SCOTLAND'S INFRASTRUCTURE

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1 SCOTLAND'S INFRASTRUCTURE Delivering Firm Foundations for the Future Scotland Means Business

2 The Scotland Means Business reports have been prepared for N-56 by a study team that includes: This report has been prepared by BiGGAR Economics.

3 CONTENTS PAGE! 1! INTRODUCTION 1! 2! KEY FINDINGS 2! 3! INFRASTRUCTURE FOR GROWTH 3! 4! TRENDS IN INFRASTRUCTURE 5! 5! STRATEGIC APPROACH 9! 6! INFRASTRUCTURE AND DRIVERS OF GROWTH 12! 7! FUNDING MODEL FOR INFRASTRUCTURE 16! Scotland s Infrastructure Delivering Firm Foundations For The Future

4 1 INTRODUCTION N-56 is an initiative that seeks to examine and promote the fundamentals of Scotland s economic investment case while advocating the introduction of an economic plan that will lead to stronger and more sustainable growth in the future. N-56 aims to provide a new locus for Scotland s business community to work with government and others throughout the country, to plan a more prosperous future for the whole of Scottish society. The ultimate aim is to ensure that Scotland attains a position among the top five advanced economies in the world. The objectives of N-56 are to: provide an independent analysis of Scotland s economic performance and potential; promote a culture of collective strategic decision-making about what is best for Scotland s economy; raise the level of the debate on Scotland s economic future; ensure that the debate is open, inclusive and informed by a wide range of stakeholders; engage businesses from all sectors of Scotland s economy in the debate and bring focus to the importance of the private sector; and learn from international success stories. This will allow us to move the economic debate from a discussion of economic powers for Scotland (constitution) to what should be done with those economic powers (policy), thinking beyond the referendum. In June 2014, N-56 published two major reports: Scotland Means Business: The Facts reviewed Scotland s economic performance and potential; and Scotland Means Business: The Strategy set out proposals for a different approach to policy making and a range of policy proposals so that Scotland can reach its potential. This report, draws on these previous reports, highlighting the importance of infrastructure for the future of the competitiveness and prosperity of the Scottish economy. Scotland s Infrastructure Delivering Firm Foundations For The Future 1

5 2 KEY FINDINGS High quality infrastructure can facilitate economic growth while poor quality infrastructure can inhibit competitiveness and constrain growth. OECD research finds that infrastructure can be a driver of economic growth in advanced economies, where investment facilitates access to markets, the development of intellectual capacity and efficiency gains. The UK invests less in infrastructure than other advanced economies, which makes the UK economy less competitive. UK investment in infrastructure has fallen below the 0.8% of GDP benchmark widely considered to be necessary to support an advanced economy. If investment is not taken back to this level it could cost the UK economy 90 billion per year by 2026 (Scotland s share of that loss could be at least 7.5 billion). Over the last 20 years, much investment in UK infrastructure has been supported by the Private Finance Initiative, incurring higher interest rate charges than traditional public sector borrowing. On the 0.8% of GDP benchmark, Scotland would require annual infrastructure investment of 1.2 billion per annum, possibly more to deal with historic under-investment. The requirement is for the equivalent of a new Forth Crossing (the biggest ever Scottish infrastructure project), every year. This level of investment could generate significant economic impacts, for each 1 billion, a one off GDP increase of 1.3 billion could be expected and an increase in overall economic activity of 2.8 billion. Investment in infrastructure should be planned strategically, rather than on a case-by-case basis. The starting point for the long-term plan should be the national economic strategy, with projects prioritised based on their contribution to strategic objectives. Ireland s National Development Plan is an example of how this can be done. While infrastructure planning should be based on meeting Scotland s economic and social needs and opportunities, there may be some areas of infrastructure where a more entrepreneurial approach might be appropriate. Airport and port services are two areas where a more entrepreneurial approach may be appropriate since Scotland s geographical location presents opportunities that are worth further examination. The infrastructure priorities of an export-based growth strategy will include global transport connections, including air links to make business travel easier and facilities to make exporting goods easier. Connections between Scotland s main centres of population will also be increasingly important to compete against the growth of global cities. Long-term real interest rates are at historically very low levels, making increased investment in infrastructure provision an attractive proposition It seems unlikely that Scotland s infrastructure requirements can be funded in full under current capital budgets. However, investment in improving infrastructure need not be entirely funded from public sector sources. One potential model would be Scottish Infrastructure Bonds, which could be offered to international bond markets and as domestic savings products. The feasibility of a model similar to Singapore s Central Provident Fund should be examined, since it has the potential to both address the need for pension and saving reforms and expansion and the need to invest in infrastructure to facilitate an acceleration in economic growth. Scotland s Infrastructure Delivering Firm Foundations For The Future 2

