you anyway. So, there is that requirement to be dealing with people who can carry the risk that you're transferring and you have to be confident that they can. We've seen conspicuous cases where very large companies turned out not to be able to do it.
Very briefly, they also use single investment vehicles, don't they? So, although it's part of a major company, the single investment is there and, if that's in trouble, they just close the company down.
Yes. You've got to be careful in the way you go at the contracting.
Once they take a 20 per cent investment, they have to create an investment vehicle, don't they? They can't do it as 20 per cent of part of their company.
No. Well, that's true. They always do anyway. They always create a project. It has to be capitalised adequately is the point.
Okay. Very, very briefly, then, because we are out of time.
Just for clarification, earlier in your answer to Neil Hamilton you said, in terms of the MIMs, that the finance, or a proportion of it, could be repackaged or sold on. Did I understand you right there or did I get totally the wrong end of the stick? There's an aspect of the structure of doing it that allows that to happen but it hadn't happened at the moment, I think you said.
Well, there's the finance you raise from your counterparty who's setting up the project company. You can take up to 20 per cent of the equity in that project company yourself, and then the template allows you to say, 'We want you to put up 70 per cent of the finance because we're going to then have a competitive tender for the other 30 per cent, quite apart from you, from somebody else, to see if we can bring somebody else in'. The point of that latter bit is to try and cap profits that can be made from refinancing, because, often in PFI contracts, what you find is that the initial phase is the riskiest—there are construction risks or something, like the overrun on the Hirwaun road—and that's why the long-run investors don't want to take that on. So, you're raising capital at 10 per cent to do that. Once it's built, you could refinance it at 4 per cent, because a pension fund would be very happy to come in at that point. So, the idea of this MIM—the two elements—is to try and limit excess profits that can be made because people make excessive provision for initial risk, and then, when they refinance it at a lower interest rate, they make a large gain—(a) the state will share that gain through the 20 per cent, and (b) if it has managed to bring in some long-run investors initially, that also reduces the scope for that kind of gain. So, that's the thinking, I think.
There we are. Can I thank you very much? We've come to the end of our allocated time. You will be sent a copy of the transcript to check for accuracy. And can I thank you for the evidence that you've given us to kick-off our inquiry this morning? Diolch yn fawr iawn.
The committee will now break for just 10 minutes, and we'll reconvene for 10:45. Diolch.
Gohiriwyd y cyfarfod rhwng 10:36 a 10:44.
The meeting adjourned between 10:36 and 10:44.
Can I welcome Members back to the Finance Committee, and welcome, particularly, Peter Reekie, who is chief executive of the Scottish Futures Trust? Thank you for joining us, and thank you for the evidence that you've provided us beforehand. Would you like to say a word first, or are you happy to go straight into questions?
No, I'm very happy to take questions.
There we are, because we'll pick up on any issues as we go along. So, I'll kick-off, if I may. Of course, we know that the Scottish Government, in the same way as the Welsh Government, is subject to capital borrowing limits, and I'm just wondering if you could tell us a bit about how it prioritises infrastructure investment to deliver its capital strategy.
Certainly, yes, I'm very happy to do that. The Scottish Futures Trust is an independent centre of infrastructure expertise, operating as a non-departmental public body. So, whilst I can talk about the generality of that, I'm not speaking directly on behalf of Scottish Government today, if that's all right.
No, we understand that.
We published—the Scottish Government published—its last infrastructure investment plan in 2015, and it had done so previously in 2011, and that sets out the strategic context of what the Scottish Government's trying to get out of infrastructure investment and then takes a sectoral view of investment plans and publishes a list of projects underneath that. The driving force behind that investment is to deliver sustainable economic growth through increasing competitiveness and decreasing inequality, to manage the transition to a low-carbon economy, and to use its resources more efficiently to support the delivery of efficient and high-quality public services and to support employment and opportunity across Scotland. So, it's to get a balance of investment that supports economic activity and that supports public services, to make sure that is inclusive across Scotland's geographies and focuses on inclusive growth.
The publication of that pipeline, we find, is really important, because the market needs to know where the opportunities are coming from. The pipeline is regularly updated. The last update was to the Public Audit and Post-legislative Scrutiny Committee of the Parliament in March 2019—so, we go every six months and provide an update on the plan. The last plan, 2015, there was a focus in there about infrastructure to support early learning and childcare, about housing supply, digital investment in digital infrastructure, health, as usual transport, and energy generation and efficiency. The pipeline publishes projects above a £20 million value where the Scottish Government is a majority funder.
