The SNP outlined proposals to replace the private finance initiative with a ‘Scottish Futures Trust’ in the summer of 2006, while still in opposition. Then, the Nationalists were bold and assertive: the “folly” of PFI would be brought to an end; public facilities would remain in the public sector; new infrastructure would be held in trust for the nation, and public bonds raised for new investment. Under Alex Salmond and Co, there would be no “unnecessary” private profit from public services. But, at the end of last year, the SNP government issued more detailed plans for it’s the investment vehicle, and these describe a very different kind of entity. Most significantly, the Futures Trust will no longer be a public body; it will sit in the private sector. Though the vehicle will operate on ‘non-profit distributing’ principles, and with some form of undefined ‘public ethos’, its main role will be to act as a private conduit for private investment, delivered by equity bureaux, banks and the capital markets – the very institutions, in fact, that finance standard PFI schemes.

The body has to sit in the private sector, the Scottish government now explains, because this is the only way that the investment it delivers will be allowed to take place off the public sector books – that is to say off the Scottish government’s capital budget and away from the British government’s public debt figures. To an extent, this argument is a reasonable one: under current legislation, Scotland has an expenditure limit that is unable to support big capital programmes, and the country can’t borrow or issue bonds – even for new investment. These capital constraints stem from the Treasury’s ‘sustainable investment rule’, which sets the ratio of public sector net debt (PSND) to gross domestic product (GDP) at 40 per cent. As off-balance sheet finance does not normally score against PSND, financing through a private entity such as that proposed by the Scottish government provides a way of getting round the 40 per cent target.

This logic underpins the argument that private finance, while more expensive than government borrowing (‘sovereign debt’) provides ‘additional’ investment. This argument has been politically important since New Labour controversially took on PFI policy from the Conservatives in 1997. However, had the SNP administration chosen to challenge the basis of these constraints – as it hinted it would prior to last May’s election - it would have had a very strong case. While the 40 per cent ratio has political significance for the British government (being roughly the figure Labour inherited from the Tories) it is not underpinned by any convincing economic rationale, as the Institute of Fiscal Studies (IFS) has pointed out.

In a 2001 paper on the government’s fiscal rules, the IFS states: “The government has provided no justification for a net debt target of 40 per cent of GDP - it could just as easily have chosen 38 per cent or 42 per cent.” Indeed, the European Union’s Stability and Growth Pact - widely seen as conservative - caps “gross government debt” at 60 per cent of GDP, which “is consistent with public debt being considerably higher than the level set by the British cap”.

Meanwhile, as the Scottish government acknowledges, there is no guarantee that private finance raised through the Futures Trust model will, in fact, be off-balance sheet. The British government is moving from GAAP to IFRS accounting standards this year, as a result of which the bulk of investment undertaken through private finance will come on-balance sheet and begin to score against capital budges and public debt.

The consultation document acknowledges that “the changeover to IFRS is likely to make more difficult the task of designing an [Trust] which would continue to provide additionality of investment.” But since there is no obvious solution to this, it adds, rather lamely, that “the proposals will be developed in the light of the final IFRS outcome.”

The current plans for a Futures Trust are the product of a working group led by the Scottish government’s financial partnerships unit, which has for many years been in charge of the country’s PFI programme. Another influential voice has been Partnerships UK, the public-private partnerships agency, which is majority-owned by a group of private financiers. Shareholders include the Royal Bank of Scotland and the Bank of Scotland - both leading players in the PFI programmes in the UK and indeed globally.

With such input, it is no surprise that the proposals now issued can be understood and even welcomed the PFI industry.

While the details of the Futures Trust model are being worked on, the current PFI programme has been allowed to roll on. Privately financed schemes on the brink of reaching completion have been allowed to proceed. A contract for a £200 million schools scheme for Dumfries and Galloway, for example, was signed in January, with government approval. For less advanced schemes that were earmarked to go ahead as PFIs, most will go ahead, but bidders will be asked to re-submit proposals on the basis of so-called “Non-Profit Distribution”.

This form of public-private partnership is becoming more familiar to the PFI industry, having being piloted in the schools sector and more recently in healthcare. The model structure involves the creation of a PFI-style private Special Purpose Vehicle (SPV) – essentially a bespoke business established to undertake a project – but unlike in traditional PFI these involve no equity capital. Instead of project companies receiving profits in the form of shareholder dividends, investors take their money through returns on loans provided to the SPV.

