PublicPrivate funding for Scottish infrastructure

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Public-Private funding for Scottish infrastructure
Scottish Property Federation presentation to
Edinburgh Business Assembly 31st January
2008 Saltire Court, Dundas Wilson, Edinburgh
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Demand for investment

• National planning framework 2 identifies need for
  9 major projects
• Much greater backlog of investment across public
  buildings and infrastructure networks
• From development industry perspective investment
  vital if sustainable economic growth is to be
  realised

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Current funding

• Expected to be limited at best 10 of total
  Scottish Gvt budget about 3bn per annum this
  is not enough to meet demand
• SG borrowing powers constrained under existing
  constitutional arrangements but local
  authorities have been able to use prudential
  borrowing powers since 2003 legislation
• Taxation powers also constrained as well as
  politically difficult
• Private sector financing has come under political
  pressure in Scotland new approach is called for
  from the SNP administration
• Scottish Futures Trust debate currently open and
  SG is looking to continue to enter private
  markets but with greater constraints upon private
  sector returns

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Borrowing

• Public sector can generally borrow at a better
  rate than private sector but
• SG is heavily constrained by Scotland Act
• UK has certain borrowing obligations that control
  the extent of borrowing the Scottish Gvt can
  budget for
• In addition new international financial reporting
  standards in 2008 add further constraints on how
  public sector accounts for PPP/PFI schemes

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Taxation

• Again, Scotland Act reserves most taxation powers
  to Westminster
• Income tax can be varied but politically
  contentious
• Business rates / council tax- intended to pay
  for local services
• BIDs in Scotland are intended to provide more
  modest additional services to business
  communities
• Proposals are coming forward in England for a
  supplementary business rate to pay for
  infrastructure projects

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London Crossrail supplementary rates

• Crossrail perhaps most famous example of
  infrastructure contributions via business rates
• 16bn cost of project up to 3.5bn is expected
  to be raised by the London business community,
  through a London wide sbr
• Developer contributions are to be sought by
  London Mayor
• Hugely contentious within business community and
  politically idea first proposed in early 1990s
  it is still progressing through UK Parliament

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Supplementary rates

• Proposal for an SBR of 2p based on major local
  authorities in England
• Hypothecated for economic development projects
• If more than 50 of the project cost then there
  is a vote by the business community akin to BIDs
• Moneys raised wld vary greatly Gtr. London wld.
  raise about 180mn p.a.
• Edinburgh more likely to be in the region of
  10mn p.a.
• Idea would be to turn the additional rates
  revenue into significant capital raised through
  the financial markets

8
Developer contributions

• UK Gvt. persuaded to back off from planning gain
  supplement in England a new Community
  Investment Levy is currently being legislated for
• In Scotland the debate on planning gain has been
  opened up by the Scottish gvt.
• DW estimate of 50mn we think a 0 is
  missing!
• The issue of mitigating the impacts of
  development are well understood but it is
  apparent that there has been a lack of cost
  controls the cumulative contribution of the
  development industry does not appear to be easily
  assessed
• We realise that going forward there will continue
  to be obligations - but we do not think the
  development industry can be expected to pay for
  the full infrastructure backlog to expect it to
  do so could drive investment out of Scotland

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Private finance

• PPP/PFI has raised 5bn since it began in the
  90s arguably this is investment that may not
  have happened otherwise
• Critics of PPP-PFI claim that it is costly,
  provides excessive returns to its investors
  that it is inflexible for its public sector
  customers
• SNP made its concerns known ahead of the 2007
  election has now opened a debate on an
  alternative model the Scottish Futures Trust
• Initial fears may not be fully realised that a
  complete break with private sector skills
  investment is likely but

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Scottish Futures Trust some concerns

• Does the Scottish Government have the range of
  financial powers it would need to make SFT a
  success?
• If not, will it get them what happens in the
  interim?
• The gvt has a lot of faith in the Non-Profit
  Distributing model piloted by the Gateway
  Consortium in relation to Falkirk Argyll Bute
  (schools)
• NPDs may not attract same level of private
  investment due to cap on returns
• on-going maintenance w/out private sector
  commitment will public sector lose the value of
  initial private sector investment

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Initial views

• We need to seize the opportunity of new NPF and
  political desire to achieve sustainable economic
  growth
• Investment in infrastructure is essential if this
  is to be achieved and this will need support
  and leadership from both gvt and private sector
• SFT appears to be very uncertain at this
  stage.gvt will need to refine its initial
  proposals but there appears to be a willingness
  to engage with the private sector upon its
  details
• Gvt. borrowing and taxation powers are highly
  constrained
• Local indirect taxation (contributions) will
  only be of limited capacity and could have wider
  deterrent costs associated with them developers
  will not be able to make up the backlog
• PPP/PFI politically unpopular but recent
  introduction of NDP principle shows that there is
  scope to change model for particular projects
• Major expertise within Scotland in relation to
  PPP and PFI problems associated with early
  projects are increasingly being improved in more
  recent schemesScottish PPP PFI expertise is a
  major asset fort he Scottish economy reform
  rather than removal could be a better option
• Adapting different funding models depending on
  the project has to be attractive, including gtr.
  use of prudential borrowing and raising capital
  via certain revenue streams