National Association of Pension Funds Investment Conference
Wednesday March 7 2012
Thank-you Mark (Hyde Harrison, Chair of NAPF) for that warm welcome.
I’m here before you, not so much as the First Minister of Scotland, but as the only politician mentioned by name in the UK Business Secretary Vince Cable’s memo to the Prime Minister, released unofficially last evening – and thank-you to Mark for pointing that out to me.
I’m delighted to get a mention!
Now, you couldn’t have chosen a better venue to stage your annual conference.
Edinburgh is obviously a beautiful city – I hope you get to enjoy it while you are here – but this is also one of the major financial centres of Europe.
We have been involved in financial services for some substantial time – as many of you will know, the Bank of England was founded by a Scot, William Paterson, in 1694, and the Bank of Scotland was established one year later.
Since then, our financial services industry has developed a huge and enviable track record for innovation.
- The Royal Bank of Scotland was the first in the world to develop colour banknotes in 1777;
- Henry Duncan launched the savings bank movement in 1810;
- And, perhaps of most relevance to you, Robert Fleming established the investment trust in Dundee in 1873 – playing a enormous role in the development of the US economy through investment in railroads and other infrastructure projects.
- Scotland was also the first nation to develop the overdraft back in 1728 - we don’t actually talk about that quite so much these days!
More recently, James Goodfellow patented the ATM in 1966.
The direct model of insurance provision was pioneered in 1985, and offset banking was launched by Intelligent Finance in 2000.
I want to be absolutely clear that Scotland did not invent financial derivatives, that was something we left to other people!
And today, some 750 billion pounds sterling of assets are managed from Scotland.
Our financial services industry employs some 87,000 people in 2010, and Scotland accounts for around a quarter of those working in the UK life and pensions sector.
The Scottish Government has established the Financial Services Advisory Board – a unique collaboration of industry, government, academia and trade unions – to ensure that the public sector and the financial services industry work together.
So Scotland can offer the financial sector a massive concentration of expertise; a highly skilled workforce; and strong collaboration between the public and private sector – in addition of course to a great quality of life and good communications links.
For those reasons, despite the difficulties facing the sector, Tesco Bank and Virgin Money have both established headquarters in Scotland in recent years.
A number of companies already present in Scotland, for example Barclays, Blackrock, State Street and NFU, have announced significant expansion plans.
And these plans will be added to very shortly by some other announcements.
And there is strong support – indeed as Vince Cable was probably alluding to in his letter to the Prime Minister – across the Scottish political spectrum for our bid to host the Green Investment Bank here in Edinburgh.
So if any of you are looking for new bases for your operations, or are wondering where to look to place your funds, Scotland has a substantial number of advantages.
I want to talk briefly about the Scottish Government’s purpose of sustainable economic growth.
I want to talk about the role of capital investment in achieving that purpose, and to set out the “what, when and why” of infrastructure investment in Scotland – explaining what we will do, when we are doing it, and why these projects offer exciting opportunities for pension funds.
The entire public sector in Scotland shares a common purpose – to make Scotland a more successful country with opportunities for all in Scotland to flourish through increasing sustainable economic growth.
That purpose has grown in importance over the last four years, during these tough economic times.
And what it means in practice is that every part of Government is committed to supporting jobs, investment and economic recovery.
The Scottish Government has been keen to impress upon the UK Government the need for what a ‘plan McB’ as we call it, to secure economic recovery.
Indeed, the substantive part of Vince Cable’s missive to the Prime Minister was on that very subject – it was on his analysis of a lack of, as he put it, a compelling vision to generate economic growth beyond necessary deficit reduction.
In our part, we have tried within the powers that we have to maintain the most competitive business taxation environment anywhere in these islands, we are helping public sector agencies to promote business investment and we have taken steps to support the supply of private finance to businesses, for example by establishing the Scottish Loan Fund.
An absolutely key element of our recovery plan is investment in infrastructure.
Improving the physical infrastructure of the country is one of the best possible ways of boosting the economy now, because of the immediate support that it provides to skills and jobs in the construction sector and through the supply chain.
Every £100m of additional capital investment supports around 1,400 jobs in the Scottish economy.
