The UK picture: Big plans and big money
Big on borrowing and big on taxes, the Chancellor's Budget confirmed infrastructure looms large in their plans.
This was not a surprise. In his speech at Skanska's HQ on 10 October, Darren Jones, new Chief Secretary to the Treasury, described the previous Conservative Government's record on infrastructure as one of "chaos". Identifying infrastructure as a key engine for growth in need of "… a serious MOT", he said Labour's objective was to rebuild Britain, promising to publish a 10-year national infrastructure plan in Spring 2025 (following their multi-year Spending Review), covering both core "economic" infrastructure (e.g. transport energy and housing) and "social" infrastructure (e.g. schools, hospitals).
This is an ambitious Government – one keen to pick winners and set direction for parts of the economy. In addition to its "10 year plan", other initiatives include:
- On 24 October, the UK Government published its consultation paper "Invest 2035: the UK's modern industrial strategy". The paper is openly interventionist. Arguing that a new perspective on industrial strategy has emerged in recent years, it states that the UK (an open, mid-sized economy) needs targeted policy interventions in the areas offering the greatest growth. Eight growth driving sectors are identified, one of which is clean energy.
- The Chancellor's Budget contained clear green commitments, with the Department for Energy Security and Net Zero (DESNZ) receiving the biggest lift, and billions in support for e.g. carbon capture, hydrogen, and other decarbonisation efforts.
- Pension reform: the Chief Secretary's speech referred to plans to bring together "the deep pension pots throughout the UK" to unlock productive new investment into the economy – a plan subsequently confirmed by the Chancellor in her Mansion House speech on 14 November.
- Planning reform: a Planning and Infrastructure Bill is to be introduced this parliamentary session to simplify the consenting process for major infrastructure projects
- New bodies: Great British Energy (GBE) to be headquartered in Aberdeen.
- Reformed bodies: the Infrastructure and Projects Authority and the National Infrastructure Commission will be merged to form the National Infrastructure and Service Transformation Authority (NISTA), to be responsible for oversight of strategy and delivery of the 10-year plan; and the renewal of the UK Infrastructure Bank as the National Wealth Fund (NWF) to mobilise investment in and support the Industrial Strategy.
- COP 29: UK commits to reducing greenhouse gas emission by 81% by 2035 (compared to 1990).
The net zero transition appears the main focus. Clean energy is the only infrastructure-related growth-driving sector identified in the draft Industrial Strategy. The Prime Minister's comments at COP 29 on the UK's net zero commitments confirm the present direction.
This ought to sit comfortably with the Scottish Government: it too has shown great commitment to the energy transition, and its very wide definition of infrastructure includes energy. Detailed discussions with the devolved administrations – Scottish Government, Welsh Government and the NI Executive – will be had; the Industrial Strategy paper makes clear there will be close working with them.
Come Spring 2025, the details of the Infrastructure Plan and the Industrial Strategy will be set and a better understanding had on how NISTA will push them forward, and the investment priorities of the NWF.
These are bold plans and promises. Much political capital is now at stake, and reputations too.
The Scottish Budget: 4 December
The UK Budget confirmed Scotland will receive £1.5bn more in 2024/25 and an additional £3.4bn in 2025/26, the largest real-term settlement since devolution.
On 4 December, Scotland's Finance Minister, Shona Robison, will set out her draft Budget for the period 1 April 2025 to 31 March 2026, detailing how she intends to use the additional funds.
The Scottish Government has been very open that it faces huge financial pressures and difficult choices. A number of major (non-energy) infrastructure projects, including health and roads projects, have been delayed. In mid-July, Shona Robison informed the Scottish Parliament that a “refresh” of the Scottish Infrastructure Investment Plan would be delayed too until she had confirmed capital allocations from the Chancellor's Budget.
Now she has them, it is hoped she will say when the refreshed Scottish Infrastructure Investment Plan will appear, and confirm capital allocations for projects suspended or delayed.
The place of private finance: England
In his speech last month, the Chief Secretary said a new and improved relationship with the private sector is crucial, and acknowledged that the vast majority of growth will be driven by private sector investment. His objective is to unlock private investment by being a real partner to business by sharing in the risks and financial burdens of investing.
Recently, there has been much speculation of a return, in England, of PPP type structures to deliver social and some economic infrastructure. The use of the Mutual Investment Model (MIM) – the most recent PPP variant used in three Welsh projects – has been suggested.
To many, PPP/MIM seems an obvious solution to reverse the recent lack of investment in neglected core (social) assets – a proven (if sometimes controversial) delivery method with off balance sheet benefits for procuring authorities with limited capital budgets and diminished or overworked procurement and estates teams.