6 3 INFRASTRUCTURE FOR GROWTH 3.1 Why Infrastructure Matters While economic growth in an advanced economy depends on productivity growth, driven in turn by human capital and innovation, the foundations required for growth include infrastructure that meets the needs of a changing economy. The Economist newspaper has described infrastructure as: The economic arteries and veins; roads, ports, railways, airports, power lines, pipes and wires that enable people, goods, commodities, water, energy and information to move about efficiently. Empirical evidence from the OECD 1 has concluded that investment in network infrastructure can boost long-term economic growth in advanced economies as a result of the effect of the capital investment and because of its impact on economies of scale, network externalities and competition enhancing effects. The UK Government s National Infrastructure Plan 2 identifies a number of specific ways that investment in infrastructure can increase productivity, by enabling businesses to: sell products to customers more efficiently (e.g. through quicker and cheaper transport of goods, services or data, or lower costs of production); produce higher value products, including new intellectual capital (e.g. through improved facilities for research and innovation); and access larger markets (e.g. through improved links between production centres and ports/airports or through internet sales). 3.2 Benefits of Infrastructure Investment CECA recommends that investment in infrastructure should be maintained at least at 0.8% of GDP. For Scotland that would be 1.2 billion per annum and given the historic under-investment in infrastructure, there may be a case for substantially higher levels of investment over the next 5-10 years. To put this in some context, the new Queensferry Crossing, the biggest ever infrastructure project in Scotland is budgeted at around 1.4 billion, with construction taking place over a five-year period. The M74 extension in Glasgow cost almost 700 million. CECA estimates that the cost to the UK economy of failing to increase infrastructure investment back to the levels more typical for advanced economies could be an annual loss to the economy of some 90 billion by Scotland s share of that loss could be at least 7.5 billion per annum. However, investment in infrastructure generates both immediate economic impacts and a sustained contribution to economic growth. CECA estimates that each 1 billion in infrastructure investment: 1 Balazs Egert, Tomasz Kozluk & Douglas Sutherland (March 2009), Infrastructure and Growth: Empirical Evidence, OECD Economics Department Working Paper HM Treasury (2011), National Infrastructure Plan Scotland s Infrastructure Delivering Firm Foundations For The Future 3

7 increases GDP by 1.3 billion as a result of economic multiplier effects (e.g. associated supplies for the construction and the knock-on benefits from construction employment); and increases overall economic activity by 2.8 billion, by creating a competitive environment for business. The role of infrastructure could be even more important to the future of the Scottish economy than in the past. The growth and economic dominance of London is not an isolated phenomenon; other large global cities have grown, taking advantage of agglomeration effects, where businesses and people clustering together deliver economies of scale from network effects to drive economic growth. If Scotland is to compete in such a global environment, the role of infrastructure in connecting the main cities and towns, physically and virtually, becomes more important. Scotland s Infrastructure Delivering Firm Foundations For The Future 4