Our experience is that capital spending was the key reason for the recent recession being shorter and shallower in Scotland than that in the UK as a whole.
And of course, capital investment is much more than looking at and addressing immediate economic impacts.
It has a huge long-term impact by delivering permanent improvements to our asset base, encouraging increased competitiveness, productivity and long-term growth.
For these reasons, we have emphasised to the UK Government – which has, under plans inherited from their predecessors, reduced capital investment by a third over four years as part of its Spending Review – the desirability of bringing forward capital investment plans to support the fragile economic recovery.
The UK Government has recently indicated that it supports the principle of bringing forward capital investment.
When I met the Prime Minister last month, he actually asked me for a list of projects in Scotland which are, to use the terminology, ‘shovel-ready’, after explaining to me that there had no projects south of the border which could commence in 2012 or 2013.
I have to say I found that a most remarkable admission by the Prime Minister, though I did very much appreciate his offer and so I sent him a list of ‘shovel-ready’ projects which could start in the coming financial year.
The Scottish Government is already using our existing powers to prioritise, plan and support investment in infrastructure.
Over the last five years we have delivered key projects such as the Airdrie to Bathgate railway, which was within budget and on time, and the M74, which was under budget and ahead of time.
Our Spending Review plans, published last year, include a switch of more than £200 million per year from resource to capital programmes.
Like you, we recognise the importance of investing for the longer term.
We have set up an innovative mechanism, the Scottish Futures Trust, which works with the public sector across Scotland to get the best value for money from capital investment projects.
We are also seeking to be innovative in funding methods – using capital funding where we can, and where it is most appropriate, but also using our resource funding to back capital projects.
As a result of these measures, by 2014-15 the Scottish Government’s capital investment in Scotland’s economy will be 25% higher than this year.
And that investment is what I want to speak to you about this afternoon.
As I indicated, I will outline the “what, when and why” of infrastructure investment in Scotland.
The “what” is set out in the Scottish Government’s infrastructure investment plan, published in December last year.
In total, the plan includes 54 major infrastructure projects and 33 programmes, covering an estimated £60 billion of capital investment between now and 2030.
- In housing, for example, we intend to deliver 30,000 new affordable homes by 2016;
- We will make major investments in schools, hospitals and colleges and universities – for example a new £200m college for Glasgow and a new Sick Children’s hospital in Edinburgh;
- We will deliver next generation broadband across all of Scotland by 2020.
- And in transport, we will make the A9, the main road between Perth and Inverness, entirely dual carriageway by 2025, and we will complete construction of the new Forth Road Bridge by 2016. We will also make substantial improvements to existing rail lines.
Scottish Water – which is in public ownership - also has a massive capital investment programme.
Indeed, Alex Neil, the Cabinet Secretary for Infrastructure and Capital Investment, this morning opened a £130m new water treatment works at Glencorse just outside Edinburgh.
That highlights a possible opportunity for the future.
As was alluded to in the introduction, we are engaged in a significant constitutional debate in Scotland.
One of the questions that I am often asked what difference independence would make for Scotland.
If we had full fiscal powers, within a sterling zone, what could an independent Scotland do with such fiscal powers?
I recently gave a lecture at the London School of Economics setting out 6 examples of what we could do with such powers.
And I thought the example of Scottish Water would be of particular interest to you.
At the moment, the Scottish Government has no borrowing powers whatsoever.
But Scottish Water in recent years has managed its infrastructure well, water rates have been frozen for both businesses and consumers and last winter during the crisis of water supplies in Northern Ireland, Scottish Water stepped forward to send 160,000 litres of water to our friends in the province.
Scottish Water is, on any measurement, a social, economic and environmental success at the present moment.
With borrowing powers, Scottish Water could have greater flexibility to accelerate its investment programme when appropriate, pumping demand into the economy and enhancing its asset base.
But it is currently prevented from doing so by Treasury rules.
But it wouldn’t be difficult to change these rules.
For example, if Scottish Water was on the same status as Network Rail then it could borrow easily, quickly, and substantially in order to finance its investment programme.
It is probably the most classic illustration of an organisation fit for a bond issue than there ever has been.
