European Investment Bank - SPRUCE evaluation: final report

4. Impact Assessment

4.1 Introduction

The impact assessment of SPRUCE is based on the material provided to Indigo House for the purposes of the final evaluation along with structured interviews with several consultees, including project sponsors. It is not intended to be an audit of the impacts or a fresh analysis of them, rather it works from the information provided and considers whether SPRUCE has delivered the impacts expected.

4.2 Summary findings

Overall our impact assessment found:

SPRUCE has been successful in supporting the economic growth strategy of the Scottish Government. It has delivered a number of significant projects and benefits in Scotland which otherwise would not have occurred either in the same timeframe or in those priority areas.

It has supported more than £0.5bn of development activity during an extremely challenging period for the Scottish economy including a long run recovery from the global financial crash during the initial investing period and Scotland's departure from the European Union and response to the global COVID pandemic during the recycling period. This demonstrates a number of positive attributes for investment led interventions including resilience and sustainability but perhaps most importantly for the evaluation it demonstrates the strategic need for SPRUCE type funding in challenging times.

The business space projects, both Office and Industrial space, are supported by significant market need and demand and the SPRUCE funding is justified by market failure, particularly access to capital issues. The energy projects address wider socio- economic (including fuel poverty) and environmental concerns. The rationale for the SPRUCE investments was therefore found to be consistent with the investment strategy.

In terms of the core qualitative objectives initially set we found:

SPRUCE invested more than £135m in 18 projects. A total of £48.7m was invested in 7 initial tranche projects by 31st December 2015 thereby meeting the first core objective to defray £48m in that period and a further £87.2m was invested in another 11 projects over the following 5 years from to the investment period end of November 2021;

The SPRUCE investments included:

• Grade A office accommodation and Industrial business units resulting in just under 46,000 square metres of business space created to BREEAM standards (Excellence for new build, Very Good for refurbishment) and meaning the investment strategy objective to fund the creation or refurbishment of 90,000m2 to those standards has been more than met. It is worth noting that this had already been exceeded at the interim evaluation stage with around 29,000 square meters of business space created to BREEAM standards at that point.
• Two Energy Efficiency projects funded in Glasgow and St Andrews contributing significantly to the stated objectives of investing in projects which deliver circa 20,000 tonnes of C02 savings and aggregate Energy Savings of at least 20% annually. These objectives have been partially met – around 11,000 tonnes of CO2 savings are delivered from the 2 projects and Energy Savings Ration has been exceeded at 25%. One more energy project would have gone a long way to exceeding the C02 savings.

Remediation of a large and strategically important sites at Haymarket and Edinburgh Park in Edinburgh which, in addition to the above projects has involved the remediation of 7.57 ha of brownfield land thus making a valuable contribution to the first of the Priority 3 objectives.

The extent to which the investments have contributed to the full range of Priority 3 of the Lowlands and Uplands Scotland Operational Programme output targets and a broader range of economic, social and environmental benefits for Scotland, is considered at section 4.4. Three projects, stand out as exemplary in their contribution to the wider regeneration impact of SPRUCE and these are set out in detail in Appendix I.

In terms of the investor return objectives we found:

Over the investing period from 2011 to 2021, a total of £94M was subscribed/invested in the SPRUCE fund by the Scottish Government. Initially £49M in 2011 and a further £45M in three separate tranches during 2016 to 2018.

Over that same period Amber utilised the SPRUCE capital to invest £135M in 18 projects. The SPRUCE capital was therefore recycled,1.4 times. SPRUCE was recycling its original capital from late 2015 and this compares favourably to other interventions, particularly non repayable grant which, by its nature, can be invested only once. SPRUCE funding achieved strong leverage of £2.82 for each SPRUCE pound invested. The total development cost of the projects supported exceeded £519.1m with SPRUCE providing 26% of the total funding requirement. Again, this leverage compares favourably.

