Government bond would help private infrastructure investment, Brodies claim

Scottish ministers should use new borrowing powers to create an infrastructure bond to encourage private sector investment in public sector projects such as the transport network, according to a survey by law firm Brodies.

The survey, which canvassed the views of organisations active in the Scottish infrastructure sector, also identified an appetite from private developers and investors for earlier and more detailed information from the Scottish Government regarding new public projects in order to encourage knowledge-sharing and closer collaboration at an early stage.

Last year the Scottish Government announced that it was to expand its existing infrastructure investment plan and introduce new arrangements to engage with businesses, with an extra £100m being made available in 2017-18 for infrastructure projects.

The UK’s National Infrastructure Commission is promoting £9.5bn of capital investment directly into Scotland, mainly in rail, digital connectivity and energy developments, in addition to the Scottish pipeline developed by the Government’s Scottish Futures Trust. Survey respondents expressed strong support for greater collaboration between the two bodies.

Respondents also say that in addition to maximising the use of the capital budget, the Scottish Government should use new borrowing powers to issue an infrastructure bond, the proceeds of which could be invested on a commercial basis for a return in supporting the project pipeline.

This could supplement the external financing requirement, by providing long-term lower risk institutional investment raised by the bond alongside shorter term banking facilities that may be better placed to take development risk.

They cited the recent Aberdeen City Council £370m bond, raised to part-finance the council’s transformational capital and infrastructure programme, as a model for an infrastructure bond to provide a new financing stream for projects Scotland-wide.

The bonds, the first to be issued by a Scottish local authority, were admitted to trading on the main market of the London Stock Exchange last November.

All the organisations that responded to the survey said they intended to invest in the infrastructure sector in the next three years, with a long-term commitment to the market: nearly 90% were not expecting to sell out of any Scottish infrastructure assets in the next three years.

Asked to identify the most significant barriers to delivering projects, respondents highlighted the insufficient volume of projects currently being rolled out and the continuing backdrop of political and policy uncertainty.

Michael Stoneham, head of Infrastructure at Brodies, and an adviser on the Aberdeen City Council bond issue, commented: “There is a clear appetite for greater collaboration between the private and public sectors, and for the use of private finance alongside capital spending, to deliver the urgently-needed infrastructure improvements that will deliver tangible benefits to local communities and fuel economic growth.

"Private finance can be more flexible than borrowing from the UK Treasury and only marginally more expensive.

“The significant funding commitments for the sector from the Scottish and UK Governments, in relation to both mainstream projects and the City Deal programme, are very positive indeed and have certainly been welcomed.

"However, the private sector needs earlier and more detailed information about the pipeline of public projects in order to share knowledge and make investment decisions at an early stage. As with all businesses, contractors and others involved in infrastructure projects need to know that there is a sufficiently active market to justify building and maintaining resource to respond to demand.”