In a headline announcement at the SNP annual conference in October 2023, First Minister Humza Yousaf announced a pledge to issue Scottish Government bonds before the end of the current parliamentary session – that is by the beginning of May 2026. The proceeds will be used to fund "vital infrastructure" projects in Scotland.

Colleagues recently wrote on this subject here with details of what is proposed. In this article, we take a further look at what, for those of us active in the Scottish infrastructure market, is an eye-catching development and at some of the hurdles the Scottish Government may have to clear before bringing such bonds to market.

What has happened since the annual conference announcement?

A month after the annual SNP conference the Scottish Government's Investor Panel published proposals entitled "Mobilising international capital to finance the transition to Net Zero". These proposals recommended that more regular investor engagement should be happening and that:

"Although it will involve additional costs, Scotland's profile could be significantly raised in the international capital markets by using existing devolved powers to issue debt".

The proposals also stressed that key to issuing such new debt would be a pipeline of projects "that are properly costed, shaped and prioritised", and stated that this needs to be "a real pipeline, not a wish list."

The following month, in December 2023, the Scottish Budget 2024 – 2025 was delivered to the Scottish Parliament. At the same time a Memorandum specifically addressing the use of infrastructure bonds and examining their potential when set against the wider fiscal context for Scotland and its evolving approach to the use of its borrowing powers (the "Memorandum") was published.

  • Is the ability to issue Scottish infrastructure bonds new?

    No, as is reflected in the Investor Panel proposals the infrastructure bonds would be issued under existing devolved powers to issue debt. The power to raise funds was granted to Holyrood under the Scotland Act 2012. In early 2014, before the 2014 Scottish Independence Referendum, the UK Treasury under the Conservative/Lib Dem coalition government of the day confirmed that that power included the ability to issue bonds specifically to fund infrastructure projects. Post-referendum, the power to issue bonds was given legislative force by the Scotland Act 2016.

    But since then, nothing. So perhaps the best question to ask might be: why now?

  • Why issue infrastructure bonds now?

    There may be two answers to that question: one political, and one financial. Politically, this was a bold statement made in a key political speech, and the First Minister may have wanted to use the spotlight of his conference speech for maximum impact.

    Financially, pressures on capital budgets are greater than they have been for some time and, in Scotland certainly, there seems little current appetite to resurrect revenue funding of infrastructure projects through any of the recognised PPP-type structures. This is in contrast to the Irish approach, which is based on a €4 billion PPP programme which adopts much of the approach historically followed for UK PPP. Brodies advised recently on the financing of the first healthcare project in that programme.

    The money to fund Scottish infrastructure projects has to come from somewhere, and it may be difficult to find other sources in the wider economic situation. The Memorandum goes some way towards recognising this when it states that:

    "The immediate priority for capital borrowing is to support the constrained capital funding outlook resulting from severe real terms cuts to capital funding through the core block grant. For these reasons it is currently necessary to use the additional flexibility secured through the fiscal framework review to maximise capital borrowing for the 2024-25 Scottish Budget."

  • Which infrastructure projects?

    Where are these "vital infrastructure" projects that are so desperately needed now? The SNP annual conference announcement (the full text of the First Minister's address is here) does not offer much more detail: Yousaf only singled out social housing projects as potential recipients of bond funds. Scotland has a highly ambitious target of delivering 110,000 affordable homes by 2032, and so focusing on the "social" housing sector makes some sense, but there was, unfortunately, no mention of any other projects.

    It is clear from the announcement that due diligence on other possible fundable projects and on the value for money of the bonds themselves is now being undertaken. Both the Memorandum and the Budget continue to stress that "due diligence and market testing" of any bond issuance is ongoing.

    The results of this due diligence and market testing will be keenly anticipated by those with interest in where infrastructure investment in Scotland may need to take place.

  • Are Scottish infrastructure bonds viable?

    Reaction to the economics of issuing Scottish bonds/gilts (inevitably already referred to as "kilts") has been cautious. From an economic standpoint, and with some focus in particular on the pricing of the bonds, the question that could again be asked is: why now?

    Economic commentaries on the viability of Scottish infrastructure bonds point out that issuing bonds that will likely attract a premium at a time of high interest rates is somewhat hard to square with any value for money analysis. Given the effect of higher interest rates in raising gilt yields and given that the power to issue such bonds has existed since 2012 and been exercisable since 2016, it is, with hindsight, disappointing that testing the viability of such bonds was not undertaken at a time of historically low base rates.

    There are also a number of other factors that may raise the premium on the bonds:

      • firstly, Scotland would be a new and untested issuer of bonds, which in and of itself is likely to raise the premium on the bonds;
      • critically, Scotland's appetite for bonds may be small, and the market for such bonds relatively illiquid, again indicative of a premium hike. Scotland is already predicted to reach circa 80% of its debt cap in 2026, meaning that, crudely, 20% of that debt cap as a maximum could be raised through the issue of kilts. To set that in the context of current 2023 – 2024 figures, that would allow bonds of up to £90m to be issued, a relatively modest sum in the world of large scale infrastructure projects;
      • Scotland (at least currently) would be a sub-national government issuer without its own central bank and one which is dependent on fiscal transfers back from another (the UK) government; and
      • further political risk would need to be priced in. In accounting for the possibility of an independent Scotland, it is likely that some premium or other protection would be added over the lifetime of any bonds that are issued.

      Regardless of whether an express or implicit UK government guarantee would sit behind "kilts", all of these factors – together with the importance placed on pipeline projects rightly singled out by the Investor Panel – will be weighed up by the rating agencies engaged to rate the bonds. And those ratings will largely determine the kilts' price. That price may struggle to be competitive with the rate at which the Scottish Government can already borrow through the National Loans Fund.

    • What next?

      The profile of infrastructure investment appears to be coming into sharper focus. Given the low level of interest for the past decade or so in infrastructure investment across the whole of the UK – outside a handful of huge scale and mostly successful projects - this increased focus is to be welcomed.

      The Scottish Government's new willingness to use its pre-existing bond issuing powers to plug the gap needed to fund such investment is similarly heartening. However, on current analysis, there are hurdles to be overcome: scoping, developing and delivering a bond issuance programme from scratch, by an untested issuer, in a little over two years will be challenging. Sizing such a programme within current borrowing constraints, may not raise enough to fund infrastructure on any meaningful scale, which may limit interest and investment.

      Addressing and fixing these issues, will go some way towards providing essential funding for key projects and provide a precedent and a proven track record for the greater use of bond financing in Scotland in the future.


    Lindsay Lee

    Senior Associate

    Ben Powell

    Legal Director