Scottish Government publishes updated infrastructure plan

Strategic approach set out for the next five years and beyond

Political issues around austerity policies and developing fiscal framework bubbling to the surface

Background

The Scottish Infrastructure Investment Plan, which was first published in 2011 and led to a strong pipeline of Scottish projects, has been updated and reissued.

The context was the publication of the Scottish draft budget in December 2015, following the UK Spending Review in the Autumn Statement, and the continuing engagement with the UK about further fiscal devolution (including an expansion of borrowing powers).

Those discussions and the related debate over the implementation of the Smith Commission proposals for further devolution are expected to continue up to the Holyrood Elections in May. Once the new Holyrood Parliament is elected there will be a confirmation of the infrastructure strategy by the new Scottish Government.

In England, the Government has set up a National Infrastructure Commission chaired by Lord Adonis and including Sir John Arnitt, who conducted a review of long term infrastructure planning for the Labour Party prior to the 2015 General Election. The Commission's brief is to determine Britain's infrastructure priorities at the start of each five year UK Parliament, however there are concerns that it will not meet regularly enough to make a difference.

In Scotland, the strategic approach has long been followed and is now reinforced, backed by engagement across the whole of central government. Broadly we are not expecting much divergence in infrastructure policy across the Scottish political parties, though this cannot be taken for granted. The Scottish economy has been given a boost by the strong programme of infrastructure construction projects over the last few years, and we are looking for this to continue.

Strategic priorities

The new 2016 plan sets out long term strategic infrastructure priorities up to 2021 and beyond against a background of cuts to investment and public services.

Areas of focus

Highlights of Approach

There is evidence of new thinking designed to maximise the ability to respond to current issues. There is reference to a new, holistic approach which takes into account the wider benefits of investment in assessing value, which is welcome. Specific areas worth looking at include:

Planning

• On planning matters, there is to be a presumption in favour of development that contributes to sustainable development, along with a review of the overall approach to development.
• Infrastructure blockages, where upfront investment is needed, are identified as a barrier to development.
• Planning for Infrastructure is an exercise that Brodies have been working on for the Scottish Government. An independent review of the planning system is now under way and will report in the Spring _ the intention clearly being to join up the planning process with the delivery of the necessary infrastructure.

Infrastructure

• The accounting issues raised by the EU's ESA 10 accounting standard have apparently been successfully addressed in the context of the Hub community infrastructure programme, by a slight revision of the Hub model, so that balance sheet treatment is no longer an issue there. The Scottish Government is working on a similar approach to resolve these issues as they affect the non-profit distributing (NPD) programme. Clearly, it will need to adjust the structure of the model, which envisages a public interest director having certain rights, a direct investment by the Government in the equity of the project and a potential flow of excess profits back to the Government.
• There will be continuing use of the regulatory asset base (RAB), specifically for rail infrastructure investment through Network Rail. Renewals and enhancement expenditure tends to be capitalised and added to the RAB, and the cost is met by the Scottish Government through grant and loan. Following the successful launch of the new Scottish Borders Railway, procured on this basis, we can expect several more such schemes to be brought forward.

Energy

• Energy issues feature strongly in the new plan. Strategic electricity grid reinforcements are a top priority, particularly for the islands (Orkney, Shetland and the Western isles).
• A new Scottish Energy strategy aimed at creating a firm, long-term basis for energy investment in Scotland is envisaged, clearly a response to the UK Government's current approach to renewable subsidies, along with continued investment in North Sea oil and gas exploration and development. There is a possibility of Scottish top-up subsidies being a part of the funding mix, once the fiscal framework is established.
• Energy efficiency is seen as a national priority, with a multi-year funding programme to improve Scottish public buildings. This is to start with a pilot scheme and will be upgraded as of 2018. A new Non Domestic Energy Efficiency (NDEE) framework will be issued early this year backed by four projects aggregating £300 million in value, and a street lighting replacement programme will be launched across local authorities.
• Frustration is evident at the UK Government's decision to cancel without prior consultation its support for the carbon capture and storage project at Peterhead in November 2015. CCS technology is seen as crucial for future energy policy.

Housing

• Housing supply remains a topical issue. There is a commitment to a £3 billion programme over five years to deliver the 50,000 affordable homes target, an increase of 167% over the delivery level achieved over the past five years. The approach to housing is aimed at covering all types of tenure, from social housing for both Registered Social Landlords and councils to mid-market property for rent as well as the private rented sector, along with help to buy initiatives to encourage private ownership.
• There is a well-developed Joint Housing Delivery Plan, which is facilitating involvement by the various public sector entities and related stakeholders in an integrated fashion. And there is a Rural Homes Fund, which is designed to deal with the particular issues faced by rural communities.

Filling the funding gap

At a time when private financing is cheap and plentiful, government is faced with its own funding constraints, whether as a result of austerity policies or a simple lack of available cash to spend.

There are four funding methods that have been utilised to date, as shown in the boxes below.

The new 2016 plan will continue to utilise these approaches, but with some variations.

• The Smith Commission recommendations on increasing borrowing powers to support capital investment through a new prudential borrowing regime, are seen as important. The full extent of borrowing powers already available in 2016/17, some £316 million, have already been earmarked for some of the NPD and Hub projects in the new pipeline.
• Financial transactions funding, which supplements the agreed block grant from time to time as and when the UK Government increases its own spending commitments, is also expected to be used in full.
• Innovative financing concepts will continue to develop. The new Growth Accelerator Model - which replaces the assessment of growth in non domestic rates revenues with a wider impact assessment, including the effect on employment levels - looks set to be widely used. The proposed redevelopment of the Edinburgh St James Centre into the premier retail experience in the capital is a forerunner here.
• The unique Scottish approach to the UK City Deals funding strategy combines matched funding with a city region approach (through the Scottish Cities Alliance) encouraging a strategic pipeline to be developed by regional collaboration. There are £3 billion worth of projects already identified, with Aberdeen and Edinburgh in the process of finalising their participation in the initiative.
• The successful National Housing Trust is now being supplemented by new government initiatives including the LAR Housing Trust, which aims to set up an aggregator vehicle to develop new mid-market housing with government funding and then refinance into long term institutional investors.
• The colleges and universities sector is looking to the European Investment Bank and the Green Investment Bank for funding to supplement what is channelled through the Scottish Funding Council, along with private institutional finance supporting the provision of student accommodation.

A realistic programme?

The funding issues are immense. The Scottish Government expects the traditional capital budget to cover a large part of the programme, relying on continuing cheap finance being available from UK Treasury. It points to the success of the new Queensferry Crossing across the Forth and associated road improvement works, coming in on time (expected to open later this year) and under budget. They feel this is the best value type of finance.

The Scottish Government also sees an expansion of government borrowing as being part of the way forward, but this brings its own particular issues even at a time when the Scottish Government is a part of the UK structure and when its debts are implicitly, if not expressly, underwritten by the UK Treasury and supported by elements of UK regulation.

It will be necessary, in our view, to continue to develop PPP and similar concepts that have the effect of leveraging in substantial amounts of private capital alongside government funding contributions if the ambitious pipeline is to be delivered. In this context, we feel continuing primary reliance on the capital budget is unrealistic, and an appetite for increasing borrowings needs to be carefully managed.

However, there are two significant benefits already well within reach. One is the continuing integration of the public sector planning process, which can result in a truly strategic programme. The other is the expectation that a new and deliverable long term project pipeline can be established during 2016, in a way that encourages the private sector supply chain to invest in supporting these projects rather than looking at other markets. It's time now for this to actually happen.