The Scottish Government

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3. Policy Context

3.1. Introduction

The Purpose of the Scottish Government is to create a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth.

The Government Economic Strategy ( GES) ⁷ sets out how the Scottish Government will deliver its Purpose and associated targets, while the Scottish Budget ⁸ puts in place the necessary resources. The Economic Strategy recognises the importance of investment in Scotland's physical and electronic infrastructure to achieving of the Purpose, while the Scottish Budget supports an ambitious capital investment programme, with allocations of £3.26 billion, £3.58 billion and £3.66 billion for public sector investment in the three years to 2010-11.

The spatial aspects of the GES are addressed in the National Planning Framework for Scotland 2 ⁹. This document sets out clear priorities for improving infrastructure to support Scotland's long-term development aims. The key contribution of the infrastructure planning system to economic development is also recognised. The Framework reflects the Government's commitments on sustainable economic development, climate change, regeneration and housing supply, identifying key transport, energy and environmental infrastructure projects as national developments.

It is envisaged that SFT will play an important role in delivering increased levels of world-class infrastructure in Scotland and provide a better deal for taxpayers. The main role of the SFT is to act as a catalyst for additional and more efficient infrastructure investment, and to supplement public private partnerships, local government projects and other forms of investment delivery.

3.2. Economic Rationale

International evidence clearly demonstrates that capital investment, both public and private, is an essential driver of productivity, competitiveness and long-term economic growth. Over recent decades, the performance of the Scottish economy has been dented by low rates of investment (both public and private) and the resultant poor productivity growth. Increased productivity - that is, more or higher quality output per unit of labour input - represents an efficiency gain that lowers average production costs. New investment is required to replace, update and increase the capital stock to improve productivity growth through capital deepening and incorporation of new technology.

Governments have a vital role to play in creating the planning and development structures to encourage private capital formation. While governments have a role to play in delivering a supportive business environment that will facilitate private sector investment, clearly their role in directly investing in an economy's infrastructure is of critical importance. Public sector investment that relates primarily to the development of a country's physical and electronic infrastructure, such as the transport network, schools and hospitals, increases the productive capacity of the public sector and economy as a whole. Similarly, government investment in infrastructure increases the return to private investment leading to a virtuous public and private sector investment cycle and continuous improvements in productivity. The Government Economic Strategy recognises the important role efficient public investment in Scotland's physical and electronic infrastructure will play in achieving the Purpose of increasing sustainable growth via the Strategic Priority - Infrastructure Development and Place.

An efficient transport system is a key enabler for enhancing productivity growth and delivering faster, more sustainable economic growth. A well-developed and efficient network provides good access to markets and services and can increase productivity by lowering transport costs, improving the mobility of goods and people, and lowering production costs through increased specialisation and greater access to economies of scale.

In addition, reduced journey times for commuting and business travel can have a positive impact on labour productivity and labour market flexibility while reductions in transport costs can improve competitiveness, open up new markets and help to build a critical mass of businesses that all help to drive up productivity and growth. Transport improvements between homes and workplaces can encourage people to join the labour market when previously they were economically inactive or unemployed. Good transport links are also an important element in attracting, and retaining inward investment and high value-added employment, and is vital to ensuring that the benefits of growth are shared across the whole of Scotland.

An increasingly important role for public infrastructure is through its ability to facilitate access to new markets and the adoption of new technologies. Such investment, particularly in electronic infrastructure, opens up opportunities for companies to expand their production, operate in markets outside of their home country and reduce costs through economies of scale and scope. All such investments will have a direct impact on the Government's Wealthier and Fairer objective. Improved transport and telecommunications connections will help to build Safer and Stronger communities and enhance the attractiveness of Scotland as a place to live and work.

Furthermore, by supporting social objectives in health, education and housing provision, investment in infrastructure can improve labour participation, reduce inequalities and offer opportunities for all of society to benefit. Investment in education infrastructure will contribute to a Smarter Scotland while investment in health infrastructure will contribute directly to the Government's Healthier objective. In addition to the individual and wider social benefits that this provides, it can impact directly on human capital formation and further enhance the attractiveness of Scotland as a location to live, work and invest thereby boosting labour supply and productivity.

