Update on Progress with Innovative Finance Investments
The Scottish Government continues to pursue a range of innovative financing mechanisms which are intended to support economic growth in Scotland, maintain or increase investment and help to deliver key policy outcomes, within the overall strategy set out in the 'Infrastructure Investment Plan'.
Innovation in Housing Investment
The Scottish Government continues to break new ground through leading and supporting innovative financing schemes that deliver increased levels of affordable housing and attract private investment. The use of government guarantees, loans, grant recycling and new sources of private funding is already supporting the delivery of approaching 5,000 new affordable homes, generating up to £650 million of housing investment which is set to increase further.
We will continue to innovate and stretch public resources to harness increased investment in housing to deliver our ambitious housing targets, including through:
- supporting local authorities to develop plans to boost the supply of affordable housing through prudential borrowing;
- running an open invitation for proposals from housing providers that can deliver affordable mid-market rent homes at scale across Scotland, with a number of proposals now being progressed through due diligence; and
- market-testing and developing a Rental Income Guarantee Scheme that aims to attract private investors to kick-start delivery of high quality new-build private rented sector homes at scale.
Initially part-funded by the European Union, the SPRUCE Fund has now entered the recycling phase and is now operating across all local authority areas in Scotland where there is identified market failure and lack of investment. There have been seven investments by the fund taking the total invested so far to over £48 million. Forecasts suggest that SPRUCE investments will lever in an additional £158 million in private funding, creating over 4,000 jobs.
Tax Incremental Financing
Tax Incremental Financing ( TIF) allows local authorities to fund public sector infrastructure, which unlocks private sector investment, contributing to sustainable and inclusive economic growth. This growth is funded from future business taxes that are generated as a result of attracting more businesses into the area because of upfront public sector enabling investment.
Six pilot TIF schemes were developed through secondary legislation under existing provisions of the Local Government Finance Act (1992). This pilot approach has allowed this model to be tested in Scotland, with four pilot projects currently in place, of which three have received full approval and one has received approval in principle. These pilots have so far seen approximately £30 million of the total £175 million of public sector investment anticipated, which is expected to generate £900 million of private sector investment over the life of the projects. Two other TIF pilots (North Lanarkshire and City of Edinburgh) have not proceeded as planned due to changing market conditions and agreement by all parties to pursue other options for supporting growth. The two TIF opportunities will now be made available for all local authorities to apply for during the course of 2017.
In comparison to TIF, the Growth Accelerator ( GA) mechanism seeks to assess the impact of intervention and investment across a wider economic geography and measure wider relevant impacts that align with the priorities of the investment. The first GA project was signed in October 2016 with City of Edinburgh Council, for the St James Quarter, with up to £60 million of public sector investment unlocking around £1 billion of new retail, leisure, hotel and residential development in the city centre. The second project has been agreed with Dundee City Council and the underpinning financial arrangements are being concluded. The project is designed to stimulate growth, create jobs and support businesses through a combination of public and private sector investment in local infrastructure and public spaces within Dundee's Central Waterfront area. Other growth accelerator projects will be developed where this is agreed to be the best tool for investment. The Scottish Government and the Scottish Futures Trust are engaging with local authority partners to consider the potential application of the GA model.
City Deals and Regional Partnership Plans
The City Deal approach encourages local authorities to operate strategically at the regional level, in partnership with national governments. The Scottish Government, along with the UK Government, is supporting £1.13 billion of investment as a result of the Glasgow City Region Deal. Local authority partners estimate that the City Region Deal will support an overall increase of around 29,000 jobs in the city region and lever in an estimated £3.3 billion of private sector investment over 20 years.
The Scottish Government, UK Government and regional partners recently signed the Aberdeen City Region Deal and the Scottish Government committed to investing up to £125 million in the Deal. In addition the Scottish Government has committed to investing a further £254 million over the same 10-year period as the Deal to make a more significant step change to the economy of the North East. The Scottish Government is also committed to investing up to £135 million in the Inverness City Region Deal.
The Scottish Government is prepared to support all Scotland's cities to develop City Deal proposals, where this can stimulate collaborative working and regional investment, and has welcomed the UK Government's commitment to City Region Deals for Edinburgh, Dundee/Perth and Stirling. This approach is not just for Scotland's cities and we are committed to working with groups of local authorities where there is potential to support more effective collaboration in delivering shared priorities.
Non-Profit Distributing Programme
Since the announcement of the NPD programme in 2010, 37 projects with a value of £2.4 billion have been contracted with 12 state-of-the-art facilities across the education and health sectors already constructed and operational. They include three NPD colleges now open in Glasgow, Inverness and Kilmarnock delivering modern flexible learning spaces to over 50,000 students. The colleges construction represented over £300 million investment supporting an estimated 3,500 jobs with 73 apprentice opportunities and 128 jobs filled by new entrants. In addition to the economic stimulus, the College NPD procurements were delivered in shorter timescales than previous norms and have won architecture and design awards including a shortlisting for the prestigious Royal Institute for British Architects 2016 Stirling Prize.
investment in our roads is ongoing including construction on
M8/M74/M73 and the Aberdeen Western Peripheral Route ( AWPR) bringing significant connectivity and economic benefits. During 2016-17 there has been over £150 million construction investment in the NHS Lothian Royal Hospital for Sick Children and Department for Clinical Neurosciences ( RHSC/ DCN) and the large acute hospital facilities in Dumfries.
Projects in the NPD programme, both large standalone projects such as the roads and hospitals or community infrastructure projects delivered through the hub programme, use future revenue streams to fund capital investment now. A change in the European System of Accounts ( ESA10), rules as they apply to revenue funded projects caused a review of the NPD programme, including hub in November 2015, March 2016 and again in September 2016 when further iterations of guidance were published.
