Jim and Margaret Cuthbert: The mysterious tale of Edinburgh City Council and the shoddy PFI schools

Economists Jim and Margaret Cuthbert raise serious concerns about a refusal to release information to the public to protect commercial relationships

IN assessing any PFI deal, an examination of the financial modelling is critical, in particular, because it is in the financial modelling that the vitally important question of risk transfer comes in: who bears the risk of any problem?

Experience with other PFI schemes indicates the importance of the public being able to assess the financial details of PFI projects: in our case this included Hairmyres Hospital, (which we dubbed one hospital for the price of two) and the Edinburgh Royal Infirmary. 

Making public the information previously locked up in the financial models greatly increased general awareness of what was actually going on in PFI. It was very gratifying, for example, when Rory Bremner used the information in a brilliant TV skit on the state of PFI.

There can be few more critically important PFI schemes just now than the Edinburgh schools. The nature of the construction failures makes this literally a potential matter of life and death.

There can be few more critically important PFI schemes just now than the Edinburgh schools. The nature of the construction failures makes this literally a potential matter of life and death.

So can the public get at the financial details in the Edinburgh schools PFI project? The answer is no.

Most of us are familiar with the Edinburgh PFI schools’ problems, but to recap: between 2002 and 2005, 17 new or refurbished and extended schools in Edinburgh were completed as part of a public private partnership arrangement, PPP1, between the City of Edinburgh Council and ESP, the special purpose private sector company formed to deliver the project. 

In 2016, an external wall in one of the schools fell down, and further tests showed problems in other schools. There was then considerable disruption affecting children, young people, teachers and other staff, and parents. The cost was considerable, and must have had an effect on the nerves of those students preparing for their final school exams.

Two separate requests we made to the council to obtain the contract and the financial model have met with a refusal.

So can the public get at the financial details in the Edinburgh schools PFI project? The answer is no. Two separate requests we made to the council to obtain the contract and the financial model have met with a refusal.

A Freedom of Information request made to the Council for these documents in June 2016 was refused on the grounds of confidentiality.

"On balance the council has concluded that in all circumstances, the public interest in making the information available is outweighed by the commercial and confidentiality considerations which weigh in favour of non-disclosure."

However, there is now a 15-year limit on the normal length of time for documents to be held in secrecy by the public sector before they become "public records": so we renewed our request to Edinburgh this autumn, in the knowledge that the 15-year period for the Edinburgh schools contract would have passed. 

But we were wrong to have assumed that the 15-year limit would actually mean anything in this case. The following was the reply we received: "I can confirm that we hold the full contract and the financial model, however, under the terms of the legislation, a request for information can be refused where one or more exceptions listed in the legislation apply. 

"In this instance, the council is claiming the following exception to the information that you have requested: Regulation 10(5)(e). This exception applies to information where disclosure would, or would be likely to, prejudice substantially the confidentiality of commercial or industrial information where confidentiality is provided for to protect a legitimate economic interest."

READ MORE: Campaigner calls for halt of private finance projects in wake of Edinburgh schools debacle

Worryingly, the FoI refusal letter also states: "If this information were to be disclosed in response to this request this would be likely to prejudice substantially the commercial interests of the council and its partners." 

And, "in all the circumstances, the public interest in making the information available is outweighed by the commercial and confidentiality considerations which weigh in favour of non-disclosure."

Ah, one might ask, what are the explicit commercial interests of the council that rank higher than the public getting information concerning a deal which the council entered into and which we are going to be paying for 25 years? 

Despite clear deficiencies in the school buildings and the horrific consequences that could have ensued from them, the council appears determined to keep the information secret for as long as it possibly can. Maintaining secrecy like this actually does the council no favours. 

What secrecy does is to raise the natural response: has the council something to hide? Alternatively, is the council’s stance a result of signing a contract to maintain the commercial confidentiality of its private partners? And in the last resort, what right had it to do that when it is we the public who are paying?

Despite the Scottish Government’s apparent commitment to Freedom of Information, and its pride in the 15-year rule – none of this matters in practice in a critically important case such as Edinburgh schools.

Further enquiries to the public procurement division at the Scottish Government showed that the 15-year deadline was indeed intended to be a deadline. It was not even expected that those covered by Freedom of Information, and that certainly included the City of Edinburgh, would hold on to the last minute before releasing information. 

However, the reality is rather different. Despite the Scottish Government’s apparent commitment to Freedom of Information, and its pride in the 15-year rule – none of this matters in practice in a critically important case such as Edinburgh schools, and the information remains locked up under a commercial confidentiality exemption.

But perhaps we are being too negative. After all, while the council is determined to maintain secrecy on the detail of the contract, it did commission an inquiry to look at what went wrong. Surely, we should be relying on that inquiry to have gone thoroughly into all relevant matters, and to have drawn the appropriate conclusions?

The inquiry was chaired by John Cole, an architect from Northern Ireland who has been deeply involved with public procurement and PFI. One would expect that the inquiry would have gone adequately into the financial details in the handling of risk. 