8 4 TRENDS IN INFRASTRUCTURE 4.1 Trends in UK Investment and Infrastructure The trends in net public sector investment suggest that there has been a significant decline in infrastructure investment in the UK. In the mid-1960s net public sector investment was more the 7% of GDP and has fallen to around 1.5% of GDP now (Figure 4-1). The figures are for the UK as a whole, rather than for Scotland since comparable data for Scotland is not available. However, the approach to setting public expenditure budgets for Scotland means it is likely the trends for Scotland are the same as for the UK. Figure 4-1 UK Net Public Sector Investment, to Source: HM Treasury Public Sector Finances Databank (30 January 2013) Some of the change will be the result of privatisation with investment (for example, in power networks) now classified as private sector rather than public sector. However, Professor John Kay 3 estimates that this would add only around 2% and so there has been significant real decline in infrastructure investment. Professor Kay s sectoral analysis of trends in spending found that the largest decline was in social housing expenditure. While this can be explained partly by the increasing role of the private sector in providing housing in the UK, there are now significantly fewer houses being built than in the 1960s. There have also been reductions in spending on gas and electricity infrastructure, capital related to education and health and the water sector. Communications spend has been static, but this can be explained by reduced equipment costs. With these trends it is not surprising that the World Economic Forum s Global Competitiveness Index 4 ranked the UK only 28 th in the world on overall quality of infrastructure. Given the link between infrastructure and long-term economic growth, these trends give cause for concern about the future of the UK and Scottish economies. 3 Professor John Kay (September 2008), The Fabric of Scotland Lecture, Edinburgh 4 World Economic Forum (2014), The Global Competitiveness Report Scotland s Infrastructure Delivering Firm Foundations For The Future 5

9 4.2 Infrastructure Investment Trends High quality infrastructure can be a facilitator of economic growth and investment in infrastructure can generate economic impacts in the short term and increase the economic growth rate. Conversely, poor infrastructure will reduce overall economic competitiveness. The World Economic Forum s Global Competitiveness report ranks the UK as 24 th for the overall level of infrastructure (the top three are Switzerland, Singapore and Finland) and so with better infrastructure, the UK s overall competitiveness would be higher than its 8 th ranking. In the years before the recession, , the UK was the lowest investor in infrastructure amongst the OECD advanced states 5. Research published by the Civil Engineering Contractors Association (CECA) 6 on UK infrastructure trends also found that infrastructure spending fell below a threshold level of 0.8% of GDP in early 2003 and was as low as 0.5% of GDP by Comparable figures are not readily available for Scotland; however, the CECA analysis suggests that major projects (such as the Channel Tunnel, Crossrail and the London Olympics) have made a significant contribution to overall UK infrastructure related output over the last 30 years and so it is possible that the decline in spending in Scotland may be even lower than the UK as a whole. UK trends highlighted in the CECA report included a shift in the source of capital for infrastructure from 96.5% public sector in 1980 to 61.6% private sector in 2010, mostly via the private finance initiative. 4.3 Funding Infrastructure in the UK Since the mid-1990s the Public Finance Initiative (PFI) and Public Private Partnerships (PPP) have been used to procure infrastructure and other public sector capital projects, with the number of projects and capital reaching a peak in 2008 (Figure 4-2). By the end of March 2013, there had been 725 projects, with a total capital value of 54.7 billion (and there were a further 21 projects with a capital value of 2.8 billion in procurement; although none of these were in Scotland). PFI/PPP has been used extensively in Scotland, although it has now largely been superseded by the Scottish Futures Trust s Non-Profit Distributing (NPD) model. However, there is a legacy associated with the historic use of PPP/PFI in Scotland, since 90 of the 725 UK projects are in Scotland, with capital costs of 5.8 billion; per capita capital costs for PPP/PFI projects are 27% higher for Scotland than the UK as a whole. 5 OECD (2010), Going for Growth, 2010: Country Notes, UK 6 Civil Engineering Contractors Association (May 2013), Securing our economy: The case for infrastructure Scotland s Infrastructure Delivering Firm Foundations For The Future 6