So, taking that medium-term view and having a pipeline of projects that deliver a strategy has been really important. A couple of other things that that needs to link to, for me, is that it's really important that that links with the national planning framework for Scotland, because that sets the spatial plans, if you like, for what the important developments will be across Scotland, and infrastructure, obviously, needs to support development. And it also links very closely to the Climate Change Act 2008, because all of our investment needs to be driving, as I said, to the low-carbon economy. So, we have a long-term plan that's prioritised within that limited budget, as you say, against strategic priorities, publish a plan, linked to the spatial use, to the carbon reduction, and then we provide updates to the Parliament on a regular basis on the progress against that plan.
Okay, thank you. Alun wants to just come in with a question.
Yes. I'm fascinated by your paper and by the evidence you're giving this morning. I'm just interested in understanding the basis of this. This has existed under a number of Parliaments now, so it's a firm part of the Scottish infrastructure economy. I'm interested in your legal basis. Are you a company? You're wholly owned by Scottish Ministers.
Yes. So, we are, in public sector classification terms, a non-departmental public body, but we're established as a company that's wholly owned by Scottish Ministers, and we bring together experts from across the public and the private sectors, and one of the things that allows us to do is to—it gives us in the public sector, I call it the 'luxury', if you like, of a complete focus on infrastructure investment. We don't deliver public services, and we're able to see across the range of infrastructure, whether that be economic infrastructure or social infrastructure, and also across all of the geographies.
So, by way of example as to what that allows us to do, when we're working with local authorities on education buildings and schools, it allows us to share good practice in school design, in specification in the approaches to building, between all of the different local authorities, of which there are 32 in Scotland. So, we don't centralise all of that activity and do it just once from Edinburgh, but we are able to share expertise and practices and particularly—so, that's on the social infrastructure side. It allows us then also to draw together things like health and education into more of a place-based approach that we're looking at—that's just been adopted across Scotland now—where we're increasingly trying—I think this is really important—to make sure that our social infrastructure delivers what a place needs and doesn't just deliver a school or a health centre or a police station, it thinks about what's the social and the service delivery need of that place and how can we best provide integrated buildings that support integrated public service delivery. And, on the economic infrastructure side, there's going to be increasing convergence, in my mind, between roads, transport networks, electricity networks and distribution systems as we move more and more to electric vehicles, and data networks as we move to things like autonomous vehicles. So, we're no longer operating separate networks—or, in the future, we won't be. And, so, our role there is to have a bit of an overview, and we don't—. Again, we're not responsible for the delivery of any of those things, but we're able to take an overview of the linkages between those things and try and create coherent delivery mechanisms that work across all of those integrating forms of infrastructure. So, that's—. We're 70 people now and we've been in existence since—set up in 2008 and we've been operational for 10 years, starting in 2009.
Okay. And, in terms of your governance, you have a board?
We have an independent board, appointed by Scottish Ministers.
By Scottish Ministers. Okay.
Okay. I'm interested in what you say about the pipeline, clearly, because that's something that eminently makes perfect sense, but how far into the future does that sort of project pipeline project?
So, I would say that for different values of projects it extends different distances into the future, and some of the projects it set out in 2015 were out to 2025 and beyond—so, at least 10 years for some things. We've recently—and you might come on to this—set up an infrastructure commission for Scotland, which is trying to take a view a lot longer, out to 30 years. I don't think you can have a project pipeline stretching that far out, because we don't know enough about exactly what projects we need, but having a direction of travel for that far out I think is really important, and, personally, I don't think there's a perfect model for when the direction of travel—at what point in time that turns into a definitive project pipeline, because it depends very much on the delivery bodies, the size of the project, and the distance out of the project vision that politicians take, because, in the end, spending decisions, although they can receive advice, that's a democratic activity to undertake, I believe, by politicians.
Okay. And you see the way—. We're on the same journey in terms of a national infrastructure commission for Wales, and I'm just thinking about the link between the national development framework, which the Welsh Government will be consulting upon this summer, actually, so they all need to come together in terms of identifying those opportunities and projects and the spatial plan element as well, as you say. I'm just looking for the lessons that maybe we can learn in Wales in terms of your experiences in Scotland.
Yes, and, again, I'm not trying to paint the picture of perfection on all of this. We're all getting better, I think, at all of these sort of things, and, for me, one of the roles of public infrastructure that's gaining in importance in our minds and our understanding of it is enabling private sector development. So, the economic activity jobs creation is principally a private sector activity and private sector development is important for that, creating the roofs over jobs, if you like, and the roofs over new homes. So, our infrastructure investment activity has to be there to connect places, connect data, obviously, and provide energy, but it also has to provide the capacity for private sector development and investment as well. So, that's, I think, a good link between spatial planning and infrastructure investment. The importance of that linkage is increasingly recognised, and really difficult, actually.
