Scottish Budget 2019-2020

Chapter 3 - Infrastructure Investment

Introduction

Infrastructure investment is one of the four pillars of the government’s economic strategy. We recognise the importance of it to the economy: not only from the immediate short-term benefits of construction but also the longer-term economic impact of our investment in hospitals, schools, transport, infrastructure, digital connectivity and low carbon technology. 

At this Budget we will progress our programme for infrastructure investment in line with our latest ‘Infrastructure Investment Plan’,^[1] published in 2015. Infrastructure projects have been undertaken using a variety of funding mechanisms as we seek to maximise our investment. Our capital programme for 2019-20 will be over £5 billion, making significant progress towards our 2016 Programme for Government commitment to invest £20 billion over the life of this Parliament. 

Our long-term aspirations for infrastructure investment are demonstrated through our 2018 Programme for Government commitment to undertake a National Infrastructure Mission to increase annual investment in infrastructure by 1 per cent of current (2017) GDP^[2], £1.56 billion, by the end of the next Parliament in 2025-26.

Our Priorities

In 2019-20 we will:

• invest £175 million in early learning and childcare facilities, advancing our commitment to provide £476 million capital funding to local authorities over 2017-18 to 2020-21 to support the expansion of early learning and childcare entitlement to 1,140 hours;
• create a £50 million Town Centre Fund as part of a wider package of business support measures to drive local economic activity;
• increase investment in the Affordable Housing Supply Programme to over £825 million (including the Transfer of Management of Development Funding (TMDF) in the local government budget), to progress our commitment to deliver 50,000 new affordable homes by 2021, the majority of which will be for social rent;
• provide £187 million funding for the Aberdeen, Glasgow and Clyde Valley, Edinburgh and South East Scotland, Inverness and Highland, Stirling and Clackmannanshire and Tay City Region deals;
• progress our £320 million commitment to construct five new NHS elective care centres in Clydebank, Inverness, Aberdeen, Dundee and Livingston;
• invest £1.7 billion in our transport infrastructure, including £93 million to take forward our commitment to dual the A9 and £207 million in our major rail electrification programme;
• invest £6.3 million of capital to continue the delivery of the National Manufacturing Institute for Scotland, to bring together research, industry and the public sector to help companies across Scotland embrace new manufacturing techniques and support research and develop the skills of our workforce; and
• invest to develop and maintain our Higher Education and Further Education estate, including up to £22.7 million to complete the construction of Forth Valley College’s new campus in Falkirk.

In addition to the economic impact of our wide-ranging capital programme, we will also invest in key projects to maximise our economic potential: 

• an additional £120 million in 2019-20 into pre-cursors to the Scottish National Investment Bank, ensuring that when the Bank launches, in 2020, it makes a significant impact from the outset – delivering long-term, strategic investments which help power innovation and accelerate our transition to a low carbon, high-tech, connected, globally competitive and inclusive economy; and
• £25.5 million of capital investment for Highlands and Islands Enterprise and £8.4 million capital investment to support the work of the South of Scotland  Economic Partnership to invest in projects and economic activity, sustain and grow communities, and drive forward inclusive growth and fair work across Scotland’s rural economy, and to help establish the South of Scotland Enterprise Agency.

Environmental Sustainability

The Scottish Government is committed to tackling climate change and moving towards a low carbon economy. This budget supports these objectives through:

• making over £145 million available through Energy Efficient Scotland to reduce energy costs, tackle fuel poverty and place us well track to invest £500 million in energy efficiency by 2020-21;
• investing £10 million, with support from the European Regional Development Fund, in innovative low carbon energy projects that support decarbonisation ambitions and deliver economic growth;
• invest £80 million annually in cycling and walking to encourage a greater shift towards active travel to build an Active Nation and help create high quality walking and cycling infrastructure in towns and cities across Scotland to make them friendlier, safer and healthier places for pedestrians and cyclists; and
• continue to support behaviour change programmes to promote active and sustainable travel for everyone, through schemes such as interest free e-bike loans, subsidised bike hire and cycle training. We will also work towards the target to phase out the need for new petrol and diesel cars and vans by 2032 by a significant expansion of Electric Vehicle (EV) charging infrastructure across Scotland, including pilots to address complex issues such as on-street parking in urban areas.

