Our next item of business is an evidence-taking session on the Scottish Government’s draft budget for 2015-16. I welcome to the meeting Barry White and Peter Reekie of the Scottish Futures Trust. Members have a copy of the submission, so we will go directly to questions. As always, I will start off before opening up the discussion to colleagues around the table.
It is impressive that the Scottish Futures Trust has made £640 million of savings and benefits and supports 6,700 jobs. Congratulations on your successes in that regard.
I want to query some of the figures that you have presented to us. For example, the introduction to your paper refers, in paragraph 1, to
“£671m of additional investment in 2014-15”.
However, when we look at the figures on page 164 of the budget, we see not only that the budget figures do not coincide with your figure but that what is expected to be spent over a three-year period is £195 million less than was estimated only two years ago—£614 million as opposed to £809 million—although the figure that is presented in your paper is a £57 million increase on that £614 million. Can you talk us through those figures? You will recall from our report last year that the committee commented on
“the significant overestimation of the delivery of NPD projects in specific years”
and once again we appear to have a situation in which we have an overestimation.
Thank you for the opportunity to attend the committee.
Before I respond to that specific question, it is worth my first registering with the committee that I am a director of the company that is working on the M8 project, which is part of the non-profit-distributing programme. I think that it is a courtesy to make sure that the committee is aware of that. I am what is called the public interest director, which is part of the NPD structure. The public interest director protects surpluses and the profit-capping nature of the project. For absolute transparency, I wanted to let you know that I am officially a director, in the Companies House sense, of that company. If it comes to any matters of detail around the M8, I might ask Peter Reekie to talk about them.
On your question about the £671 million, NPD is just one of the things that the Scottish Futures Trust does. We do many other things. For instance, on low carbon and energy efficiency, we have worked with local authorities to quadruple investment in street lighting. In preparing our paper for the committee, we took the NPD investment and added on what we do with the national housing trust, tax increment financing and the growth accelerator model to show the total additional investment. The growth accelerator model is a recent innovation that is launching a major investment in the centre of Edinburgh, where TIAA Henderson Real Estate is going to invest some £400 million. On additional investment as a whole—investment that is additional to the NPD money, which is the figure that is shown in the budget—we are also looking at national housing trust investment to buy houses out on the market, as well as investment through TIF and the growth accelerator model. Our paper gives the total additional investment figure, over and above NPD, whereas the budget figure is purely an NPD figure.
11:15
I did not pick that up, because I thought that there had just been a change since the draft budget was published and because of figures such as that for the national housing trust. The figure for 2015-16 is £42 million. I should perhaps have thought that, given the £57 million gap and the £42 million figure, TIF might account for £15 million, but I did not go through the figures. My apologies for that.
On my broader point, your estimates are considerably lower than they have been, but there seems to be an issue each year around the overestimation of budgets. In the paragraph of your submission relating to schools, for example, you discuss
“the inability to proceed on common good land, the outturn of statutory consultation processes and land acquisition / ground conditions issues.”
I realise that there are things that come up that prevent the delivery of such projects, but why do we still have that overestimation year on year? We know that there is an issue every year with potential delays in projects—we have all experienced that in our constituencies. It is never the other way round, however. You never say, for example, “Well, we actually thought it would be £809 million,” when the figure is actually £900 million. You do not seem very cautious in your estimates.
We exceeded the estimate for last year by £21 million, so there is movement both ways. The movement this year is something like £142 million from what we said last year. However, £21 million moved forward and something like £89 million moved back, so the actual overall difference over three years is just over £30 million, which is 2 per cent across a total of about £1.7 billion.
We have set out two things for the committee this year. First, we have produced a very clear table showing the main reasons for that movement. We are keen to push for pace, and we are continuing to achieve financial close well ahead of historic norms. The average time from the start of procurement to financial close is still around 17 months across the hub programme and the NPD programme, which is how projects are being procured, whereas the historic norm published by the Treasury is something like 34 or 35 months. We are making rapid progress, and our ambition for the programme has helped to make that progress happen.
Secondly, in considering the forecast for 2015-16—the current budget scrutiny period—we have taken on board what the committee said last year and have added £100 million of contingency. The current profile of work suggests that, for 2015-16, the estimate could be £100 million higher than what we said. Taking on board what the committee has said, we have taken £100 million off. We have always said that there has been uncertainty, and we have reflected that by adding in that contingency.
I am sure that colleagues will wish to explore that a wee bit further.
In your letter to John Swinney, you say:
“The £1bn programme extension will benefit from the lessons learned in delivering the current projects and we are currently putting together detailed implementation plans.”
Could you talk us through those “lessons learned”?
We always learn lessons as we go along. We are learning them within the current programme, and we will learn them with future programmes, too. The first lesson is that it is really important for the construction and other industries to know which projects are coming up and when, so that they can plan their resources accordingly and can build up and put in place the right skills at the right time. We will continue to let the industry know as early as we can about what is coming.
