Investing for jobs: capital spending review framework 2021-2022 to 2025-2026

Delivering The National Infrastructure Mission

In the 2018 Programme for Government, the First Minister announced a National Infrastructure Mission to increase annual investment in infrastructure by 1% of 2017 Scottish GDP by 2025-26.

This is the level we think is required to match the ongoing investment of our key OECD competitors. We are the first part of the UK to commit to overcome historically lower UK investment, and seek to reach such internationally competitive levels.

The economic rationale for the National Infrastructure Mission was supported by a paper produced by Scottish Government analysts^[1], which set out the important role that infrastructure investment plays in improving the productive capacity of the economy and delivering long-term economic benefits. Delivering our National Infrastructure Mission will be a critical component of Scotland's recovery from the economic harm arising from COVID-19.

The National Infrastructure Mission aims to ensure that investment is £1.5 billion higher in 2025-26, than the £5.2 billion invested in 2019-20. It runs through the full next Parliamentary term, and consequently our Capital Spending Review planning does the same. It has the potential to boost Scottish GDP by £10 - £25 billion over 15 years.

Sound Planning to Ensure Delivery

The Scottish Government commenced its planning for the National Infrastructure Mission promptly in 2018. Its evolution has recognised some key factors:

• the term 'National Infrastructure Mission' describes the overall programme of capital and revenue-financed investment. It uses a number of financial tools, each operating with their own limits
• planning investment to deliver economic value requires a culture change across Scotland to focus on its outcomes and benefits, rather than the amount spent
• the important role of the independent Infrastructure Commission in advising and shaping future strategic priorities and infrastructure choices
• portfolios might align their timing and approach when shaping new strategies, to ensure a coherent Scottish Government-wide Infrastructure Investment Plan
• whilst revenue finance can apply widely, the higher costs of private finance means the Mutual Investment Model of finance should be restricted to central government, including Agencies and NDPBs

The Scottish Government also made a commitment to Parliament during this term to increase annual investment in low carbon activity by at least 1% per annum. Annex A details the level and nature of such investment in this financial year, 2020-21.

In recognition of the climate emergency, declared by the First Minister, the Scottish Government announced, in February 2020, that it would also ring-fence £2 billion of new funding over the next Parliamentary term for new low carbon investment.

Financial Planning Assumptions for the Capital Spending Review

Scottish Ministers have agreed some key financial planning assumptions to shape our Capital Spending Review.

To support our commitment to addressing climate change, and in recognition of the climate emergency, new funding is predominantly directed towards investment in emissions mitigation and adapting to the effects of climate change already underway.
This can help ensure we shape a green economic recovery from the pandemic.

Our financial planning assumptions are:

• Level cash capital grant across Scottish Government as a whole, rolling forward Scottish Budget 2020-21 baselines* into future years to 2025-26
• Boosting total maintenance investment over the 5 year period within this limit, alongside future asset creation. Capital maintenance includes asset enhancement, ensuring asset compliance with regulatory requirements, major equipment and fleet
• At least preserving the £1.8 billion annual level of low carbon investment
• £2 billion new funding for low carbon schemes over the next Parliamentary term

*Baselines are as set out in the Budget introduced into Parliament, not including one-off sums added as part of the Budget agreement.

Stakeholder Expectations of the National Infrastructure Mission

Scottish Ministers have not yet placed in the public domain a detailed trajectory or plan to deliver the National Infrastructure Mission, which is now included in this document. However, we are aware of the thoughts of others, most notably estimates published by Audit Scotland in 2020 in their report Privately Financed Infrastructure Investment – The Non-Profit Distributing Model (NPD) and Hub Models^[2].

We include this credible external estimate for completeness, and note that Scottish Ministers have already invested, in 2020-21, at a considerably higher level than Audit Scotland had foreseen compared to the £5.2 billion 2019-20 baseline. Scottish Budget 2020-21 detailed £6.2 billion of investment, showing we had started to pull ahead of our own Mission.

The below diagram was published in the Audit Scotland report Privately Financed Infrastructure: The NPD and Hub Models, and is reproduced here with the permission of Audit Scotland.

Exhibit 9 The current trend in capital budgets, 2019/20 to 2025/26

The Scottish Government may need to use a variety of funding sources, potentially including private finance, to meet its target to increase investment in line with the National Infrastructure Mission.