Yes, sure. Rhianon would like to come in as well.
Just briefly. I mean, in terms of the alignment of some of these agendas, critically, what have your learning points been since 2008?
That it's really important to be able to take a view across different sectors and geographies, and it's very natural because any organisation has to be organised somehow and portfolios, however they spring out from the Government, are very natural for service delivery and for project delivery, but the linkages between those are really, really important, particularly in relation to place, places. And our role—a role that we didn't really envisage at the outset—has increasingly been to say to colleagues in the health service, 'Did you realise this was happening in education?, and, 'The police service are thinking about their estate in the following way; how could that connect to education estates or health?' So, that connection across has been really important, and working across the different geographic bits of the public sector as well to create some shared experiences and retain that knowledge in the public sector. So, there's a big piece of learning in there about how you retain and share knowledge, and what are the right skills to have in the public sector versus buying in from the private sector when you need them, and how you become an expert client for when you do need to buy it in. All of those sorts of things are things that we try and do.
Okay, thank you. We move on to Mike, then.
I think the first thing I'd say is that getting the public sector to share resources—. I mean I live in a place called Morriston. We've got a fire station opposite and next door to two health centres. Next door to the health centre is a police station; 100 yards up the road is a library; next door to the library is a district housing office; and a quarter of a mile away from that, which is quite a distance in this journey of travel, we've got a social services centre. Are you having any success in trying to get different parts of the public sector to actually talk about sharing buildings and sharing resources, rather than, 'This is mine and I want to keep it'?
Yes. [Laughter.] I don't want to trivialise that, because it is deeply, deeply tricky, but most people want to try and collaborate and co-operate, and the opportunity of an investment, in our minds, in a new building, is an opportunity that can't be missed to catalyse that and make it happen. So, we've got examples of a number of public services—I think one's got seven public services coming together in one building. We've opened a school that has the local library as well as the school library; it has council offices in it. We've got council officials working very closely with health officials in a building. We are working with the police on rationalising their estate and using other public buildings wherever possible. So, it is possible.
There are barriers to doing it, and one of our jobs, if you like, is to build up the case studies of what makes these things possible. So, 'Oh, it can't work because my computer network needs to be separate from their computer network.' 'Ah ha, well the way that was solved in this building was like this.' So, some of that storytelling and showing people where it's happened well has been really important in doing that. It genuinely is difficult because, if nothing else, aligning timescales and money being available in different bits of the system to build new buildings is hard, but we have had some good progress in that, and the case studies we are building show the service benefits that come from doing things from combined assets as well.
Thank you for that. Scotland, like Wales, has recently established an infrastructure commission. We've just listened to Gerry Holtham earlier, and he was talking about planning to fund projects on a project-by-project basis in such a way that you fund from the public sector those that are going to be more expensive to borrow money into, and then you only borrow from the private sector for those that have reduced risk. Have you done anything along those lines?
In our programme of privately financed investment, which started in 2011, which was a non-profit distributing programme and hub, we looked at what were the projects that had the characteristics and the programmes that had the characteristics that made them most suitable for financing and delivering in that way. For a number of years now, and particularly in that programme, projects where there's a very large element of, or a significant element of refurbishment, or where there's been a very high technology element, like computer systems and investment in IT, have not been seen as suitable and we've not done more of those sorts of projects because the risks, as you say, are very high. Some of the projects that we've had, that we've delivered a lot of, have been things like health centres and schools, where they've been relatively lower risk building projects that we've delivered through the hub programme. So there's an aspect of fundamentally how risky and complicated the project is, and how you develop the project and minimise that risk throughout, and then what risk you transfer.
So all of these things are difficult and the most important thing is that we deliver the projects that make the most difference to the economy and the delivery of public services. But I agree, then there needs to be quite a careful process of choosing which are suitable for doing in different ways. So, what are the parties involved, what powers of financing do the individual parties that are involved have, what's the risk profile of the project, what's the experience in that sector of both the market and the public sector in delivering using different approaches? Because one of the best indicators of how well it will go using a form of procurement or financing is, 'How well did it go last time you did it?' Doing it in a new sector or a new area where the market's not used to it and the public sector's not used to it will be inherently more difficult. So track record is really important for us as well.
Was it just the way you picked the project? But the ones you picked as being not suitable were very short-term payback and those that you picked to be useful were schools and health centres, which would have a long-term payback.