10 Figure 4-2 Number of Projects Reaching Financial Close and Total Capital Costs Incurred for Current Projects "9.0"" 70" "8.0"" 60" Capital'Value'( 'billion)' "7.0"" "6.0"" "5.0"" "4.0"" "3.0"" "2.0"" 50" 40" 30" 20" Number'of'deals' "1.0"" 10" "*"""" 1990*91" 1991*92" 1992*93" 1993*94" 1994*95" 1995*96" 1996*97" 1997*98" 1998*99" 1999*00" 2000*01" 2001*02" 2002*03" 2003*04" 2004*05" 2005*06" 2006*07" 2007*08" 2008*09" 2009*10" 2010*11" 2011*12" 2012*13" 0" Capital"costs"of"deals"closed"in"year"( "billion)" Number"of"deals"closed" Source: HM Treasury, UK Private Finance Initiative Projects: Summary Data, December 2013 Criticisms of the PPP/PFI approach include that projects are often not included in public sector balance sheets and that interest rates on capital borrowing are higher than could be achieved by traditional public sector borrowing. The Office for Budget Responsibility 7 estimates that the total capital liabilities in arising from PPP/PFI contracts were around 36 billion at the end of , but that only 5 billion of these were on the public sector balance sheet. If all investment undertaken through PPP/PFI had been included on the public sector balance sheet, this would increase UK public sector debt from 75.1% of GDP in to 77.2% of GDP. A 2011 National Audit Office 8 report found that: The cost of capital for a typical PFI project is currently over 8% - double the long term government gilt rate of approximately 4%. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers. That 4% differential in interest rates would imply additional interest costs of more than 2 billion each year on the UK s 54.7 billion of PPP/PFI projects and around 250 million each year of additional interest on Scotland s PPP/PFI projects. The scale of the PPP/PFI projects will also tend to favour international main contractors with smaller Scottish firms confined to subcontracting. Alternative models to PPP/PFI include the Scottish Futures Trust s NPD model and other models where public sector access to low interest borrowing can be utilised, including traditional public sector financing and municipal bonds. Whichever model of infrastructure is used, the ultimate providers of the funds will 7 Office for Budget Responsibility (July 2013), Fiscal Sustainability Report 8 House of Commons Treasury Committee (August 2011), Private Finance Initiative, Seventeenth Report of Session Scotland s Infrastructure Delivering Firm Foundations For The Future 7

11 be long-term investors such as pension funds. Models that minimise intermediation will tend to have a cost advantage over more complex models. Following the last UK Government Spending Review, the Scottish Government s capital budget was cut by more than a third in real terms over four years, although some of this was mitigated by a decision to transfer some spending from revenue to capital. However, there is a compelling argument that this is the opposite of what government should be doing in the current economic circumstances. The price of government borrowing for infrastructure is probably lower now than at any other time in economic history. The UK or Scottish Government could borrow today, for thirty to fifty years, at real interest rates (that is taking account of inflation rates) of less than 1%. These would seem to be ideal circumstances for substantially increasing investment in infrastructure. The result of such investment will include both short-term economic impacts associated with the capital spending and long-term increases in the economic growth rate. Scotland s Infrastructure Delivering Firm Foundations For The Future 8

12 5 STRATEGIC APPROACH 5.1 Approach to Infrastructure Investment Decisions on infrastructure investment in the UK and in Scotland tend to be made on a case-by-case basis. There are well-developed processes in place to prepare and assess cases for investment. These include, for example, the Scottish Transport Appraisal Guidance (STAG) system of appraising transport projects. A STAG appraisal is prepared when Government funding, support or approval is required for transport projects. The STAG appraisal system is comprehensive and claims to be objective-led rather than solution-led, that is, designed to start with a definition of the transport problem rather than a pre-conceived solution. However, the starting point for such analysis is the current transport system and a set of objectives for changing it. Moreover, in most cases the STAG is undertaken by or commissioned by the local authority or transport authority promoting a project and so a STAG appraisal that identifies an alternative solution to the proposed project would be rare. An alterative approach would be more strategic, taking the national economic strategy as the starting point and identifying the investments required in pursuit of the objectives set out. It seems likely that such an approach would generate a long list of projects, far in excess of the capital funding likely to be available. However, the advantage of a strategic approach is that projects are not accepted or rejected for funding; rather they are prioritised in a long-term programme, with projects that will do most to facilitate economic growth given the highest priority. The example of the process used in Ireland shows how such a strategic approach to infrastructure investment can work. 5.2 Ireland s National Development Plan Ireland can be a case study for the delivery of significant improvements in infrastructure within one generation. Anyone who lived, worked or visited Ireland in the 1980s or even in the 1990s as Celtic Tiger economic growth rates were being delivered, will remember long and frustrating journeys between the major cities and towns. Ireland now has a motorway network and has invested in rail and other public transport capital, such as the bus fleet. In most countries, infrastructure projects are assessed on a project-by-project basis, sometimes based on cost benefit analysis cases and sometimes on political priorities. Infrastructure plans are often published, but these are often summaries of previously announced spending priorities. A more strategic approach has been taken in Ireland with the first National Development Plan (NDP), published in 1999, covering the seven-year period The NDP also served as the Operational Programme document for prioritising European funding with 1.42 billion of the 26 billion of investment from the EU regional development and cohesion funds. The plan set out a range of proposed spending priorities covering national roads and public transport, environmental infrastructure, sustainable energy, housing and health facilities, in order to meet a number of objectives: maintaining sustainable national economic and employment growth; Scotland s Infrastructure Delivering Firm Foundations For The Future 9

