Chapter 3: Infrastructure Investment
This budget supports our long-term aspirations for infrastructure investment as set out in our latest Infrastructure Investment Plan, published in 2015, and the Programme for Government. Infrastructure investment is one of the four pillars of the government’s economic strategy and we recognise the importance of it to the economy: not only from the immediate short-term benefits from construction but the longer-term impact of what we have chosen to invest in.
Current infrastructure projects have been undertaken using a variety of funding mechanisms as we seek to maximise our investment. We have set out an ambitious programme of infrastructure investment for 2018-19 of over £4 billion, in line with our Programme for Government commitment to invest £20 billion over the life of this Parliament.
In 2018-19 we will:
- invest £150 million in early learning and childcare facilities to support expansion of the service to 1,140 hours;
- increase funding for affordable housing to £756 million as we continue to progress delivery of 50,000 new homes by 2021;
- facilitate the launch of the first phase of our Reaching 100 per cent (R100) programme to deliver superfast broadband to all premises across Scotland. This connectivity will also support future innovation in the digital economy and ensure Scotland’s business base can grow and remain competitive in the global digital environment;
- double investment in sustainable and active travel to £80 million;
- invest £1.2 billion in our transport infrastructure including key roads projects, such as improvements to the A9, and on rail; the electrification of the Stirling, Dunblane and Alloa line, improvements to the route between Aberdeen and Inverness and on the Highland Main Line between Inverness and Perth;
- continue to support capital investment in our public sector estate including new hospital facilities in Aberdeen and Orkney, and our £200 million investment programme to expand the Golden Jubilee Hospital and develop five new NHS elective care centres across the country; and
- support the new Forth Valley College and our school investment programme as we continue to improve our learning facilities.
In addition to the economic impact of our wide-ranging capital programme, we have chosen to invest in some key projects to exploit our economic potential. These include:
- the establishment of a Building Scotland Fund to support construction jobs and further accelerate delivery of housing development, industrial premises and research and development, drawing together public sector interventions in housing, regeneration and infrastructure;
- the National Manufacturing Institute for Scotland; and
- support for decommissioning through investment in an ultra-deep water port facility.
We will also prepare for implementation and capitalisation of the Scottish National Investment Bank.
The Scottish Government is committed to tackling climate change and moving towards a low carbon economy. This budget supports these objectives through:
- making available £137 million of funding for Scotland’s Energy Efficiency Programme, to reduce energy costs and tackle fuel poverty as well as investing in renewable energy technologies; and
- increasing investment in active and sustainable transport and investing £35 million in electric charging points as we work towards our target to phase out the need for new petrol and diesel cars and vans by 2032.
In 2018-19 our investment is funded through capital grant of £3.4 billion, capital borrowing of £450 million and £489 million of financial transactions. We are also harnessing additional investment in infrastructure through our innovative funding routes including revenue financed schemes, Tax Incremental Financing ( TIF) and Growth Accelerator, housing delivery and City Region Deals.
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 2018-19. In assessing affordability, this is modelled as being drawn from the National Loans Fund in 2018-19 with an assumption of repayment over 10 years, an interest rate of 2 per cent, and repayments of both principal and interest from 2019-20 onwards. Final decisions on borrowing arrangements will be taken over the course of the year reflecting an ongoing assessment of programme requirements.
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 Enterprises and to support energy efficiency programmes. We will continue to support these schemes in 2018-19 as well as using Financial Transactions to support the Building Scotland Fund and increase loan funding available for low carbon vehicles. Once the Scottish National Investment Bank is established Financial Transactions will also be made available to capitalise it.
Revenue Financed Investment and Innovative Financing
In addition to utilising capital grant and our borrowing powers, 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 as set out in the Infrastructure Investment Plan.
The Non-Profit Distributing ( NPD) model was developed as an alternative to the traditional Private Finance Initiative ( PFI) model in Scotland. The model involves a partnership with a private sector provider who designs, builds, finances and maintains the asset. The public sector then pays an annual charge over a 25-30 year period to the private sector provider from the revenue budget, once the asset has been built.
Since its announcement in 2010, there have been four college developments, five NHS facilities and two major roads projects with contracts valuing £1.6 billion. Many of these major facilities are now open and operational.
- The new colleges in Glasgow, Kilmarnock and Inverness are providing world-class learning environments for over 50,000 students. These colleges, delivered more quickly than previous schemes, have also received numerous design awards, including the Royal Incorporation of the Architects in Scotland ( RIAS) award.
- The M8/M73/M74 motorway improvements project is now benefiting thousands of road users daily, reducing congestion and significantly cutting down journey times on some of Scotland’s busiest road links.
- In health, the District General Hospital in Dumfries opened in December 2017. As with all NPD projects, the Dumfries project contracted community benefits targets for training and recruitment during the construction period. It exceeded its targets, delivering 57 apprenticeships, 17 graduates and 50 work experience placements.
