Scottish infrastructure and the weaknesses of current private funding models

Forth Road Bridge and Queensferry Crossing - Image credit: byronv2 via Flickr

Their humps span the Forth like steel Nessies.

Few structures in Scotland are more iconic than the Forth bridges and as key infrastructure linking up Scotland from the Borders to the North East, they also represent some of the most significant pieces of engineering from the 19th, 20th and, when the new Queensferry Crossing is complete, 21st centuries.

The completion of the new bridge has been delayed a second time until September this year due to adverse weather, having originally been due to be completed by the end of last year, but when finished, the £1.35bn structure is expected to stand for at least 120 years. Not a bad investment.

It is among a number of recent and forthcoming major infrastructure projects across Scotland that are expected to make a crucial difference to the areas they serve in terms of connectivity, economic productivity and jobs.

The Borders Railway between Edinburgh and Tweedbank opened in September 2015, following campaigns for a reopening of the south of Scotland route that had being going on since the start of the Scottish Parliament.

According to the Scottish Tourism Economic Assessment Monitor (STEAM) statistics for the first half of 2016, compared to 2015 the number of visitor days in hotels and B&Bs in the Borders rose by 27 per cent and the number of days visitors stayed in the area increased by almost 11 per cent, with a 16 per cent rise in overall visitor spend and an eight per cent increase in tourism-related employment.

In Midlothian, there was a 12.3 per cent rise in the number of visitor days in hotels and B&Bs compared with the first six months of 2015, overall visitor spend was up 6.8 per cent and the number of days visitors stayed in Midlothian increased by 7.2 per cent. Employment related to tourism in Midlothian increased by 4.1 per cent.

Two weeks ago, Transport Scotland announced that a feasibility study will be undertaken into extending the route through the Borders as far as Carlisle.

Another major work is the dualling of the A9, the main spine from north to south through the centre of Scotland, for years winner of the distinctly dubious accolade of most dangerous road in Scotland and one of the most treacherous in the entire UK.

For Malcolm Roughead, chief executive of VisitScotland, connectivity is vital to tourism, one of Scotland’s key sectors.

He tells Holyrood: “Undoubtedly connectivity is vital if visitors are to travel around the country, exploring new places and enjoying the very best that Scotland offers.

“The Borders Railway is one example of how investment in transport infrastructure has opened up new areas to visitors.

“In this case it’s Midlothian and the Scottish Borders, with visitor attractions including the National Mining Museum and Abbotsford House enjoying increased visits as a result of the railway and the successful promotion campaign for the route.”

However, new infrastructure is not the only option.

Referring to the North Coast 500, a rebranding of the 500-mile route around existing roads in Caithness, Sutherland and Ross-shire, he adds: “The NC500 is a great example of an initiative taking more visitors to the North Highlands, but interestingly, it’s not been done by creating new infrastructure.

“Rather, success has come by imaginatively promoting a 516-mile route made up of existing roads and presenting it as something new.

“This inspirational approach has seen the existing road infrastructure put to great use with businesses on the route reporting increased trade.”

There have been calls, though, for improvements to the train line north of Inverness in order to make access to the area easier for tourists, as well the line as from Inverness southwards.

Other key transport infrastructure projects are improvements to the Edinburgh to Glasgow train line, the Aberdeen bypass, a proposed new rail link from central Glasgow to the airport, a possible extension to Edinburgh’s tram line, plus the SNP announced last week that if it wins control of Glasgow City Council, it will look to extend the Glasgow underground.

And it’s not just transport infrastructure that will bring change to Scotland, there are also major building projects in the pipeline, such as the expansion of Aberdeen Harbour, the new Aberdeen International Conference Centre and, one of the most notable, the new V&A museum in Dundee, which is a catalyst for further development in the city.

Many projects are coming about via city deals, collaborations between councils in an area to bring in investment, both government and private sector, with a view to boosting the local economy.

But infrastructure projects are not known for going smoothly, with recent high profile failures including the safety of school buildings.

In January last year, a wall at Oxgangs Primary School in Edinburgh collapsed during high winds.

Investigations revealed that wall ties that should have been used to hold the outer and inner walls together were missing.

