Economist Jim Cuthbert raises concerns that lack of openness means we just can't know if we're getting the best value for money out of Government borrowing arrangements – and that this problem will get worse if it isn't addressed
AN IMPORTANT ISSUE about the use of the Scottish Government’s new borrowing powers in 2015/16 seems to have slipped largely under the radar: and yet this issue very much highlights the need for greater openness and scrutiny – particularly in relation to the non-profit distributing (NPD) schemes being carried out under the Scottish Futures Trust (SFT).
In 2015/16 the Scottish budget included, for the first time, provision to borrow a significant amount for capital investment: the actual amount was £306m. This was a new power delivered under the Scotland Act 2012.
How has the Scottish Government used this new power? Well, actually, thereby hangs an interesting tale – because in July 2015, something else very significant happened. The Office for National Statistics (ONS) decided at that point to classify the Aberdeen Western Peripheral Route (AWPR) NPD scheme as being “on the books” of the public sector, in government accounting terms, rather than being “off the books”, as the SFT had hoped.
This meant that up to £280m of expenditure on this and similar NPD projects threatened to be an unexpected charge against the Scottish Government’s capital budget in 2015/16. To manage the problem, the then Finance Secretary John Swinney did a deal with the Treasury: this expenditure, rather than being a charge against the Scottish government’s capital budget, would be recorded against the Scottish government’s new borrowing limit.
This expenditure, rather than being a charge against the Scottish government’s capital budget, would be recorded against the Scottish government’s new borrowing limit.
What this means is that, instead of using its new borrowing powers to borrow from the National Loans Fund at an interest cost of around two per cent, the Scottish Government is instead using the new powers to enable the “borrowing” element in the private sector financing of the new AWPR to take place.
This whole issue, and its implications, seems to have largely escaped the public’s notice, although John Swinney did write a letter to the Finance Committee on 4 March 2016 letting them know what was happening. However, there was no discussion of the issue in the committee’s consideration of the revised Scottish Budget at its 9 March meeting.
It may well be that John Swinney had no option other than to take the course that he did – given that the AWPR scheme was well underway when the ONS launched its googly, he would not have had any realistic chance of re-arranging the financing of the scheme. But the mechanism used nevertheless raises important issues – which need to be addressed.
The first question that arises, therefore, is – did the Scottish government know what the financing costs implicit in the AWPR project were when it made its deal with the Treasury?
As already noted, what John Swinney’s decision means is that the Scottish government has lost the ability to fund around £300m of capital investment at NLF interest rates of about two per cent – in order to enable the private sector to finance the AWPR and related projects at the interest rates, and associated costs, implicit in the AWPR project.
The opportunity cost of this decision, therefore, depends on the relative cost of NLF finance, versus the cost to the public sector of paying that element of the AWPR unitary charge which will cover the private sector’s financing costs. The first question that arises, therefore, is – did the Scottish government know what the financing costs implicit in the AWPR project were when it made its deal with the Treasury?
(And it is not just the AWPR interest rates that they needed to know: they would also have needed to know the scheduling of the AWPR financing payments.)
If they did not know this detail, then they could not be confident that they were reaching a reasonable decision when they did the deal. If, on the other hand, they did know this detail, then it should be released, so that we can be aware of the true costs implicit in the deal with the Treasury. Either way, more information needs to be released.
The Scottish Government is instead using the new powers to enable the “borrowing” element in the private sector financing of the new AWPR to take place.
The second issue which this deal highlights is the question of why the dog, in the shape of the Finance Committee, did not bark. Why did the committee not pursue the implications of this issue at its 9 March meeting? This raises serious issues about the adequacy of parliamentary scrutiny arrangements for devolved financing.
The final issue relates to the question of the lack of openness with regard to NPD projects, and the operation of the SFT. Commonweal itself, in its Open the Books campaign, identified this as an important topic in its responses to the recent GERS consultation carried out by the Scottish government (this consultation covered the wider operation of devolution financing, not just GERS itself).
The only way future NPD projects can be “off the books” is if the role of the private sector in these projects is further increased, probably in a way which makes them look more like old PFI projects:
Around 50 responses to the consultation from Commonweal supporters argued for greater openness about NPD projects. The government’s response to the consultation was inadequate. It did provide, in the most recent GERS report (published in August) some more detail on the unitary charge payments stemming from NPD projects. But this information in itself is totally inadequate to enable the financing costs of NPD projects to be determined.
As was argued forcibly in submissions to the consultation, what is required is that unitary charge payments for individual schemes are split down into their separate financing and non-financing elements, and the phasing of these elements through time must be given. The need for better understanding of the implications of John Swinney’s deal with the Treasury is just one, very graphic, illustration of why the Scottish government needs to re-open the wider aspects of its GERS consultation, and reconsider its inadequate response.
As was argued forcibly in submissions to the consultation, what is required is that unitary charge payments for individual schemes are split down into their separate financing and non-financing elements, and the phasing of these elements through time must be given.
It is important to note, too, that if the SFT manages to change the governance of future NPD projects to get then “off the books”, this does not make the need for openness disappear – in fact, it increases it. The only way future NPD projects can be “off the books” is if the role of the private sector in these projects is further increased, probably in a way which makes them look more like old PFI projects: this means it will be even more important for proper monitoring arrangements to be in place.
Overall, what the issue described in this note illustrates is the need for the Scottish government, and the Scottish parliament, to get to grips now with the much greater degree of openness, and the more stringent scrutiny, which are both required if the various new aspects of devolution finance are to operate satisfactorily.
Read more of both Jim and Margaret Cuthbert’s economic analysis at jamcuthbert.co.uk