The Scottish Government attaches considerable value to the role of private finance in infrastructure investment. A revised structure for the hub programme has been introduced to align with the new ESA10 rules and this has allowed 12 schools projects and three community health projects to reach financial close and enter into construction during 2016. A pipeline of further hub projects has been agreed which will commence construction during 2017.
The Office for National Statistics ( ONS) confirmed on 31 July 2015 that the Aberdeen Western Peripheral Route infrastructure project should be classified to the public sector. While classification to the public rather than private sector has no cashflow impact, following review of the ONS decision by the Scottish Futures Trust ( SFT) and consultation with HM Treasury on the budgetary implications, the Draft Budget 2016-17 and the 2017-18 draft budget make provision for the construction costs of the AWPR and three other NPD projects which have received a public sector classification.
SFT is reviewing options for the delivery of future revenue-funded projects, taking into account the work on the revised hub structure. In the current pipeline, the Fife College project is currently developing its business case. Work is also ongoing to consider innovative investment opportunities across other sectors.
To maintain progress on projects, a bespoke funding structure for the Orkney Hospital project retaining an element of private finance has been developed. Capital funding has been allocated for the Baird Family Hospital, the ANCHOR Centre and Forth Valley College which were previously listed as revenue funded projects under the NPD programme. All three projects are progressing their procurements.
Estimated Capital Investment Profile (£m)
The table below provides an up-to-date profile of estimated capital investment delivered through the programme. For comparison, the investment profile estimates at the time of the Draft Budget 2016-17 are also shown. As in prior years, estimates include an adjustment to the forecast for the year ahead, to reflect the fact that estimates of future annual investment across a portfolio of complex projects sit within a range of potential outcomes and that individual projects are subject to a number of factors that can influence implementation timetables.
|Year||Project||Draft Budget 2016-17||Draft Budget 2017-18*|
|2015-16||M8 M73 M74 Motorway Improvements||101||101|
|A90 Aberdeen Western Peripheral Route/Balmedie - Tipperty||260||141|
Royal Hospital for Sick Children/Department
of Clinical Neurosciences
|NHS Ayrshire and Arran Acute Mental Health and North Ayrshire Community Hospital||25||25|
|NHS NSS Scottish National Blood Transfusion Service National Centre||21||21|
|NHS Dumfries and Galloway Acute Services Redevelopment Project||52||52|
|2016-17||M8 M73 M74 Motorway Improvements||76||76|
|A90 Aberdeen Western Peripheral Route/Balmedie - Tipperty||176||183|
|NHS Lothian Royal Hospital for Sick Children/Department of Clinical Neurosciences||73||64|
|NHS NSS Scottish National Blood Transfusion Service National Centre||8||8|
|NHS Dumfries and Galloway Acute Services Redevelopment Project||101||101|
|NHS Orkney New Hospital and Healthcare Facilities Project****||-||-|
|2017-18||A90 Aberdeen Western Peripheral Route/Balmedie - Tipperty||-||142|
|NHS Lothian Royal Hospital for Sick Children/Department of Clinical Neurosciences||-||22|
|NHS Dumfries and Galloway Acute Services Redevelopment Project||-||26|
* Estimated profile of construction activity associated with Scottish Government revenue-funded projects in the budget period based on dates and values updated by procuring bodies for the August 2016 Infrastructure Investment Plan project pipeline update. For projects in construction, the investment profile per annum reflects the contractor's financial close model projections with the exception of the AWPR and RHSC/ DCN where the contractors have reforecast the planned works between investment years. The profiled investment reflects the Scottish Government's response to all updates in relevant EU guidance on ESA 10.
** Projects in development manage a portfolio of risk connected with land, planning, design development and service planning. These risks create some uncertainty in the forecasts for projects yet to be contracted. It is critical that projects are finalised to deliver the best possible value for money and user experience over their life. Reflecting the greater uncertainty further out in time, the programme level adjustment applied in the 2016-17 estimate has been removed and is applied to the 2017-18 estimate.
*** Totals may not sum due to rounding.
**** Investment value for the NHS Orkney project has been removed from the table to reflect that this project is being funded through an alternative route to allow a comparison net of this effect to be made.
2015-16 Estimated Capital Investment Delivered
The latest estimates demonstrate that the NPD delivery programme progressed investment of around £666 million in 2015-16. This reflects significant construction activity across the roads projects, the acute health projects as well as a number of schools and health centres. The updated forecast for AWPR reflects the contractors reforecast construction profile and accounts for project complexities and severe weather conditions during the year.
2016-17 Estimated Capital Investment Forecast
The total forecast capital investment of £816 million reflects the volume of construction activity on the M8/M74/M73 improvements project, the AWPR and the large acute hospital facilities in Dumfries and the Royal Hospital for Sick Children and Department for Clinical Neurosciences ( RHSC/ DCN) in Edinburgh. Twelve new school projects reached financial close in year and these are all contributing to the schools investment forecast of over £300 million in 2016-17. The reduction on the prior year estimates reflects that a number of schools projects delivered under budget. Whilst the programme level issues around ESA10 have been resolved, some project specific issues mean that in some cases schools and some community health projects have reforecast their dates for construction commencement.
2017-18 Estimated Capital Investment Forecast
The larger NPD projects are moving towards their operational phases and the majority of the forecast relates to the schools and community health projects. Some uncertainty regarding dates for construction will remain whilst projects are still in their development phase and dealing with project complexities and value engineering reviews. This risk is reflected in the provision for pre contract uncertainty in 2017-18.