13 the consolidation and improvement of Ireland s international competitiveness; fostering balanced regional development; and promoting social inclusion. A second NDP covered the period 2007 to 2013, was bigger in scale (setting out 187 million of infrastructure investment) and wider in scope, covering economic infrastructure (transport, energy, environment and ICT), enterprise, science and innovation (investment in the R&D base, foreign direct investment, indigenous business development, tourism and rural development), human capital (skills development, modernising schools and higher education), social infrastructure (housing, health, justice, culture and sport) and social inclusion (pre-school education, social and economic participation, older people, people with disabilities and local and community development). By the time of the third NDP ( ) the document had become more strategic in nature and covered a total of 60 billion in spending, only 5% of which was from EU sources. Almost half of this total was on infrastructure, including transport, water, waste, energy, telecommunications, health, education and housing. The NDP set out spending of 184 billion, including 55 billion for economic infrastructure, the largest proportion of which was for transport projects ( 33 billion). The financial crisis meant that this spending plan was scaled back; however, the strategic approach to prioritising infrastructure spending survived the spending reviews. The advantage of the approach taken by Ireland is that infrastructure investment can be prioritised based on economic and social policy priorities. The NPD also provided a mechanism for achieving a broad consensus across the political spectrum and in wider society, including businesses and trade unions. The development of the NDP involved extensive consultation, in particular with the social partners (the Government, representatives of industry such as the Irish Business and Employers Confederation and the Construction Industry Federation, trade union representatives the Irish Congress of Trades Unions, the voluntary and community sector) as well as research into Ireland s economic and social needs and opportunities and evaluations of the previous NDP. Another feature of the NDP was the integration of different measures. So, for example, a regional dimension focused more per capita resources in the Border, Midland and Western (BMW) region and ensured that the transport and other infrastructure was in place to service greenfield industrial sites which were the focus of inward investment promotional activities. The strategic approach has been maintained in the Infrastructure and Capital Investment plan for , part of the Irish Government s Medium Term Exchequer Framework. The plan sets out capital investment of more than 17 billion over 5 years, including 4.4 billion in transport infrastructure. The NDP approach was not an alternative to assessing the costs and benefits of individual investment decisions; indeed, the use of cost benefit analysis has increased in recent years. However, it has ensured that national (and initially EU) investment in infrastructure was focused on projects that aligned with national economic and social objectives. Scotland s Infrastructure Delivering Firm Foundations For The Future 10

14 Perceptions about the quality of infrastructure have depressed Ireland s performance in international rankings of competitiveness. However, investment in infrastructure has seen improvements; for example, in 2005 the IMD World Competitiveness Yearbook scored Ireland 4.48 out of 10 for perception of infrastructure but this had increased to 7.96 by Over the last two decades, the average investment in what would be defined as infrastructure in Scotland (the Irish definition is wider, including both housing and health services investments) has exceeded 2 billion per year. The Scottish Government s Infrastructure Investment Plan follows good practice in that it is also set in the context of the Government Economic Strategy. However, the corporative approach to policy development and implementation recommended by N-56 means that the plan will need to be reviewed and refreshed as part of the development of the new economic strategy for Scotland. Scotland s Infrastructure Delivering Firm Foundations For The Future 11

