3.1.3 The on-going availability of public sector capital funding was at an inadequate level to facilitate the required level of investment and no further funding of this type was available from central Government. At the time, the U.K. Government and subsequently the Scottish Executive, were actively promoting PPP as their favoured route and were implementing a scheme called 'Levelling the Playing Field' under which they were offering the City of Edinburgh Council an ongoing contribution of £6.2m towards the annual revenue cost of the PPP1 project. This contribution made the PPP scheme affordable to the Council.
3.1.4 In making their decision to use PPP, the Council were aware that this procurement model had recently been successfully used by other Local Authorities in Scotland to replace worn out school infrastructure.
3.1.5 An Outline and Final Business Case had been prepared by the City of Edinburgh Council in accordance with the required procedural guidance, which demonstrated that the PPP1 process represented value-for-money. These business cases received formal approval from the Council itself, Audit Scotland and the Scottish Government.
3.1.6 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.
3.1.7 The following is an extract from a 2002 Report produced by Audit Scotland entitled, 'Taking the Initiative - Using PFI Contracts to Renew Council Schools'. (For the purpose of this Inquiry, the terms Private Finance Initiative ("PFI") and PPP are used interchangeably). It read:
"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.
A further consideration is the inevitable subjectivity that surrounds judgements on which the PSC costings are based and wider decisions regarding the respective merits of the PFI and any alternative solution to providing new schools. Under the terms of the competition for financial support from the Scottish Executive for PFI projects, no funding for the PSC was available. Consequently, if the PSC had suggested that the PFI was not economic it would have proved fatal to the project (no PFI schools project has so far failed this test)."
3.1.8 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.
3.1.9 In the case of the PPP1 Project, the fact that the costs, associated with the remedial works arising from the collapse of the wall at Oxgangs and the discovery of defective construction in all 17 schools, and the responsibility for implementation of the necessary remedial works have been borne by ESP, demonstrates the application of risk transfer to the Private Sector.
3.1.10 The conclusion of the Inquiry on this first part of Remit Item 1 is that, given the above context, the City of Edinburgh Council had a sound rationale for their decision to adopt the PPP methodology for the funding and procurement of the PPP1 schools and acted both appropriately and pragmatically in making this decision.