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Scottish independence: how would it affect the construction industry?

When Bank of England governor Mark Carney claimed a currency union between an independent Scotland and the rest of the UK would require “some ceding of national sovereignty”, he fired an arrow straight at the heart of the referendum debate.

The fiscal context of the independence debate is crucial to the construction industry.

It will affect the role of sterling in an independent Scotland or the potential for greater taxation and borrowing powers afforded to Holyrood, cut off from the pursestrings of Whitehall.

“Voters already believe that independence is a significant economic risk”

Alistair Darling, Labour

But it is the national identity of the Scottish people, who will vote on independence just 15 years after Scottish devolution, that could still play a significant role in swaying the public vote, which at this point is considered too close to call.

So what of the impact on the construction industry, a contributor of 10 per cent of Scottish GDP and a sector given renewed prominence under the current Scottish Government?

Business as usual?

The industry is keen to toe the ‘business as usual’ line, but is privately wishing all the fuss would go away.

At present, businesses must get on and build and hope for commitment to medium-term revenue financed pipelines. It is pipelines, skills and the impact of an improving market that are foremost in their thoughts, not dissimilar to the priorities of English, Welsh and Northern Irish firms.

“We’re not asking people to take it on trust; we’re asking them to look at our record”

Nicola Sturgeon, SNP

Poster boy for the ‘no’ campaign, Labour Edinburgh MP Alistair Darling, penned an open letter to Scottish first minister Alex Salmond last week, in which he implied that the intervention of the governor made the position of the Scottish National Party untenable.

He said: “Voters already believe that independence is a significant economic risk. Your inability to give a straight answer on what money people will have in their pockets after independence is only adding to the growing sense that leaving the UK is too big a risk to take.”

Track record

But deputy first minister Nicola Sturgeon demands the construction industry look at the SNP’s record in government for proof that it should be trusted when it comes to decision-making that affects the industry.

“If Scotland becomes independent, we get a whole range of economic powers, and that can only be a positive for the industry”

Nicola Sturgeon, SNP

She tells Construction News: “We have done absolutely everything that’s been possible to do to maximise investment in construction, so that understanding of the importance of construction investment and that commitment to ensuring we maximise it is there.

“We’re not asking people to take it on trust; we’re asking them to look at our record.

“If Scotland becomes independent, we get a whole range of economic powers we don’t have right now, and that can only be a positive for the industry.”

She adds: “Scotland is, outside of London, the best performing part of the UK in terms of inward investment. People are voting with their feet; Scotland is a great place to invest and will be an even better place to invest if the referendum is for a yes vote.”

Sterling efforts

The Scottish Government wants to retain sterling, but has faced scepticism over the possibility from the chancellor and Mr Carney.

The Scottish Futures Trust, set up by the Scottish Government to secure and promote infrastructure investment, last year rewrote contracts to ensure payments on deals were carried out in sterling, something its chief executive Barry White says was simply a decision that “made sense” rather than the product of external influence.

“We wanted to ensure we continue to get competitive financing and value for money”

Barry White, SFT

He says: “The reality is we’re borrowing in sterling, so it seems sensible to say we’ll repay it in sterling.

“We have discussions with banks all the time, but we were more proactive than it being a case of being pressured into it.

“The last thing we would want is someone adjusting the pricing and we wanted to ensure we continue to get competitive financing and value for money.”

Wary investors?

Japanese banks have waivered on their commitment to investing in Scottish infrastructure, but the SFT insists it is being offered attractive rates of financing from all types of investors from banks to insurers and pension funds.

Ken Gillespie, chairman of the Scottish Contractors Group and chief executive of Morrison Construction, part of Galliford Try, says he can understand why foreign institutions may look on Scotland’s potential independence warily, but insists it matters little to those working on the ground.

“From an industry point of view, if there’s a currency change or if trading conditions alter then we will need to look at how we cater for that”

Ken Gillespie, Morrison Construction

“If you’re outside Scotland and maybe don’t understand it as much as we might, I can see there might be some concern about what happens after the referendum – that’s a reasonable question. But from our point of view it’s business as usual regardless.

“Any planning we might do at the moment is purely hypothetical. From an industry point of view, if there’s a currency change or if trading conditions alter then we will need to look at how we cater for that.

“But the flip-side is you’ve got UK businesses operating all over the world, so it’s not a new concept.”

Mr White says Scotland is buoyant for a number of reasons, not least the favourable rates being offered by financiers and the number looking to inject cash for its schools, hospitals and roads.