15 6 INFRASTRUCTURE AND DRIVERS OF GROWTH 6.1 Scotland s Infrastructure Needs While the Irish approach to infrastructure planning has been highlighted as an example, the position of Scotland s infrastructure is not comparable with the situation faced by Ireland in the late 1990s, which, for example, still had a road network that predated the acceleration of Irish economic growth and was constraining further growth. However, the business leaders who have contributed their views to N-56 believe that Scotland has less well developed infrastructure than many of its competitors and the analysis presented earlier in this report shows how UK investment in infrastructure has been in long term decline. In the context of the Scottish economy, there are two types of infrastructure investment that could drive economic growth. The first applies to any advanced economy and consists of infrastructure investment that facilitates productivity growth. This would include: physical infrastructure such as transport and information and communications technologies (including net generation access broadband) which can deliver better market access and efficiency gains; and investments that might be expected to deliver innovation and technological advance (such as investment in the R&D base). Such priorities would need to be well integrated with Scotland s economic strategy. So, for example, if renewable energy continued to be a priority, then infrastructure priorities should include electricity grid development (including investment in grid technologies, the domestic grid and international grid connections). The second would be based on an assessment of any particular opportunities that might exist given Scotland s particular circumstances. 6.2 Infrastructure Needs and Business Opportunities Airport and port services are two areas where a more entrepreneurial approach may be appropriate since Scotland s geographical location presents opportunities that are worthy of further examination. One potential project could be the development of hub airport services, in the same way that other small advanced economies including Denmark, Iceland and Singapore have done. As can be seen in Figure 6-1, Scotland is particularly well placed geographically to be a European hub for links to North America. Scotland s Infrastructure Delivering Firm Foundations For The Future 12

16 Figure 6-1 Scotland s Potential as a North American-European Air Hub Source: Google Earth An increase in international air connections with Scotland would also have the advantage of addressing the concerns of business leaders and the tourism industry about air links to London and other global business and population hubs. Scotland is well placed for air transport links between North America and Europe. However, Edinburgh airport, with 9.8 million passengers in 2013 was Europe s 42 nd busiest airport and Glasgow, with 7.4 million passengers in 2013 was the 59 th busiest. To put this in context, the four busiest air hubs in Europe in 2013 were London Heathrow (72.4 million passengers), Paris Charles de Gaulle (62.3 million), Frankfort (57.5 million) and Amsterdam (52.6 million). While it might not be realistic for Scottish hub airports to compete with the busiest hubs in Europe, the development of Copenhagen airport demonstrates what might be possible. With 24.1 million passengers in 2013, it was Europe s 16 th busiest airport. It is the hub for Scandinavian Airlines (SAS) and for Norwegian and has flights operated by most European airlines and other international carriers. Passenger numbers have increased from 17 million in 1998 and there are plans to increase to 40 million. The airport is well connected by road and rail to Copenhagen and the rest of Denmark and, via the Oresund Bridge, to Sweden. Another example of an airport development that has taken advantage of its geographic position, despite a limited domestic market, is Iceland s Keflavik International Airport. While it only has 2.8 million passengers a year, the population of Iceland is only 300,000 and the development of hub services has allowed regular flights to both North American and European cities, reducing Iceland s peripheral disadvantages. The successful hub airports elsewhere have good road and rail links with the cities and regions in which they are based, an issue that would have to be addressed in Scotland, whether hubs were developed at existing airports or at a new site. Scotland s Infrastructure Delivering Firm Foundations For The Future 13

