It is a subject that Barry White, chief executive of the Scottish Futures Trust, confronted during an interview session with Partnerships Bulletin at the second annual Financing Scottish Infrastructure conference, sponsored by law firm Brodies. He insisted that his team is ready to tackle any change when it comes, pointing out that this could be in the form of independence, greater devolution (Scotland is already due to get more borrowing powers from 2015), or something else altogether.
“From our point of view, we have to keep focused on the project fundamentals,” he said.
Whether that will be enough to keep investors pumping their money into Scotland in the event of a ‘yes’ vote remains to be seen. During the conference, Charles Livingstone, associate at Brodies, took delegates through some of the potential impacts on existing long-term deals resulting from independence.
One of the main challenges facing the country’s contracts in the event of independence will be the foreign exchange risk that will suddenly emerge. With little likelihood that Scotland will be allowed to continue using the pound, all sorts of questions around whether contract terms should be redenominated in the new currency arise.
“There will be a foreign exchange risk where you have obligations that have mismatches; or where there are cross-border contracts; or networks of related contracts, as is often the case in PPPs,” Livingstone explained.
“Where there is a redenomination within a contract, it is potentially bad for the lender, unless they are willing to take the risk that the strength of the ‘Scottish pound’ rises significantly.”
At the moment, though, most in the industry appear pleased to have some real deals to concentrate on. “Scotland compares very well with the rest of UK and Ireland; and in the global infrastructure environment,” said Julian Rudd-Jones, managing director at Kajima Partnerships.
“I am sure there will be lots of interesting things to do post 2015, but we are in the here and now and that is what we are concentrating on.”
Many in the audience agreed. When asked whether the independence referendum had been factored into their investment decisions, only a handful of delegates said it had.
And the keynote address from Nicola Sturgeon, Scotland’s Deputy First Minister and the minister with responsibility for infrastructure in the country, was aimed squarely at reassuring the private finance community that the administration will continue to focus on infrastructure over the coming years.
Indeed, the minister took a swipe at her colleagues down south, where the Westminster government continues to struggle to bring any realistic pipeline to the market. “This government,” she said, referring to the Scottish Parliament, “has recognised the vital importance of infrastructure investment for accelerating the economic recovery. We are using every policy lever to expand the capital programme.”
Twelve months on from her speech at the last event, it is true that real progress has been achieved in the market.
In particular, the non-profit distributing (NPD) model has been the Scottish government’s biggest success story in infrastructure, with the first reaching financial close in just 17 months, and a long list of deals moving forward at pace. “In terms of private finance, there is a lot of good news out there,” said Scottish Futures Trust (SFT) chief executive Barry White. “It is an incredibly important part of the mix.”
But it is not just the NPD programme keeping interest in Scotland. The UK’s first tax increment financing (TIF) scheme, in Falkirk, has been signed off by the Scottish government, with several more in the pipeline. And the National Housing Trust is now in its second phase, with more expected in the future.
Then there is the Hub programme, where new building projects are already off the ground and expected to keep coming for the foreseeable future.
Taking up the challenge
Regardless of the potential for a new political landscape, both private sector players and the public sector representatives agreed that new approaches to investment will be needed over the coming years.
Although the Scottish government is to obtain new borrowing powers, it recognises that even as an independent state it would not be able to fund all its needs without innovative approaches that can leverage in private sector cash.
‘Necessity is the mother of invention’ was a phrase mentioned both by delegates and speakers on a number of occasions over the course of the day. “We all need to be more flexible in our approach,” recognised Marc Ritchie, director at Robertson Capital Projects. “We need to be willing to consider hybrid models that we may not be quite so comfortable with as the ones that we have become used to over the years.”
White sought to tap into this mindset when discussing the National Housing Trust (NHT). “Bidders have largely been housebuilders. Not one of the PPP industry took on the challenge presented by the NHT,” he said. “Going forward, the PPP industry has to be willing to take on challenges like these.”
White dangled the carrot of a rich seam of housing investment opportunities sitting underneath what has come already, describing the NHT as the tip of the iceberg.
“Sitting below is a significant opportunity which shows a large need for more housing of all demographics, and a significant element will be affordable mid-market and private rented properties.”