Key projects currently under construction include the Aberdeen Western Peripheral Route and the Edinburgh Royal Hospital for Sick Children and a new rural hospital facility in Orkney.
Thirty-six projects with a value of £1.2 billion have now been contracted through the hub programme. These are community infrastructure projects – including schools, health centres and other community facilities – which also use future revenue streams to fund capital investment now. A revised structure for the hub programme has been introduced to align with the new ESA2010 classification rules and this has allowed this programme to continue to deliver using this procurement route.
Sixteen revenue-funded hub projects are open and providing modern fit-for-purpose accommodation for our communities.
During 2018-19 revenue-funded hub projects are expected to contribute to further capital investment on the ground of £150 million. Construction work continues on key health facilities such as the East Lothian Community Hospital, the Gorbals and Woodside Health Centres and the Stirling Care Village.
A number of revenue-funded hub projects remain under development and will support capital investment in 2018-19 and beyond:
- phase 2 of the Royal Edinburgh Hospital development;
- a number of health centres in Grampian, the Highlands and in the West; and
- secondary school developments through the Scotland’s Schools for the Future Programme.
Tax Incremental Financing and Growth Accelerator
Managed by the Scottish Futures Trust ( SFT), the Tax Incremental Financing ( TIF) and Growth Accelerator ( GA) schemes are driving investment and unlocking major development activity across Scotland and, where possible, complementing and aligning with proposed City Region and Growth Deal investments. To date, £50 million of public sector investment has been made across TIF and GA, stimulating and securing a further £1 billion of private sector investment. Over £150 million of public sector investment through TIF and GA is forecast over the next three years. A summary of progress across existing and newly-announced schemes is set out below:
Tax Incremental Financing
Approval has been given for six TIF pilot schemes, four of which are live in Glasgow, Falkirk, Argyll and Bute and Fife Levenmouth and two announced in December 2016 where business cases are being developed. Across the combined six TIF schemes, over £200 million of public sector investment is anticipated. The TIF investments have allowed local authorities to fund public sector infrastructure, which unlocks private sector investment, contributing to significant sustainable and inclusive economic growth outcomes. This growth is funded from future business rates that are generated as a result of attracting more businesses into the area because of upfront public sector enabling investment. The two most recently approved schemes where business cases are being developed are:
- The Fife Council Fife Interchange TIF scheme submitted a final revised Business Case in late 2017 and an approved TIF Agreement is anticipated for early 2018, enabling investment to flow from March 2018.
- The North Ayrshire TIF scheme submitted a revised Business Case to Scottish Futures Trust in late 2017 with discussions anticipated to continue in early 2018.
The two GA schemes are in Edinburgh and Dundee:
- The first was signed in October 2016 with the City of Edinburgh Council, for the St James Quarter, unlocking around £1 billion of new retail, leisure, hotel and residential development in the city centre.
- The second is with Dundee City Council and will see £60 million of Scottish Government investment support the wider £1 billion Waterfront Development that includes the iconic V&A Museum. 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.
SFT is currently also in early discussions with the Highland Council, Aberdeen City Council, Mallaig and Stornoway Harbour Trusts on possible GA schemes.
City Region Deals, Growth Deals and Regional Partnership Plans
The City Region Deals in Scotland have encouraged local authorities to operate strategically at the regional level, in partnership with national government. The Scottish Government, along with the UK Government, is committed to delivering City Region Deals for each of Scotland’s six city regions and positive progress across these deals continues to be made.
Sparked by City Region Deals, Scotland’s local authorities sitting outside city regions have also begun to develop plans with the Scottish Government and UK Government for Regional Growth Deals, aimed at stimulating economic activity, addressing barriers to inclusive growth, and encouraging partnership working at the regional level. A summary of the Scottish Government’s commitments is set out below:
The Scottish Government is supporting £1.13 billion of investment in the Glasgow and City Region Deal, committed to £500 million of investment, with the UK Government matching this contribution and local authority partners providing £130 million of funding utilising their access to prudential borrowing. 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 National Manufacturing Institute will be located in Renfrewshire, backed by Scottish Government investment, and supported by the City Region Deal.
The Aberdeen City Region Deal, was signed in 2016 with the Scottish Government committed to £125 million of investment, matched by the UK Government. In addition, the Scottish Government committed to investing a further £254 million over the same 10 year period to make a more significant step change to the economy of the North East. Significant progress has been made on the Aberdeen City Region Deal to date including the launch of the flagship Oil and Gas Technology Centre in October 2017, by the First Minister.
The Scottish Government committed to investing up to £135 million in the Inverness City Deal, signed in 2016. Significant progress has been made on the deal to date with work commencing on the Science Skills Academy and the School of Health, Social Care and Life Sciences.