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. Recognising the importance of infrastructure investment to our economy, our 2018 Programme for Government set out our commitment to a National Infrastructure Mission which will increase annual investment by 1 per cent of current GDP^[3] by the end of the next Parliament, compared to the 2019-20 baseline set out in Table 3.01. By 2025-26, this will mean an additional £1.56 billion of investment per year in our key economic infrastructure, delivering a long-term boost to Scotland’s economy and maintaining our competitive global economic position. This baseline has been maximised by making full use of our borrowing powers, deploying 2018-19 capital consequentials from the UK Budget by carrying them forward into 2019-20, and the re-profiling of Financial Transactions.

The National Infrastructure Mission will be financed from a combination of approaches, including traditional capital expenditure, Financial Transactions, capital borrowing, revenue financed investment and innovative finance methods such as Growth Accelerator. We have also asked Scottish Futures Trust to examine the use of profit sharing revenue finance schemes, such as the Welsh Government’s Mutual Investment Model, to help secure both the investment we need and best value for the taxpayer. We will utilise all mechanisms available to enable us to deliver on our priorities including the completion of the A9 dualling. We will also maintain momentum on improving the learning estate with a further £1 billion school investment programme from 2021 as part of the National Infrastructure Mission. 

Table 3.01 sets out how we have measured the 2019-20 baseline and our projections for infrastructure investment had we not announced our ambitious plans to boost infrastructure spending between now and 2025-26. Future expenditure estimates here are based on the central scenarios in ‘Scotland’s Fiscal Outlook: The Scottish Government Five Year Financial Strategy to 2022-23’.^[4] Thereafter, a prudent assumption of an additional £75 million over the following three years has been modelled for future capital grant. We have modelled a flat profile of Financial Transactions from 2020-21 as we do not know if the UK Government will continue with this type of funding. NPD/hub and innovative finance projections are latest estimates. Future reporting will show how increased investment is being made above the levels in Table 3.01. 

Table 3.01 – Projected Infrastructure Investment before National Infrastructure Mission

Investment Profile with no National Infrastructure Mission
Source	2019-20	2020-21	2021-22	2022-23	2023-24	2024-25	2025-26
	£m	£m	£m	£m	£m	£m	£m
Capital Grant	4,020.3	4,095	4,086	4,226	4,301	4,301	4,301
Borrowing	450.0	–	–	–	–	–	–
Financial Transactions	635.5	505	505	505	505	505	505
NPD/Hub	60.0	40	–	–	–	–	–
Innovative Finance	30.0	25	25	35	20	2	3
Current Total	5,195.8	4,665	4,616	4,766	4,826	4,808	4,809

To meet our commitment to increase annual infrastructure investment by £1.56 billion over our 2019-20 baseline we will steadily increase annual investment so that we reach £6,750.8 million of infrastructure investment in 2025-26. This will be a combination of capital grant and Financial Transactions, future borrowing and the use of other innovative finance instruments. As time progresses this mix may change. We will provide updates at future budgets detailing our progress against this ambitious target.

It is vital that the right investments are made that generate inclusive growth and deliver our low carbon objectives. For example, investments in broadband, transport and utilities provide the foundation for companies to invest and bring new economic opportunities across all of Scotland. 

We will establish an Infrastructure Commission to provide strategic infrastructure investment advice to the Scottish Government. The Infrastructure Commission will utilise evidence and learning from the best international practice to ensure our National Infrastructure Mission delivers inclusive economic growth and meets our low carbon objectives. 

Investment Sources

In 2019-20 our investment of over £5 billion is funded through capital grant of £4 billion, capital borrowing of £450 million and £635.5 million of Financial Transactions. We are also continuing to deliver additional investment in infrastructure through our innovative funding routes including revenue financed schemes, Tax Incremental Financing (TIF) and Growth Accelerator and by levering in private finance through housing delivery and City Region Deals.

Capital Grant

Capital grant is determined by the allocation provided to the Scottish Government by HM Treasury at the UK Government Budget. It forms the vast majority of capital investment by the Scottish Government. Capital grant can be used for any new infrastructure investment and net policy lending.