If I'm honest, I don't think so much about the payback for the project, because the prioritisation of whether the project is a good project to invest in is done through a separate process, if you like. It makes it on the list, and then, 'What's the right one to deliver using different forms of capital borrowing powers financing?' That's more about the characteristics of the project rather than its payback. It's kind of tricky to calculate the payback, I think, for some of these projects.
But I think you talked about IT systems, which I would imagine you'd expect do not have a life expectancy longer than 10 years, and you were talking about schools and then health centres, where you would probably hope that, certainly with a school, they would last over 100 years.
The rate of change that's likely to be needed is really important. So projects where there's likely to be a very high rate of change, like IT projects, are really tricky to do under long-term contracts.
And the last question from me: the advantages and disadvantages of using public-private partnerships for things like schools and other local authority services, rather than supporting local authorities to borrow from the public works loan board. Do you think that using public-private partnership is better, or do you see an advantage of supported borrowing through whatever you call the rate support grant in Scotland? I'm not sure of your terminology, but it's the amount of money that is given from the government to local authorities to support them through what we call the standard spending assessment, and I think you use the same term.
That's quite a tricky question, I would say, and it's clear that the interest rates on public borrowing are lower than the interest rates that we pay on private financing, so as a generality we would seek to use the lowest interest rates wherever that was possible. But there are some complicated public sector accounting and financing rules around supported borrowing and the capitalisation or not capitalisation of that in government budgets. We're working on that again now for another round of investment, working through what's possible in all of that to get the additionality that we need, so, to be able to invest more and to use the lowest cost of financing that's available in any sector at any given time. So I don't have a definitive answer, but that would be my principle: if it's possible, go with the lower cost of financing, but overall we need to get the level of infrastructure investment up because of the economic and social benefits of doing that.
Thank you very much. Right, we move on next to Nick.
Good morning. Can I ask you about PFI and what's your overall view of it? The UK Government abolished the use of it because of worries about value for money. Did you share those worries, and do you feel that there were any benefits to PFI in meeting the infrastructure needs of the UK?
PFI has delivered around £6 billion-worth of public infrastructure in Scotland, so it has added to our infrastructure stock. The UK Government, as we have alluded to, has different powers than either, I believe, the Welsh Assembly or the Scottish Government. So, it has a different set of abilities to make decisions around the use of public financing or private financing. In Scotland, we're very clear that, as set out in my written evidence, the use of private financing is to deliver the level of infrastructure investment that's needed to support the economy and modern public service delivery. So, I think the National Audit Office found that the cost of finance—. They were comparing the cost of finance with the risk transfer for individual projects. We don't think about it as, 'Should we do this project this way or this way?', because the reason we do projects using private finance is to deliver additionality of investment. So, there's a different set of drivers behind that, perhaps, and a different set of constraints at the UK level. So, I can understand why that decision has been taken.
In terms of, 'Has it delivered any benefits?', I would say that there's an awful lot of discipline in project development. I think a lot of the lessons that have been learnt in public infrastructure procurement across 20, 30 years have been driven by the disciplines and approaches that came in through using the private financing approaches. A lot of those lessons are now available to be used in public financing or in private financing approaches, but there were lessons that were leant through that approach.
One other thing that I believe is very, very important is the linking of life-cycle maintenance to the original decision to procure an asset. And in a public–private partnership project, of whatever structure and arrangement, you contract for the maintenance of the asset and, therefore, you firm up the budget allocation for the maintenance of that asset at the same time as you buy the asset, and make the decision to invest in the capital. That seems to me to be an advantage because, I think, there's some track record in the public sector of not finding the budgets to maintain assets that we've decided to buy. And so, contracting for that at the same time means that the asset will be kept in good condition and maintained well over the period of 25 years. Should we be able to do that in a different way without using private financing? That's entirely possible that we could, but the track record is that—
In some cases, they were over maintained, weren't they, with those contracts? Painting every year, whether they were needed or not.
[Inaudible.]—to change a light bulb.
So, the over-maintenance bit, I think, is really interesting as well, in that you receive, in a well-managed contract—and I'll come back to that, if I may—the service that you specify. In most of our recent projects, we haven't included decoration in the contracts, for example, because it's not fundamental to the long-term condition of the asset. You can have a building that's just as fit for purpose in 25 years' time if it's not decorated every year. So, whether you choose to decorate it or not, I think you can reasonably de-link that from the fundamental condition of the asset. So, we tended to leave that up to public authorities to decide whether they wanted to do that or not.
