Infrastructure Investment Plan 2015: progress report 2018-2019

Overview Report

The Infrastructure Investment Plan

The 2015 Scottish Government Infrastructure Investment Plan (IIP) was published on 16 December 2015 and sets out priorities for investment and a long-term strategy for the development of public infrastructure in Scotland. It set out why the Scottish Government invests, how it invests and what it intends to invest in sector by sector.

The 2015 IIP sets out a set of guiding principles for infrastructure investment, which provide the framework for investment decisions and how they promote the Scottish Government's overarching objectives. These are:

• delivering sustainable economic growth through increasing competitiveness and tackling inequality;
• managing the transition to a more resource efficient, lower carbon economy;
• supporting delivery of efficient and high quality public services; and
• supporting employment and opportunity across Scotland.

National Infrastructure Mission

International evidence from studies by the International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), World Bank and European Union, all demonstrate a strong link between government infrastructure investment and longer-term economic growth. The Scottish Government is firmly committed to infrastructure investment as a key factor in securing inclusive economic growth and our focus is on stimulating growth, protecting and creating jobs and promoting Scotland as a great place to do business. In recognition of the importance of infrastructure investment to the economy, the 2018 Programme for Government set out our commitment to a National Infrastructure Mission to increase annual investment by 1% of current (2017) GDP (Gross Domestic Product) by the end of the next Parliament. This will mean an additional £1.56 billion of investment per year by 2025-26.

An Infrastructure Commission for Scotland has also been established to provide long-term strategic advice to the Scottish Government on national infrastructure priorities, based on evidence and learning from good practice and to align investment with long-term inclusive economic growth and low carbon objectives. It will advise on the National Infrastructure Mission by identifying key strategic investments in Scotland to be made to boost economic growth and support public services. The Commission will report on infrastructure ambitions and priorities by the end of 2019, and will also advise on the possible creation of a Scottish National Infrastructure Company six months later.

The Commission will engage industry stakeholders and civic society across Scotland to seek a wide range of views about what is needed and how it might best be delivered. The Commission's advice will inform the development of the Scottish Government's next Infrastructure Investment Plan, setting out a coherent plan across the sectors for the next 5 years.

Government Expenditure and Revenues Scotland (GERS)

The Government Expenditure and Revenues Scotland (GERS) publication provides details of capital expenditure for Scotland beyond that invested by the Scottish Government and can be found using the following link:

www.gov.scot/publications/government-expenditure-revenue-scotland-2017-18

It includes estimates of spend on capital by the Scottish Government, Scottish Government funded public corporations and local authorities as well as including spending by the UK Government, UK public corporations and UK Government bodies such as Network Rail.

Infrastructure Investment Plan Reporting

The Infrastructure Investment Plan (IIP) includes both programmes and projects. Programmes co-ordinate, direct and oversee the implementation of a set of related projects. Projects have defined start and end points (usually time-constrained and often constrained by funding or deliverables) and are undertaken to meet unique goals and objectives. Projects can be part of a programme but are not always.

The Infrastructure Investment Plan - Project Pipeline is based on the 2015 Infrastructure Investment Plan and is updated on a six-monthly basis. It details projects with a capital value of £20 million or more where the Scottish Government has a lead role in procurement or funding. It also includes school and health projects being taken forward through the Scotland-wide 'hub' initiative which form part of the Scottish Government's current revenue funded £3.5 billion NPD/hub investment programme. A summary of the IIP Project Pipeline at March 2019 by funding type and sector is provided at Annex A.

In addition to publishing the IIP Project Pipeline, the Infrastructure Investment Plan - Major Capital Projects Progress Update is published on a six-monthly basis which provides information on projects with a capital value of £20 million or more which are at the Outline Business Case (or equivalent) approved stage or beyond. The Infrastructure Investment Plan - Programme Pipeline Update is also published on a six-monthly basis and this includes information relating to ongoing key major infrastructure programmes with an investment of £50 million or more.

The latest versions of the IIP Project Pipeline, IIP Major Capital Projects Progress Update and IIP Programme Pipeline Update publications, can be found by way of the following link: http://www.gov.scot/Topics/Government/Finance/18232/IIP

Progress to March 2019

Major infrastructure improvements have been delivered and significant progress continues to be made. In total over the course of 2018-19, the following infrastructure projects worth more than £1.4 billion completed construction and opened to the public within our accompanying project pipeline:

Transport

• Aberdeen Western Peripheral Route/Balmedie to Tipperty (£745 million).
• Stirling Dunblane Alloa Rail Electrification (£159 million).

Health

• NHS Scotland Pharmaceutical Specials Service (£29 million).
• Inverurie Health Care Hub & Foresterhill Health Centre (£24.1 million).
• Gorbals Health Centre (£18.6 million).