The profile that we have given you is an estimate of future workload; it is not a budget. A lesson for the industry and for all those concerned is probably that when projects happen is less important than the fact that they are coming and, broadly, people need to resource up for them. We will publish detailed information on individual projects at the time that is right for those projects.
We will seek corporate commitment on project timescales and resourcing from the individual bodies that run procurements. An important principle for us across the programme is that, on individual projects, accountability rests with the procuring body for the project. We want to strengthen the commitment of those bodies to delivery and to getting the right resources in place to deliver those projects.
A series of detailed lessons have been shared across the programme already and are available on our website. That information goes into all sorts of commercial and practical details about how to specify buildings so that we get what we want, and about how, commercially, we should pay for those buildings through the payment mechanism, which is quite a detailed formula. We are spreading best practice across the public sector so that we can drive down transaction costs for the public and private sectors in doing these deals. We will continue to learn those lessons.
We will have a focus on getting the right projects and doing the right deals. That is shown by the fact that in the hub programme, for example, for the projects that have been completed there has been less than 0.5 per cent cost growth between the outline business case stage and construction completion, and across the programme from contract award to construction completion we see zero cost growth. We are continuing to learn the lesson that we must get the right projects and do the right deals by getting experienced individuals in locally accountable project teams to do them. That is exactly what we will do over the programme extension.
That is impressive, but I take issue with one thing that you said—that when projects happen is not important. I think that that probably is important for the people who are waiting for them.
I turn to the national housing trust, which you said in your submission is
“a joint venture between SFT, private developers and local authorities, allowing affordable housing to be developed without Scottish Government grant subsidy.”
I notice from the figures that you have provided that there seems to be a year-on-year decline in the number of homes handed over, from 398 to 325 to 277, which is the figure for next year. In addition, the capital value of those homes averages out at around £150,000 per unit, which seems quite expensive for an affordable home. How big are those homes?
They are a variety of sizes. The most popular size is two or three-bedroom properties. We are talking about homes that are being built without grant subsidy, so there is no offsetting of the cost by a grant of £25,000 or £45,000, as might be the case in other areas. In general, the homes in question are in the eastern side of Scotland, so they are in the hotter housing markets. Many of them have been built in Aberdeen and Edinburgh. They are being bought at market rates, and we are using a Government guarantee to get cheaper loans through a partnership, which has allowed them to be rented in the mid-market rent sector without Government grant.
The national housing trust also offers a wider benefit for the residents. As well as getting a below-market rent, quite often their energy costs come down considerably. In addition, they have a highly professional landlord service. The demand for the homes has been very significant. We are looking at ways of building more properties for mid-market rent. We view that as an addition to the Government’s other programmes on social housing and council house building. We see the NHT as being a way of bringing in more housing supply, which is a critical challenge that we face as a country.
But why are the numbers going down from 398 to 277 over a couple of years?
The numbers really flow off the back of a series of procurements. We have procured a number of phases, and houses are handed over as they are built out. We have launched a further procurement with the City of Edinburgh Council for up to 500 homes, so you will see the numbers starting to go up again in future years as an outcome of that.
There is phased procurement and we get blocks handed over. It is very much part of the success that so much has happened already. The work is dependent on the market and market conditions rather than grant funding, so it follows the profile set by the developers when their developments are being built out.
On page 3 of your submission, you say that
“the most recent October 2014 industry statistics”
show that
“21% of UK construction contracts and 53% of infrastructure contracts”
were
“awarded ... in Scotland.”
That sounds incredibly impressive, but what is the average size of those contracts compared with the average in the UK?
The table and figures on page 3 show that, over the past 18 months, construction GDP growth in Scotland has been 9 per cent compared with 7.6 per cent in the rest of the UK. If you stripped London out of the figures for the rest of the UK, you would see on a regional basis just how much construction GDP has grown in Scotland. We do not actually have the separate London figures, but we know that London is a really vibrant construction area.
The diagram on page 3 is by Barbour ABI, which is a well-respected monitor of construction workflow. It publishes the UK Government’s construction pipeline, for instance. It monitors the total orders that are placed each month, and the diagram shows the percentages for each area. In June, Barbour ABI reported that half of all public healthcare orders in the UK were placed in Scotland. We show the most recent data, which was published in October. It compares September this year with September last year and it shows that there has been a lot of growth in Scotland, with 34 per cent more this year.
The figures that you quoted—the 21 per cent and the 53 per cent—are percentages of the total UK orders of that type that Barbour ABI has monitored, so they are percentages of the whole UK market orders. I do not know what the total UK market order figure is, but—
I just wonder what it is in cash terms. A contract could be worth £100,000 or £10 million, so I do not know that the figures mean a lot in themselves, to be honest.
The GDP figures show that the construction industry in Scotland has had strong growth over the past 18 months, and the chart shows that the forward order book is looking strong as well. On the outlook for the industry, Alan Watt from the Civil Engineering Contractors Association has said:
“The core message on workload is pretty heartening not only for work in progress but, importantly, with a very good future outlook as well.”
However, he expressed some concerns about skills after that. That issue is concerning all of the industry at present.