But making sure that the roof is properly maintained is obviously a different—
But making sure the roof is properly maintained is fundamental. So, it's looking at where that boundary rightly falls that I think is important. On the costs of replacing various elements, that's got, as most arguments do, two sides to it. One is that, yes, if you look at the subcontractor's cost, the cost of overseeing that, and the cost of a special purpose vehicle, then that all adds up, and is quite a lot of money for replacing a light bulb.
The flip side of that is what it makes transparent is the full cost of maintaining an asset, which is not hugely different, whoever does it—it's just that when you contract for it, it's clear and transparent, and when you don't, it's just a cost of the system. And I'm certainly not going to say that it costs the public sector exactly the same to change every light bulb as they would pay in a PFI contract, but what I will suggest—
But you've got the figure.
The figure's there—you know what it is. So, that's quite an interesting balance, if you like.
The point on contract management is that, for me, any time you sign up to a long-term contract, or even a large contract if it's a short-term contract, it's really important to have the skills and experience, and make the resources available, to manage that contract well. We've got a system in Scotland that we're developing where we in SFT maintain a central set of skills and capabilities to do the strategic elements of PPP contract management. So, looking at things like where major changes occur, or how we prepare for hand-back of some of these assets, what happens if there's refinancing going on. And we occasionally take deep dives into contracts to look at how well they've been managed on the ground.
And then we've begun to form collaboratives, either across regions or sectors, whereby the individuals that are managing individual contracts get together and share experience and share skills, so that that can be done on a more coherent basis. On the ground, you've obviously got to monitor the payment of the bills and the checking of the condition on an asset-by-asset basis. So, having a good structure for contract management and making sure, bluntly, that you get what you've paid for, is really important under these long-term contracts. And I think it's arguably an area that's taken some time to get right in the overall experience of this sort of contracting, but I think we are getting there now.
That's really interesting. Can you explain the key differences between the mutual investment model and the non-profit distributing model?
NPD was a profit-capping approach. The mutual investment model is a profit-sharing approach through shared investment.
And what lessons have you learnt from implementing the NPD model that could be applied to the Welsh Government's MIM?
I guess some of those I've covered already. I think there's a big point about capacity and capability. These are complicated contracts. I could have brought with me the document list when you sign one of these things up. The documents probably wouldn't cover all of these tables, but they would cover half of these tables; they're big, complicated beasts—there's no getting away from it. So, having the capacity and capability to understand that, to handle it, both in the individual authorities that are doing the procurement, and as a central body developing the contracts and assuring that they're being progressed right through the procurement process and that they're managed right, is really, really important. And that was one of the reasons that we were set up—to retain some of that capacity and capability for use across the public sector. I used to be, in a previous life, an adviser on these things; I worked for PricewaterhouseCoopers for a number of years. We've got technical people in our team—we've got surveyors, we've got architects, we've got engineers. I'm an engineer by trade, so I have to mention engineers. We've got financiers, bankers, we've got lawyers in our team that are capable of doing all of that work and understanding these contracts.
I think the other message from me is about understanding the marketplace really well. So, the market is changing for these sorts of things—construction in general and for the finance contracts. So, when we launched our programme in 2011, post the global financial crisis, the construction companies were really keen for this sort of work, and the financiers were really quite concerned about long-term lending, and so on and so forth. So, we had to spend quite a lot of time with the financiers, getting them comfortable. Now, I think if you went to speak to the market, you'd find that the financiers are really quite comfortable with all of this business, and you hear about walls of capital, and so and so forth, out there to invest. And the construction market has changed quite fundamentally, with Carillion and other events, and have less of an appetite for these big fixed-price, lump-sum type contracts. So, understanding what the market needs. I'm increasingly talking about procuring for industry as well as procuring from industry. The industry is our economy; we have as much interest in the supply side of our economy as we do in buying from it.
So, the market bit, the central skills I've talked about, contract management I've talked about and, finally—and I know you do this a lot—is the thinking about the wider benefits that you need to deliver as you're delivering a public asset. So, it's nowhere near good enough to deliver a fantastic road, school or hospital; it's about what we do for the community and for the individuals who work in the supply chain, what we do for the smaller and medium-sized enterprises in that supply chain as we're delivering that. An increasing amount of our focus has been on that, as well as just getting great buildings at the end of it.
Okay. Just out of interest, how large an organisation are you? You listed the different—
Seventy, there we are. Okay, just to give us that sort of idea of scale.