The independent inquiry into the failures, led by architect John Cole, concluded that it was “only luck” that no one had been injured or killed in the incident.

This follows the death of teenager Keane Wallis-Bennett in another Edinburgh school, Liberton High School, in 2014 when a wall fell on her, after which investigations were carried out into similar freestanding walls at other schools in the city.

Investigations after the Oxgangs incident found defects in other school buildings, leading to the closure of 17 Edinburgh schools a year ago with around 7,600 children affected, including secondary pupils about to sit exams.

All the schools were either built or refurbished as part of the same public-private partnership (PPP) scheme. 

A recent investigation by the BBC discovered that defects had been found in at least 72 schools across 15 council areas.

However, 13 councils said they had not done surveys of the kind recommended in the Cole report to find out if there were problems.

And last week, investigative journalism site The Ferret revealed that five schools in Angus and three in Dundee had been found to have similar defects and were repaired quietly during school holidays without informing parents.

Although the report and the faults uncovered so far have all related to schools, other buildings, including hospitals, colleges and care homes, have been built under PPP or PFI and related non-profit distributing (NPD) design and build models, meaning they could also be affected.

NPD was introduced by the SNP under arms-length public body the Scottish Futures Trust in 2008 to replace Labour’s previous PPP and PFI models.

NPD allows private companies to finance infrastructure with debt paid off by the taxpayer over decades, but with returns capped and more public sector involvement than under PFI.

Essentially, the idea is that the debt stays off the public balance sheet, but the disadvantages are the higher costs as the debt is paid back and possible lack of accountability over the quality of the buildings, bridges or roads.

And there have been serious errors with this funding which led to four projects – the Aberdeen bypass, Dumfries and Galloway Royal Infirmary, Sick Children’s Hospital in Edinburgh and the Scottish National Blood Transfusion Service HQ on the Heriot-Watt campus – being reclassified as public rather than private projects under EU rules.

Another hospital in Orkney is also likely to end up on the public balance sheet.

And while the interest paid under NPD is lower than under PFI, it is still higher than if the money was borrowed from the state National Loans Fund.

A joint investigation by the Guardian and The Ferret last year estimated this reclassification is likely to cost the public purse £932m, because as publicly funded projects the Scottish Government has to match the private sector spend, reducing the amount available for other earmarked uses.

Following the revelation of the scale of the problem with PPP schools, public sector union Unite has called for a wholesale review of this model of financing public infrastructure.

Unite deputy Scottish secretary Mary Alexander said: “Professor John Cole’s independent report into the Edinburgh private finance schools showed how local councils were being forced at gun point to use private finance.

“That’s a central government policy that is still continuing – so we now need the Scottish Government to stand up and take responsibility.

“Private finance has given us poor quality, unsafe buildings at extortionate cost, putting massive debt around the necks of councils, health boards and other public bodies, and dragging them under at a time of austerity. The use of private finance models should be scrapped now.”

She added: “NPD is basically PFI-light. We want an inquiry to take an independent look at all these contracts – and where it’s shown that private finance schemes are not delivering value for money, the Scottish Government should enable public bodies to buy them out.”

Audit Scotland will carry out an investigation next year into whether NPD funding of roads, schools and hospitals offers the public value for money.

Brexit, too, throws a spanner in the works, with many major infrastructure projects in Scotland having some element of European funding.

A campaign video by Theresa May has been mocked for featuring Aberdeen Harbour, which was awarded a €258m loan by the European Investment Bank, just days before the UK voted to leave the EU last year.

But according to Neil Baxter of the Royal Incorporation of Architects in Scotland, it is not just the method of financing but the method of procurement and management of building projects that can lead to these problems.

Baxter tells Holyrood: “It’s not so much the funding. It’s the mechanism that underpins the funding, if the funding is about or has a significant profit aspect to it – so, for example, PPP is a long-term mortgage, and it’s a mortgage to companies which are effectively, as most private businesses are, they have a responsibility to their shareholders.

“That’s the issue, because then profit becomes the motive, and when profit is the motive then there is a tendency – now I’m not saying this is an absolute, but there is a tendency – to actually try to maximise that profit and that sometimes means that corners are cut.