The chart shows that the Scottish order book is strong, and that gives industry confidence to recruit. That is why the £1 billion extension to the NPD pipeline is so important. It sends industry a signal that the workflow that is here today, the orders that are coming through and the future workload mean that Scotland is a good place in which to invest in recruitment and skills.
Thank you for that. I will ask one final question before I open up the session to colleagues. As I said to you during the suspension, I raised the issue of borrowing with the previous panel. What discussions have you had with the Scottish Government about the planned use of capital borrowing?
We have always said that the use of capital budgets and the prioritisation of investments is a matter for the Scottish Government. We are implementers. We have looked at the implementation of the future NPD programme and the £1 billion extension, and we are in discussion with officials all the time about that, the lessons that we have learned and so on.
We have regular discussions at a detailed level on the NPD programme and that form of revenue-funded investment. Decisions on the way that investment is split—what comes out of capital budgets and what is delivered through NPD—are based on the suitability of projects to individual styles of investment. We have always said that the NPD programme and the revenue-funded projects are better suited to larger-scale investments, and that is what we are continuing through the £1 billion extension.
11:30
Your submission mentions that 6,700 jobs are being supported across the country, which is obviously significant for Scotland as a whole. Can those figures be broken down by project? I am not asking you to detail that here and now, but examples might be helpful. It might be more meaningful to local communities if you could say that a certain project was delivering X number of jobs. Can you provide an example to the committee?
The 6,700 figure comes from the general metric that the Government applies, which I think I am right in saying is—
Ten to £1 million.
So the £671 million translates to 6,700 jobs. The figure is calculated using the Government formula that says that for X amount of expenditure, we get Y number of jobs. We could allocate figures to projects, but we would be doing so simply on a formulaic basis. The figures are calculated on a programme level using that approach rather than being built up from data on specific projects.
That is useful.
You say that the
“NPD infrastructure investment programme remains one of the largest of its type in Europe”.
Can you give us comparisons?
The Dutch Government has a very big programme, and the French Government had a very big programme. According to David Smith of The Sunday Times,
“The International Monetary Fund, concerned about the slowdown in the eurozone’s ... growth, has called for debt-financed infrastructure spending”.
I can provide the committee with an update on the evidence that we gave one or two years ago on the relative scale of investment that has been made in other areas. We know from the European Public-Private Partnership Expertise Centre, which publishes statistics on what individual countries do, that, on a per head basis, what we are doing in Scotland is one of the biggest investment programmes in Europe.
The incoming president of the European Commission, Jean-Claude Juncker, has made a major announcement calling for an investment programme of, I think, €300 billion. The challenge that he has set is whether we can do more infrastructure investment that involves public and private investment. We are interested in seeing whether Europe’s investment activity starts to increase after the call by the IMF and the challenge set by President Juncker.
If you could provide the detail that you mentioned, that would be helpful.
On a related point, in your submission you say that
“Scotland’s infrastructure activity has risen by 34.4% when compared with September 2013.”
You offer some comparative figures for the regions of England and Wales. The figure for Scotland is considerably larger than the next largest increase, 3.1 per cent, which is for the south-east of England. The east of England is down by 12.4 per cent and London is down by 9.5 per cent. That is quite a disparity. Why is that the case?
To be fair, the figures show trends rather than absolutes. It may be that London had a very active month in September 2013, so its activity going down by 9 per cent could still mean that a lot of orders were placed. What our submission shows is that, looking back in time—as the GDP growth figures do—as well as looking forward, the impact of the investment plans is considerable.
The budget for 2015-16 shows that approximately £4.5 billion of investment is planned from a capital budget of approximately £2.7 billion. It is clear that in Scotland we are seeing a strong commitment to invest heavily in addition to capital budgets, and that is flowing through in the audit figures.
I do not believe that the rest of the UK is making the same additional investment that we are making through the NPD model. The Welsh Government is considering starting some NPD programmes, and we know that Northern Ireland is talking about it. England has a priority schools-building programme, but the scale is relatively small.
In Scotland, we are using the powers that we have, and we know that more borrowing powers are coming. We have submitted our views on borrowing powers to the Smith commission. We believe that there is a slight inconsistency in the current borrowing powers. Our projection for next year is that NPD could provide more than £900 million of investment, whereas borrowing powers would allow us to make only £300 million of investment. We would argue that, in both cases, the repayments have to be paid from the same pot of money, so having the flexibility to choose whether to use the NPD model or to borrow seems to be a sensible choice for Scotland to have.
To come back to the convener’s point about the national housing trust, you have spoken about the reason for the change in the number of homes delivered each year. Do you have a target for the number of homes to be delivered through the national housing trust?
At the start, we set ourselves the target of building 1,000 homes.
Was that a cumulative target?
Yes. We started work on developing the idea of the national housing trust in 2009. It was totally untested—it was a totally innovative idea. While we were working up the concept, the Treasury added a levy to the Public Works Loan Board, and the interest rate went up. We went from a working assumption of 3 per cent to one of 4 per cent almost overnight for the type of borrowing that we would undertake, which would be over five to 10 years.