Unfortunately, the answer here is no, particularly as regards the effect of the funding method, and the assessment of risk transfer.

The information remains locked up under a commercial confidentiality exemption.

The inquiry chose to use a 2002 statement by Audit Scotland to justify ignoring the method of finance as playing a critical part in the schools building failure. The inquiry stated: "Audit Scotland's analysis is that, in most cases, the main costs underlying the PFI option are not significantly different from or are higher than the equivalent forecast costs under the PSC. 

"In most cases the risk adjustment tipped the balance back in favour of the PFI option."

The Inquiry also made the point: "The comparison of the PPP option with a public sector funded option (the public sector comparator or 'PSC') was a mandatory aspect of this business case process. However, local authorities knew in advance that, even if the publicly funded option was found to be better value for money, this was not a realistic option due to the non-availability of public sector funding. 

"It is perhaps not surprising therefore, that following the risk adjustments required by the process, the PPP option frequently became less (rather than more) expensive than the public sector option."

What the inquiry is effectively saying here is that, since PFI was the only game in town, it is common knowledge that risk assessments were often fudged in PFI business cases to make sure that PFI offered the cheapest option. 

READ MORE: Journalists unite with open letter damning Scottish Government handling of FoI requests

The inquiry then used this general principle to justify not examining in detail the risk assessment actually carried out in this specific case. It used the following breathtaking statement to justify not looking in detail at the Edinburgh schools risk assessment: "From the evidence provided to the inquiry, it would appear that an objective and professional approach was taken by the council, with the support of their external consultants, to the assessment of the value of the risk being transferred to the PPP company. The inquiry has not sought to rerun that somewhat complicated process."

So there we have it. It is not just that the public is prevented from evaluating the adequacy of the risk transfer assessment in this case because of failings in Freedom of Information: in addition, the inquiry commissioned by the council chose not to look in detail at the risk transfer component. 

In doing so, it ignored the submission we had made to the inquiry pointing out that the nature of the scheme actually transferred risk to the public sector. The inquiry casually brushed aside substantive work in the PFI systems as if it was of no relevance to the Edinburgh schools fiasco.

But another very important point is: under the PFI system, was it reasonable to expect the council to carry out proper due diligence? On this point, the inquiry stated: "The inquiry is of the view that a fundamental weakness of the process adopted was the lack of properly resourced and structured scrutiny of the building work at an appropriate level of detail by the external appointment or direct employment of those with requisite experience acting on behalf of the City of Edinburgh Council. 

"There was an over-reliance on the part of the council, without adequate evidence, that others in the project structure, including those building the schools would comprehensively fulfil this essential role."

There is still a need to open up the details of the financing, and more generally, there are lessons to be learned for any future PFI-style projects. 

This conclusion does not tell the whole story. The inquiry and the chair should have been well aware that, under Treasury rules, the public sector is limited in the extent it can check on detailed progress during the construction phase of a PFI project. 

As guidance issued by the Treasury on PFI contracts states: "It will not be appropriate for the authority to adopt the type of overseeing role it might traditionally expect to have when procuring stand-alone construction or development services". 

This shows that local authorities were encouraged to have a hands-off approach to PFI projects as otherwise the question of the transfer of risk to the private sector, which is an essential part of the rationale for PFI, becomes clouded.

The effect has been that the public sector has relied on the mechanisms for checking the quality of construction which are built into the contract: and this may well increase the risk of defects going undetected relative to what would happen under traditional public sector procurement.

So what do we get out of the above sorry story? First, as we have shown, it is too early to draw a line under the Edinburgh schools PFI disaster. There is still a need to open up the details of the financing, and more generally, there are lessons to be learned for any future PFI-style projects. 

The present Freedom of Information system in Scotland lacks any teeth with regard to helping the public get to grips with public procurement in Scotland.

The PFI system itself harboured a construction process which automatically limited the due diligence which the public sector customer, like all customers, needed to carry out on the project. 

Not only was the public sector prevented from so doing by the PFI system, but through time these essential skills have been lost to the public sector.

The inquiry’s conclusion that "the method of financing the project, per se, did not negatively influence the quality of construction in the Edinburgh schools", is worryingly naive.

But above all, the present Freedom of Information system in Scotland lacks any teeth with regard to helping the public get to grips with public procurement in Scotland. Researchers and journalists alike have been stymied by point blank refusal by authorities to reveal contracts and financial projections of public sector procurement projects. 

There is a fundamental need to improve the terms of Freedom of Information. And for public procurement projects, the time period during which information can be withheld should be drastically shortened.

Unless changes are made in the FoI system, public bodies will continue to put up a smokescreen hiding the commitments they have made with private sector organisations, in construction and in finance. 

This situation is likely to get worse as public sector budgets are cut, but the authorities are obliged to continue making the PFI payments as first call on their budgets.

Picture courtesy of kaysgeog

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