Schools

• Blairdardie Primary School (£11.7 million).
• Carntyne Primary School (£7.3 million).
• Clackmannan Primary School (£1.6 million).
• Dunoon Primary School (£10.1 million).
• Ladyloan Primary School (£8.5 million).
• Lochside Academy (£47.4 million).
• Milne's Primary School (£2.2 million).
• Muirfield Primary School (£8.2 million).
• Newbattle Community Campus (£35.9 million).
• Dundee Joint Campus (£17.2 million).
• North West Community Campus (£35.9 million).
• Oban High School (£36 million).
• St John's Primary School (£13.2 million).
• St Joseph's College (£24.2 million).
• Stoneywood Primary School (£13.6 million).
• Underbank Primary School (£6 million).
• Wallyford Primary School (£18.7 million).
• West Calder High School (£38.6 million).
• William McIlvanney Campus (£45.1 million).

Culture

• V&A Museum of Design Dundee (£80.1 million).

Particular highlights in this progress report include:

• The Aberdeen Western Peripheral Route (AWPR), which was the longest length of road under construction in the UK, opened to full to traffic on 19 February 2019. This followed road openings between Craibstone to Charleston and Stonehaven in December 2018, Balmedie and Tipperty in August 2018, and Parkhill and Blackdog in June 2018. The opening of this final section of the AWPR represents a major achievement for this Government in delivering this major transformational investment to the North East of Scotland, which also saw the A90/A96 Haudagain Junction Improvement project commence construction in January 2019.

• The electrification of 100 kilometres of single-track line from Dunblane through Stirling and Alloa (Stirling Dunblane Alloa Rail Electrification) was completed in December 2018 and enabled the introduction of new electric services on 9 December 2018. The Highland Main Line Phase 2 rail project commenced construction within the last year.

• The new purpose-built state-of-the-art Pharmaceutical Specials Service facility at Ninewells Hospital in Dundee was completed in March 2019. It will manufacture and supply a range of medicines to meet specific patient needs to all 14 health boards in NHS Scotland. The reprovision of Inverurie Health Care Hub & Foresterhill Health Centre in Aberdeen was completed in July 2018 and May 2018 respectively. The new state-of-the-art Greenock Health & Care Centre recently commenced construction.

• The V&A Museum of Design Dundee, Scotland's first design museum opened its doors to the public in September 2018. The museum is the centrepiece of an ambitious transformation of Dundee's waterfront that is making a significant cultural, economic and social contribution to the area and helping to reshape the city's future as a hub of the UK creative industries, drawing in visitors, business and investment.

• 19 school projects worth £381 million were completed within the Schools for the Future programme in total over the course of the last year.

Funding

Projects within the IIP are funded from several funding sources: capital DEL (Departmental Expenditure Limits), NPD/hub revenue finance and Regulated Asset Base (RAB) for rail projects until 2018-19 (thereafter it will be grant funded with HM Treasury taking on responsibility for debts accrued by Network Rail). The Scottish Government also has the power to borrow up to £3 billion for capital purposes with an annual cap of £450 million. Borrowing is added to the total capital grant funding available to determine the overall availability of capital, therefore we do not distinguish between capital grant funded projects and those funded by borrowing.

In order to ensure choices are sustainable the Scottish Government has a self-imposed revenue finance investment limit in place. Prior to Budget 2019-20 this was set at 5% of the total Scottish Government Budget. At Budget 2019-20 this limit was tightened to 5% of the Scottish Government resource budget only (excluding social security) to ensure that the National Infrastructure Mission can be delivered in the most fiscally prudent manner. Under the new limit planned and committed projects and borrowing, are expected to peak at 3.21% in 2020-21 and 2021-22.

Financial Transactions

In addition, the UK Government has made a subset of capital funding available called Financial Transactions (FTs). FTs are a subset of capital funding from HM Treasury that were introduced in financial year 2012-13 and which can only be used to make loans to, or equity investments in, private sector entities, including universities, or individuals.

They need to be repaid to Scottish Government for onward repayment to HM Treasury. No interest is payable to HM Treasury by the Scottish Government. The interest rate to be applied on loans provided by Scottish Government can be at commercial or below market rates depending on the purpose of the loan and compliance with State Aid rules. The repayment period should be appropriate to the nature of the loan or investment and can be short or patient in nature.

The Scottish Government has disbursed over £2.4 billion in FTs to 31 March 2019 with a further £1.1 billion available over the period 2019-20 to 2020-21, excluding recycling of any repayments. Our repayment profile, as agreed with HM Treasury and updated annually, incorporates our first repayment of £51 million by March 2020. For the financial year 2020-21 onwards, we anticipate a fairly even repayment pattern based on at least an 80% repayment rate which reflects known and anticipated repayments. The majority of FTs to date have been allocated mainly to support housing and regeneration schemes, support for businesses through Scottish Enterprise and investment in energy efficiency measures over the medium to long-term. There have also been short-term allocations to support farmers, which, in general, are repaid the following financial year and made available for recycling.

