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Infrastructure Investment in the economic downturn Scottish Policy Innovation Forum 6 March 2009

Infrastructure Investment in the economic downturn Scottish Policy Innovation Forum 6 March 2009. Introduction . Neil McMonagle Associate Director, Government and Infrastructure Advisory, Grant Thornton

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Infrastructure Investment in the economic downturn Scottish Policy Innovation Forum 6 March 2009

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  1. Infrastructure Investment in the economic downturn Scottish Policy Innovation Forum 6 March 2009

  2. Introduction Neil McMonagle Associate Director, Government and Infrastructure Advisory, Grant Thornton Please note that the opinions in these slides are solely those of the author and do not represent the views of Grant Thornton UK LLP or its partners.

  3. Stimulating the economy… Recurring characteristics of policyinterventions internationally, attempting to stimulate the economy through a combination of • tax cuts, and • large scale investment in national infrastructure. • As seen in US, UK, Australia, China…

  4. Effectiveness of interventions? Infrastructure investment is a direct form of stimulus - compare with tax cuts which are indirect and dependent upon how the recipient uses them. "Fiscal multiplier" impact upon GDP of an intervention; • Infrastructure investment - 0.5% to 1.8% increase in output per 1% of GDP spending by government; • Tax cut of equivalent size - 0.3% to 0.6% (Source: IMF, February 2009)

  5. Benefits of infrastructure investment...… in good times or bad Short term impacts of investment; • short term boost to labourmarket and supplychains; • delivers improved services (transport, education, utilities, etc); Long term; • attracts inwardinvestment; • improves the quality of life and workforce; and • ultimately enhances economiccompetitiveness.

  6. Investment in Scottish infrastructureRecord levels…

  7. .. but the need for investment remains • Waste • Education • Transport • Health and social care Others? • Street-lighting • Flood defences • Renewable energy • Social housing

  8. Challenges to delivery Funding infrastructure projects has become challenging in economic climate; • Publicfinances are stretched -simply less money available, particularly at local authority level; • Fixed Scottish capital budget with few levers and looming £3bn capital expenditure needed for the ForthCrossing • Private finance is scarce due to banking crisis, debt margins are high and tenors short; • Risktransfer has been reduced;

  9. Challenges to delivery (2) • Government's ideologicalobjection to PPP/ PFI as a delivery route - but no deliverable alternative proposed to date. • Development of ScottishFuturesTrust initiative has been too slow and objectives have changed • Major expectationsgap regarding SFT • Costsattached to procurement are high and risk attached to unsuccessful bids significant in downturn. • Perceived risk premium attached to potentially novel delivery models - refer to bidder comments on NPDO.

  10. Shaping future infrastructure investment?

  11. Efficient delivery - more important than ever • Tighter conditions, so need to deliver infrastructure more efficiently. • Audit Scotland Report on major capital projects suggests scope for improvement: • 60% of capital projects over-run against cost estimate • Average cost over-run of 39% • 67% of projects delivered late

  12. Policy proposals - Short term • Firstly, ensure that projects currently in procurement are delivered. • This may mean the public sector accepting a greaterdegree of risk in PPP procurements (eg underwriting portions of project debt as for M25), with contract being revised to reflect reduced risk transfer; • Accelerating the hub health and social care initiative expected in 2009; • Target investment in infrastructure delivered by local businesses? A "buy American" equivalent?

  13. Policy proposals - longer term • All delivery options should remain on the table, at least until SFT can develop a workable alternative. • Need to ensure that a managedpipeline is created for key infrastructure; • Projects likely to be brought back onto public sector balance sheet by IFRS - therefore, public sector should seek to consider how true "partnershipapproach can be developed" • proper communication • address the flaws of PPP (expensive finance and inflexibility) while retaining benefits (lifecycle management) • reconsideration of how infrastructure is funded at central and local government level.

  14. Discussion

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