A successful and green natural, historic and built environment can be in itself be a source of economic wealth through increased tourism and development of renewable technologies. Efficient transport infrastructure can contribute to a Greener Scotland by facilitating changes in travel patterns and the promotion of more sustainable modes of transport leading to a cut in emissions and improvement in air quality.

3.3. Past Performance on Growth and Investment

In recent decades Scotland's economy has underperformed relative to the UK and other small European countries. As Figure 4 highlights, Scottish long run GDP growth over the past 30 years of 1.8 per cent is well below that of comparable European countries, and significantly below the UK average of 2.3 per cent.

Figure 3. Scotland's long-term GDP growth performance (1975-2005)

There is a consensus that for significant periods of time, during the last thirty years, investment in Scotland's infrastructure was neglected. From 1963-64 to 1997-98, UK public sector net investment fell from 5% to 0.5% of UKGDP¹⁰. While this decline can be partly explained by the reduction in the size of the public sector during the 1970s and 1980s, through privatisation and housing purchases, it also reflected the low priority placed on infrastructure investment by successive UK governments.

This underinvestment resulted in a deterioration in the fabric of Scotland's roads, hospitals, schools and public sector housing. In addition to the impact on quality of life, the lack of investment placed Scotland at a competitive disadvantage relative to other countries and helped contribute to Scotland's relatively poor growth record.

While a significant start has been made since devolution to reverse this trend, the Government recognises that there remains a substantial task to redress the decades of underinvestment in Scotland's infrastructure. Figure 5 compares the level of government investment between the UK and the 'Arc of Prosperity' countries ¹¹. Panel 1 highlights the rate of government investment as a percentage of GDP while in Panel 2, the rate of government investment is expressed as a percentage of total government expenditure.

Figure 5 shows that government investment in the UK has lagged behind that of the Arc of Prosperity countries over the period 1995-2006. During this period public investment in Ireland and Iceland was over double that of the UK (though a significant proportion of the investment in Ireland was financed by EU Structural Funds).

Figure 4. Public Investment as % of i) GDP and ii) General Government Expenditure

Source: Eurostat

As discussed above, economic growth can be raised by increasing the input of labour in the economy and/or by improving productivity and thereby increasing the output each unit of labour is able to produce. While labour input is typically subject to limits, such as the number of people of working age available to work and to the hours that can physically be worked, the mechanisms for increasing productivity are not typically subject to the same constraints. Therefore an alternative assessment of Scotland's past performance on growth and investment is to focus on levels of productivity in Scotland vis-à-vis Arc of Prosperity countries. As highlighted in Figure 6, Scotland's productivity (as measured by GDP per hour worked) lags behind that of both the UK and the Arc of Prosperity countries. Again this is an indication of Scotland's relatively poor performance, with regard to growth and investment, and illustrates the scale of the challenge faced.

Figure 5. GDP Per Hour Worked

Source: OECD estimates of labour productivity for 2006 (September 2007)

3.4. Affordability of Infrastructure Investment

On of the Scottish government's considerations must be the affordability of infrastructure investment. The Scottish public sector plans to spend £14bn in capital investment in the next three years. In addition the SG has had to identify new resources to fund the increasing costs of PPP/ PFI projects commissioned by previous administrations. From 2007/08 to 2010/11 the cost of signed PPP/ PFI projects has increased from some £0.5bn to £0.7bn per annum and will continue to increase up to a peak of approaching £1bn in 2024.

The table below shows the full commitment to signed PPP/ PFI projects:

Table 1. Signed PPP/ PFI Projects Unitary Payments (£m)

Note: Unitary payments cover 25-30 year costs of £5.3bn capital and maintenance, cost of finance at risk, asset related services and inflation.

3.5. Summary

Economic theory highlights that capital investment is a key driver of economic growth and will play an important role in delivering the Government's Purpose and meeting its targets. Consequently, the Government Economic Strategy, via the Strategic Priority Infrastructure Development and Place, makes clear that a priority of the Government is the delivery of world-class infrastructure in Scotland.

The Scottish Futures Trust, in partnership with Public Private Partnerships, local government projects and other forms of delivery such as strategic partnerships, will act as a catalyst for investment in Scottish infrastructure programmes and projects and delivering better and more efficient infrastructure for taxpayers.

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