Scottish Infrastructure - What's Next?

United KingdomScotland

Scottish Government has previously stated that annual investment in infrastructure in Scotland will be 1.56 billion higher in 2025/25, than the £5.2 billion being invested in 2019/20. Tasked with examining the options for delivery of infrastructure, Scottish Futures Trust (SFT) recently published its Options Appraisal on profit sharing finance schemes. The Finance and Economy Secretary, Derek Mackay accepted SFT’s recommendations in an address to the Scottish Parliament on 30 May 2019.

Fundamental to SFT’s analysis was the requirement that investment models provide additionality - that additional investment over and above that which can be delivered through traditional funding or capital grant can be secured.

It is perhaps unsurprising, given the challenges of ensuring investments remain off the public sector’s balance sheet, that SFT concluded that the new Scottish model should be based on Welsh Mutual Investment Model (MIM), which has achieved private classification under current Eurostat rules.

The MIM model replicates many of the features of the Scottish Non-Profit Distributing (NPD) model, but rather than a capped return, MIM shares return between the public and private sectors, a feature which is similar to the Scottish hub model. Whilst in Welsh MIM the public sector may elect to invest up to 15% in the risk capital of the project, the Scottish model may permit the public sector to invest up to 20%.

There is more to this appraisal than a simple statement that any future pipeline of projects will be MIM with a kilt. With the data available on existing NPD and hub projects, SFT have developed ratios which has allowed it to compare the whole life costs of assets funded by capital grant, public borrowing (Public Works Loan Board) and private borrowing, as a proportion of construction cost. Within assets funded by private finance, a further set of ratios allows comparison of the costs of funding Schools, Colleges, hub health, NPD health and roads.

With the requirement that projects delivered through a new model of investment provide value for money and are affordable, it seems likely we can expect to see these ratios applied to future projects, at key stages of appraisal.

Also worthy of note are the value for money aspects which SFT flags as “lessons learned” from NPD and hub projects. These include: enhanced stakeholder involvement through board membership of Project Co; lower level of private sector return from that achieved in historic PFI projects; funding competitions; and a focus on community benefits, sustainability and wider economic stimuli.

This news is a welcome step in providing details as to how Scottish Government intends to deliver some of the additional £1.56 billion future infrastructure investment announced. We wait with interest to hear which projects may be included in any future investment programme.

SFT’s Options Appraisal can be accessed here.