“Now I know that all big developers would say, ‘We would never do that’; the Cole inquiry and other instances where catastrophic failures have happened in recent years would indicate that that is not true.

“It’s not true in all instances. I’m sure most individuals are very responsible and do their utmost to ensure health and safety is a priority, but on occasion, cost cutting means that health and safety suffers.”

Asked whether the desire to cut cost also affects the quality, as well as the safety of the buildings, he replied: “Oh, undoubtedly. Undoubtedly. I know of instances in recent years where teaching rooms have been created which don’t have windows.

“It’s cheaper to build a room without windows. Now, you try and teach children in a room without windows, in a room without natural light.

“I mean, essentially, are we battery farming or are we educating children? And the fact is that has happened and nobody can deny it.”

Another key cost saving with safety implications Baxter mentions is that a clerk of works is often no longer used in building contracts.

Usually the clerk of works is a seasoned joiner, plumber or electrician who knows the business inside out and what everybody does on site, who checks that everything is being done safely.

“The clerk of works is the man who says ‘Should we not have some wall head ties in this wall?’” says Baxter.

“The catastrophic collapse at Oxgangs Primary would not have happened had there been wall ties.

“Now I’m not saying absolutely 100 per cent had there been a good clerk of works on that job, that wouldn’t have happened, but I think the chance would have been much, much, much lesser.”

Another change is that while previously the architect ran the building project right through, now it is usual for the contractor to do that and the architect to be ‘novated’ on public projects after the design has been agreed and planning permission granted, meaning their services are transferred from the client to the contractor.

This makes it hard for the architect to raise issues with the build, because the contractor rather than the client has become their employer.

Introduced under Margaret Thatcher, this was intended as a cost saving, to drive down costs and make things simpler for the client in only having to liaise with one professional.

But, Baxter says, it also leads to a conflict of interest in terms of quality versus profit that could be prevented if the architect was in charge and the client had direct contact with the other professionals.

“Essentially, the client is still paying the same money, but the client no longer has a direct connection to the architect, the surveyor, the engineer, the M&E [mechanical and electrical], you know, all the professional team, because the professional team has been novated to the contractor.

“So you’ve got a one-stop shop which is spearheaded then by the contractor,” he says.

He adds: “Now, who does the contractor have responsibility to, and you’re going to say to me, ‘Well, their client’.

“Well, yeah, but the contractor is also a shareholder-owned entity. So actually legally, the contractor has a responsibility to maximise profit to their shareholder.

“So the contractor immediately has a conflict of interest. And that conflict of interest is because they’re trying to maximise profit.

“How do you maximise profit? You cut your costs. So essentially what you do is try and introduce cost savings.

“How do you introduce cost savings into a building project? You reduce the specification.

“You might say you refine the design. Well, you can refine the design so far [that] ultimately you cut the specification.

“So you reduce the specification on a job, essentially, you are diminishing the quality of what is ultimately delivered.”

Baxter suggests that maybe people don’t care if something will last 100 years rather than 200, but points out that much of the infrastructure we rely on daily – sewerage, railways, bridges, hundreds of thousands of buildings – was built by the Victorians.

And some housing, for example, he says, is being built now with only a 25-year guarantee. The solution, he suggests, is to not build on the basis of cost only.

“The common notion is, and you can understand politicians when they’re saying, ‘Well, if one contractor’s going to charge us ‘x’ and another contractor’s going to charge us ‘half x’ for the same thing’ – which is a hospital, for example – ‘let’s go for the half-x hospital. That’s a huge saving to the public purse.’

“Well, is it, is the question, because let’s look at the length of time that the cheaper version lasts, let’s look at the quality of the environment that the cheaper version provides, let’s look at the quality of the materials that are used in both, let’s look at the quality of build in both and the health and safety issues.

“Let’s consider all of these factors and then let’s make a qualitative judgement rather than simply a cost-based judgement.

“The judgement ought to be a balance of cost and quality and the problem is until one or two recent warning shots like the failure of Oxgangs Primary, up until then the notion among our political masters has always been, ‘Let’s do it for the cheap cost, that’s always going to be best.’

“Well, it’s not and we have to re-educate our politicians.”