Contribution to Economic Development

Infrastructure investment contributes to economic development and supports jobs. The contribution made by the individual projects is detailed in the IIP Major Capital Projects Progress Report on a six-monthly basis. This includes, where possible, the number of jobs supported, the number of sub-contracts awarded to Scottish firms and the number of graduate, apprenticeships and work experience placements positions created.

Our investment in housing, will, on average, leverage economic output in the region of £1.4 billion per year, supporting around 10,000 to 12,000 jobs per annum in the construction and related industries in Scotland.

Our Digital Scotland Superfast Broadband (DSSB) Programme has delivered fibre broadband access to 95% of premises in Scotland, creating a fibre spine that will support future generations of fixed and mobile connectivity. Many SME's, some for the very first time, are now capable of accessing fast, reliable broadband opening their businesses to a far wider market and contribute to Scotland's economic growth

Going forward, our ambitious A9 Dualling programme will bring many benefits for road users, communities and businesses who live along or use this important route between central Scotland and the Highlands and Islands. It will improve journey times and their reliability, operational performance and levels of safety which will benefit businesses and road users and deliver significant wider economic benefits including improved access to markets, and increased productivity. During construction, the programme will provide opportunities for local SME employment, support sustainable employment opportunities, provide training and upskilling of the workforce and deliver engagement with local communities and schools.

In addition, the A96 Dualling programme will help tackle congestion in towns along the route, reduce journey times, improve journey time reliability and improve road safety for all users.

Leverage

In order to maximise the government's investment in infrastructure, leverage of other funding is pursued where possible. Examples of this include the City Region Deals where it is estimated that the Glasgow City Region Deal will lever in an additional £3.3 billion of private sector investment into the proposed infrastructure investment programme and the Inverness City Deal is expected to unlock an additional £800 million of private sector investment. The Aberdeen City Region Deal anticipates around a further £500 million of leverage from the private sector and other economic partners and the Edinburgh and South East Scotland City Region Deal includes £425 million of leverage from the private sector and other economic partners.

Publicly funded social housing and mid-market rented (MMR) attracts matching private investment across the housing programme. There will be variations for individual projects but social housing grant pays approximately half the unit build cost with the remainder being funded by lenders. For many of our innovative MMR schemes supported by loan funding, the private finance leverage can be much higher, generating significant investment at scale into affordable housing in Scotland. We have made loan investments of over £100 million in recent years towards MMR schemes that have the potential to leverage significant private sector investment into housing. Examples include the LAR Housing Trust where a £55 million Scottish Government loan has attracted £65 million investment from Scottish Widows arranged through Bank of Scotland to support their target of 1,000 affordable MMR homes.

The Digital Scotland Superfast Broadband (DSSB) programme is delivering over £400 million of investment (around £280 million from public sector with £126 million from BT) to extend fibre broadband access to areas where the market would not otherwise go. The programme met its target to provide fibre broadband access to 95% of Scotland's premises by December 2017 and will continue to deploy infrastructure throughout 2019. Similarly, both the Reaching 100% (R100) and Scottish 4G Infill (S4GI) programmes will utilise this same gap funding approach to encourage the private sector to invest in areas that they might not otherwise consider.

NPD/hub Revenue Funded Projects

The IIP Project Pipeline includes the capital value of revenue funded projects through NPD and hub. These projects may also have an additional capital funded element. The revenue funded element is paid through unitary charges for a period of 25-30 years once the project is completed and is funded from resource budgets. The annual estimated unitary charges are published on the Scottish Government website by way of the following link:

https://www.gov.scot/policies/government-finance/infrastructure-investment/#npd

The graph provided at Annex B shows the total unitary charges payable each year in nominal and real terms. The nominal values represent the cash payments that will be made and the real figures remove the effect of inflation. The largest elements of the unitary charge relates to construction and financing which, under the terms of the NPD and hub contract, are not linked to inflation therefore in real terms these costs reduce over the period of the contract.

The Net Present Value (NPV) is calculated here as the value of all future cash flows over the entire life of the project, discounted to the date each contract was signed. In accordance with the established HM Treasury Green Book principles, the discount rate applied to calculate the NPV removes the effect of inflation and adjusts for social time preference. The future cash flows and therefore the net present values for each project reflect the capital, financing costs, project company running costs and contracted maintenance costs for each project. With the exception of the two major roads projects, which have an operational period of 30 years, the future cashflows for each project cover an operational period of 25 years.

The table provided at Annex C provides the total unitary charges payable for each project and the associated NPV value.

Conclusion

This overview summarises the approach to infrastructure investment that Scottish Government is following to support the economy and deliver high quality public services. Investment is maximised through not only utilising capital grant but delivering infrastructure through revenue financed methods, capital borrowing and levering in additionality from the private sector and other sources. The IIP Progress Report and associated IIP monitoring reports set out in more detail the scale and diversity of the infrastructure programme, use of a variety of funding routes and the associated economic benefits.