SPRUCE investments involved senior debt facilities in line with the expectations of the Investment Strategy. No mezzanine or equity investments were made, albeit these were explored and this flexibility should remain an option for future SPRUCE type investments.

Repayment of SPRUCE loans by borrowers commenced from as early as 2013. A total of £28M has been repaid to date, with £66M repayable to the fund by September 2025. Fourteen projects have repaid in full, one project is expected to repay in early 2023 and the remaining three by September 2025. The original expected repayment date for the fund was November 2023, so extensions to repayment periods appear to have been approved by the Investment Committee.

Earnings from interest and other charges applied (for example, commitment fees) have been used to meet the cost of administering SPRUCE, which is another positive feature of SPRUCE, meaning that the Scottish Government capital subscribed has been fully deployed within the fund in supporting projects rather than management and administrative costs.

Of the £94M repayable from the fund to the Scottish Government, a total of £14M has been repaid to date with a further £80M profiled in 5 tranches to December 2026. A modest return for investors of just under £0.250M is estimated (though this needs to be confirmed).

Of the £94M being repaid to the Scottish Government around 15% is categorised as revenue suggesting ultimately £80M (85%) of the original capital subscribed by the Scottish Government may be available to support future investment beyond 2025 (though again this needs to be confirmed, particularly for the final few years).

The original intention was to increase the Total SPRUCE Fund through co-funding from other partners and the Royal Bank of Scotland (RBS) was initially expected to contribute £25m. However, to date, RBS has not engaged in any of the projects which SPRUCE has funded, and no other copartner was established. However, that said, significant leverage has been secured at the project rather than the fund level and this is an appropriate financing mechanism.

4.3 Wider impacts delivered

The relevant information for the wider impact assessment mainly exists in the various monitoring reports and integrated plan for sustainable developments (IPSUD) report for each project which formed part of the basis on which the funding for each project was signed off.

The output targets were reviewed and updated in June 2016. Seven were retained and classified into primary and secondary indicators. Projects satisfying a higher number of primary targets would take priority in being financed through SPRUCE.

Primary	Secondary
Area of business space created or modified under the BREEAM classification	Leverage of SPRUCE funding at the project level
Enterprises supported	Renewable energy and resource/energy efficiency projects supported
Number of gross jobs created/safeguarded	Brownfield land reclaimed or redeveloped
CO2 Savings

Three of the primary indicators were split into sub indicators but these have not been reported on. The report in June 2016 stated that reporting on sub-indicators should not be mandatory but should rather follow the availability of the information. Also, as part of the update in June 2016, seven outputs were removed and these are noted in Appendix III for completeness.

At the end of investing period (November 2021), SPRUCE reported on the outputs achieved as follows:

Over 100,000 square meters of business space created or modified under the BREEAM classification against a target of 90,000 with just under 46,000 square metres of the Grade A office accommodation and Industrial business units created to BREEAM standards (Excellence for new build, Very Good for refurbishment).

88 enterprises supported against an increased target of 100 (the original target was 54).

Over 5,100 jobs created (against a target of 4500 jobs). The gross jobs were found to have been calculated using reasonable density assumptions at around one job per 12 sq ft for the commercial space. Over 6,300 such jobs are expected over the life of the fund for the first 7 projects with more than half (3,500) associated with Haymarket. This does not seem to include the construction impact, which would have lasted for a period but could not be split out further.

Around 11,000 tonnes of CO2 savings delivered from the Biomass projects in Glasgow and St Andrews. One more energy project would have gone a long way to perhaps exceeding the primary energy targets which appear to have been increased from an original target of 20,000 to 30,000 tonnes of C02 savings. Several more energy projects would have been required to meet the secondary target which was to support 6 renewable energy and resource/energy efficiency projects.

