Submitted by Bill Fernie
14th November 2026
Highland Council's ambitious 20-year investment programme was designed to modernise schools, roads and public buildings. But higher borrowing costs, construction inflation and rising energy prices are raising questions about whether the original financial assumptions will still stand up. Could projects such as the new Thurso High School become more expensive or face delays?
Highland Council has embarked on one of the most ambitious public investment programmes in Scotland. Its £2.1 billion Highland Investment Plan is intended to transform schools, improve roads and replace ageing public buildings over the next 20 years.
The programme is badly needed. Many Highland schools and public facilities require modernisation, while maintaining infrastructure across such a large geographical area presents considerable challenges.
However, the economic conditions in which the programme must now be delivered are very different from those under which many of its original financial assumptions were developed.
Interest rates are higher than they were during the period of exceptionally cheap borrowing. Construction materials and labour have become more expensive, while renewed energy price pressures are affecting virtually every stage of building work.
These developments raise an important question: can Highland Council still deliver its investment programme at the original projected cost?
A £2.1 billion commitment
The Highland Investment Plan is a 20-year capital programme covering schools, roads and other local infrastructure.
It is funded through a combination of borrowing and a ring-fenced allocation equivalent to 2% of council tax revenue each year.
An important element is the development of Community Points of Delivery. These are intended to bring schools and other public services together in modern buildings, reducing the need to maintain separate facilities and potentially generating longer-term savings.
The programme includes major developments at Thurso, Beauly, Dingwall, Fortrose, Inverness and other locations.
The underlying principle is sensible. Replacing ageing buildings can reduce maintenance costs, improve energy efficiency and provide better facilities for communities.
But the financial challenge is substantial. A programme spread over two decades is exposed to changing economic conditions, and even relatively modest increases in costs can add millions of pounds to the final bill.
Interest rates: borrowing is no longer cheap
One of the biggest risks is the cost of financing the programme.
Highland Council relies heavily on borrowing to fund capital investment. Its principal source of longer-term borrowing is the Public Works Loan Board (PWLB).
An important distinction is that PWLB borrowing rates do not simply follow the Bank of England base rate. They are influenced by government bond yields and wider financial market conditions.
Highland Council has already acknowledged that borrowing costs have been higher than originally anticipated and that interest rates directly affect the affordability of its investment programme.
The Bank of England's November 2026 decision to raise Bank Rate to 4% illustrates how inflationary pressures are complicating the outlook.
If borrowing rates remain elevated, or increase further, the Council will face higher financing costs when it needs to borrow additional money.
Consider the implications of borrowing an additional £100 million.
At an illustrative interest rate of 3%, annual interest would be £3 million. At 5%, it would be £5 million.
That is an additional £2 million every year before considering repayments of the borrowed capital.
Across a programme involving billions of pounds of investment, the difference between the original borrowing assumptions and actual financing costs could become substantial.
It is also worth remembering that borrowing costs are not the only financial commitment. The Council must continue to meet repayments and interest on its existing debt while funding everyday services.
Construction costs: the original estimates may no longer be realistic
The second problem is the increasing cost of building.
Schools, hospitals and other public buildings require large quantities of steel, concrete, glass, timber, electrical equipment and specialist heating systems.
The cost of these materials has been affected by international supply chains, energy prices, transport costs and labour shortages.
The Building Cost Information Service (BCIS), in its October 2026 construction industry forecast, expects building costs to increase by approximately 14% over the five years to 2031. Tender prices are forecast to rise by just over 14% over the same period.
That is a significant increase for a council planning major developments over many years.
There is an additional complication. Building costs and the prices contractors submit in tenders do not always increase at the same rate.
BCIS reports that contractors have been absorbing some increases in their own costs because competition for available work remains relatively strong.
This may provide opportunities for councils to secure competitive tenders in the short term. However, contractors cannot absorb rising costs indefinitely without affecting their margins and financial stability.
If energy, materials and labour costs remain high, those increases are likely to feed through into future contract prices.
The danger for Highland Council is that project estimates prepared several years ago may no longer reflect the actual cost of delivering the buildings.
Energy prices: an often overlooked part of construction costs
Energy is sometimes treated as a separate issue from construction inflation, but it is actually embedded throughout the building process.
The production of cement, steel, bricks, glass and insulation requires substantial amounts of energy.
Manufacturing costs are affected by electricity and gas prices, while the transport of materials to building sites depends heavily on diesel and other fuels.
Heavy machinery, cranes, excavators and site vehicles also consume considerable quantities of fuel.
Highland presents an additional logistical challenge. Materials and specialist equipment frequently have to travel considerable distances, sometimes from central Scotland or further south.
Higher diesel prices therefore have a direct effect on the cost of getting materials and machinery to remote construction sites.
There are also indirect effects. If energy prices rise, suppliers may increase their prices to cover higher manufacturing and operating costs. Subcontractors then face similar pressures, eventually passing some of those increases through to the main contractor.
For a large school development, the combined effect can be significant.
Energy prices also matter after construction is completed.
A modern school should be designed to minimise its future heating and electricity requirements. Better insulation, efficient heating systems, ventilation controls and potentially renewable energy installations can reduce running costs over the lifetime of the building.