A raft of things happened and a number of challenges were overcome, but the national housing trust was partly a response to the downturn in the housing market. One of the hidden benefits of the trust has been in Dundee, where it is buying 99 units from a developer. That has allowed the developer to open up a whole site for 200 units—the other 101 units will be sold privately or rented on the private market.
The scheme was aimed partly at providing more affordable rented homes and at helping to stimulate development overall by unlocking sites that would otherwise have remained mothballed. If someone goes to the bank with an agreed purchase agreement for 99 homes, the bank will be much more willing to lend them money to develop the infrastructure of a site.
In its current form, the national housing trust will probably run for one or two more phases—the phase in Edinburgh might be its last. We will have to continue to innovate and find different ways to approach housing, and we are taking on that challenge. Through the trust, we have learned a lot that can be applied to future affordable housing schemes.
You have almost pre-empted my follow-up question. The trust was devised as a response to the downturn in the housing market but, as the market recovers, you still see a role for it, although it might have to develop and innovate and do different things.
The times in which we are working mean that the concept of developing one way of doing things and sticking with it for ever is not a likely outcome. We have to be nimble and willing to adapt and change. We started the national housing trust as a joint venture with private sector developers. We have now branched out and are running it as a joint venture with local authorities. We will continue to look at new ways to proceed. Given the changing economic circumstances and changes in the house-building market, we will have to change and adapt. It is right that we do so, and we welcome that challenge.
The underlying issue is that we need to build more homes. We are looking at that challenge and asking how we can do that, whether in the private rented sector or the affordable housing sector. We need to find more ways of meeting that challenge. The national housing trust has been a fantastic way of addressing the issue, but it will perhaps not continue to operate in its present form into the future.
As you have said, the bottom line is that we need to build more homes. You have made the point that the trust is—or seems to be—focusing on a few specific areas of the country. Could we roll out the scheme to other areas? Can I look forward to it supporting the building of houses in my constituency of Cumbernauld and Kilsyth? I am not necessarily seeking an absolute commitment for my constituency.
He has a couple of sites in mind. [Laughter.]
You take my point, though. Will the scheme be rolled out elsewhere?
Please feel free to commit to building houses in Cumbernauld and Kilsyth.
Naturally, we offered every local authority the chance to be part of the scheme. Some grabbed the opportunity and were more willing and able to move forward quickly, and we moved forward with those authorities, which included Dumfries and Galloway, Inverness, Falkirk, Stirling and Dundee. The initiative is widespread, but we need partners who are willing to move quickly and be nimble, and we will work with them wherever they are. There are no barriers set by us.
Okay—I think I read the message there, and I will take it away.
I want to go back to the issue of borrowing. I do not know whether the witnesses will be able to answer my question, but they might be able to help us to understand the way in which the budget might pan out.
The Scottish Government’s budget for 2015-16 sets out the three options that are available for borrowing: the national loans fund; the banks, from which we would have to borrow on commercial terms; and the issuing of bonds. The Government has said that, in due course, it will learn which of those methods—or which combination of them—will be used to borrow the £300 million or £400 million.
Have you had any discussions with the Scottish Government about what the most attractive option for the financial sector would be in order to get the projects that will benefit from that borrowing to move forward as speedily as possible?
We obviously get market feedback reasonably frequently, because we are dealing with banks and financial institutions on projects and finance deals through the NPD and hub programmes. As for exactly which route Scottish Government borrowing will take, I am sure that the decision will be taken in due course, depending on a detailed assessment that is made at the time.
We know that with the NPD and hub models, we must take into account a wide variety of factors in selecting who to borrow from and which structure to use. One factor is the absolute price of funds from any given source at any given point in time. Another example is the repayment profile. In the NPD and hub programmes, we have a structure whereby we start to repay our financing when the buildings are occupied, so here we have all the additionality of investment that we have already discussed. The unitary charges or repayments start when the buildings are occupied, not immediately when the money is borrowed. The way in which the repayments are made is another important factor, as they are repaid fully over the 25-year life of the building.
I am sure that a detailed assessment will be necessary in relation to not only the cost of finance at any point in time, but other factors such as how quickly borrowing can occur, the repayment profiles and the flexibility in that respect.
So, in essence, you are saying that we cannot expect a date on which the Government will announce that it is borrowing £300 million or £400 million through a particular method for specific projects. Is that unlikely?
The great flexibility that borrowing offers—which is one of the reasons why we included borrowing powers in our submission to the Smith commission—is that it is not necessary to choose the projects. We can choose to use the money and then borrow to fund the projects, whereas with the NPD model, we have to attach the financing to the project at an early stage. The flexibility of borrowing powers means that, in effect, we can use borrowing to increase the capital budget. If the capital budget from the UK Government is £2.7 billion and you can borrow £300 million on top of that, you can, in effect, express your capital budget as the total of those two things.