The Scottish Government signed Heads of Terms with the Edinburgh and South East Scotland City Region Deal partners in July 2017, committing to £300 million of investment into the region, match funded by the UK Government. The various regional partners, including six local authorities and the regions’ universities and colleges, have committed £501 million in funding. The Scottish Government continues to work with the partners to set in place the delivery arrangements for the deal with projects anticipated to commence in 2018.
The Scottish Government is currently in negotiation with Stirling and Clackmannanshire Councils on the Stirling City Region Deal and with Perth, Dundee, Angus and Fife Councils on the Tay Cities Deal and we expect the Scottish Government’s financial commitment to these deals to be confirmed in 2018.
The Scottish Government has also committed to working with local authorities outside of city regions where regional economic partnerships are seeking growth deals. The Scottish Government is already in discussion with the Ayrshire, Moray, Argyll and Bute, Falkirk and the three island councils. Alongside this, Scottish Government is continuing discussions with local authorities to shape a Borderlands Deal to drive inclusive growth across the area.
Innovation in housing investment
Housing investment is being spearheaded by a combination of traditional capital and Financial Transactions totalling £836 million in 2018-19, of which £756 million is part of our commitment to invest over £3 billion to deliver 50,000 affordable homes over the course of the Parliament.
In addition, we continue to innovate and optimise public resources to harness increased investment in housing to deliver our ambitious targets and boost the housing construction sector. The innovative use of government guarantees, loans, grant recycling and leveraging in new sources of private funding is generating over £750 million of housing investment, to deliver around 6,000 affordable homes, the majority of which will contribute to the 50,000 affordable homes commitment.
The latest guarantee and loan-based schemes aiming to attract additional private investment and support new house-building include:
- implementing a Rental Income Guarantee Scheme launched in October 2017. This aims to help attract private investors to kick-start delivery of high quality new-build private rented sector homes at scale, and could deliver up to 2,500 homes and leverage in £500 million investment;
- selection from the recent Mid-market Rent Invitation of one proposal which has the potential to deliver around 1,000 mid-market rent homes while leveraging significant pension fund investment to the affordable housing sector; and
- supporting local authorities to develop plans to boost the supply of affordable housing through prudential borrowing, and delivering City Deal commitments on housing. This includes approval this year of consent to on-lend up to £248 million along with a £16 million capital grant to City of Edinburgh Council to support a new city region housing company to deliver a minimum of 1,500 homes at mid-market rent and competitive market rent levels.
The new Building Scotland Fund, with a prominent housing and infrastructure focus, will support an expansion of Help to Build housing interventions to further accelerate and scale up housing delivery through proven innovative models. It will also promote and support further innovation in both affordable and market housing in future.
Monitoring of Long-Term Investment Commitments
We remain committed to ensure that we use revenue-funded methods of investment at a sustainable level, and do not overly constrain our choices in future years. These plans for 2018-19 continue to keep within the maximum of 5 per cent of our annual Departmental Expenditure Limit ( DEL) budget. The commitments included in the calculation are the Scottish Government’s share of the ongoing costs of: previous PPP contracts that are now operational; the current Non Profit Distributing ( NPD) and hub programmes; rail investment (financed via the Regulatory Asset Base – RAB) and the costs of borrowing for capital investment under Scotland Act powers.
The following graph shows future revenue costs associated with our committed projects, planned projects and borrowing.  The annual revenue costs of committed projects are estimated to peak in 2019-20 at 3.88 per cent of total annual DEL budget. The annual revenue costs of committed projects plus planned projects and planned borrowing, peak at 4.3 per cent in 2020-21. It should be noted that following the reclassification of Network Rail from a private to public sector classification, the funding regime will also change from 2019-20 and rail projects will become entirely grant-funded. HM Treasury will take on responsibility for debts accrued by Network Rail in Scotland. Figure 1 below, in the interests of maintaining comparability with previous periods, the years 2019-20 to 2022-23 contain estimates of the Network Rail investment as if it had been RAB funded. This will be revised as part of the production of the medium-term financial plan in response to the recommendations of the Budget Process Review Group.
Figure 1: Long-Term Investment Commitments – Scottish Government’s Share of Costs as a Proportion of the Total Projected DEL Budget
Committed projects are those where a contract has been signed. The assets will therefore be under construction, or the project is operational. Committed projects also include the Scottish Government’s share of the revenue costs of PFI projects (which are completed and in operation) and the five pre-pipeline NPD projects. Unitary charges usually include ongoing maintenance commitments over the project life, as well as costs associated with project construction and financing. Costs associated with planned projects and investments are those where a contract is not yet signed.
In the UK Spending Review announcement of 25 November 2015, the UK Government set out spending allocations up to 2019-20 for Resource DEL and up to 2020-21 for Capital DEL and Financial Transactions. Beyond 2019-20 we have no detailed UK departmental spending plans, and therefore of the Scottish block grant. We have therefore assumed that spending allocations will grow in line with projected nominal GDP. The years without firm DEL allocations are 2020–2023 and these are shown with the hatched pattern in Figure 1.