Time to be bold

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.

Gerald Holtham, an IWA trustee, chaired the Commission on Funding and Finance of the National Assembly. This article appears in the current Summer 2011 issue of the IWA’s journal Agenda distributed to IWA members who can also access the contents online here. To join the IWA click here.

5 thoughts on “Time to be bold

  1. The planning process in Wales also needs reform to ensure that any projects are fast tracked and not rejected by councillors in the run up to elections next year because they don’t want to alienate local groups who seem to oppose any development. Recently I have attended a number of planning committees and watched in amazement as officers’ recommendations to grant planning permission for major investments have been rejected as councillors play to the gallery. In Torfaen recently councillors decided not to give planning approval for a scheme for 1200 houses even though the site has been allocated for housing development since the 1990s. The authority would also have obtained a section 106 contribution at a time of local authority cutbacks of nearly £6 million which would have been used to improve schools in the area. Since part of the site is also owned by the Assembly the Welsh Government would also have obtained a capital receipt. The development would in a difficult period for the construction industry have provided much needed employment in South East Wales. None of this made any difference to the 21 councillors who voted to reject the planning officers recommendation. They might have in February this year included the site as a key strategic site for houisng in the authority’s draft LDP. But now the same councillors want the site to be classified as a green wedge. Decisions such as this send out the wrong message about Wales. No one is going to invest in an area where planning becomes a lottery. Again Gerry Holtham proves that he is one of the few individuals prepared to think outside the box. But the key question is who is going to bang the heads together in order to make the maximum use of the idea he has outlined in this article. As it stands we are just as likely to get a great deal of hot air and very little action as usual.

  2. The problem with politicians and economists alike is that they view Wales as being ‘peripheral’. For some of us, it’s rather ‘central’. It reminds me of some UK politicians on Irish TV saying that such and such was the case on the ‘mainland’ meaning Britain. A lady from the audience interjected…..’Here we view Ireland as the mainland’.

  3. I have to say I think Jeff Jones is living in a fantasy world. Good on the Torfaen councillors. A few questions:

    1) 1200 houses – who is going to buy them? Will local young families be able to afford them? Where is the current market demand?
    2) Employment – assuming 2 adults of employable age per household – that’s 2400 jobs. Where are these jobs going to come from?
    3) Construction – yes the development will create temporary construction jobs. But not sustainable long-term employment. It’s Mickey Mouse Economics.

    The LDP process meanwhile is based on housing allocations set by the Welsh Government for each Local Authority. These allocations in turn are based on population projections. These projections were set by the Welsh Government in 2007 – before the housing market tanked. They take no account of local NEED and they take no account of the current state of the housing market. In other words they are based on a flawed methodology.

    I’m very much afraid that the days of large scale suburban housing developments are well and truly over. They are fundamentally unsustainable.

  4. “A bold initiative that creates a sense of momentum, even excitement” is exactly what was planned in the 21st Century Schools programme, recently put on hold by Leighton Andrews.

    As its former Programme Director, I am very disappointed that a nation-wide initiative that had the potential to achieve such great things for Wales has, after two years of planning and involvement from all 22 local authorities, lost the very momentum that Gerald correctly identifies as fundamental to revitalising the economy. Whilst the Minister and his Department protest that the program me will continue, the truth is that a real opportunity has been missed, and that things have reverted to the previous “one project at a time” mentality.

    My experience in England was that major investment programmes in schools over the whole period of the last government there had a dramatic positive effect economically. Local communities took pride in their new or refurbished schools and found many ways to involve local business and other service providers; employment was created in the supply and contracting industries all over the country, and both large and small businesses could plan sustainably for the medium-term; and teachers found renewed vigour in their ambitions to provide leadership in a new generation of schools.

    It was the imaginative power of a government-led programme supporting the environment in which our children are educated that gripped people. It had the element of certainty, and over the years, this became a new industry in which many people were proud to play a part. Even though stopped prematurely by the incoming coalition, the impact on the school infrastructure is visible and tangible all over the country, and many more children like going to school.