Alternatively, you could choose to use the borrowing powers to fund a particular programme, and you could earmark the money for that programme. You would then profile your borrowing powers against that. That is a choice that the Government would have to make. Other countries that borrow to invest have set up funds, such as the building Australia fund and the build America bonds. They make it very clear that the borrowing is for investment and they earmark it as a fund, with the details being published separately. It is not necessary to do that with borrowing.
Our view is that borrowing powers are a very flexible tool in terms of what you do and how you do it. For instance, you could borrow and decide to use the money on anything that you would normally use your capital budget for. That flexibility is one of the big benefits of borrowing powers.
11:45
I understand the benefits of the borrowing powers, but there is the downside of having to pay the money back at some point. [Laughter.]
As we scrutinise the Scottish Government’s draft budget, it is not clear how the borrowing powers are going to be used. That is the point. We know that there are three options available to access that borrowing. I am trying to establish whether we can expect an announcement of how much we are going to borrow—and we know that it will be the maximum—how we are going to do it and what the projects will be. As we move through the financial year, can we expect to see changes in how we borrow and additions to the projects that are being borrowed against? Is that scenario more likely than one that would involve our getting a big-bang announcement that there will be X amount of borrowing for X number of projects, which will be done in a particular way?
That is not something that is in my gift to answer. We can help the Government with the technicalities of borrowing, such as whether to adopt a bullet repayment or a repayment profile and whether to go for a 10-year or a 25-year period. That is our area of expertise, and that is where we can add a lot of value. We speak to the market about that. By the way, this is a great time for financing projects. We are getting really attractive rates on the projects that we are financing.
However, I am afraid that we really cannot answer the question that you are asking. Perhaps others would be better placed to answer it. I am sorry about that.
That is fine.
Item 4 in your submission, which is on page 2 and is headed “Investment for Growth”, is really about tax increment financing. You have given us some helpful statistics. The programme for TIF
“is forecast to deliver up to £261m of public sector investment over the period from 2013-14 to 2023-24.”
Is it possible to get—perhaps in writing—a breakdown of what you think the profile of that expenditure is likely to be? Will it be fairly light in the early years and mainly loaded towards 2023-24, or is it more front loaded than that? Is it spread evenly? Do you have any sense of the profile of spend for the TIF projects?
The overall level of public sector investment is calculated at a high level, based on the enabling projects that the different local authorities involved in the TIF projects believe they will have to deliver. The timing for delivery of each of the projects will be subject to individual decisions that are made under the governance arrangements for each of the TIF areas. We cannot say at this stage that a certain individual project and the budget associated with it will be delivered at a given stage over the programme duration, which is intended to be the full enabling period that TIF supports.
I suppose that what you are saying is that it is difficult to be specific.
It is.
That is fair enough. I accept that. If you come to us in a year’s time to report back as part of the budget process, what is the expenditure on TIF likely to be for 2014-15? You have said that it is hard to project too far into the future, but is there a rough projection of what you think will happen in the current financial year? Is it the £9 million that you mentioned?
It is the £9 million that we set out in the second paragraph under heading 4. We estimate that that is the likely public spend, but I would really like to come back to what the private sector is doing as a result, because there is a multiplier effect between what we do and what the public sector does. That is the case with projects such as the St James quarter investment that has been agreed in Edinburgh. The biggest prize for us is not the public sector investment but what we can invest in an area that unlocks private sector investment.
Let us turn to private sector investment, in that case. You say at the end of that paragraph:
“Private sector investment of around 5 times this amount (c. £1.3bn) is anticipated to be leveraged.”
Is that £1.3 billion, or the five-times multiple, a best-case scenario, a central scenario or a cautious estimate? How likely is the £1.3 billion investment to actually happen?
One of the great things about economic investment approaches such as TIF and the growth accelerator model is that they require local authorities to put forward absolutely true business cases, because TIF allows them to borrow in the belief that their business case is right. For example, on the back of the TIF in Glasgow, it is forecast that private sector investment will flow and that there will therefore be an increase in non-domestic rates. After allowing for displacement, the local authority can keep the non-domestic rates.
We find that, when people make business cases under TIF, they really think about them, because they are taking a risk that their forecasts are right. The business case regime around those forecasts means that, if they are overoptimistic, the financial cost of that investment will fall back on the local authority, so we believe that the forecasts are reasonably prudent. They are not necessarily best-case or worst-case forecasts, but the nature of that type of investment means that the business case will not promote overstatement, otherwise the authority would be taking risk back internally.
If you ask people to submit a business case when they are simply applying for a grant, they normally turn it round incredibly quickly, because they will put a business case forward to win a slice of the pie. The TIF regime creates an interesting alignment, because people have to genuinely believe what they are putting forward, as they are taking a risk on their predictions.
You talked about displacement. Do the individual local authorities make assumptions about displacement, do they get input from you, or do you have control over that? Who decides in a business case how much displacement there is likely to be? Is there a standard approach?