So, this bit of what we do is part of what we do. We also work in affordable housing, so the bit between social housing and market housing. We're quite active in that and bringing the public and private sector financing together in that. We've got quite a large team looking at digital infrastructure. So, we're working on mobile masts where the market won't go—so, 4G—and we're looking at Scotland's 5G strategy. We've got a team working on energy efficiency of public buildings across the estate and the overall efficiency of the public estate. So, making the best use of what we've got, whether that be through contract management or making efficient use of buildings, and helping the public sector dispose of assets it doesn't need, whether that be to recover money or to get those assets into the economy again and make best use of them for either housing or economic development, amongst other things. So, those are the bits that we do—delivery and a development strand as well.
Okay, thank you very much. Alun.
So, in that way, you will be trying to shape the market as well as addressing market failure, I presume.
We're trying to understand the market and get the best for the indigenous marketplace that is delivering for us. Are we trying to shape it? I guess, yes—we're trying to help the industry be the best it can be. So, the construction industry has had pretty flat productivity for quite a long time. The public sector, as a generality, buys in the order of half of the output of that industry. So, as a client-driven industry, it delivers what its clients require of it; it doesn't build things and then—. Except for housing; housing in the construction industry builds stuff and waits for people to buy it. The rest of the construction industry builds what its clients asks it to. So, we have the ability to help that industry, through the way we buy from it, to increase its productivity, to help with the fair work and the treatment down its supply chain. So, we need to use that—
I'm interested in how you see your role in the mixed market economy. That's behind my question. In terms of where you are now, one of the objectives that Scottish Ministers gave to you was to achieve a significant number of savings. Is it £100 million to £150 million, which you exceeded in your first reporting period? I'd be grateful if you could outline to us how you achieved those savings and where those savings are from.
There's a big list. A couple of areas, for example—. I've talked about schools programme delivery and, in that programme, when we started our work, there was a very great variation in two really quite easy numbers. One was how many square metres of building per child educated do you need to create a great school that can deliver great educational outcomes. And the second was how many pounds per square metre is the right price to be paying for that building. And both of those variables varied very greatly between different local authorities, based on how they had specified buildings, what local decisions had been taken. And we brought the Scottish Government's funding for schools, which had previously been variable, as local authorities, down to a single 'square metres per child' and 'pounds per square metre'. We did some reference design work and some early projects that demonstrated you could get great schools for this funding. Once we adopted that approach and took out some of that real variability that we'd found locally, that led to substantial savings across that schools programme, which has allowed more schools to be delivered for the same amount of Scottish Government funding made available. So, that's a key area.
Across the Scottish Government's own estate, the footprint of that estate and the costs of that estate—. We worked with our colleagues across Government and public bodies to make substantial savings in that by working more efficiently and effectively in the space that we've got and by, as I said before, joining people up and working together. And then there are some other things around the edges. Just by way of an example, to show you the breadth of it all, we've worked on energy-efficient LED street lighting. When we initially went into that, we thought it might be about whizzy financing and delivery models for street lighting, but what we in the end put together was, effectively, a business case toolkit that helped all of the street lighting departments in local authorities make the case for relatively simple spend-to-save investment in LED street lights. We worked with the Scottish local authorities' central procurement team, Scotland Excel, to put in place a framework for them to buy LED street lights efficiently. That's led to a much faster adoption of LED street lights across local authorities that has both a long-term cash saving from the electricity bills and a massive carbon benefit as well. So, there are different approaches in different cases, and what we do is aggregate the impact that we've made across all of those.
That's fascinating and I'm very interested by it. I'm interested as to what the benchmark is, what that savings benchmark would be and why you think that you are able to make savings that traditional public sector procurement are unable to do. Because nothing you've described there is rocket science in the sense of being shocking—not innovative, but it's not beyond the capacity of traditional public sector bodies to think in that way as well. So, how have you been able to achieve that in a way that you don't believe—or tell me if you do believe—couldn't have been achieved within Scottish Government?
Focus, skills and sharing knowledge across. So, our baseline, if you like, in most of these cases, is what happened before. The savings benefits, if you like, are always—and I mean always—delivered with other people. So, that £100 million to £150 million, if you like, is a pro-rata share of the impact that we think we've added to working collaboratively with others. So, we don't do anything on our own. Could those things have happened without us being there, in a different way? It's possible, but our experience is that the fortunate position, if you like, or the foresight of Ministers to have a group of people specifically focused on infrastructure and to have the skills and governance together to create those connections, has caused things to be looked at in a new way that they weren't before.
Very interesting. Thank you. Rhun.
Yes, all fascinating and, in fact, in your comprehensive answers, I think you've addressed the issues that I wanted to ask you about. Just one remaining question on NPD versus mutual investment model. You've explained what the difference was—one being capped and the other one being sharing benefits. What are the benefits of one over the other? How do you compare the potential benefits? And in which potential projects, what kind of risk profile of projects, would mutual investment work better than NPD, and vice versa?
