There will be only one issue on the Holyrood agenda exercising MSPs’ minds when they return today: the budget.
The revenue aspects – which budget head is being cut and by how much – together with the deal to freeze council tax levels – a kind of Concordat plus – have grabbed all the headlines so far. But the budget is about much more than yearly expenditure; it also sets out the country’s investment proposals. This chapter is so dense you need a wide toothed comb to try and unpick the financial jargon and some of it, I have to confess, I’m toiling with. But this is where to look for bright ideas on financial modelling.
By 2015, our capital budget will be considerably less than it was in 2005 and more than a billion less than it is in the current financial year. Scary stuff, for this is where future plans and dreams reside. New hospitals, bridges, railways, bypasses, schools and colleges all require capital allocations to a varying degree. The burd has previously cautioned against mass investment in shiny, new baubles and more consideration for make do and mend and moreover, for more thought to be given to the maintenance implications of such investment, which simply add to our revenue burdens in the long term. But there is no denying that future economic growth demands investment and the cuts in capital coming from Westminster give us serious problems. Thankfully, John Swinney, Cabinet Secretary for Finance, has seized the opportunity presented by this potential adversity to develop new investment vehicles.
Thus, the Scottish Futures Trust (SFT) has been charged with developing a new non profit distributing (NPD) model which – and I apologise if I have missed some of the nuance here – turns revenue into capital in order to pump prime private sector investment. In other words, councils and the like can shift some of their revenue allocation into capital to attract private sector money for new schools, transport initiatives, health facilities etc. Any similiarity with existing PFI or PPP models is dashed by the strict cap on the amount of income stream private sector companies can generate from such agreements. Which is a good job really when the cost of maintaining existing PFI agreements reaches an eye watering £613 million in 2015. Thanks Labour and Liberal Democrats. However, the SFT is also looking at how to reduce the amount we are currently paying to the private sector in PFI charges – something I (and others including Jim Sillars) have already suggested needs to happen. The NPD model, therefore, seems less than the completely not for profit model the SNP promised us in 2007 but a big improvement on the untrammelled PPP experiments of before. But if it delivers, particularly in limiting the oncosts, all to the good.
The new JESSICA Fund is of real interest. Set up with £26 million of Scottish Government funds for urban regeneration projects, it has attracted £24 million match funding from European Structural Funds and will be managed by the European Investment Bank. Its USP means it will make loans rather than grants, meaning that the investment will be repaid over time back into the fund, enabling it to be recycled for new investments. Moreover, managers of loans can use them to leverage investment for other sources so that bigger projects can be undertaken. Clever huh? One presumes that if it works for urban regeneration, it might be able to extend its reach into other areas of the public sector.
The Scottish Housing Trust is another clever vehicle which aims to deliver 1000 affordable homes in areas where such housing is currently scarce. Private or other developers build the homes which special purchase vehicles (SPVs) – community interest companies, trusts, friendly societies and the like set up arms length from local authorities – then purchase. The SPVs are funded by council loans and private equity. Private developers only get permission to build if they agree to make homes available at mid market rents for a minimum of 5 and up to 10 years before they are sold. Tenants get first option to purchase. I’m not sure why this purchasing option has been built in, perhaps to enable the capital investment to be recouped? But the SNP has an impressive track record at reversing years of decline in affordable home building – in 2009, over 2600 new homes were built, the highest number since the 1980s – and this investment vehicle will increase that tally still further.
No doubt some of the aspirations for these new capital investment vehicles will prove difficult to realise, given that there are so many financial unknowns ahead of us in the next few years. But at least the SNP Government has grasped the mettle, introducing some much needed innovation into public sector financing. The goals of leveraging in more funding from a range of sources while minimising the risk to the public purse are admirable. The result should be a much needed shot in the arm for the economy, particularly the construction industry, and of course the public gets the benefit of improved and developed infrastructure. It all adds up to a set of capital ideas.