Scotland the Brave

Our third Financing Scottish Infrastructure conference in Edinburgh revealed a confident government with some big plans. But not all its proposals were met with enthusiasm, reports Paul Jarvis

“We have made some pretty big steps on procurement times,” said Peter Reekie, deputy chief executive and director of investments at the Scottish Futures Trust (SFT) as he gave the keynote speech at this year’s Financing Scottish Infrastructure conference at the Balmoral in Edinburgh. “We can’t go much further without changing something fundamentally,” he added.

This set the context for a debate that ran throughout the day over whether the SFT should seek to move away from its use of the competitive dialogue process when procuring projects through its non-profit distributing (NPD) model. Speaking just a day after Scottish Finance Minister John Swinney published the country’s Draft Budget for 2015-16 – including an outline of where it will look to spend an additional £1bn of NPD schemes – Reekie’s comments demonstrated the growing confidence of the trust and its determination to force through an even faster procurement process.

But with a vibrant market performing well above almost any country in Europe, those in the private sector were more cautious on the idea of revolutionising the procurement process now that it is a settled and well understood method.

“It’s not broken,” warned Mark Baxter, managing director at Galliford Try Investments. “It can always be improved but the system doesn’t need fixing.”

Richard Coe, senior development manager at Kajima Partnerships, was also supportive of the way in which the programme has been run to date. Fresh from reaching financial close on the Scottish National Blood Transfusion Service NPD project earlier that week, Coe did however have some clear pointers where things might be improved.

“The funding competition took a little too long,” he suggested. He also said that the transition between the answers given in the bid documentation and what was required for the final contract could have been smoother, arguing that the process required a lot of answers to be given twice.

Marc Ritchie, director at Robertson Capital Projects, added that doing projects more quickly will be critical as the next batch comes forward. “Speed is of the essence because the longer we wait, the more susceptible we are to cost inflation,” he said.

“NPD has evolved into something that both sides are comfortable with,” added Moray Watt, partner at QMPF. “It makes Scotland attractive.” During the procurers’ panel,

Iain Marley, project director at City of Glasgow Hospital, said that the current process has not always provided the greatest innovation from bidders. “We found we had strong responses,” he began, “but they generally failed to go beyond what was specified to offer something better.” He added that the current scoring system also makes it difficult to deviate from the specific requirements of the tender notice – making it difficult to reward innovation in bids.

Paul McGirk, chief executive of Hub South East Scotland, highlighted the importance of the public sector in being proactive here and undertaking plenty of work before going out to tender. This is, of course, one of the benefits of the Hub model, which brings together a whole host of public providers alongside private contractors to develop their estate plans.

“The most successful projects have been where we have had all the key individuals involved from the outset of the project,” said McGirk.

Reekie also questioned the success of reference designs in delivering the innovation in design from the private sector that he and the SFT had hoped for. That view received a mixed response during the developers’ panel later in the day. “We much prefer to progress from a blank sheet than from reference designs,” said Coe. “We want to be able to demonstrate our own hard work and personality.”

However, Baxter offered a more subtle view. “I like reference designs that the client wants,” he started. “I don’t like reference designs where the client doesn’t want them. That is a waste of time for everyone.”

Ramping up
Plenty of food for thought, then, for the SFT as it embarks on the next stage of its NPD and Hub investment programme. Health and school projects were the big winners in the extended NPD programme, with the Draft Budget 2015-16 committing to 10 new health schemes – including Aberdeen Royal Infirmary Campus’s £120m cancer centre and maternity hospital projects.

In education, a £100m tranche of the Scotland’s Schools for the Future programme was fast-tracked, while a further £230m was outlined for new school projects. And Reekie confirmed at the conference that a new Falkirk Campus will be developed for Forth Valley College, as well as a new college in Fife, at a total combined cost of £140m through the NPD model.

“It is game-on for the market,” said Kevin Bradley, director at event sponsor Aecom, during a panel session responding to the Draft Budget.

“These announcements give comfort that when the current tranche is invested, there will be more projects coming forward,” said Richard Revess, director of project finance at Helaba.

IFM’s investment director for debt investments, David Cooper, said that there is a strong opportunity in the market at the moment. “We could always do with more,” he began, “but if you compare this market with anywhere in Europe, apart from maybe the Netherlands, it is at the front.”

Most agreed that if Scotland is to take advantage of this position in the market, it needs to move quickly.

“There is a window of opportunity for Scotland to capitalise on what is happening elsewhere,” said Andrew Orr, the morning session’s chair and a partner at event sponsor MacRoberts.

“There is a lot of interest in other countries doing similar programmes and if they do that there will be much more competition for Scotland,” warned Cooper.

Julia Prescot, partner at Meridiam Infrastructure, pointed to the recent Norwegian Budget, which had included PPPs within it and has a new government keen to increase the use of PPP schemes across the country. “Green shoots in other European countries are starting to come through,” she added.

As Baxter put it: “If our big southerly neighbour suddenly put in a big PF2 pipeline, we would be talking a different game up here.”

This urgency to move the Scottish pipeline forward was also highlighted by Reekie, who revealed the SFT is planning to reach financial close on £1bn-worth of projects over the next six-to-eight months. Finance is still relatively cheap at the moment, so making sure these deals are done quickly will be important if the government is to get the best possible price.

What next?
One thing that could slow progress, of course, will be a lack of forward pipeline.

And for all the positivity, there was some disappointment in the room that the Draft Budget had not named all the projects that will benefit from the new NPD programme.

“I would like to see more detail on specific projects,” said Baxter.

“At the moment, we are lacking as much government focus on [infrastructure] as there might have been due to the [September independence] referendum,” said Watt.

While the referendum returned a ‘No’ verdict, offering some greater stability to the Scottish economy, the fact that a whole host of new powers were promised in the run-up to the vote means that some uncertainty remains. The prospect now is of so-called devo-max, but it remains to be seen what new tax-raising and borrowing powers might be given over to Scottish control.

For the time being, most experts agreed that the questions over future powers would not have any significant impact on decisions to invest in the market.

“The market view is very much business as usual,” said Bradley. “Projects are progressing and so the outcome of ‘devo-max’ is not going to affect that too much.”

Cooper agreed, pointing out that investors are used to being in such situations. This is particularly the case in PPPs, where the long-term nature of the deals means there is often some risk of constitutional changes that needs to be taken into consideration, wherever they are in the world.

Prescot pointed to Meridiam’s decision to invest in the M8 road NPD scheme. “When we invested in the M8 we were aware the referendum was coming and we decided it wasn’t going to take us wildly off-course,” she explained. “It doesn’t look like there is going to be anything in ‘devo-max’ that would affect the contracts we have got.”

Cooper, however, struck a more cautionary note. “If you look at the M8, whoever is in charge of Scotland’s government, that is critical infrastructure so it won’t be a political issue.” Other areas may prove more difficult to sell to investors had Scotland become independent, he argued, and sectors such as renewable energy may still be a hard sell until the country’s new devolution powers have been settled.

Scotland has come a long way in a year, and the end of the independence question is clearly proving welcome news for those in the infrastructure market. Supported by the new pipeline and the SFT’s continued drive to make processes more efficient and streamlined, it looks like the country is set to continue its dominance of the European market – at least until another nation can find the resources and courage to launch a programme to rival it.