17 There may also be an opportunity for Scotland associated the increasing use of the Northern Sea Route linking the Pacific and Atlantic, north of Norway and Russia (as an alternative to the Suez Canal). While hub airport services and an international freight port would provide services to Scottish businesses and residents, their feasibility will depend on securing a share of European and global markets. The development of hub services at Scottish airports and of improved sea freight services would lower the barriers to exporting for Scottish companies and could also help to ease the congestion at the London airports, particularly Heathrow. 6.3 Transport Links with Rest of the UK Transport links with the rest of the UK will continue to be important since the rest of the UK is an important market for Scottish firms (and Scotland is the second largest export market for rest of UK firms, after the United States). The development of High Speed Two (HS2) rail links could improve these links, and deliver significant economic benefits for Great Britain (the business case 9 puts the net benefits of phase one and phase two at 70 billion, and possibly as high as 99 billion). However, the majority of the wider economic impacts will be delivered when HS2 moves into phase two, north of Birmingham. However, the planning of the project has assumed that the construction will start in London; consideration should be given to also constructing connecting high speed services from Scotland. This would improve transport connections between Scotland and Northern English cities as well as with London. There would also be environmental benefits associated with reduced demand for short haul air services. 6.4 Internal Infrastructure Priorities Global trends such as the growth of global cities, taking advantage of agglomeration effects, also means that road and rail infrastructure that improves access between Scotland s centres of population will become increasingly important to competitiveness, to facilitate the development of critical mass in key economic clusters. However, planning should avoid focusing on connecting the rest of Scotland with the capital since that could lead to the economic dominance of the economy by one city, in the same way as has happened in the UK as a whole. Given the distribution of the Scottish economy a networked approach is more appropriate than a hub and spokes centralisation of activity. It is not the role of this report to identify individual projects. Indeed, the recommended approach to infrastructure planning is that it should be driven by the priorities set out in the economic strategy. This has not always been the case for transport planning in Scotland. For example, the Scottish railway franchise has only recently had tourism issues added as one of the requirements of the bidding process. An example of how infrastructure can support economic strategy can be found in the North East of Scotland. Aberdeen City and Shire Economic Future has developed the Energetica project, which builds on the existing energy related 9 Department of Transport (October 2013), The Economic Case for HS2 Scotland s Infrastructure Delivering Firm Foundations For The Future 14

18 assets in the 30-mile Aberdeen to Peterhead coastal region (such as Peterhead Port, Peterhead Power Station and proposed carbon capture and storage demonstrator, Aberdeen Science and Energy Parks, Aberdeen Harbour and the proposed European Offshore Wind Deployment Centre). The area s transport connections will be considerably improved by the Aberdeen Western Peripheral Route. However, the improvement of roads infrastructure in the Energetica corridor itself would remove potential constraints on the delivery of this ambitious project. Scotland s Infrastructure Delivering Firm Foundations For The Future 15

19 7 FUNDING MODEL FOR INFRASTRUCTURE The Scottish Government s Infrastructure Investment Plan shows capital investment of between 2.1 billion and 2.7 billion per year over the period to However, this compares with more than 3.5 billion in and more than 4.0 billion in and includes social infrastructure (health, schools, further and higher education, culture, housing, regeneration, justice and sport) as well as economic infrastructure (transport, digital, energy, water and environment). As discussed earlier in this report, CECA recommends that investment in (economic) infrastructure should be maintained at least at 0.8% of GDP (i.e. 1.2 billion in Scotland) and there may be a case for substantially higher levels of investment over the next 5-10 years to address historic under-investment in infrastructure. It seems unlikely that this will be possible under current capital budgets. However, investment in infrastructure need not be entirely funded from public sector sources. By definition, the benefits of infrastructure are long term and so there is merit in also spreading costs out over time. There may be opportunities to fund infrastructure privately, particularly more ambitious projects, which have the potential to generate revenue income. There are many examples of such a model around the world; these include the Panama Canal, funded by Citibank. One potential model would be Scottish Infrastructure Bonds, which could be offered to international bond markets and as domestic savings products. The long-term nature of infrastructure projects is a good fit with the increasing need for long term savings products that will increasingly be required as the ageing population structure increases the need to save to fund pensions. There are several international examples of combining the need for infrastructure investment with domestic savings systems. One example is Singapore s Central Provident Fund model, originally a plan for funding pensions but subsequently expanded to fund education, health and housing. Employers (13%) and employees (20%) are required to contribute a proportion of wages to the Fund, which then invests in government bonds. The government uses these bonds to finance infrastructure (as well as investing in government owned businesses). The feasibility of such a model for Scotland should be examined, since it has the potential to both address the need for pension and saving reforms and expansion and the need to invest in infrastructure to facilitate acceleration of economic growth. The model may require taxation treatment that promotes the long-term savings that would be required to encourage take-up. Scotland s Infrastructure Delivering Firm Foundations For The Future 16

20 N-56 aims to provide a new locus for Scotland s business community to work with government and others throughout the country, to plan a more prosperous future for the whole of Scottish society. The ultimate aim is to ensure that Scotland attains a position among the top five advanced economies in the world. If you would like to learn more about N-56, its aims and activities, please visit our website 112 George Street, Edinburgh, EH2 4LH Scotland Means Business / / Follow Us on COPYRIGHT N-56 ALL RIGHTS RESERVED.

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