Capital Borrowing

Following agreement of the Fiscal Framework, ratified in the Scotland Act 2016, the limit on the Scottish Government’s capital borrowing powers was increased in 2017-18 to a maximum of £3 billion with an annual cap of £450 million. In order to maximise our commitment to investing in infrastructure, we will make use of the full £450 million available in 2019-20. In assessing affordability, this is modelled as being drawn from the National Loans Fund in 2019-20 with an assumption of repayment over 25 years, an interest rate of 2.5 per cent, and repayments of both principal and interest from 2020-21 onwards. A 25 year repayment profile was chosen to reflect the nature of the assets that we are investing in and following HM Treasury agreement in 2017-18 to enable borrowing for this duration in line with the Fiscal Framework. Final decisions on borrowing arrangements will be taken over the course of the year reflecting an ongoing assessment of programme requirements.

Financial Transactions

As well as making direct infrastructure investment, the Scottish Government has also made use of Financial Transactions funding from HM Treasury which, although limited in how it can be applied (and repayable to HMT), is available to support wider initiatives beyond the public sector. In recent years, Financial Transactions have been used to support a number of housing initiatives, including equity stakes in Help to Buy and other shared equity schemes, as well as innovative financing schemes to increase the supply of homes available for mid-market rent. Financial Transactions have also been used to provide loan funding to Small- and Medium-Sized Enterprises and to support energy efficiency programmes. We will continue to support these schemes in 2019-20 and to increase investment in the higher education sector, with £55.5 million being made available for our universities in 2019-20 to take forward estates projects to improve the learner experience and reduce the sector’s carbon footprint. We have set aside £120 million in 2019-20 for pre-cursors to the Scottish National Investment Bank with a further £220 million in 2020-21, in line with our commitment of £340 million. £50 million is also being made available to continue the Building Scotland Fund in 2019-20.

Revenue Financed Investment, Innovative Financing And Private Sector Leverage

In addition to utilising capital grant and our borrowing powers, the Scottish Government uses a range of revenue financed investment and innovative financing mechanisms to support economic growth in Scotland to maintain or increase investment and help to deliver key policy outcomes within the overall strategy as set out in the Infrastructure Investment Plan. Details of progress in our major revenue and innovative finance models is as follows:

• Non-Profit Distributing (NPD) Model – NPD was developed as an alternative to the traditional Private Finance Initiative (PFI) in Scotland. Since its announcement in 2010, NPD has enabled four college developments, five NHS facilities and two major roads projects with capital investment valued at £1.6 billion and supporting 8,000 jobs during the construction phases. The majority of these projects are now open with three projects currently under construction. 
• Hub – Hub is a public-private partnership delivery vehicle developed by Scottish Futures Trust. The Hub model operates across five geographical areas with an independent private limited company or HubCo in each. In addition to capital funded projects, 40 revenue funded projects with a value of £1.3 billion have now been contracted through the hub programme including schools, health centres and other community facilities. 
• Growth Accelerator (GA) – GA is an innovative form of revenue finance where the Scottish Government pays a grant to local authorities following infrastructure investments, providing the local authority meets agreed outcomes, such as generating a set number of additional jobs in low income areas. There are currently two Growth Accelerators in operation. The Edinburgh St James development will unlock £1 billion of new retail, leisure, hotel and residential development in the city centre. The Dundee Waterfront will see £60 million of Scottish Government investment support the wider £1 billion Waterfront Development that includes the iconic V&A Museum.
• Tax Incremental Financing (TIF) – TIF is an innovative form of finance where councils retain future tax revenue to fund current infrastructure investment and unlock significant private sector development. We have given approval for six pilot TIF projects, five of which are live in Glasgow, Falkirk, Argyll and Bute and two in Fife. The latest approved scheme at Fife Interchange reached agreement in June 2018. The remaining pilot scheme in North Ayrshire remains in development awaiting the outcome of the Ayrshire Growth Deal.
• City Region and Regional Growth Deals – City Region Deals are major strategic partnerships between the Scottish Government, Local Authorities and the UK Government designed to support long-term development in regional economies and will attract more than £1.7 billion of regional partner investment, contribute towards the construction of tens of thousands of new homes, secure over 65,000 jobs and drive innovation, investment and skills across Scotland. City Region Deals have now been agreed to support Scotland’s seven cities and their regions and positive progress across these deals continues to be made. We are committed to investing up to £1.27 billion over the lifetime of these City Region Deals, and in 2019-20 we will invest £187 million. The Scottish Government also supports 100 per cent coverage of Scotland through City Region and Growth Deals and is currently working with local authorities outside of city regions in Ayrshire and Moray, Argyll and Bute, Falkirk, the three island councils and in the Borderlands to shape Regional Growth Deals.
• Innovation in Housing Investment – The innovative use of government guarantees, loans, grant recycling and new sources of private funding is supporting the delivery of up to 8,500 homes across all tenures and generating over £1 billion of housing investment in addition to our conventional funding routes. This includes the successful delivery of the Mid-Market Rent Invitation which will deliver 1,000 mid-market rent homes by March 2021 through a long-term £47.5 million Scottish Government loan and £90 million of Institutional Investment. We have also continued Scottish Government investment in Charitable Bonds, where we have invested in 16 bonds worth almost £95 million and have provided development finance for around 1,000 affordable homes and generated around £22 million in additional grant for charities which has supported the development of over 200 social rent homes.