    It was with a similar vision that in early 2009 the Welsh Government committed to a joint programme board to oversee the planning and roll-out of the investment, expected to be over at least a 12 year period. This board has representatives of local government and other key players, in just the way that Gerald suggests should happen for his plan. The governance of the programme was hailed by many as a model for collaboration between central and local delivery. Up to this summer it worked very well too, until the Minister decided he wasn’t quite so keen on collaboration, preferring to wield a stick against local the authorities and their efforts to deliver improving exam results.

    It was then all too easy for the Welsh Government to say that the reason for this loss of momentum was public sector expenditure cuts imposed by Westminster, together with a major reduction in future levels of funding for projects. Mr. Andrews is buying time by, quite unnecessarily, requiring all the local authorities to reconsider and resubmit their plans. However, this effectively drains the energy out of the big plan, and is now making elected members, education planners, and school leaders once more exasperated at the behaviour of those in Cathays Park.

    Instead, with a bolder commitment than we have so far seen from the Welsh Government, there could be a confidence-building statement, as we had intended, that would provide a definite framework for money to be found, from all available sources, and at a pace that would reassure doubters, of whom there are now unfortunately many. A bold initiative that can help to transform the fortunes of Wales is already on the drawing board. It just needs some lasting commitment from the top to deliver.

    Martin Lipson

    (NB- I would be happy to be contacted about this response)

    [email protected]

  5. Jim Dunckley suggests there is no point building 1200 houses. From my local council’s LDP consultation, I got the impression that the new houses included are to meet population growth. The LDPs are right to assume there will be demand, the issue of lack of jobs preventing anyone actually being able to afford them is just one of many things that points to continued population growth being fundamentally unsustainable. Population growth is the problem, and the cause. Curb population growth and then the councils can drop their plans for new housing. This is probably an over-simplification, but there it is.

    Another thing that is fundamentally unsustatainable, this continued prioritisation of road improvements. Maintain roads to a high standard yes, but improving road journey times, particularly where there is a rail alternative which we should be encouraging pepole to use, is frankly a very bad idea. Of course you could upgrade the rail network too to allow it to compete with said improved road journey times but that means paying twice. It would be much better to save the money and put it into, for example, re-instating public buildings with waiting rooms at interchange stations or electrification.

    That brings me to the ValleyLines and Swansea electrification projects. I wonder, if the Welsh Government offered to purchase electric rolling stock (the class 377 ‘Electrostar’ from the threatened train building plant in Derby would be a good option) for the ValleyLines, along with hourly stopping train services from Swansea and Maesteg to Cheltenham and Bristol Temple Meads (replacing part of the Taunton – Cardiff service, with the Bristol – Taunton section remaining deisel operated) and from Cardiff to Newport via Ebbw Vale Parkway would the Westminister government pay for the necessary electrification to operate the services?

    Such a fleet of 377s would cost in the region of £200m. Scrapping the second half of the £600m Heads Of The Valleys Road 4th lane scheme (saving £300m) would more than cover this cost without burdening Wales with debt. The Welsh Government are apparently considering part-nationalisation of the railway in Wales by taking over the Wales franchise when Arriva’s franchise expires with a not-for-profit company to allow the money currently pocketed by Arriva to be used to invest in the railway. The 30 strong fleet of Pacer trains currently used in South Wales are expected to require replacment with new trains by 2020. If the Welsh Govenment buys electric trains rather then diesel ones maintenance costs should be reduced. In addition, by purchasing the units at £200m using money diverted from the Heads Of The Valleys road project rather than having a rolling stock leasing company (ROSCO) own the new trains will save money in the long run. Over 30 years (the figure most often given for the design life of rolling stock) the same trains that would cost around £200m to buy would clock up £570m of leasing charges.

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