There is not a standard approach, because the nature of the business case will change depending on whether it is for hotels, commercial or retail investment. It is an individual assessment. The local authority will propose a displacement rate and we will assess it along with Government, and at the end of the process there will be an agreed displacement rate. It is not a formulaic approach; it is a matter of judgment.
If local authorities were being overoptimistic about displacement, would you tell them that you think they need to adjust their estimates?
We have discussions along those lines.
I will not ask you for specifics.
NPD projects are also mentioned in your report. Alongside your submission is a letter that you wrote to John Swinney on 7 October. The 2013-14 figure in the table in the letter is £177 million actual. Is that a best-guess actual or is the accounting done so that it is the final figure? What is the status of that figure?
That is the figure based on all of the profiles that are now contracted for activity that has taken place in 2013-14.
The 2014-15 figure in the table is £614 million. If we do a comparison, taking out the M8 savings, the figure was £757 million a year ago. The changes appear to relate to schools, colleges and community health. Those seem to be the areas where there have been the biggest changes. Will you talk us through the changes to each of those three areas?
Peter, do you want to talk about the differences?
As we say in the letter, there are a number of areas—principally schools and community health, as Barry White said—and there are different classes of movements.
On schools, it has not been possible to proceed with a number of projects as originally scoped. It might be better to talk about that by way of example, and the Barrhead project is perhaps a good example. The school was announced in September 2012 as part of phase 3 of the Scotland’s schools for the future programme, and at that stage East Renfrewshire Council anticipated that the project could be on site within 12 to 18 months of the announcement.
The design was developed pretty rapidly through the hub programme, based on the successful project at Eastwood. The project was just about ready for financial close in the spring of 2014. All the way through the development, the council had a preferred site in mind, which was on common good land. In parallel with the project development, the council did diligence on its ability to build on the site. Unfortunately, after taking that through legal process and, in the end, to the Court of Session, the council was told that it was not able to build on the site. That led to the project being put on hold for about nine months. Only now has the council just about selected another site, and it will have to go though an element of redesign to make the work suitable for the new site and proceed on that basis.
There are some pretty binary points that happen as we go through projects. There are other examples where statutory consultations that councils expected to get through were not supported so they had to change their plans. That is one class of the things that have happened on individual projects.
We are supportive of local authorities and other procuring bodies across Scotland buying the right things. It is really important that we both buy the right things and get the right deal for them. The second class of issues related to schools that we refer to in our letter is where we have had to take time to get the right deal for individual projects. That might involve getting the right commercial deal with a contractor or ensuring that we have the right contract in place for the life-cycle maintenance of the building, because we are not interested in just putting up the right buildings; we are also interested in them being looked after for 25 years.
We will always support authorities, and we occasionally hold projects back through our key stage review process if we do not think that the deal is right for the longer term. With schools, it is principally about getting the right project and the right deal.
There have also been some delays in the community health sector, which is the other area that we mention in our letter. It is a time of pretty quick change in the delivery of health and social care, as you know, and the evolving integration agenda in that area has caused a number of projects to pause for people to think about whether they are the right ones for the long term and to rescope projects to include, in many cases, more local authority involvement.
The integration of health and care services is an example. With that integration, as you can imagine, there is first a redesign of facilities to include more services. Along with that, there is often an opportunity to resite a service and facility that is currently sited on land that is in council ownership, rather than health board ownership. Resiting can lead to redesign, and that means that projects face scrutiny, affordability and value-for-money considerations from two bodies at the same time: the local authority and the health board. That parallel processing of projects through developments in governance generally takes longer than it does if there is only one body involved.
We still believe that the projects will be the right ones because of the extra work that is being done, and because we are bringing bodies together to procure. Bringing bodies together is tricky, but it is absolutely right for those projects.
Those are the main features in relation to schools, health and community projects. As we have said, there are uncertainties, and those are the things that have happened to cause that movement.
12:00
You have made a prediction of £954 million of investment for 2015-16. You said in response to the convener that you effectively have a float or some leeway of about £100 million in there. Your central guess is that you might end up doing more than that—you are trying to be cautious.
Clearly, some factors will be outwith your control, and some of the issues that you have just described could conceivably arise in 2015-16, too. Is it your central scenario that the figure will be £954 million for 2015-16? Is it unlikely to be less than that?
We have taken a prudent contingency. We would always urge caution, however, when dealing with international financing markets. The finance that we are getting at the moment is coming from literally all around the world. We welcome that, because we are getting great deals on financing. Taking into account what the committee said last year, we believe that the contingency is very helpful in adding certainty, although we still require projects to be done.
Picking up on a point that the convener made earlier, we care enormously about when things happen. However, there is a danger when timing becomes the overriding factor for projects. There is a whole history of public sector projects where a project team has been set a deadline to meet, which forces people to make decisions that are not good long-term decisions.
While we absolutely push for time and pace—we want things to happen as quickly as possible—we will not get ourselves into a position where we end up with wrong decisions being forced because of a deadline. It would be wrong of me to list projects where history has shown that to be the case, but we all know of cases in which a sense of urgency at the start has created a long-term problem.
