Review of Scottish public sector procurement in construction

Appendix 3 - Approaches to construction by sector

Local government

Scotland's 32 local authorities were responsible for some £2.1 billion of spending on construction in 2011-12. The size and budget of the 32 authorities varies significantly, and consequently so does their level of spending on construction.

Each local authority has its own set of standing orders which determine how it carries out procurement - neither the provisions of the Scottish Public Finance Manual, nor the Scottish Construction Procurement Manual are mandatory for this sector.

Scotland Excel is the established centre of expertise for procurement in the local government sector. It is a non-profit organisation, funded by the 32 local authorities, and, as of April 2012, had a portfolio of 48 contracts with an estimated annual value of approximately £300 million ^[68] . To date, it has had limited influence in construction, although we understand that it is investigating the potential for it to increase that influence - indeed, it recently awarded a framework agreement for engineering and technical consultancy services.

Each of the 32 local authorities is also a participant in one of the five hubCos established across Scotland as a means of delivering capital investment. The structure and role of hubCos are discussed later in this appendix.

Health

There are 14 territorial NHS Boards, seven special NHS boards and one public health body in Scotland. Health Facilities Scotland is the Facilities Directorate of the Procurement Commissioning and Facilities Strategic Business Unit within National Services Scotland, and has established frameworks which NHS Scotland Organisations can call off from for the procurement of capital works. These frameworks can also be used by other health or public sector bodies for combined, or related health and social care projects.

There are a number of routes by which construction works are delivered in the health sector in Scotland.

The non-profit distributing ( NPD) model is used for large scale, acute facilities; Frameworks Scotland (awarded by Health Facilities Scotland) is used for publicly‑funded acute facilities and projects involving an element of refurbishment; whilst hubCos and the health boards themselves can deliver other facilities.

Frameworks Scotland comprises a framework agreement covering principal supply chain partners and also frameworks for professional services contracts covering the required disciplines for the form of contract. These frameworks cover the whole of Scotland, and the contracts are based on the NEC3 models. Individual health boards are not obliged to use Frameworks Scotland, but do have to justify their reasoning if they choose not to do so.

hubCos are discussed below. All territorial health boards are participants in one of the five hubCos. The agreements which underpin the creation of hubCos include "exclusivity thresholds", and the local hubCo should be offered the first opportunity to demonstrate a value for money and timely proposal for all relevant health board projects worth more than this threshold. The threshold for the first three hubCos to be established (South-East, North and East-Central) is £750,000, whilst for the final two hubCos (West and South-West), the threshold stands at £3.5 million.

Transport

Transport Scotland is the national transport agency for Scotland. The agency is responsible for overseeing the operation and improvement of:

• trunk road, ferry, inland waterway and railway networks in Scotland
• air passenger facilities and routes in the Highlands and Islands
• national concessionary travel schemes
• provision of travel information services
• future transport policy and investments
• promotion of sustainable transport and road safety

For new roads infrastructure work, Transport Scotland procures and manages a number of different types of contract models. These include private finance models such as non-profit distributing for some high-value, strategic infrastructure projects and capital funded fixed price, design & build and employer's design contracts.

Transport Scotland has contracts in place with operating companies who ensure the trunk roads are safe, efficient and well managed. These contracts are divided into four regional units and are currently operated by:

• North West - Operated by BEAR Scotland since April 2013
• North East - Operated by BEAR Scotland since April 2007 (contract extended to 31 March 2014)
• South East - Operated by BEAR Scotland since April 2007 (contract extended to 31 March 2014)
• South West - Operated by Scotland TranServ since April 2013

Operating Companies carry out all works up to a threshold value of £250,000 for the east contracts, and £350,000 for the west contracts. Between these values and £5 million, works are competitively tendered through the Operating Company Contracts.

Ministerial objectives for improving the Scottish Rail Network are taken forward in conjunction with the rail infrastructure owner, Network Rail. Arrangements are in place which enable Network Rail to maintain the infrastructure required to facilitate the train services and also deliver the agreed rail programmes, including the procurement of works and services for projects such as the construction of the Borders Railway and the Edinburgh Glasgow Improvements Programme .

Water

Scottish Water is the public corporation charged with managing Scotland's water network. It has an investment programme worth around £450-500 million per annum. Scottish Water Solutions is a joint venture delivery vehicle in which Scottish Water has a 51 per cent share ownership, with the balance held by delivery partners. It is currently the delivery vehicle for 30 per cent of the investment programme.

Scottish Water's investment priorities are set by Scottish Ministers, with the Water Industry Commission in Scotland providing a value for money challenge to Scottish Water's proposals for delivering on these priorities.

Scottish Water is primarily subject to the provisions of the European Utilities Directive, rather than the Procurement Directive.

Affordable housing

There is a complex landscape in the delivery of affordable housing in Scotland.

The Scottish Government's Affordable Housing Supply Programme ( AHSP) funds housing for rent and for low cost home ownership. The majority of funding is provided to Registered Social Landlords ( RSLs) and local authorities to build new homes for rent, although the AHSP also provides funding to improve existing homes, often as part of the wider regeneration of an area, and to others such as private developers.

