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2 DELIVERY AND FUNDING
Introduction
Within this chapter, we identify the key project delivery and funding mechanisms which the Government plans to utilise to deliver its infrastructure investment. It is anticipated that partnerships and direct private sector investment will contribute around £1 billion a year to infrastructure investment, in addition to direct public procurement, in Scotland. The principal procurement mechanisms are:
- Direct public procurement
- Scottish Futures Trust
- Private Finance
- Local Government Projects
- Other forms of delivery such as strategic partnerships and private sector investment.
Direct Public Procurement
The majority of infrastructure investment funded by the Scottish Government is delivered by direct public procurement (in which the public sector client often takes responsibility and risk over the design, timeliness, and cost of delivery of the asset. It also takes responsibility for the maintenance and use of the asset over its lifecycle). The procurement and project management options are subject to guidance issued by the Scottish Government Construction and Procurement Division.
Such direct procurement procedures have been improved where the 'Gateway' review system has been employed, and where an element of 'design and risk transfer' is fully assessed under Scottish Government Value for Money guidance in the business case.
Scottish Futures Trust ( SFT)
The Scottish Futures Trust's main purpose would be to act as a catalyst for investment into Scottish infrastructure programmes and projects and to deliver better, more efficient infrastructure for taxpayers. It would be established on 'non-profit distributing' principles. We have proposed that the vehicle should be a limited company with a public interest ethos at its heart. We envisage a body that is flexible and committed to meeting local requirements, whilst showing leadership in its field.
SFT would be able to provide serviced assets directly and support local companies also delivering such assets by harnessing commercial know how and disciplines. It would provide private finance and related financial services to public authorities and other bodies who provide Scotland's public services. Other aspects of its remit would include the provision of expert advice and support on the planning and delivery of infrastructure projects and the co-ordination of shared infrastructure.
Public consultation on the SFT proposals commenced on 20 December 2007 and ended on 14 March. The consultation paper can be found at www.scotland.gov.uk/Consultations. Responses (which will be published in due course) are being analysed. A further statement about the Scottish Futures Trust will be made in the early Summer.
Role of Private Finance in Infrastructure Projects
PPP/ PFI investments which were already planned and put in place by the previous administration have been allowed to continue, excepting only those in the prisons sector which did not meet the policies and priorities for public sector management on which the Government was elected.
However, for projects not yet in procurement the Non-Profit Distributing ( NPD) model of PPP rather than the 'standard UKPFI model' has been adopted in cases where the Value for Money assessment of risks, costs and benefits indicates that a structured partnership arrangement between public and private parties would offer the most cost effective method of infrastructure delivery. NPD has already been extended from schools into the health sector and its use will be extended shortly to other sectors.
The NPD model was piloted successfully in the Scottish schools programme. It allows for capped returns on debt, but seeks to eliminate the very high gains seen in the 'standard PFI' model via the secondary market. NPD development has continued, including market dialogue over sub-debt refinancing. Former PPP guidance has been adapted for NPD requirements and a full suite of guidance, including Value for Money guidance, will be issued later this year.
Local Government Projects
Local government plays a major part in contributing to the development of the national infrastructure. The Scottish Government provides funding to local authorities as a mixture of specific and general grants as well as support for borrowing for capital expenditure.
Beyond the level of 'supported borrowing' which attracts the Scottish Government revenue support identified in Chapter 4.(vii) of this Plan, authorities may invest further under the Prudential Borrowing Regime. Authorities use a variety of other funding sources such as receipts from asset sales, contributions from private developers and other revenue sources. A number of large infrastructure procurements have been initiated under this regime.
Many authorities have established subsidiary companies for delivery purposes, often involving commercial partners in the areas of professional/technical services and funding. Examples relate to regeneration, housing, leisure and recreation, schools, and asset management.
Other Forms of Delivery and Funding
Partnership delivery arrangements other than NPD have also been developed. The Scottish Water Solutions joint venture has been re-tendered to attract partners for a second major phase of water treatment, supply and waste infrastructure, and we will ensure that Scottish Water itself continues to be structured and regulated for the best interests of the taxpayer. The Scottish Funding Council and the four Glasgow colleges are considering the procurement strategy for delivery of a major fully integrated new campus solution for the colleges. A strategic partnership proposal for the development of a major bio-technology development near Edinburgh involves several public stakeholders and private investment. Urban Regeneration Companies have been established in several key areas of Scotland, and a special company has been established to deliver the 2014 Commonwealth Games in Glasgow. The 'hub' initiative is now developing pathfinders of local 'hubs' to bring together the strategies and assets needed to support primary and community care agencies.
In the housing sector, there are many Registered Social Landlords operating at a community level and combining public and private investments. Network Rail continues to serve Scotland in the provision of rail infrastructure under the strategic direction of Transport Scotland. Investment in Scotland's energy infrastructure is dominated by the strategies and funding plans of the regulated utility companies, and of the private oil and gas industry under UK Regulation. However, development of alternative energy forms such as wind and wave power is supported by Scottish Government grants and has encouraged the formation of new R&D companies in this vital sector. There are also small-scale 'alternative energy' developments around Scotland which show potential for emulation of community gain.
Developer contributions made through planning agreements play a necessary role in helping to provide infrastructure to help offset the impact of new development. The level of contribution varies greatly according to local circumstances. The Scottish Government is committed to undertaking a thorough review of the systems of planning agreements in Scotland. The review seeks to ensure that the public benefits from the rise in value of land, following the grant of planning permission, whilst balancing this against the need to facilitate the development necessary for sustainable economic growth in Scotland at a local and national level.
International Accounting Standards
The UK Government has committed the UK as a whole to move to accounting under the International Financial Reporting Standards ( IFRS) from 2009-10. These new accounting rules will change the basis on which the balance sheet position of partnership and subsidiary companies is assessed. The changeover to IFRS is likely to make more difficult the task of attracting additional investment into Scotland's infrastructure, and we look to the UK Government to resolve and clarify urgently the implications of IFRS on public expenditure and levels of infrastructure investment across the UK.
Summary
Infrastructure investment in Scotland already utilises a variety of funding mechanisms, and that is set to continue. The Scottish infrastructure market is significant in scale and our requirement for market capacity and skills will continue to contribute strongly to the overall objective of creating a more prosperous Scotland.
The majority of investment continues to be made by the public sector at its own hand. However, investment into infrastructure will increasingly be based on joined-up strategies between public agencies; on a wide range of partnership working between public and private sectors; and on private sector investment.
The Scottish Government is open to market dialogue over key delivery issues and will proactively seek to address and resolve issues. For example, it liaises regularly with the Scottish Construction Forum, the PPP Forum, and individual firms. It will continue its shareholding in Partnerships UK and benefit from its advice.
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