As Peter Reekie said in relation to the hub programme, a lot of price certainty is being maintained. Affordability is very strong in the hub programme as a result of the decisions that are being made. From that point of view, I would absolutely say yes to pace and to getting things done, but we must not find ourselves in a position where we hand the negotiating position to the private sector. The view could be taken, “We know you’ve a deadline to meet, so we’ll sit back until you concede all our points.” We are not having that.
That is helpful—I am grateful.
I will pick up on one or two points that have already been mentioned.
In your letter to John Swinney, which Gavin Brown has been discussing, you write:
“The figures which we have provided in Annex 1 are a projection of capital investment, not a budget.”
The word “estimate” comes in somewhere, too—I think that it might have been used as an alternative for “projection”. Could you spell out for us how you view the differences between projection, estimate and budget?
You are right that “projection” and “estimate” are largely two words for the same thing—looking forward. It is possible to do a projection based on a set of facts, or based on people’s estimates. I am perhaps not helping to make this clearer.
Looking into the future, it is possible to say that a set of commitments that has been made will cost X. That is a projection. If, however, you are projecting into the future and certain things still have to fall into place, that is a projection based on estimated figures. Does that help?
I am not sure.
I am not sure that I have helped. Peter Reekie is very good at explaining such things.
The implication for us of something being a “budget” is the same as all the implications that you know well from scrutiny of the Scottish Government’s budget: it is generally set on an annualised basis, and the phrase that is often applied is “Use it or lose it”.
In this case, we have a set of projects and we know that they must be paid for in the future out of budgets set for revenue expenditure, out of which the unitary charges for the projects will be met. As I said earlier, the budgetary implication of the projects starts once the project has been completed and is in use. There is a construction period of at least 18 months—or even three years for the larger projects. That runs from the point when we have absolute certainty on the cost, when the contract is signed—under this route, the variation from that point is extraordinarily small—to the point at which the budget implication of the project occurs. That annual profile of budget is well known and well understood, and it can be put into the overall Scottish Government budget.
Is it one of the differences that “budget” is very much tied to time, whereas “projection” is more about the overall cost?
We are making a projection of the profile of when construction activity happens. In the long term, construction activity is paid for out of revenue budgets but, while it is happening, it is simply a projection of when the activity on the site will take place, which is very important for the construction industry overall and for the jobs that we have talked about. However, it is not an annualised sum that comes out of a particular pot in a particular year.
I think that we will leave that issue at this stage.
Mr McMahon was speaking about the difference between NPD and traditional borrowing. You made the point in your submission to the Smith commission that you think that there should be more flexibility. I made the assumption, rightly or wrongly, that all these schemes—PPP, the private finance initiative and NPD—are there only because we cannot use traditional borrowing. Would you argue that, in some cases, NPD is better than traditional borrowing even if traditional borrowing is available?
As our chairman would say, we are ecumenical about what we do. We seek value for money. There are countries around the world that have borrowing powers and that still have project finance structures. Germany and France are examples. Both of them have borrowing powers as countries, but they choose to use partnerships with the private sector for autobahn improvements and TGV enhancements, for example.
There are different reasons for doing different things. Our starting point is not an ideological one—far from it; it is one of value for money. It might sometimes be right, for a particularly risky project, to consider whether the private sector is better placed to take the risk and pay the higher cost of finance.
In Scotland, the main benefit that we are getting from NPD is that, under a capital budget, the Aberdeen western peripheral route would probably not be built for five years or more. The availability of budgets would determine when it could be built. Bringing that project forward in time and getting the benefit of it now will help the Aberdeen economy. One of the prime selling points of the Aberdeen international business park, which is in the process of building a headquarters office with an area of a third of a million square feet—there is a tenancy agreement for it now—is the hugely improved road links that will be in place when the AWPR is there. We already knew that projects such as the AWPR or the M8 improvements would start to have an economic impact even before they are finished.
As for being able to accelerate and bring those projects forward—
Are you bringing them forward? In effect, NPD is limitless as long as we can afford to repay it, but the capital borrowing is very limited. Is that the problem?
Yes, and the point that we are making to the Smith commission is that it would be better to have the choice. We are not saying that one approach is better than the other. One has a lower cost attached to it and offers more flexible borrowing; the other brings in private sector expertise in risk management that might be worth paying for in certain circumstances. What we are saying in our submission to the Smith commission is: if we are paying for this one way or the other, why artificially restrict one approach?
That is helpful.
We have touched on mid-market and affordable rent, and I think that the phrase “more affordable rent” was used, in the context of the east coast, where I presume that rents and housing costs are higher. Will you clarify what you mean when you use terms such as “affordable” and “mid-market”? There is no housing association grant involved, so you have to cover all the costs.
For example, someone who is in social rented housing might pay a housing association only a couple of hundred pounds a month in rent, whereas in the private sector they might pay £1,000. That leaves a big gap. Where does the housing that you were talking about fit in that range?