Note: Our analysis uses the National Infrastructure Mission Baseline from the Scottish Government's 2019 Medium Term Financial Strategy (MTFS), based upon its modelled central scenarios until 2023/24 (and thereafter kept level). This provides projections of the capital grant and Financial Transactions funding, as well as expenditure on innovative financing schemes, over the seven-year period 2019/20 to 2025/26. In line with the MTFS, our analysis assumes no NPD/hub investment after 2020/21 and does not forecast the levels of capital borrowing after this point (current powers allow the Scottish Government to borrow up to £450 million each year). The Scottish Government committed in the MTFS to 'steadily increasing' infrastructure investment by £1.56 billion between 2019/20 and 2025/26 but goes into no further detail as to how this will be profiled or achieved. We have used the Scottish Government's baseline figures and then assumed that this increased investment will take place in equal annual increments of £0.26 billion of additional investment (year on year) between 2019/20 and 2025/26. This allows annual investment levels, and the additional funding that may be required to meet the National Infrastructure Mission's commitment, to be estimated. With no changes in the baseline projections, this will need to funded through capital borrowing, MIM or by other means.

Source: Audit Scotland

The National Infrastructure Mission – Funding and Finance

The table below shows how key components to deliver the National Infrastructure Mission come together. If a choice has had to be made, prudence has guided any decision, to ensure plans are realistic.

Components include assuming that the National Infrastructure Mission enables steady increases in annual investment towards the 2025-26 target level. We show the level cash capital grant planning assumption. We further indicate a proposed increasing trajectory for the new £2 billion investment in low carbon schemes.

Given the lack of certainty around Financial Transactions funding once the current English 'Right to Buy' Scheme ends in March 2023, we currently only plan for new UK FT allocations to the end of that financial year, deploying recycled receipts from prior Scottish schemes thereafter.

These figures also illustrate the sort of revenue finance level needed to meet the NIM trajectory. There are a range of such programmes in train or under preparation for the CSR period, such as the Learning Estate Investment Programme, the dualling of the A9, and investment in Green Growth Accelerators. Figures are estimates, and actual levels of investment may be higher.

Year. All figures (£m)	20-21	2021-22	2022-23	2023-24	2024-25	2025-26	Total (5 years)
Level Cash capital allocation	5,204	5,204	5,204	5,204	5,204	5,204	26,020
New £2bn Low Carbon funding	-	200	300	400	500	600	2,000
Capital receipts or income (est.)	100	100	100	100	100	100	500
New FTs from UK Government	620	620	620	-	-	-	1,240
FTs recycled	272	200	160	140	140	140	780
Revenue Finance	47	50	200	750	1000	1000	3000
Total Investment	6,243	6,374	6,584	6,594	6,944	7,044	33,540
NIM required trajectory	6,243	6,346	6,448	6,551	6,653	6,756	32,754
Difference with NIM	-	+28	+136	+43	+291	+288	+786

The table shows that the plans set out in this Framework, using prudent assumptions, are more than sufficient for Scottish Ministers to deliver against the ambitious National Infrastructure Mission.

Our plans are realistic, and stakeholders can have confidence in them.

Risk to Scottish Financial Planning Assumptions from UK Funding Scenarios

The table below shows how the modelled UK funding scenarios compare with the Scottish Government level cash capital grant planning assumption plus £2 billion low carbon funding requirement. It gives an implied capital borrowing requirement (shown in red in brackets) or headroom figure (positive black number) in each scenario.

All figures £ million	2020-21	2021- 2022	2022- 2023	2023- 2024	2024- 2025	2025- 2026	Headroom over 5 years (2021-22 to 2025-6)
Outlook (Scenario 1)	4,866	5,616	5,917	6,252	6,476	6,476
Outlook (Scenario 2)	4,866	5,018	5,174	5,333	5,499	5,499
Outlook (Scenario 3)	4,866	4,969	5,074	5,180	5,277	5,277
Budget 20-21 Allocation level cash	5,204	5,204	5,204	5,204	5,204	5,204
£2bn low carbon		200	300	400	500	600
Total capital r'qd		5,404	5,504	5,604	5,704	5,804
Headroom (S 1)	(338)	212	413	648	772	672	2,717*
Headroom (S 2)	(338)	(483)	(429)	(376)	(317)	(417)	(2,022)
Headroom (S 3)	(338)	(532)	(528)	(527)	(524)	(624)	(2,735)

* grant may need to replace future Financial Transactions under this scenario in particular

Scottish Ministers can deploy capital borrowing to supplement grant, up to £450 million each year, within a £3 billion rolling total. Assuming all £450 million borrowing is
deployed in 2020-21, £1,994 million will have been borrowed in total by the year end,
with £1,006 million headroom remaining.

The table shows that scenario 1 is sufficient for Scottish plans. We call on the UK Government quickly to revert to its own March 2020 funding assumptions.

Scenario 2 would require deployment of over £2 billion of extra Scottish capital borrowing, which is some way higher than the total borrowing available. We call on the UK Government to permit Scottish Government the additional flexibilities we seek to ensure we can adapt to reduced UK future funding, below announced plans.

Scenario 3 would require almost as much capital borrowing again as Scotland's total capital borrowing limit, and require more in each year than Scottish Government is able to borrow annually. We call on the UK Government to at least deliver the real terms uplifts they have promised, or the fiscal flexibilities we continue to press for.