It is supplying water to 2.4 million households with a stable, secure income source, one would image that Scottish Water would develop a bond rating, perhaps comparable to Network Rail.
So the Scottish Government recognises that many of the key contributions to Scotland’s infrastructure during the coming years and decades be from private companies and private sources.
Some of these provide specific opportunities for pension funds.
The energy sector - again mentioned in Vince Cable’s letter - is a good example of that.
Scotland has 25% of Europe’s offshore wind power potential, 25% of its tidal power potential, and 10% of Europe’s wave power potential – giving us a massive comparative advantage in some of the key energy sectors of the future.
That is why major companies such as Mitsubishi, Samsung, Eon, Vattenfall, ABB, Alstom and Kawasaki are all investing in the development and testing of next generation wind and marine energy devices in Scotland.
Many of them are partnering Scotland’s own world-leading utilities, developers and supply chain companies.
This will lead, and indeed is leading, to huge infrastructure development - last month, for example, ScottishPower and National Grid awarded a £1 billion contract to lay the world’s longest subsea power cable to export greater amounts of renewable energy from Scotland.
These investments are a clear statement of confidence in Scotland’s energy sector.
Of course some of these investments may not be appropriate for pension fund investors but things like grid infrastructure most certainly are, and the ability is there to de-risk such investments.
The Scottish Low Carbon Investment Conference – which brings together Government, finance, utilities and developers - is being held for the third time in Edinburgh, in this very conference centre, this October.
I would encourage your companies to attend.
I have set out in general terms the priority that the Government gives to capital investment, and also one of the key areas where significant opportunities for investment in private sector infrastructure may arise in Scotland.
But I know that you will want to hear some specifics about the public sector’s investment plans, and what involvement is possible in these.
Of the publicly-funded projects included in the infrastructure investment plan, some of the most immediately relevant, from your perspective, are the projects delivered through the National Housing Trust and those being procured under our NPD mechanism.
The National Housing Trust initiative uses local authority borrowing to part-fund new homes.
The borrowing is combined with a Scottish Government guarantee to reduce risk, which gives developers the confidence to resume building on sites where work has previously been stalled.
All the houses are let for an affordable rent with the objective of future sales either to tenants or on the open market.
Councils across Scotland are participating in this model and proving that it works.
Now as a result of this approach, the National Housing Trust has already unlocked £100 million of investment in high-quality affordable homes for rent – developments which would not have happened without the initiative.
And there is more to come.
We are developing variants of the National Housing Trust model and supporting other innovations that housing associations can deliver, to create opportunities for long-term investment from sources such as pension funds, the capital markets and equity.
And the Housing Trust model is secure and definite in terms of the returns that can be delivered.
Our NPD, or non-profit distributing, mechanism, will be an even bigger source of investment – £2.5 billion in the next few years in education, health and transport sectors.
One of the biggest NPD transport projects will see the completion of central Scotland’s motorway network.
This involves upgrading the existing A8 between Newhouse and Bailieston to the east of Glasgow to motorway standard, and making improvements to the M73 and M74.
The tender process will start at the end of this month. We expect construction to begin in 2013, and to be completed by 2017.
Another example will be the Scottish Schools for the Future programme.
More than 60 schools will now be built under this plan – I opened the first of them personally just last week in Pumpherston – and the second phase of the programme, covering 30 of those schools, was announced last October.
Pension funds are most likely to invest in projects such as these after the initial construction phase has been completed.
However the fact that they are just about to begin the tendering or construction phases makes this an ideal time to look at the possibilities that they present.
You can therefore explore investment opportunities at any time from now – speaking to the Scottish Futures Trust is a good way of getting the most detailed information possible about our plans for investment, or indeed the refinancing of plans once they have passed the construction phase.
That gives you some indication of the “what” and “when” for capital investment. I realise, however, that you will probably be interested in the question of “why”.
Pension funds, after all, have the overriding duty to their customers, to their clients, to the pension holders.
Why is investment in Government infrastructure compatible with that duty?
I want to propose four answers to that question; My view is that infrastructure projects in Scotland are a safe, predictable, long-term and ethical location for your funds.
Before that, however, it is worth looking at the broader economic context.