Evidence suggests this form of public-private partnership does not lead to lower levels of profit-making than PFI. On the Argyll and Bute grouped schools scheme, for example, where the model was trialled, the project’s ‘internal rate of return’ was more than 15 per cent - which is about the norm for the mainstream PFI market. Interest rates on the bank loans were in the normal range, but in part this was due to the involvement of the European Investment Bank, which can secure cheaper sources of finance. In general, for this type of scheme, senior debt margins may be higher due to the absence of an equity capital “buffer”, which means banks could be exposed to higher levels of risk.

The move to non-profit distributing PPPs looks like a political, rather than a practical, change. It allows the SNP to claim that they are doing something different to their predecessors – something which looks, at first blush, more in tune with Scotland’s social democratic instincts (this, by the way, is highly dubious since the model was in fact developed by the previous administration). Meanwhile, it allows the existing programme of investment schemes in health and education to move forward, without worrying the industry too much.

There is some complexity here, however. NHS Greater Glasgow has just launched at Outline Business Case for a £700 million-plus project to replace its Southern General and children’s hospitals. On current plans, this project is to be delivered through public financing. If ministers sign off the plans, this will be the first time since 1997 that an NHS project of this scale has been taken forward outside of the PFI programme. It is hard to believe that this could have happened under the previous administration, and it is extremely unlikely indeed that this could happen currently in England. The NHS in Scotland appears to be alert to the fact that there are signs of a more pragmatic approach to financing under the SNP.

It remains unclear how the SNP intends to merge any conventional and Non-Profit Distributing projects into its Futures Trust vehicle. As noted, it is intended that the body will operate along non-profit distributing lines, and it may be that the Trust will enter into projects as a programme-level financier, replacing the current system of project-specific finance provision. To an extent, the Futures Trust could be a Scottish version of the Republic of Ireland’s National Development Finance Agency, which was set up in 2003 as a way of centralising the country’s myriad investment initiatives.

The NDFA advises public authorities on the best way of funding their major projects, and provides leadership in co-ordinating the Republic’s PPP policy. It also has the power to raise funding itself or through special purpose companies up to a total of €5 billion. However, while the NDFA has never used its financing powers.

In contrast, however it is set up, the financing function will clearly be core to the Futures Trust. The Scottish government states that, as a central financing vehicle, the Futures Trust will be able to deliver cheaper finance than project financing, through “aggregating demand” and providing investors with aggregated risks. The company would use margins around commercial lending rates to meet its costs and, in certain instances, would be allowed to generate surpluses for investment in further projects. However, as a non-profit distributing entity, there will be no provision for uncapped equity returns under the body’s Articles of Association.

It will also “provide a centre of expertise for best practice advice and support to public authorities on the planning and delivery of infrastructure investment projects.” How this will impact on the role of Partnerships UK – which carries out exactly the same role currently - remains unexplained, but given the agency’s intimate involvement with the plans, it is hard to believe they won’t be involved in some capacity. The practical impact of the Futures Trust as it currently stands is that private financiers will no longer be involved in project finance – rather, they will be financing whole batches of capital investment through the Trust.

This will be unfamiliar territory for business though it may not be unwelcome. For institutional investors, it may help to de-risk portfolios – and there is no suggestion that they will receive a lower level of profit for their trouble. For banks, it will have the same effect, but as noted risks and margins for them could increase because of the absence of equity in projects.

More confusing is the proposal to allow the SFT to operate all new public infrastructure – and provide facilities management services within it. This idea looks like an attempt to replace a conventional market for services with a private sector monopoly. The economic rationale for such a move is unclear, since the alleged benefit of contracting is that efficiencies are driven into activities through the competitive bidding process.

Public authorities may view the document with some alarm. Under current plans, not only will new facilities be operated by the Futures Trust, they will also be owned by it. With the trust in the private sector, this implies a major privatisation of public infrastructure which even the Tories, when developing plans for PFI (in which legal ownership of facilities remains in public sector hands), shied away from.

The current consultation on the Futures Trust ends of 14 March. Over the next few months, the government will be exploring the potential of the new model in primary health care, schools, housing, higher and further education and local government. It is clear that there are clearly many questions that need to be answered: on current plans, the model appears to have many of the defects of the standard PFI model (in particular, the involvement of expensive private finance), with perhaps a few new ones thrown in. Meanwhile, in the face of the continuing uncertainty over the balance sheet nature of private financing, the rationale for this policy is unclear.