What are the plans for infrastructure in Scotland and how will it be funded?

Investment in the right infrastructure can help grow the economy (LSE 2013). Many governments – including past Scottish Governments – have looked to prioritise infrastructure investment.  It is not just the quantity of infrastructure investment that matters for economic growth, but also the quality (World Bank 2014). 

How does the Scottish Government plan to fund Infrastructure investment?

The Scottish Government receives a capital budget allocation as part of its block grant from the UK Government.  In 2016-17, this allocation was £3,158m (including £326m Financial Transactions money which must be spent on equity/loan finance schemes and repaid to HM Treasury in future years) (Figure 3).

Over the last Parliament, the Scottish Government supplemented its declining capital budget allocation through a revenue financing scheme known as the ‘non-profit distributing (NPD) model’.  Under this scheme, the private sector finances the upfront capital costs of the project and, once operational, the Scottish Government makes annual payments to the private sector contractor to cover capital costs, interest costs and maintenance/service charges, usually for 25-30 years. The payments come out of public sector revenue budgets (as opposed to capital budgets).  Due to changes in European accounting rules, some of the planned NPD investment has had to be accounted for upfront from the main capital budget.  In 2016‑17, the Scottish Government plans to fund projects with a net additional capital value of £511m through its NPD scheme

Since 2015-16, the Scottish Government also has the option of using borrowing powers to finance capital investment.  It can borrow up to 10% of its capital budget for capital projects, which is equivalent to £316m in 2016-17.  Under the terms of the Scotland Act 2016, these capital borrowing powers are set to increase to £450m per year, within an overall cumulative limit of £3bn.  So far, these borrowing powers have not been used to increase capital investment.

Capital investment funding options, 2016-17

Funding Options*Net additional capital value

Source: SPICe

What is being built?

The last Scottish Government set out its long-term plans for infrastructure investment in its Infrastructure Investment Plan (IIP) (Scottish Government 2015).  The latest IIP (2015) identifies plans for more than £28bn of infrastructure investment over a 20 year period (Figure 4).

Planned investment by sector 2015-2035 (£m)

Infrastructure

Source: SPICe, data from Scottish Government 2015

Over a third of this planned investment is in the transport sector, with the biggest projects including the Queensferry Crossing (£1.3bn), the A9/A96 dual carriageway (£1.3-£3bn) and Glasgow terminal stations (£1.5bn-3.0bn).

Future issues

The current project pipeline relies heavily on revenue financing, with two-thirds of the total project value expected to be funded through revenue financing.  This planned reliance on revenue funding needs to be seen in the context of three particular issues:

  • Despite anticipated growth in the capital allocation over the spending review period, on current plans the capital budget in 2019-20 will still be 17% lower than in 2010‑11.
  • The Scottish Government has committed to spending no more than 5% of its total budget on repayments arising from revenue financing and borrowing. On current plans, the Scottish Government will spend around 3.75% of its budget on such payments in 2016‑17, peaking at just over 4.2% in 2020‑21.  Use of borrowing powers, higher interest rates and/or further use of revenue financing would affect this measure.
  • If future NPD projects are affected by the changes to the European accounting rules, this will impact on the Scottish Government’s capital budget in future years as the value of investment will need to be included in the capital budget rather than revenue budgets.

Achieving value for money in infrastructure investment will continue to be critical.  The Scottish Futures Trust and the Scottish Government’s Infrastructure Investment Board both have a remit for ensuring value for money in infrastructure investment.  In 2015, the Institution of Civil Engineers recommended that the next administration should assess Scotland’s long-term infrastructure needs to inform the prioritisation of capital investment projects. In their assessment of current infrastructure, none of the sectors covered was considered to have infrastructure provision that was fit for the future.  The best performing sectors were strategic transport and water, which were given a ‘B rating’ and assessed as “adequate for now”.

Nicola Hudson

Sources:

London School of Economics (LSE) (2013) Investing for Prosperity, Skills, Innovation and Infrastructure, Report of the LSE Growth Commission. Available at – http://www.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/LSEGC-Report.pdf [Accessed 27 April 2016]

Scottish Government (2015) Infrastructure Investment Plan 2015. Available at – http://www.gov.scot/Resource/0049/00491180.pdf [Accessed 27 April 2016]

Scottish Government (2016) IIP Project Pipeline. Available at –http://www.gov.scot/Topics/Government/Finance/18232/IIP/ProjectPipelineMarch2016 [Accessed 27 April 2016]

World Bank (2014) Strong, Sustainable and Balanced Growth: Enhancing the Impact of Infrastructure Investment on Growth and Employment, Background note for the G20 prepared by Staff of the World Bank Group, World Bank Group. Available at – http://siteresources.worldbank.org/EXTSDNET/Resources/infrastructure-background-note-G20.pdf [Accessed 27 April 2016]