The disbenefit of NPD is that it has now been found by the Office for National Statistics and Eurostat to be publicly classified, so it doesn't deliver additionality. The whole reason that we've been talking about using this sort of financing is to deliver additionality of capacity to invest. So, the MIM approach, that has been found, as I understand, by Eurostat to be privately classified, brings additionality and is therefore the right approach to use to deliver infrastructure under these public-private partnership forms these days. So, we wouldn't use NPD again, because it was there to deliver additionality, and if it doesn't, then it's not meeting its fundamental purpose.
But in terms of risk, and their capacity to drive down risk for the public sector, or to pass risk on to the public sector, there's not much in it.
They're very, very similar. And I think the forms of contract, if you like, have been developed over the years, and a lot of the features in the MIM contract you would have found in the NPD contract. So, the learning gets passed on between all of these different standard forms of contract. So, yes, it's quite similar, overall.
Okay. Thank you. Neil.
Can you categorise projects that are suitable for private financing and those that are not, or can you look at any construction project and see whether your methods of finance are suitable for it?
I've said it doesn't work terribly well for projects where the rate of change, particularly technological change, is very high—
So the payback period is quite short.
Yes, or the cycle of reinvestment in something that could be really quite different from what went before it is short. So, that's always been tricky. Projects where there's a good deal of refurbishment are difficult, because the fundamental requirement of this sort of contracting is a fixed-price construction contract. And where the underlying conditions aren't known well—i.e. you're pulling a building to pieces and looking at what's there and whether there's asbestos and so on and so forth—those have proved to be quite tricky to do in the past, and we don't tend to focus on those. Projects where there's a big process element or a very, very complicated building have been difficult to do. There have been examples in PFI in the past from things like the National Physical Laboratory. Those deeply technical buildings are very challenging to procure in that way.
Smaller projects are not necessarily the best, because of the relatively high transaction costs of doing a finance deal. We have a programme called hub, which works over five territories in Scotland, and, effectively, brings together the skills and experience and the partners to do a series of deals, and therefore operates on a stamp-it-out basis, where you—not in the sense of the buildings, but in the sense of the structure of the deal—design it and do it once, and then you do that deal again, lots of times. So, for smaller deals, you need to try and find a way of standardising the approach, to get the best value out of it. So, those are the sorts of characteristics of projects that we'd look for, to make them suitable for this sort of financing.
That's a very comprehensive answer. Can you tell me what criteria you use then to evaluate a project's viability as well?
Individual projects would be assessed as to whether they make it into the infrastructure investment plan or not through the ability to contribute to the factors that I mentioned at the beginning, through the normal processes. So, we don't have a separate process for project viability assessment depending on how it's financed or procured; it's 'The project's made it onto the list, then is it suitable for doing it this way?' if you like.
I see. Okay. You mentioned the hub approach a moment ago. Can you explain to us how that builds on the traditional public-private partnership model, and perhaps tell us where you think its strengths and limitations might be as a capital investment solution?
As a technicality, a hub is an institutional public-private partnership. So, it was set up as a delivery approach for a programme of investments across community infrastructure, which has generally been buildings that have health interests, educational interests, or occasional blue-light projects, or, most particularly, projects that span those areas. The hubs were procured as long-term partnerships that are set up for 20 years and we're probably about eight years into most of them. They have the ability to deliver capital projects or to deliver financed projects, depending on the requirements and individual needs of any authority or any individual project. They have a standard project development approach, which looks to, for example, bring contractors in early for project development and delivery, to bring in their buildability expertise. It looks to have a design development process that brings the public sector and the private sector together during that stage and it looks to build continuous improvement from delivering a number of projects one after the other.
It has some metrics involved to ensure value for money. So, a lot of the centralised costs—for example, the overheads and profits of the construction company—are tied down to the original procurement and it has a series of benchmarking and market-testing regimes for different bits of projects going through. So, what it allows is for a project delivery arrangement to work across a whole pipeline of smaller projects. So, that's a good thing. Some of the challenges it has is that, once you set a structure like that in place, because of the way it’s procured, you can't then change it too much, and as the world moves on, over the period of a 10 or 20-year partnership, then some of the things, or even some of the prices, that you originally locked in are not the way that you would do it or price it these days.