Although the Chief Secretary's comments may have sharpened those hopes, his intention may have been only to signal that the UK Government is acutely aware that further incentives and more risk sharing will be required to move the energy transition on and meet the Government's hugely ambitious net zero targets. That view may be backed up a recent call by Labour peer Lord Brooke for a "fresh look at PPPs" and for their use in green energy, in particular. Lord Livermore, Financial Secretary to the Treasury, indicated he was happy to continue discussions on that idea.
In England then, the market may have to wait until the Government completes its multi-year spending review and publishes the 10-year Infrastructure Plan in Spring 2025 to determine the Government's appetite to use PPP/MIM, and for what types of assets.
For now, though, a flat rejection of its use seems unlikely. After all, why tie their hands?
Private finance in Scotland
The UK and Scottish Governments share a common view on the criticality of certain growth industries and the net zero path. In the summer, the Scottish Green Industrial Strategy was published. The various financial support programmes of the UK and Scottish Governments reflect their commitment, as does the support of the Scottish National Investment Bank in that sector.
But the renewal and replacement of other critical (non-energy) assets cannot be delayed forever. Perhaps this is why, on 26 November at an investment conference, Deputy First Minister, Kate Forbes, said Scottish Government was identifying projects "suitable for revenue financing or public-private partnerships".
Might the Scottish Budget provide clues as to Shona Robison's thinking on the use of PPP/MIM, or the processes in play to assess the case for its use?
Transport Scotland is known to have looked at the using MIM for section(s) of the A9 dualling project. In October, the BBC revealed the Scottish Futures Trust (SFT) is to report to the Scottish Government in Spring 2025 on the use of MIM to fill capital budgets shortfalls, although that report noted that MIM was not Shona Robison's “preferred model”.
It is natural she should qualify her position, and not just because the Minister needs support for her budget from outside the SNP. Although PFI/ PPP (and related Scottish variants such as NPD and Hub) were used in Scotland, by politicians across the political spectrum, to deliver over 100 accommodation, health, education, waste water, prison and other projects, its use generated some controversy. Loud voices would no doubt be raised by those vehemently opposed to its resurrection.
On the other hand, it is not difficult to imagine that a continued delay or neglect of projects may at some point become more toxic, politically, than the use of, say, MIM. Sometimes practical decisions and compromises need to be made. In the end, these financing structures are sometimes a convenient tool: one to be used to make projects happen that would not otherwise, with payments handily spread over time – a useful "additionality".
Those that would criticise any decision the Minister makes to use MIM (or similar) in Scotland to do things that might not otherwise happen need to propose a costed, plausible, perhaps off balance sheet, alternative.
Practicalities, hurdles and new models
From a documentation perspective, it should not be difficult to adapt MIM for Scotland (SMIM?). With aspects of it having their origins in Scotland, and the Welsh experience proving it an investable proposition, it’s obvious it should be looked at.
Indeed, Transport Scotland’s MIM template may already be worked up or be substantially advanced. The SFT with all its experience of earlier structures - PFI/ PPP/ NPD and Hub DBFMs – and building on the analysis in its forthcoming report, could easily adapt the documentation to reflect “Scottish characteristics” and oversee its effective deployment.
The impact and affordability of MIM payments commitments on revenue budgets would need assessed, and there would likely be some issues regarding the appropriate allocation of financial and other risks in this era of inflation and rising costs. However, PPP has always been about allocating risks to those best able to bear them, and the recent Welsh experience on this would be helpful as to what is possible.
Market appetite would need tested too, to ensure interest, competition, and faith in the outcome. Visibility of investment opportunities – clear “pipelines” – are greatly liked by developers, investors, and funders. The fight for global private capital is real: there are many investment opportunities elsewhere in the world – a message that no doubt the SFT will take to the Finance Minister.
A paper (September 2024) from the Association of Infrastructure Investors in Public Private Partnerships (AIIB) highlights another risk to obtaining market interest in new PPP/MIM projects – adversarial contract managers (usually external) in existing, operational PPP Projects. Unless tackled, the paper warns, the disputes thus generated may impair investor confidence and the willingness of the construction, FM, and funder base to support new PPP/MIM projects and invest in the UK.
Interestingly, the AIIB paper also observes that these disputes may also impact upon the returns received by public pension funds invested in PPP projects. If, following the English pension reforms, Scotland were to create a pension "megafund" in the hope that it too invests further in Scottish infrastructure projects, perhaps even MIM project(s), that risk of return disappointment would need considered; that risk would need compared to other investment opportunities.
Other investment models could be looked at. The AIIB paper identifies two, but cautions that new models alone are not the solution to the market's concerns that investors in UK PPP projects receive fair treatment. Overseas opportunities with less risk may be more attractive. Besides, creating and marketing new models takes time. There is comfort in the familiar.
No doubt the SFT report will consider all these concerns, and the realities of the Scottish market.
Meantime, the market hopes the Scottish Budget provides a pre-Christmas peek into what the new year holds.