His colleague at the SFT, Peter Reekie, also laid down a challenge to the industry. Discussing the future of the country’s TIF programme, Reekie said that although such schemes are currently being financed by the Public Works Loan Board, the SFT is hopeful that the private sector will be able to take on this task in future deals.
“We thought the private sector was not ready to take all the risks [in the Falkirk TIF project], but we hope the model is created flexibly enough to let that happen in the future.”
One area where a new approach has proved successful is through the Hub programme. Paul McGirk, chief executive of Hub South East, and Neil McCormick, chief executive at Hub East Central, provided delegates with a run-down of the initiative’s progress. With all partnerships now in operation, and projects starting to be built, both demonstrated some of the advantages of the model.
“The Hub process has a mechanism whereby at the very beginning of a project – or even before that – we can get everyone together who will be involved in the delivery of that project to help take it forward,” explained McGirk.
He also pointed to work his Hub company has done to help Edinburgh build some school extensions for a price and at a speed that he claimed could not have been achieved had the traditional procurement processes been undertaken for each project.
It is this kind of experience – combined with the fact that the NPD pipeline has managed to get so many projects off the ground – that has made Scotland such an interesting destination for other countries to attempt to follow.
Wales, for example, has unveiled in the last 12 months its own version of the NPD – the non-dividend vehicle. Speaking at the event, Gerry Holtham, adviser to the Welsh Finance Minister on strategic infrastructure investment, said that the Welsh government is currently “in the process of adapting the Scottish model for Wales”.
While he admitted that the current financial circumstances had left an initially pessimistic Welsh government with little option, the country is now embracing many of the developments seen in Scotland.
“One of the reasons we have been attracted to the Scottish Hub model is that the pre-programme engagement can avoid some problems,” said Holtham. He added that it is looking likely that the Welsh government could introduce a limited version of the Hub model into the health sector.
For Brian Murphy, chief executive of Ireland’s National Development Finance Agency, a critical lesson over recent years has been the importance of establishing credibility within the pipeline.
“The private sector felt the pipeline had to be tangible and credible, and it had to have political backing,” he said. Murphy explained that a lot of Ireland’s difficulties in attracting investment had been down to previous governments scrapping major projects, which combined with the precarious economic position that Ireland found itself in, left few investors willing to put their money into the market.
Again, this is a lesson that has been clearly learnt in Scotland. But some questions still remain. Like the rest of the world, Scotland continues to seek new entrants into the debt market – particularly institutional investors.
But Kevin Maddick, head of infrastructure finance at RBS, insisted that long-term bank debt is available, despite the problems in the market and changes to the regulatory environment. “Finance is available for well-structured projects with a certain risk structure,” he said. “My prediction for Scottish projects is that there will be a plethora of investment options.”
However, event chair Keith Patterson pointed out that projects involving new technology, such as energy schemes and waste projects, will struggle to find sufficient debt finance.
“The terms of debt are quite stringent now,” he added. “If you are a well-known, large contractor then you are likely to be able to find finance, but if not you may struggle. Lending is much more relationship-based today.”
Future pipeline, however, remains the largest bone of contention for the private sector. While sources suggest that the SFT is now working with the Scottish government to look beyond the current NPD pipeline, there are some major events coming up that could have a huge impact on any decisions.
First, of course, there’s the independence referendum. But even if Scotland did become a separate country after that, the Westminster General Election in 2015 could have a huge influence on investment in Scotland.
“Most investors don’t distinguish between England and Scotland,” said one delegate. That means a ramping up of investment activity in England could take money away from Scotland.
And if Scotland does stay in the Union, it will be party to a likely referendum after the election on remaining in the European Union. A vote in favour of leaving would also have major implications for any infrastructure investment plans in the country. It is, therefore, little surprise that the Scottish government may be reluctant to announce a raft of new projects just yet.
As one delegate put it, “There is a fog descending, not just a Scottish mist, but a fog across the whole of these islands from next year, and lasting until at least after the General Election.”
It is at least a little comforting, then, to see the progress that Scotland has made in the last 12 months. By the time of Financing Scottish Infrastructure 2014, we should have at least some of the answers as to what comes next.