Gerald Holtham urges there could not be a better moment to borrow to invest in Wales’ infrastructure
Wales needs a bold policy to promote faster economic growth. Currently the UK faces a period of slow growth as the central government and households retrench and reduce debt. As a peripheral economy Wales is unlikely to do better than the UK average without a strong initiative of its own. It faces the risk of continuing high, perhaps rising, levels of unemployment and economic inactivity.
In the long run, Welsh prosperity will depend on the level of skills and resourcefulness of the Welsh people, so education and training policy will be critical to success over coming decades. In the shorter run, the consensus view is that development can be promoted by provision of good infrastructure that only the state can provide, such as roads, or that large corporations will provide only with state aid, such as telecommunications, high-speed broad band, and rail.
In addition factors that make for a positive business climate and thereby encourage investment include: a predictable and rapid planning system, accessible business advice and liaison services and attractive places for senior executives to live. There is a role for provision of concessionary finance or tax advantages. The Welsh Government has a budget for aiding companies and European funds are also available. The general impression is that the returns to this expenditure have been disappointing in the past and it is questionable whether the best means have been found to maximise those returns. Moreover, the scope for tax concessions is currently limited to granting allowances against business rates and the Welsh Government has made relatively little use of this instrument.
While improvements in those policy areas should be pursued, at times like the present there is a role for bold initiatives that create a sense of momentum, even excitement. In line with the times, any such initiative should entail delivery rather than creating castles in the air. Such an initiative could take the form of a national infrastructure plan, which would include a few large, detailed projects in the areas of broadband roll-out, railway electrification, selected port development and strategic road development.
The plan could have a central element: a concordat between the Welsh Government and local authorities. The Welsh Government is currently seeking borrowing powers from Westminster. Even if those are not forthcoming, local authorities have so-called prudential borrowing powers. Borrowing costs currently faced by local authorities, along with gilt yields, are extremely low by historical standards. Loans of 20 years or more can be obtained from the Public Works Loan Board for around 4 per cent. Moreover, the construction and civil engineering industries are at a low ebb with plenty of spare capacity. There could not be a better time to borrow and invest. It will never be as cheap again.
Local authorities are well inside the borrowing envelop the Public Works Loan Board operates. However, they cannot prudently contemplate expanding their borrowing on the scale required without the active support and underpinning of the Welsh Government. The plan would require the Government to decide on a range of projects, then for each project to agree a share of the cost among itself, local authorities and users of the infrastructure. Local authorities could then borrow for projects in their area, against guarantees that agreed shares of the cost of servicing and repaying the debt (perhaps all of it) would be met by the other parties.
Some institutional innovation would be required to make this work. An example would be a liaison body or council between the Welsh Government and local authorities and then particular working groups or institutions for each project. The Welsh Government would also need a planning and evaluation bureau to carry out cost-benefit analysis of projects that were thrown up by the liaison council and to rank them. There would also be a strong case for pulling together expertise in procurement into a single body, which would serve all the projects. Its primary aim would be getting value for money but it would also look to foster and promote local suppliers as far as possible.
There is no shortage of candidate projects. Wales needs to equip two ports to service offshore wind and wave developments, such as Holyhead and Milford Haven. It needs to electrify the valley lines into Cardiff and Newport, and perhaps Swansea. Road developments are required in all parts of Wales as well as high-speed broadband roll-out. The candidates emerging from consultations between Government, local authorities and the business sector should be assessed by a technical body, the planning and evaluation unit, and ranked.
After political sign-off, working bodies would be set up for the top projects to hammer out the cost sharing and institutional framework then specify and cost the project in detail. The detailed plans would go back to the planning and evaluation unit for re-examination and re-ranking if necessary. The decision on go-ahead for the final plan would be political, taken at Cabinet level.
The Welsh Government would presumably not want to see its servicing of past projects, in effect its debt service, rise very high while its only revenue source is the Barnett grant. Still, just one per cent of the annual budget is £150 million. If loans were at 4 per cent with a maturity of 30 years, that would imply an annuity rate of 6 per cent and the sum would service debts of nearly £3 billion.
However, the government would not be meeting the full cost of debt servicing. In the case of ports, railways or toll roads, the users would service some of the debt through charges. Local authorities might also service some part themselves, especially if allowed to keep additions to their business rates flowing from projects. The Welsh Government money would therefore be used to service that part of the debt for which it was paying, plus some contingency reserve, so the full amount of investment could exceed £3 billion, perhaps by a substantial amount.
If there were an investment programme of over £3 billion into the Welsh economy, over and above the capital budget, over a period of five years, that could amount to a stimulus to the Welsh economy of about 1 per cent of GVA a year – Welsh GVA is about £60 billion. Even before we consider the long-run and supply side effects, this could push the Welsh growth rate from, say 1.5 per cent a year to nearer 2.5 per cent.
Unless and until the Welsh Government acquires its own borrowing powers, the actual borrowing would have to be carried out by local authorities. Serious questions then arise over the means whereby the Welsh Government would pay its share of costs by servicing the local authority debt. There are various possibilities and one has to be found in every case that gives the local authorities security and complies with UK Treasury rules. That should certainly be possible., While significant for Wales, the sums involved are negligible in the UK context where the annual government deficit is around £140 billion.
Such a programme would require co-operation between the Welsh Government and local authorities of different political colours. It would crystallise a sense of national purpose and be visible evidence of the Government’s determination to deliver economic prosperity. It could help to build administrative, technical and industrial capacity and provide a boost to business in both the short and long term. It would leave the Welsh public with a legacy of debt, but a very small one, just one per cent of its current budget and a proportion that will fall over time as the budget grows. It should also be serviced at fixed rates of interest. Families who have done well by taking out a mortgage to buy their home will easily understand and appreciate the plan.