Leverage of £2.82 for each SPRUCE pound invested. As previously set out, the total development cost of the projects supported exceeded £519.1m with SPRUCE providing 26% of the total funding requirement. A quantitative target for leverage was not established in the June 2016 update to avoid disadvantaging projects initiated by the public sector despite significant benefits reflected elsewhere.

7.57 ha of brownfield land including 1.7 ha at Haymarket in Edinburgh thus making a valuable contribution to the first of the Priority 3 objectives. The target for land remediated was not quantified/established.

It is clear from the above that the SPRUCE investments delivered solid achievements and whilst it overachieved on some of the outputs it did not achieve 100% of outputs expected including, most notably, the CO2 emissions.

Again, this points to the balance of impacts and risks required from SPRUCE (investment/financial objective balanced with broader socio-economic objectives) requiring some further consideration. That said, the investment strategy had previously made it clear that the outputs are 'a non-binding indicative list of Output Targets' which the fund hopes to achieve.

4.4 Contribution to Priority 3 Objectives

SPRUCE was also expected to contribute to the objectives of Priority 3 in two ways as follows:

• Linking urban areas of need with areas of opportunity – by ensuring that people living in less privileged areas can benefit from employment and training opportunities across the region; and,
• Improving the potential of urban area to develop – by encouraging enterprise start-ups and Small and Medium Sized Enterprises.

Amber agreed commitment to community benefits with each of the project sponsors during negotiations and this generated additional wider impacts from the SPRUCE investments including examples of local employment and apprenticeships (particularly in the construction phases) in most of the projects.

Our final evaluation found three projects stand out as exemplar in terms of their early contribution to the wider regeneration of the urban area and their on-going potential. The three exemplar projects include the Biomass plant at Guardbridge, the Industrial Units at Clyde Gateway and the Grade A Office development NW1A at South Gyle. The early land remediation at Haymarket (as difficult as it was at the time) is also worthy of mention. Case studies for these exemplar projects are provided in Appendix I and demonstrate the priority 3 outputs from SPRUCE are very significant when you consider the broader regeneration programme/activity which the early SPRUCE investment has facilitated/pump primed.

These case studies demonstrate a number of things buts importantly the multiplier effects when you consider the broader regeneration programme/activity which the early SPRUCE investment has facilitated/pump primed.

4.5 Additional outputs

In addition to the core outputs, Amber also monitors some additional indicators including total business space created or modified, number of start-ups supported and long-term occupancy. The full range of outputs monitored by Amber, including those in the original IPSUDs are set out in Appendix III.

For any future fund, the output indicators and targets would require consideration to adequately balance the financial and investor return objectives with the wider outputs required to support domestic policies. These could include, additional indicators focussed on promoting regeneration, energy efficiency and community well being. Some VFM metrics should also be considered e.g. public funding cost per job, GVA per job created.

Figures provided on economic impacts are gross, with no assessment of additionality. It is therefore difficult to provide a view as to what the net impact of the overall fund or individual projects are. However, feedback from the structured interviews with the project sponsors and with the property industry confirms that the commercial space projects would not have happened without SPRUCE funding and therefore we can estimate additionality to be relatively high, at least for the construction impact.

However, as companies have re-located into the new office and industrial space there is likely to be some level of displacement though this does not appear to be significant as the demand for office and industrial space remains strong. It is also difficult to be precise on the size of this without consulting with the companies themselves and equally there are likely be productivity impacts from operating in more modern, bespoke and energy efficient premises.

There is also multiplier effect to be considered from both the direct construction and operating expenditure. It has been calculated that the construction sector in Scotland has an output multiplier of 2.1, which indicates that £1 of spending generates £2.10 of economic output (from direct, indirect and induced effects).

4.6 Overall impact assessment

An evaluation study commissioned by Scottish Government in 2009 found that there was a strong case for using the JESSICA initiative to support Urban Development Fund investments in the Lowands and Uplands region, based on a review of emerging opportunities, how they aligned to the LUPS OP objective and the prevailing landscape of public and private finance. The final evaluation confirms this remains the case.