A legacy of the recession has been a scaling back in investment by the private sector as investors remain nervous about future economic developments and small and medium seized companies find themselves starved of bank finance.
Indeed, business investment remains some 20% below pre-recession levels.
As a result there is now a 'wall of capital' waiting to be unleashed when the recovery builds momentum.
We know, for example, that corporations were running surpluses of approximately 5% of GDP in the twelve months up to the third quarter of 2011.
It is vital that we encourage such corporations to find safe homes for productive investment rather than hoarding it or – as has happened in the past – investing surplus capital in periodic asset booms.
The long-term success of the economy depends upon a mixture of higher investment and smaller government debt and current account deficits.
We must find ways to focus on investments that provide long-term returns - something that is good for business itself but also good for the long-term productive capacity of the economy.
Therefore pension fund involvement in infrastructure – both private and public – could potentially make a major contribution to that necessary re-balancing of the economy.
That is why the Scottish Government has been in negotiation with pension funds for the last 18 months to help mobilize the use of these funds for investment in housing and infrastructure projects in Scotland.
The UK Government has been in similar discussions for the past few months.
I hope to see a major step forward in the March Budget in this area of policy.
I believe appropriate incentives should be brought forward by the Treasury to encourage pension funds to finance large-scale infrastructure and other capital investment projects throughout these islands.
This would help boost jobs and investment and thereby increase economic growth rates north and south of the border.
And this additional investment would be good for pension funds and their members, for the following four reasons.
First, these are safe investments.
To take the example of housing, which in this world has not always had a reputation as a safe haven for investment.
I mentioned housing earlier - we are not interested in speculative, complicated or sub-prime models for property investment.
The National Housing Trust model will be used to reduce risk, stimulate the economy, and deliver quality homes while providing a secure return for investors.
Housing associations for example in Scotland deliver an annual turnover of more than £1 billion.
They hold assets worth £10 billion.
These are funded by a combination currently of around £3 billion in private finance and some £7 billion from taxpayers.
The sector’s balance sheet is strong, and together with its effective regulation and financial stability, offers a very attractive haven for pension fund investment.
Secondly, and importantly, public sector assets provide a predictable income stream.
The NPD non-profit distributing model of funding, for example, involves the public sector paying an annual charge over a 25-30 year period once the asset has been established.
This model is better value for the public sector than many PFI schemes proved to be – returns to the private sector are capped; there is no dividend-bearing equity; and surpluses from the projects can be directed in favour of the public sector.
But it does offer predictable revenues over the long term for the private sector.
And the M8 improvement project which I mentioned earlier would be an excellent example of this.
Thirdly, this safe and predictable income stream can be offered over a long period of time.
The NPD method, for example, is used when there is a long-term and stable demand for an asset, and when substantial technological change is unlikely to radically affect the delivery of services.
That is why it is used for schools, for transport and for hospitals.
The government invests in that sort of infrastructure for the long-term – we expect to see benefits from that investment over a period of decades.
Our investment horizons therefore match those of pension funds – which need to consider, as you do, the value of their funds many decades into the future.
Finally, public sector infrastructure is an ethical investment.
You would be improving the roads, schools, hospitals, and housing that your clients benefit from on a daily basis – supporting communities, promoting sustainable economic growth and enhancing the well-being of the clients you serve.
In that sense it’s a benefit twice over – first, as I have outlined, through the tremendous opportunities presented by infrastructure investment.
And secondly – less directly, but still importantly – a more prosperous society, as a result of greater infrastructure investment, which would undoubtedly creates further business for pension funds over that long term.
So this is a great moment to come to Scotland for this conference.
Not only are you at the heart of one of the major financial centres in Europe, but the Scottish public sector is united by that common purpose to increase sustainable economic growth.
We see infrastructure investment as absolutely central to that purpose.
We have a series of projects in the pipeline which can generate safe, predictable, long-term revenues, while benefiting Scotland’s economy and Scotland’s society more widely.
All of this gives you the opportunity to invest in Scotland’s future by building Scotland’s future.
Seizing that opportunity will be good for Scotland, good for you and good for your members.
Ladies and gentlemen, I thank you for your attention, and welcome you again to our capital city.