All local authorities publish Local Housing Strategies ( LHS). These set out a strategic approach to addressing housing need and demand and inform the delivery of housing and related services over a five year period. Authorities supplement their LHS with an annual Strategic Housing Investment Plan ( SHIP) which is the key document for setting out the priorities for affordable housing investment at the local level over a five year period and provides the basis for targeting the AHSP funds locally to meet the desired outcomes as outlined in the LHS. A recent addition to the SHIP requirements is for a Strategic Local Programme to be developed which matches the SHIP priorities to available resources over a three year period.

The award of AHSP funding to local authorities and RSLs is administered by the Scottish Government Housing Supply Division, except in Glasgow and Edinburgh, where the two city councils administer the funding to RSLs within their areas as a result of the Transfer of Management of Development Funding. In 2011-12, total AHSP grant funding was £352 million.

There are approximately 180 RSLs registered in Scotland, of which we understand some 40-50 are actively engaged in development work at any time. Each RSL has its own constitution, policy and procedures and is governed by a voluntary committee.

There have been some sporadic attempts at collaborative procurement within the RSL sector. There are examples of this in West Lothian and Fife, where a model operates in which a lead RSL acquires sites, procures contracts and develops the projects. An agreement between partner RSLs identifies their roles and relationships, and also covers risk assessment, risk management and risk sharing. As part of that agreement, they identify and agree specific projects which will transfer from the lead RSL to other members at completion stage. After completion, the 'landlord' RSL or council then owns and manages their new housing. These approaches tend to be strategic in nature and have the support of the relevant local authority.

Most alliances under this model are not separate legal entities; they are generally a consortium and each RSL retains its own identity. Each RSL also retains responsibility for reporting to its own management committees. There are also less formal arrangements driven by some councils in which only a small number of RSLs receive funding for new developments.

Another form of collaboration is through the use of agency services. From Annual Performance and Statistical Returns submitted to the Scottish Housing Regulator we also know that 21 RSLs were using other RSLs' development services and 13 RSLs were using non- RSLs to deliver their affordable housing programme in the twelve months to 31 March 2012. Twelve RSLs were providing development agency services to RSLs and local authorities.

Central government

The remainder of central government and its agencies - such as the Scottish Prison Service and Scottish Court Service - is responsible for lesser amounts of direct construction spending, although it does take forward some large projects, like the construction of the new Scottish Crime Campus at Gartcosh.

The Scottish Procurement and Commercial Directorate performs a triple role as the Centre of Expertise for procurement within the central government sector, the National Centre of Expertise (awarding national contracts for stationery and utilities, for example), and as the policy centre for procurement.

The Scottish Government currently carries out very few construction exercises. It does, however, retain some residual professional construction expertise, whose focus is policy development.

Universities and colleges

Data from the Procurement Information Hub shows that universities and colleges spent at least £219 million on construction works in 2011-12.

We are told that universities tend, by and large, to carry out these exercises themselves - or at least to appoint consultants to act as project managers on their behalf. In the college sector, in-house expertise tends to be more limited and the reliance on external funding greater, and so the Scottish Funding Council has in the past taken a much stronger role in overseeing capital projects. The three large college projects currently underway, however - in Kilmarnock, Inverness and Glasgow - are all being delivered by the non-profit distributing model, with support from the Scottish Futures Trust.

The established centre of expertise for this sector is Advanced Procurement for Universities and Colleges ( APUC). APUC has a small team which can support capital projects in colleges, although we are told that their focus is increasingly involved on maintenance and general estates management work. There is a strong relationship between APUC and directors of estate in the sector.

Scottish Futures Trust

The Scottish Futures Trust ( SFT) was established in 2008 as a limited company wholly owned by Scottish Ministers, with the aim of improving the efficiency and effectiveness of infrastructure investment in Scotland. It works collaboratively with a range of public bodies to deliver innovative financing for infrastructure investment, particularly through the delivery of the non-profit distributing programme of works; the National Housing Trust; and works funded by tax incremental financing.

Taken together, these three programmes represent more than £3 billion of public sector investment ^[69] , which makes SFT a very significant player in the Scottish construction sector.

Whilst SFT is wholly owned by Scottish Ministers, and is therefore subject to the provisions of public procurement law, its arms-length status does give it some more latitude in some aspects of its operations - such as its ability to recruit outwith the boundaries of civil service restrictions.

In addition it works to support public bodies with property asset management, through supporting the hubCo programme and facilitating the Schools for the Future programme.

hubCos

There are five regional "hubCos" in Scotland. These are institutional public private partnerships owned 60 per cent by a private sector partner, 30 per cent by the public sector partners within each of the five territories, and 10 per cent by the Scottish Futures Trust. The rights to the private sector share ownership in each of the hubCos were competitively tendered and a diverse range of public sector partners are involved, for example health, local authorities, emergency services and RSLs.

The aim of this approach is that:

"Each hubCo will take a strategic, long-term planning approach of its infrastructure requirements to support the delivery of community services. hub will provide a mechanism for delivering and managing assets more effectively, with continuous improvement leading to better value for money, which will be measured through detailed key performance indicators" ^[70]

There is an "exclusivity threshold" set for NHS primary and community-based projects within each hubCo area, which means that the local hubCo should be offered the first opportunity to demonstrate a value for money proposal for all relevant health board projects worth more than this threshold. The threshold for the first three hubCos to be established (South-East, North and East-Central) is £750,000, whilst for the final two hubCos (West and South-West), the threshold stands at £3.5 million.