Monitoring of Long-term Investment Commitments

We are committed to the sustainable use of revenue financed investment methods to ensure we do not overly constrain our choices in future years. 

Prior to this budget the Scottish Government had a self-imposed revenue finance investment limit of 5 per cent of the total Scottish Government Budget. To ensure our National Infrastructure Mission will be delivered in a fiscally prudent way, we are tightening this self-imposed limit to 5 per cent of the Scottish Government resource budget (excluding social security).

The commitments included in the revenue finance limit calculation are the Scottish Government’s costs relating to: previous Public Private Partnership (PPP) contracts that are now operational, the current Non-Profit Distributing (NPD) and hub programmes, Growth Accelerator payments and the costs of repaying capital borrowing. 

In previous years rail investment (financed via the Regulatory Asset Base (RAB)) was included in this calculation; but from 2019-20 this is no longer the case following the reclassification of Network Rail from a private to public sector classification, and the change in funding regime to grant-based rather than borrowing. Agreement has been reached with HM Treasury for repayment of historical RAB debt to 31 March 2019. All future funding for rail in Scotland beyond that will be grant-based and there will be no liabilities falling to Scottish Government therefore no RAB payments will be included within the 5 per cent cap from 2019-20 onwards.

Figure 3.01 shows annual revenue funded investment costs as a percentage of the Scottish Government’s resource budget, broken down into committed projects and borrowing, and planned projects and planned borrowing^[5]. It shows that the peak occurred in 2017-18 at 4.5 per cent, including RAB payments. In 2019-20 committed projects are estimated to be 3.1 per cent of the resource budget with planned and committed projects and borrowing 3.17 per cent of the resource budget. This is estimated to increase to 3.21 per cent in 2020-21 and 2021-22. 

Figure 3.01: Long-term Investment Commitments – Scottish Government’s Share of Costs as a Proportion of the Total Projected Resource Budget

We only have firm resource budget allocations from the UK Government until 2019-20, although the UK Government set out a profile for overall UK public spending until 2023-24, in the UK Budget on 29 October 2018. We have therefore assumed that spending allocations will grow in line with these plans until 2023-24, with spending allocations beyond this point growing in line with projected nominal GDP from the OBR’s most recent Fiscal Sustainability Report. The years without firm resource budget allocations are 2020–21 to 2025-26.

Footnotes

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

2 Based on the latest Scottish GDP estimate for 2017, which can be found at https://www2.gov.scot/Topics/Statistics/Browse/Economy/

3 Based on the latest Scottish GDP estimate for 2017, which can be found at https://www2.gov.scot/Topics/Statistics/Browse/Economy/

4 https://www.gov.scot/publications/scotlands-fiscal-outlook-scottish-governments-five-year-financial-strategy/

5 Estimated costs have been adjusted to reflect the impact of a public sector classification for the Aberdeen Western Peripheral Route project, the Dumfries and Galloway Acute Services Redevelopment Project, Edinburgh Royal Hospital for Sick Children, Scottish National Blood Transfusion Service and an assumption of a similar classification for the NHS Orkney New Hospital and Healthcare Facilities.