Overall we found:

The additional value for money and potential additional benefits available from the recycling phase(s) are so considerable that the Scottish Government should consider the broader application of the investment led approach to other areas of public policy and finance. This could represent a significant public policy funding mechanism in Scotland enabling scarce public finances to go significantly further.

Feedback from consultees suggests access to capital continues to be a considerable constraint (particularly with regards to development finance and early stage finance) for infrastructure projects including new build and refurbishment (or retrofit) works.

There was some early success in promoting the development of the energy efficiency market and facilitating regeneration in Scotland by providing finance to sustainable Urban Projects with two of the first seven projects invo

lving energy efficient district heating schemes in Glasgow and St Andrews.

The scale of SPRUCE invested in individual projects is modest and with the cost of inflation a gap at £9.6m on individual projects is considered a barrier that may be preventing good projects coming forward or SPRUCE from supporting otherwise eligible projects. Increased approval levels may be worth considering.

Feedback around the relatively modest scale of the fund and the limits on individual projects suggests these may have prevented otherwise eligible projects coming forward. However, special investor consent was available for SPRUCE to consider higher value projects, and to combine SPRUCE funding with grant and other funds. Some of the perceived constraints could therefore have been addressed in some cases through appropriate project funding expertise. It is also important to note that it is not the purpose of SPRUCE to address potential viability gaps on projects and that this remains the role of grant funding, where appropriate.

Other challenges experienced with SPRUCE included the process being considered to be longer and more onerous than sponsors expected. Some of the project sponsors also commented on the level of fees involved. That said, project sponsors found AMBER, the fund manager, easy to work with post financial close. SPRUCE involves a considerable amount of public money (Scottish and European funds), and the investors may consider some of these observations to reflect good governance of the fund, including satisfying European regulation that would not form part of a standard commercial funding agreement.

Market engagement suggests access to capital remains as much a concern now as it was when SPRUCE was originally implemented. As well as increasing the recycling rate, the interim study identified that more development work is required to bring forward opportunities to apply the investment led approach which is a distinguishing feature of SPRUCE in more deprived areas and where there is wider socioeconomic and market failure. The final evaluation found this still be the case. As set out previously in table 2 only £35M was invested out with Glasgow and Edinburgh City Centre areas. Further consideration of the governance arrangements may also be required to ensure the portfolio of future projects and investments optimises the balance of socio-economic returns required. For example, delivery of a third and possibly fourth energy project in the recycling phase rather than one or two more office developments would have provided a broader range of outcomes more closely aligned to the targets initially set rather than a significant overachievement of a more limited range of outcomes. However, this assumes perfect choices are available in the capital rationing decisions, which is not often the case.

It is fair to say that the financial profile of the Office type project fits the investment/commercial aspects of SPRUCE well, i.e. shorter term lending and money repaid quicker than say the energy projects and/or land remediation works. Feedback around the relatively modest scale of the fund and the limits on individual projects suggests these may be preventing otherwise eligible projects coming forward. However, special investor consent is available for SPRUCE to consider higher value projects, and to combine SPRUCE funding with grant and other funds. Some of the perceived constraints could therefore be addressed in some cases through appropriate project funding expertise. It is also important to note that it is not the purpose of SPRUCE to address potential viability gaps on projects and that this remains the role of grant funding, where appropriate.

4.7 Conclusion

A central principle for SPRUCE is that the investment-based approach rather than traditional grant funding is a distinguishing feature expected to deliver improved longer-term outcomes through creating value in the built environment and the communities the fund serves.

The final evaluation found SPRUCE offers considerable value for money to the public purse when compared against alternative pricing interventions including non-repayable grant and/or other structured financing alternatives. SPRUCE achieved strong leverage in the first tranche and represents the most economically advantageous option for achieving a set of desired impacts compared to the other funding options assessed in the short, medium and long term.