Scottish ministers have cut £400m from their spending plans after four privately financed building projects, including two new hospitals, ran foul of European Union spending rules.

Ministers were forced to reclassify the funding of a new children’s hospital in Edinburgh, an acute hospital in Dumfries and a new blood transfusion service headquarters as public projects after the Office of National Statistics said the Scottish government’s private financing model breached EU rules.

Ministers shifted the three projects onto the public accounts after the ONS ruled last year that one of the government’s biggest projects, the £1.45bn Aberdeen western peripheral route (AWPR) bypass, was not truly a private project due to the high level of government control.

The ONS has yet to rule formally on whether the two hospitals and the blood transfusion service HQ breach the same EU rules. However, they are all built under the same private finance system devised by the Scottish Futures Trust – a government quango – so the Scottish government has pre-empted the anticipated ONS decision.

Caroline Gardner, Scotland’s auditor general, said in this year’s Scottish government consolidated accounts that putting these projects onto the public accounts had led to a cut in capital and day-to-day spending of £283m last year and £109m in 2014-15, totaling £392m.

That £283m lost last year effectively wiped out the first tranche of the Scottish government’s new capital borrowing powers, agreed under the Scotland Act 2012.

Gardner disclosed that Scottish ministers will need to find further capital funds to cover future capital spending on all four projects, as well as finance the capital projects which were postponed to help balance their overall budget.

The full lifetime costs of the three health service projects are expected to reach more than £1bn in capital borrowing, interest and service charges, according to Scottish government forecasts. Their capital costs are put at £395m, plus a capital cost of £469m for the AWPR.



Gardner said the unexpected capital charge caused a direct reduction in the cash available to ministers in Edinburgh for other projects. In order to make up for other shortfalls, they also had to: release contingency funds for the new Firth of Forth bridge, currently behind schedule; reduce planned loans to Scottish Water, which is publicly controlled; and postpone uncommitted grants.

In a parallel development, the Scottish government is drafting new legislation to prevent future borrowing for new social housing being put on the public accounts after social housing debt also ran foul of the same EU regulations.

The ONS said on Thursday that £4.5bn worth of Scottish housing debt counted as public debt, as did such borrowing in Wales and Northern Ireland. The move follows a similar ruling for English social housing borrowing made last year.

The Treasury has told Scottish ministers that £4.5bn will not be added to the Scottish government books. Officials in Edinburgh admitted, however, they did not yet know whether the ONS would agree that the new legislation would satisfy the EU regulations.

Gardner said that overall the Scottish government’s accounts, which covered total spending of £37bn, were healthy and well-managed. She said ministers were improving the transparency and authority of their budgets now that Holyrood has substantial new tax and welfare powers worth around £15bn.

However, she added that ministers had yet to publish the more detailed public sector accounts required under the terms of the fiscal framework deal with the UK government earlier this year.

“While recent developments show the Scottish government is heading in the right direction, there’s much still to do to ensure that the Scottish parliament, and the public, have the information they need to fully understand and scrutinise the implementation of the new powers, especially the new tax and spending choices,” she said.

Gardner revealed, however, that ministers had lost £14m from the EU after bungling structural funds rules for business growth and skills packages. It also faced further financial penalties after a new £178m IT system for farm subsidies was badly botched.