Potential dangers of public sector investment in hub sub debt

Stephen Richard — Mon, 06 Sep 2021 21:55:21 +0000

Primary Author or Creator

Jim Cuthbert

Stephen Richard Mon, 09/06/2021 - 22:55

Additional Author(s) / Creators

Common Weal

Alternative Published Date

April 2017

Category

Finance

Type of Resource

Policy Paper

Fast Facts

Jim Cuthbert analyses the potential dangers of Scottish Government investment in Hub sub-debt, which may act as a form of ‘concealed’ borrowing from the secondary market.

More details

― Hub is a form of public-private partnership set-up by Scottish Futures Trust which uses private finance to fund the building of public projects now to then be paid back based on future revenue payments (and is therefore off the current Scottish Government’s balance sheet). Over £2 billion of Hub investment is currently ‘live’.

― 90% of Hub capital is raised from senior debt – commonly bank loans. 10% comes from subordinate debt, which is the risk capital of the project and therefore raises a higher rate of return than senior debt (currently 10-11%). 40% of this sub-debt can be invested in by the public-sector or bodies allied to the public sector.

― The likely purpose of investing in the Scottish Government’s own debt is the potential to sell the sub-debt holdings on the secondary market. This offers attractive possibilities for the public-sector, but also potential dangers.

― The attraction of this is that it can act as a ‘concealed’ form of borrowing, as the secondary market investment can create a cash flow that can be used now. Additionally, the capital sum received by the public sector bodies from the secondary market could total somewhere in the region of 2 to 2.7 times the original investment.

― However, there is also potential dangers of this approach. First, a perverse incentive could arise since the greater the difference between the original interest rate on sub debt, and the secondary market rate, the greater the capital return on a secondary market sale. This might mean the public sector may not adequately scrutinise the original rate of interest on sub debt, resulting in it being set too high. Private financiers on the original investment would therefore be making excessive, unearned profits. Second, the ‘concealed’ borrowing rate from the secondary market may be higher than what it would cost the government to borrow from elsewhere. Finally, this form of borrowing could operate outside of the normal prudential scrutiny on government borrowing, raising potential dangers in how the money is used and whether the public interest is being served.

― In order to address this, mechanisms should be established for monitoring. First, the internal rates of return and the phasing of payments on Hub sub debt should be published. Second, there should be mechanisms for evaluating whether sub-debt interest rates are too high. Third, any sales of Hub sub-debt on the secondary market from any public-sector (or public sector allied) bodies should be made open, including both the capital value realised and the implicit internal rate of return.

― There should also be active arrangements for assessing the results of such monitoring, including the potential for active government intervention to change course if necessary. This requires ministerial responsibility and Scottish Parliamentary oversight, through the Finance Committee. There should also be an active debate now about what sort of performance the public-sector should expect from Hub sub-debt, in order to assess success criteria.

Resource Address (URL)

https://commonweal.scot/wp-content/uploads/2017/04/Potential-dangers-of-public-…

Keywords

Scottish Futures Trust

Public Private Partnerships

Scottish government borrowing

Profits

Hub sub debt

Language English

Public Procurement in Scotland: The case for scrutiny, accountability and transparency

Stephen Richard — Mon, 06 Sep 2021 21:42:14 +0000

Public Procurement in Scotland: The case for scrutiny, accountability and transparency

Primary Author or Creator

Margaret Cuthbert

Stephen Richard Mon, 09/06/2021 - 22:42

Additional Author(s) / Creators

Common Weal

Date Published

Tue, 05/09/2017 - 12:00

Category

Scottish government

Type of Resource

Policy Paper

Fast Facts

Leading economist Margaret Cuthbert draws on 15 years of research on Scottish public procurement in making the case that procurement in Scotland is shrouded in secrecy and wide-ranging reforms are needed to ensure transparency and accountability.

More details

― Why is it that our public representatives are signing up to contracts where the public cannot see the terms of the contract? In the few cases where we have finally been given access to a contract and its financial model, we have found serious problems.

― Why is it, in the cases concerning public procurement, we continually have to resort to Freedom of Information requests which is time consuming, rarely frees the information requested on major public procurement projects, and of no benefit in regard to getting changes made in any existing contract? Helpful answers to requests for information concerning contracts and financial models have rarely been forthcoming.

― The third issue concerns the very powerful role that is being played by the Non-Departmental Public Body (NDPB) and the Scottish Futures Trust (SFT) in the public procurement of major projects. The SFT, set up in 2008, is a private company. It now has a major role in Scotland’s public sector build, maintenance and servicing of projects. Its presence in the procurement chain has resulted in the public finding it difficult, if not impossible, to scrutinise the decision-making process on the facility being built; the process of handing out contracts; the financial aspects of the contract; the effect that the project will have on the local community including on jobs, and on local businesses; and importantly the long term effect this is having on Scotland’s financial well-being and the ownership of what was once regarded as essential public goods.

― There appears to be no analysis of whether the methods now being used for public procurement of major projects are constructed in such a way that local businesses are missing out on the architectural work, on the maintenance and services work, and, for example, potentially innovative work that could lead to other contracts. Local businesses are involved but are far down the food chain and may not be in as advantageous a position as is desirable for them to grow and develop as they might otherwise have done.

― The fifth issue considered concerns the methods used by the Scottish Government, Health Boards, Prisons, and Local Authority Councils to raise finance for public procurement. The lack of Whole of Government Accounts for Scotland means that we have no idea what the effect on Scotland’s long term level of debt will be from these projects.

― The final issue concerns the need for a strengthening of the role which needs to be played by the relevant Parliamentary Committees in dealing with economic and financial issues.

― This paper is based on what information has been made available through published documents and through Freedom of Information and other requests on each of the above six areas. It draws on research carried out by Jim Cuthbert and I over the past 15 years.

Resource Address (URL)

https://commonweal.scot/wp-content/uploads/2017/05/Public-Procurement-in-Scotla…

Keywords

Scottish public procurement

Public procurement

Freedom of Information

Scottish Futures Trust

Public procurement finance

Government transparency

Accountability of government

Government accountability

Language English