However, some of these technologies involve higher initial investment.
The Council therefore faces a balancing act between controlling construction costs today and ensuring that new buildings are affordable to operate for the next 30 or 40 years.
Cutting investment in energy efficiency to reduce the initial price could prove an expensive mistake.
Thurso High School: a practical example
The proposed £100 million Thurso Community Point of Delivery illustrates the challenges facing Highland Council.
The project is intended to replace ageing school buildings and create a modern education campus.
It includes a new Thurso High School, a combined primary school incorporating Pennyland and Miller Academy, early learning and childcare, Gaelic-medium education and opportunities to share community facilities.
Morrison Construction has been appointed as the main contractor.
The published programme envisages a planning application in 2027 and construction beginning in February 2028.
There has been no announcement that the project is being delayed.
However, there is an important distinction between appointing a contractor to help develop a project and agreeing a final construction price.
As the detailed design progresses, contractors will have to assess the actual quantities of materials, labour requirements, specialist equipment, ground conditions and construction timetable.
The final price may therefore differ from the original £100 million estimate.
Even a 10% increase would add £10 million. A 15% increase would take the project to £115 million.
These are illustrative scenarios rather than predictions, but they demonstrate how quickly construction inflation can affect a major public investment.
If the Council has to borrow more to cover the additional cost, it could also face higher interest payments over the life of the loan.
The same problem applies to other developments in the Highland Investment Plan.
The combined effect is more worrying than any individual increase
It is tempting to consider borrowing costs, construction inflation and energy prices separately.
But the real danger is that they occur together.
Higher energy prices increase the cost of manufacturing and transporting building materials. Contractors face higher operating expenses and may revise their estimates. The Council then needs additional funding to complete the project.
If that additional funding comes from borrowing, higher interest rates increase the cost of financing the revised project.
This creates a chain reaction.
A development originally estimated to cost £100 million could become £110 million or £115 million before the final contract is agreed. The Council then has to finance the additional expenditure at borrowing rates that may be higher than those assumed when the original programme was approved.
Multiply that across a £2.1 billion investment programme and the financial implications become much more serious.
There is also the possibility that some projects will have to compete with one another for available funding.
The Council might decide to protect essential school replacements while postponing other developments, reducing the scope of certain projects or spreading investment over a longer period.
That would not necessarily mean abandoning the Highland Investment Plan, but it could mean delivering less than originally intended within the planned timescale.
The Scottish Budget adds another uncertainty
The Scottish Government's Budget on 3 December provides another reason for Highland Council to examine its assumptions.
Local authorities depend on a combination of Scottish Government grants, locally raised revenue and borrowing.
If capital funding from Westminster to Scotland is reduced, the Scottish Government may have less money available for capital allocations to councils.
Highland's Investment Plan has its own financing arrangements, including the ring-fenced council tax contribution, so it is not entirely dependent on annual Scottish Government capital grants.
Nevertheless, a reduction in external funding could make it more difficult to support other projects and maintain existing infrastructure.
Councils are already struggling with revenue budget gaps. They cannot simply divert unlimited amounts of money from everyday services to cover capital cost increases.
The position of health boards is also relevant. NHS organisations face their own demands for hospital improvements, equipment and maintenance. They will be competing for limited public capital funding.
The financial pressures therefore extend well beyond Highland Council.
What should Highland Council do?
The Council needs to demonstrate that the Highland Investment Plan remains affordable under current economic conditions.
It should publish an updated assessment of the programme, showing how its financial assumptions have changed since the original plans were prepared.
In particular, councillors and residents should be able to see what happens if borrowing costs rise by another 1% or 2%, if construction costs increase by 10% or 15%, or if energy prices remain elevated for several years.
The most useful assessment would combine these pressures rather than examining them individually.
It should also explain how much contingency funding is available and which projects would be affected if the overall programme becomes more expensive.
There is a strong argument for protecting projects which replace unsafe or seriously deteriorating buildings. But that requires clear priorities and an honest assessment of what the Council can afford.
An ambitious plan needs realistic financial assumptions
There is no question that Highland needs substantial investment in its schools, roads and public facilities.
The existing estate is ageing, and postponing necessary improvements can create higher maintenance costs and poorer services.
The Highland Investment Plan has a sound underlying purpose. Modern schools and shared public facilities can improve education, reduce duplicated costs and provide better services to communities.
But ambition must be matched by financial realism.
The economic conditions of the past few years have demonstrated how quickly borrowing costs, energy prices and construction estimates can change.
A 20-year investment programme cannot rely on financial assumptions which were reasonable when interest rates were exceptionally low but may no longer be appropriate today.
The new Thurso school should not be assumed to be at risk of delay simply because costs are rising. However, its final price and funding arrangements deserve close scrutiny before a major construction commitment is made.
The wider question is whether Highland Council can deliver everything it has promised without placing even greater pressure on future council budgets.
A £2.1 billion investment programme may be ambitious and necessary. But announcing the investment is only the beginning. The real test is whether Highland can afford to build it, finance it and operate it over the next two decades.