Successful finance models

Scottish procurement models, such as its Non Profit Distributing form of private finance or its Hub model, which attracts public and private investment in infrastructure across five geographical territories, have been hailed as successes by contractors.

Major schemes, such as the Edinburgh-to-Glasgow electrification programme, Borders Rail and projects in procurement including the £745m Aberdeen Western Peripheral Route and A90 Balmedie-Tipperty contracts, have been good to the industry.

“As the market progresses everyone needs to be alive to the fact that the risk and reward needs to be in a balanced scenario”

Chris Webster, Miller Construction

But with the market picking up and contractors increasingly choosing work rather than scraping the bottom of an empty barrel, will the SFT’s models continue to offer sufficient reward to generate private sector interest?

Mille Construction chief executive Chris Webster says the NPD and Hub programmes have been hugely successful, having “genuinely taken on some of the historical challenges of the PFI models”, but warns the challenge for PPP going forward is the balance of risk and reward.

“As the market progresses everyone needs to be alive to the fact that the risk and reward needs to be in a balanced scenario,” he says. “The challenge for the public sector is to ensure there remains sufficient reward to generate interest.

“We mustn’t seek to tighten the balance further as the market picks up. People shouldn’t revert back to previous mistakes though; it’s appropriate that people are always conscious of the requirements and need to make sure the model maximises efficiency on both fronts.”

PPP drive

Mr White says contractors need to come forward with new PPP models (see box), and is conscious of the need for new forms of procurement as the market evolves.

“The great truism we all face at the moment is that whatever innovation you do, you cannot predict that same model will work for the next 10 years,” he says.

But he says Scotland is investing around £150 per person annually over its current three-year spending period and that in terms of scale, he doesn’t believe anywhere in Europe matches Scottish ambition in this regard.

Housing at the forefront

As is the case south of the border, housing is the backdrop to much of the debate around the industry’s recovery.

The Scottish Government and SFT have seen some success with their National Housing Trust model, which leverages private sector funding and council borrowing to build homes for intermediate rent.

The model sees limited liability partnerships set up between the local authority, developer and SFT. The LLP pays up to 70 per cent of an agreed sale to the developer upfront through participating council loans; once complete, the homes are purchased by the LLPs.

“As industry recovers, you have to keep evolving and adapting. I think that’s the hallmark of our time, being nimble and agile”

Barry White, SFT

Mr White says the SFT has signed contracts for more than 1,000 homes and is in 20 joint venture partnerships with private developers from whom it will buy the homes.

He points to a scheme in Dundee where the LLP will buy 99 houses from a developer when they are completed. This has enabled the developer to build out the remaining 101 plots on the landbank, as it can provide evidence to its bank that a pre-sale agreement is in place to provide necessary infrastructure for a loan agreement.

Mr White says: “As industry recovers, you have to keep evolving and adapting; as we have gone forward with the NHT we have done different variants. I think that’s the hallmark of our time, being nimble and agile.

“We can change direction here, make things better. NHT is an umbrella for a series of innovative projects. We have more than 1,600 homes built, in procurement, or with permission given to local authorities to develop.”

Poor building figures

But opposition politicians are keen to press home the dire need for new private and affordable housing. The latest quarterly statistics showed a 14 per cent drop in homes being built year on year, with 13,478 in the year to June 2013.

Shadow business minister Ian Murray MP says the government’s record on housing is “deplorable”.

He says: “Construction and capital spending has been depressed because of funding since 2008 and… my contention is we could have been out of this economic hole quicker had more money been put into Scottish construction.

“There might be activity going on but it could be a lot better. I keep hearing Scottish Government officials saying ‘shovel-ready projects’, but many aren’t near a planning department, let alone a shovel.”

“I don’t think the referendum is affecting investment. Infrastructure investment is important full stop”

Barry White, SFT

Regardless of their politics, both sides are united in insisting that Scotland is attractive to investors.

Mr Webster says: “Whatever the result in September, we will have a strong business in Scotland and England. Inevitably in any election or referendum, politicians will deal with it in a political way, which will impact construction programmes.”

Mr White says: “We’re ready for whatever the outcome is, but it’s business as usual getting things done.

“I don’t think the referendum is affecting investment. Infrastructure investment is important full stop. It’s the core part of what we’re about – improving Scotland’s infrastructure.

“That’s been important since devolution in 1999 and before then. We have a clear focus on that and will keep driving that forward.”

Selling off assets and getting projects to financial close continue to be its priorities in 2014, with attractive finance and ability to procure at good prices all leading to signs of a healthy year ahead – regardless of who the winners will be come referendum day.

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