So, there’s always a tension between two things, I think, really: longer-term arrangements, which work well to develop partnerships and to develop trust, which is really important, and to develop the skills to develop projects, if you like, based on an approach to value for money that is collaborative rather than competitive. So, there is that tension and the changing nature of things. But there’s also a tension in there between doing things on a large scale—and the hub works across five territories in Scotland, each of which has about a 1 million population, and so we have a pipeline of projects across that. The other end of that is keeping individual projects very small so that local companies in towns and villages can bid for their local work.
I would always say on that that there is no single answer. There is a genuine tension between working with a few people to improve over time and give pipelines of projects where you can invest in productivity and people—great—or having the ability for local companies to bid for local work that they know and that they can develop themselves—great as well. We have to find a way of doing both of those things, because there are good bits about all of that and we would never say that there’s a single right answer. So, that’s one thing about hub: it’s great about some things, but it’s not the right answer for everything. Nothing is.
If you're contracted for a 20-year period, you have to build in a certain degree of flexibility as well—
—so how do you manage that?
Through benchmarking and market testing arrangements and continuous improvement. And we monitor key performance indicators. So, we publish on our website the outcomes of projects and, for example, the percentage of the work that went to local, smaller businesses for each of the contracts over that period of time. We have indicators around the training. We've developed those indicators slightly through time. So, there are things in there—benchmarking, market testing, key performance indicators—to keep on top of that change and allow things to evolve.
Could I ask something?
Yes, of course.
When you're talking about local contractors, are you talking about local contractors taking on the project or are you talking about the contractors working as sub-contractors, which tends to be the norm?
Both. Because for larger projects—and most of the projects that we deal with in the scheme of things are larger projects—it’s really important that the local SME market has an opportunity to be in the supply chain—so tier 2 or 3 for that—and that we do what we can, as the ultimate buyer, to make sure that they’re well treated in that role in the supply chain. So, whether that be in payment terms or whether that be in the accessibility to the contracts to start with. So, for example, our hubCos often have supplier development programmes where they all work with local tier 2 suppliers to help them increase their capability to be part of the supply chain. So, fair treatment in the supply chain and access to the supply chain. But for smaller projects, it's really important that the local SME marketplace has the opportunity to interact directly with the authorities and to be a main supplier for that. Because through that role they have a chance to grow to be main suppliers for other projects. We're less involved in that end of the market, but I certainly recognise the importance of it.
In your written evidence, it says that you've got £600 million worth of projects in construction—41 designed, built, financed and maintained privately financed projects—and in the 2019-20 Scottish budget another 40 revenue-funded projects for £1.3 billion. So, the average size of a contract is between £15 million and £30 million. What are the parameters on both sides, smallest and largest? What are we looking at here?
There's a low end where the hub companies—particularly for the health boards, when they originally procured—had exclusivity over contracts, and I probably shouldn't quote the figure because I think it's different for each of the hubs and I will get it wrong, but it's in the very low millions. The hub companies at the upper end have gone to £60 million to £70 million contracts, I think. So, that's about the right level. The financed projects have tended to be over about £10 million: a secondary school at £30 million or £40 million, maybe a couple of primary schools bundled together, or a health centre—that sort of size project.
Okay. Thank you very much.
Thank you. Okay. And finally, Rhianon.
Thank you. In regard to the mutual investment model that was predicated around the NDP model, you've mentioned a number of different products, really, in terms of investment for Scotland. Are they very localised within Scotland or are they utilised across the UK wider to that? How would you scope that?
The NPD programme was Scottish. So, that was our approach, if you like. They're all forms of the public-private partnership—design, build, finance and maintain; whatever you want to call them. That was something that we developed. There had been one or two projects procured that way before. The pipeline of projects that we brought forward was announced in 2010 as part of the 2011-12 draft budget. The hub programme is a Scottish programme—as I said, there are five hub territories across Scotland—but it has a number of similarities with the LIFT and Building Schools for the Future programmes that have been used in the past across England. I don't know whether those have been used in Wales.
All of these things, I think, build on the experience of what's gone before. For example, in NPD, some of the construction risk transfer is fairly similar, but we don't include things like catering and cleaning in those contracts, whereas in many PFI contracts those services had been included. So, the core of designing a building, financing the construction, building it, and then maintaining it for 25 years are the sort of common elements of all of these structures. But there are different ways that they are in detail contracted as to the role of the public sector in the financing—the MIM, for example, or the profit capping and sharing—and the NPD and the hub have been our specific Scottish versions of that.
In regard to the growth accelerator programme and how that grows, assuming it's public sector investment, there are two projects that have been outlined in the briefing paper. How successful do you think they have been, as there are only two? You say that they've evolved. What were the weaknesses around that? Predicated around the social capital and the Welsh economic agreement around that, there are some very interesting similarities.