The Lawyer
August 2007

On 3rd May 2007, the Scottish National Party ("SNP") claimed a narrow, but historic victory in the Scottish Parliamentary elections. To most lawyers in Scotland the change in administration will make little difference, but for law firms with teams of PFI lawyers there could be big changes ahead. The SNP arrived at the forefront of Scottish politics for the first time with the promise to introduce "a new system of infrastructure funding as an alternative to the costly and flawed PFI/PPP", in the form of the Scottish Futures Trust. Indeed only days after the election, the SNP showed it meant business by stating that not just planned but current Private Finance Initiative (PFI) prison projects would now be reviewed as a matter of urgent priority. In a previously thriving Scottish Public Private Partnerships (PPP)/PFI market, all of the major law firms in Scotland have built up sizeable PFI teams and will be watching with interest to find out whether there is a future for PFI in Scotland − and if not, what will replace it.

PFI lawyers, however, may be pleased to note that the SNP's manifesto does not make adoption of the Scottish Futures Trust mandatory, rather it states that procuring authorities may choose to use PPP/PFI over the Scottish Futures Trust model if they wish. It is a statement made with an underlying confidence that the Scottish Futures Trust will be demonstrably better and therefore no right-minded procuring authority would choose PPP/PFI. However, the SNP rhetoric since the election and the review of PFI/PPP projects both in procurement and in the pipeline (and in the case of the Addiewell prison PFI even mid construction) currently being carried out would suggest that PFI lawyers will have to accept that it is the intention that in the long term Scotland moves away from PFI/PPP as a procurement model.

The Scottish Futures Trust is described as a "not-for-profit" vehicle which will invest in Scotland's infrastructure and will, the SNP says, provide lower cost borrowing opportunities. Finance would be raised through a tax-free public bond issue at a proposed return of 4% per annum. In terms of the detail of the proposal, that is pretty much it. Immediate issues, such as whether central UK government will sanction this tax free set up which favours Scotland over England within the UK, and how a new stand-alone agency will achieve the credit rating required to allow it to raise money at the preferential rates hoped for, remain unanswered. The level on which the Scottish Futures Trust would operate within the government's procurement framework is also unclear. On one interpretation it simply provides a method of funding, but there is also a suggestion that it may become a wholly new procurement agency in its own right. Although the SNP has created the opportunity to address some of the longstanding political concerns with PFI, it is clear that if it wants to make this particular proposal fly, it has a lot of work to do. Work which will take years, not months.

But the SNP does not have years to wait. It has promised to match "brick for brick" current plans for improvements in schools and hospitals; there are fast approaching European Union deadlines relating to waste and recycling targets which were to be met, in part, through PFI projects; and prison overcrowding means that the need for increased prison accommodation is critical. Either the PFI/PPP model continues to be used in the meantime, or the SNP is going to have to come up with something else.

Leaving aside traditional procurement, as that has always been and will continue to be an option for procuring authorities where it provides better value for money, any suggestion of the options available to SNP requires examination of its ideology. Although the SNP is critical of "PFI/PPP", the actual criticisms suggest that it is not PPPs per se that it has a problem with, rather PFIs – which are of course only a subset of PPPs. The main concerns would seem to be the cost of borrowing and the private sector "profiteering" out of equity stakes in the Special Purpose Vehicle (SPV) delivery company, not the collaboration with the private sector itself. Indeed law firms should note that the SNP does not appear to have ruled out working with the private sector to deliver projects, but unfortunately the distinction between PPPs and PFIs is often blurred. Even the Futures Trust proposals appear to be addressing the "evil" of the funding rather than the involvement of the private sector. On this assumption, there are two procurement models in use in Scotland which would fit with the SNP ideology and could be used to allow the stream of projects to continue pending resolution of the Scottish Futures Trust model. We acted for the procuring authorities in the pathfinders for each of these models and interestingly one of the main drivers behind each was addressing political concerns within the traditional PFI model – which creates an interesting parallel with what the SNP is trying to do now.

The first, the "not-for-profit" model was implemented for the first time in Argyll and Bute Council's Education PPP. This model is set up in contractually the same way as a PFI project, but any surpluses generated by the SPV delivery vehicle are ploughed back into education in the area via an educational charity – they are not paid out as profit to the equity holders. The benefits of PFI are retained in that the SPV is not paid until the schools are delivered. The schools must be maintained for a period of 25 years, with penalties if they aren't, and the procuring authority manages to spread the cost over the life of the contract. This model is has now been used on another signed project and is, we understand, being used on another which is at preferred bidder stage, so is known to be marketable. Even if law firms have not been directly involved in these projects, most PFI lawyers are aware of the not-for-profit structure.

Then there is the Hybrid PPP structure which is being used by Western Isles Council on their Education PPP. Again this model is contractually similar to a PFI project but the SPV delivery vehicle in this case is wholly council owned. Private sector experience is imported through a private sector development partner and a private sector director rather than through an equity stake. This model would address both the concern regarding profit on equity, and the concern over private sector borrowing, as all borrowing is done either by the council itself or its SPV. Whilst the Western Isles Council Project has not closed yet and is therefore not a model with which most PFI lawyers will be familiar, it has already been approved for use on another project by the Scottish Executive.

In addition to using these two models to keep projects moving in the immediate future, they could well provide the SNP with the start point or framework required for its Futures Trust proposal. The SNP now has the chance to iron out some of the politically unacceptable wrinkles of the current PFI model, and where some of the thinking has already been done by lawyers and other advisers, it should be used.

To maintain political momentum, the SNP has to introduce an alternative to PFI sooner rather than later – and it is likely that regardless of form, this will be labelled the Scottish Futures Trust. It is therefore inevitable that PFI as we know it will – particularly if the use of the Scottish Futures Trust is mandatory – will gradually be consigned to history and law firms will have teams of "SFT" rather than "PFI" lawyers What we have probably not seen the end of, however, is the PPP and the hope is the SNP uses the alternative models already in circulation to keep large projects moving. This would present a picture of a party moving in the direction promised pre-election, maintaining momentum on capital investment but doing so in a way which is marketable, while giving itself time to thoroughly think through and develop a new model which it finds more politically acceptable.