It fits at around 80 per cent of market rent. That is the type of level that we are talking about. For someone in a private rented home, who probably has little hope of getting a social rented home, that can be a significant saving. The target market that the national housing trust has largely serviced is typically working households on or around median income. The housing is available to all income groups, but that is probably the group that it is most popular with.
For the households that I am talking about, a large percentage of monthly take-home income often goes on property costs, so to save 20 per cent on rent is significant. In addition, there is the professional landlord service, which gives the householder confidence that they are likely to be able to stay beyond the six-month tenancy agreement if they want to do so—although they have the flexibility to leave. There is also the energy saving cost, which can be a big part of the benefit. For someone who moves from an ageing private rented home to a modern affordable rented house, the energy saving can be enormous.
You have painted an attractive picture, but from what you said to Mr Hepburn it sounded like demand is falling. I would have expected it to be increasing.
Demand is increasing; the issue is the willingness of house builders.
The partnership works on the basis that builders maintain an investment in the rental sector, which is not their natural way of doing business. Most house builders are set up to build homes and then sell them. During the hard times they are willing to look at alternative models, but right now they are much more readily able to build and sell homes, because mortgage availability has come back a bit and initiatives such as help to buy have enabled people to get into the housing market.
We are not turning the tap off—not at all. It is just that the opportunity to build on the basis that we are talking about depends on market conditions. Market conditions have shifted, so we might not be able to do the same thing for ever. We are operating in a market, rather than in a grant-controlled, decision-making framework.
Okay. That makes sense.
As you said, there is no HAG in the structure; there is no grant as a form of funding for units. All the long-term funding comes from the people who pay rent.
SFT’s innovation with NHT is to combine private developer equity and local authority borrowing through the Public Works Loan Board, along with a Scottish Government guarantee over elements of that borrowing. As Barry White said, if developers want to deploy their equity elsewhere they will not necessarily want to get involved. Given that there is still a demand for affordable housing, it is then our job to consider how we can continue to innovate, with the tools at our disposal, to enable such housing to be delivered within the funding and financing arrangements that are available.
That relates to what you said about looking for a variation.
Yes.
12:15
On the jobs that have been created, I take the point about you using a formula rather than being able to provide a list of people, but I am wondering whether the jobs are going to men 90 per cent of the time. Do you have any idea where women fit in?
I do not. The construction industry is still largely male dominated. I do not know the exact percentages, but that is the reality of the industry—I am not defending it. I could try to find out whether there are more industry figures on the issue. We would like to see change in the industry, and there are a lot of initiatives to encourage more female workers to go into construction.
Is the matter discussed at any stage? Is it suggested that the contractor or builder should be an equal opportunities employer and so on?
The biggest thing that we do to improve skills and increase opportunity is to do with community benefit clauses and key performance indicators in things like hub. In hub, 80 per cent of the work is flowing to small and medium-sized enterprises, which is where a lot of the training and development of skilled workers takes place. In the NPD programme that Peter Reekie leads, we have pushed community benefits as far as we can do. We can give you examples of the sort of community benefits that are flowing from that in terms of graduate jobs and apprenticeships.
In the construction procurement review, we have been asked to lead on how we can push such benefits as far as possible. Your point about the balance of who works in the construction industry is something that we should look at as part of the review work.
Thank you.
There are no more questions from members, but I have a final question. This morning, Professor John Kay suggested to us that the Scottish Fiscal Commission should have a role in monitoring future financial obligations that arise from NPD. Do you agree?
I think that there will have to be more transparency around future liabilities. Monitoring the long-term commitments that we make is part of what happens if we get extra borrowing powers. If we are to be able to go to the market to borrow, we have to be much more transparent about all that. If the Government wants to issue bonds nationally, for instance, being transparent about liabilities and long-term financial commitments will be an important element. I think that we have led the way by having the 5 per cent cap. That was a Government decision, not an SFT decision, but I think that it was the right thing to do.
Peter Reekie might want to add to that.
As Barry White said, ability to repay is what constrains how much one gets to borrow. Whoever we decide has a role in setting and monitoring that element of the economy will obviously take an interest in NPD payments as part of the overall picture. It is important that they do so and that they can easily access completely transparent information on commitments. Part of our job is to be able to provide that information, at programme level and aggregated across all the projects that we overlook. We will continue to do that, to support whichever bodies oversee that element of the economy.
Thank you. Does either of you want to make any final points before we wind up the meeting?
I thank the committee for its questions. What we have in Scotland is viewed by industry and by partners across Europe as an active programme. Financial institutions are very interested in what we are doing and we have been able to attract great-value finance. Our having the pipeline out there—and the extension to the pipeline that has been announced—has maintained that interest. The European Investment Bank is investing heavily, and Allianz Global Investors invested in the M8, bringing in pension fund money as part of that. We are seeing a lot of international money. While much discussion takes place worldwide about how to get institutional money into infrastructure, we are just getting on and doing it in Scotland, and wonderful projects are going ahead.
Thank you for answering our questions.
We agreed at last week’s meeting that we would take the next item in private.
12:20 Meeting continued in private until 13:32.Previous
Further Fiscal Devolution