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17 November 2010

Budget - capital investment

The Scottish Government is to take forward a major new pipeline of transport, education and health infrastructure projects, worth up to £2.5 billion through the Non-Profit Distributing (NPD) model.

Faced with a reduction from Westminster in capital budgets for 2011-12 of a quarter, Ministers are mitigating this and maintaining continuity of capital investment plans. The 2011-12 Draft Budget proposes major investments to support national infrastructure priorities, including initial work on the new Forth Crossing, investment in the South Glasgow Hospitals - both to be delivered through traditional capital funding - and Scotland's Schools for the Future building programme.

In addition Ministers propose a new pipeline of revenue-funded NPD investment to be delivered by the Scottish Futures Trust in partnership with the Scottish Government, local government, NHS boards and other public bodies, involving:

Major transport projects with a capital value of £1 billion - the Borders Railway project (£230-£290 million); upgrade of the M8 Baillieston to Newhouse, M74 Raith Junction and M8, M73 and M74 network improvements (approx £320 million); the new Aberdeen Western Peripheral Route and A90 Balmedie upgrade (£350-£450 million).

Education projects with a capital value up to £750 million - specific projects within Scotland's Schools for the Future programme, subject to the agreement of local authorities (£400-£500 million); improvements to the further education college estate at Kilmarnock and Inverness (around £100 million); modernisation of the Glasgow college estate, subject to the conclusion of a robust and affordable business case (approx £200 million).

Health projects with a capital value up to 750 million pounds - the Royal Sick Children's Hospital and Department of Clinical Neurosciences in Edinburgh (approx 250 million pounds); revenue support to finance projects through the hub initiative (200 million pounds approx); individual hospital projects, health centres and mental health facilities across Scotland (up to 300 million pounds).

Infrastructure Minister Stewart Stevenson said:

"Capital investment is undoubtedly an essential driver of productivity, competitiveness and long-term economic growth. The most recent GDP figures for Scotland indicated strong growth in the construction sector - something put at risk by the 800 million pounds reduction in our capital budget imposed by Westminster, which threatens some 12,000 jobs in Scotland.

"We are determined to mitigate the impact of these severe Westminster cuts by using all available levers to sustain investment in vital infrastructure projects, including transport, education and health projects.

"Since 2007 the Non-Profit Distributing (NPD) model has been the preferred option for revenue financed projects in Scotland and using the NPD model to deliver a pipeline of new projects - including the Borders railway, specific projects within Scotland's School's for the Future Programme and individual hospital projects - is an affordable and effective way of delivering capital expenditure despite sharply falling budgets. We are providing vital support to Scotland's construction industry, jobs and public services. The Scottish Futures Trust, set up to deliver better value for money for infrastructure, will play a central role in this programme.

"NPD is a fairer form of finance than PFI, enabling private sector participation and expertise to be utilised in delivering public infrastructure, but setting a cap on the profits that can be made, avoiding the kind of excessive returns and poor taxpayer value we have seen in the past."

Background

The Draft Budget 2011-12 can be viewed at http://www.scotland.gsi.gov.uk/budget. The Scottish Government's capital budget will fall by 800 million pounds in cash terms next year, compared to 2010-11. This is a real terms cut of 26 per cent.

The pipeline announced today follows a number of NPD projects which have entered procurement, been given approval or reached financial close since 2007. For example, the Aberdeen City Schools NPD, NHS Tayside Mental Health Development NPD and Moray Schools projects - worth a combined 255 million pounds - are all currently in construction.

The NPD model aims to retain the benefits of revenue finance such as optimal risk allocation between the public and private sector partners and performance based payments while removing the potential for excessive profits that were seen under some of the original PFI deals.

It is defined by the broad principles of:

enhanced stakeholder involvement in the management of projects no dividend bearing equity capped private sector returns The NPD model eliminates uncapped equity returns which were a feature of PFI projects. Any operational surplus generated is reinvested in the public sector in accordance with priorities agreed with the contracting authority. Stakeholder involvement in the NPD model is ensured through a Public Interest Director, helping to create a more stable partnership between the public and private sector.
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