By Paul Brewer
Economic infrastructure is a significant enabler of growth, and will make our top Growth Cities increasingly good places to live and work in
After the Scottish Budget and UK Spending Review, one thing is certain; Scotland’s local authorities can expect to continue facing a tough and complex set of pressures in 2016 – cuts in grant funding alongside rising demands for services and economic growth challenges.
With further fiscal austerity on the horizon, this raises the question of how they can transform themselves to respond to these ongoing pressures.
Increasingly, cities are the tier of government being tasked not only with providing essential public services to their communities but also for formulating the means of funding them and the supporting infrastructure. And in many regards, they are already moving in the right direction. PwC’s 2014 Good Growth for Cities index reveals the increasing competitiveness of Scotland and Scottish cities in national and international markets as places to live and to grow businesses.
Developed in partnership with the think-tank, DEMOS, it ranked Aberdeen and Edinburgh as the second and third top cities respectively across the UK in which to live and work.
Glasgow, in 25th place, came out alongside Manchester and well ahead of London and large city peers such as Liverpool and Birmingham. And when looked at through a devolved UK lens, Dundee, Inverness, Perth and Stirling also feature well.
Performance is measured against a basket of 10 categories defined by the public as key to success in the work and money sides of their lives including jobs, health, income, skills, work-life balance, house prices, travel-to-work times and the environment.
Overall, the index shows that people are looking for a package of attractions in their preferred city home, ranging from available jobs to affordable housing and a good quality of life. Our research also suggests that investors set similar priorities in their hunt for skills, talent and appropriate locations. Collectively that suggests that our top Good Growth Cities are good for employers, workers and their families too.
Gearing up for Growth
So far so good – but are we doing enough? What investment platforms can UK, Scottish and local government leverage to build on this, encourage future economic growth, and ensure a stronger asset base for the next generation?
A very significant enabler of economic growth is infrastructure – from digital and housing to industrial/commercial and transport. Leading think-tank Policy Exchange estimates that renewing Britain’s infrastructure will demand a further £500 billion of investment by 2020. This is huge challenge for both government and industry, particularly as the National Infrastructure Plan has only identified £200 billion investment over the next five years, aimed at improving the environment for all sectors to invest in economic infrastructure.
But, infrastructure investment pays. According to a CEBR report for the Civil Engineering Contractors Association, every £1 billion of additional infrastructure investment UK GDP gets a boost worth £1.3 billion and every infrastructure job creates three additional jobs elsewhere in the economy.
The need for increased capacity and infrastructure investment across Scotland’s key cities and regions is well recognised.
To its credit, Holyrood has taken an integrated approach to infrastructure investment, economic development and growth, creating a Ministerial post to oversee this priority area, enabling it to be seen as a whole rather than in isolation.
Under the Cabinet Secretary’s stewardship, almost 70 major infrastructure projects totalling around £7 billion are in progress or will be completed this year alone, from new hospitals in Dumfries & Galloway and Edinburgh to the creation of the long awaited Aberdeen Western Peripheral Route to the new Borders Railway.
Are Scotland’s cities investor ready?
But while Scotland’s seven cities are recognised as key engines of growth and development, the playing field is changing dramatically. They are increasingly competing in an international market.
Challenges include the need to upgrade existing and create new infrastructure to drive economic growth, create jobs, improve standards of living and promote connectivity. As well as enabling public services to be delivered as efficiently and cost-effectively as possible, the dividend will also be a reduction in demand for job support and welfare. Recognising the growth potential of Scotland’s seven cities and the need to attract future investment, The Scottish Cities Alliance has just launched a £10 billion development and investment prospectus aimed at driving sustainable economic growth through the delivery of future-proofed infrastructure projects.
However, with our latest Investor Ready Cities report revealing that up to 75% of capital projects run over budget, government, infrastructure companies and investors will need to apply their expertise to better planning, estimating, risk management and governance if programmes are to be successful.
Cities must understand the fundamental concept of sustainable development to give investors at home or abroad the required confidence to that emerging challenges are understood, are planned for and can be managed.
And strong leadership in developing and selling this vision will be vital along with putting the right people and systems in place to if the assets are to deliver value throughout their lives.
Working with the private sector
With public funds limited and government capital resources well short of the total costs required, its clear that cities have to work ever harder to get the financing of infrastructure projects over the line. A wide range of finance sources are available but external finance sources, whether government related such as the European Investment Bank, or private sector, will require a high degree of confidence in both project delivery and the resources to service and repay the finance.
The government procures infrastructure but builds relatively little itself . Consequently effective procurement and public-private collaboration is central in driving forward major infrastructure delivery. This needs to be accompanied by long term obligations to ensure effective maintenance and operation, which in turn enhance confidence in sustained delivery.
Securing private sector support to scope, finance and deliver future projects is now seen as vital and the overall case for spending needs to be a strong one. Cities must be able to clearly demonstrate not only how infrastructure will deliver value to both users and investors but its officials also need to work much harder to understand the private sector approach to doing business and specifically how projects are (or are not) ready in investors’ eyes.
This means not only identifying the growth story and the most appropriate public-private sector financing mechanisms, such as Tax Increment Financing, but also demonstrating how infrastructure investment projects can help contribute to overall fiscal improvement by enabling faster growth.
Full speed ahead
Harking back to that CEBR report, if the UK had matched international levels of infrastructure investment, between 2000 and 2010, it could have boosted the UK’s annual GDP by around 5%.
In economic terms, investing in infrastructure ticks essential boxes. It boosts productivity and creates jobs – and with interest rates near an all-time low, the financing costs are relatively low.
So what’s the problem? Unsurprisingly, it’s politics. The cost of infrastructure investment arrives today, but the benefits are rather elusive, being delivered over what can be a long time. And in the middle, we have NIMBYs wanting it built somewhere else through to current fiscal constraints targeting capital spend. Many barriers lie between idea and action… and that’s the problem. Nobody likes action… and that’s the problem.
So the message for Scotland should be: keep spotting the opportunities, calculate the benefits, get the funding and fire up the bulldozers.
Paul Brewer is a Corporate Finance Partner at PwC