Welsh Government’s PFI replacement “not transparent enough”

(Title Image: National Assembly of Wales)

Finance Committee
Welsh Government Capital Funding Sources (pdf)
Published: 4th November 2019

“The evidence identified that whilst the Welsh Government is utilising the powers available, stakeholders are unclear how the Welsh Government prioritises projects and plans on a long term strategic basis. We believe that if the Welsh Government were to plan on a longer-term basis, and funding sources were matched to projects, it would be easier to establish the capital borrowing that will be required in the future.”
– Committee Chair, Llyr Gruffydd AM (Plaid, North Wales)

1. The Welsh Government is making good use of all funding levers at its disposal, but there needs to be a longer-term strategy

The Welsh Government has four broad sources of money it can use to one-off spending on new projects (capital funding): capital funding added to the block grant, borrowing commercially, borrowing through government bonds and the Mutual Investment Model (MIM).

The Welsh Government is limited to £1billion worth of total borrowing capped at a maximum of £150million a year. Prof. Gerald Holtham said there was an argument to increase this to an equivalent of 5% of the Welsh budget – in line with Scotland – which would be around £750million a year.

In 2019-20, capital spending in Wales totalled £2.3billion. The First Minister has said the Welsh Government’s strategy is to use the cheapest form of capital funding first (traditional capital funding allocations in the Welsh budget and sale of Welsh Government assets) before moving on to more costly/riskier forms of finance like borrowing.

Many witnesses were unclear how the Welsh Government prioritises capital projects. There’s a 10-year infrastructure plan, but it was described as nothing more than “a wish list” with no clear target dates. The Committee recommended capital spending should be carefully prioritised so it’s clear how much the Welsh Government will be expected to borrow.

2. Financial Transaction Capital should be used as a rolling loan facility for the housing sector

The UK Government has placed greater restrictions on how capital funding can be used and one of those restrictions is financial transaction capital (FTC). 14.2% of the Welsh Government’s capital budget is FTC, which can only be used for loan and equity investments in the private sector and must be repaid to the UK Treasury. The Development Bank has created most of its new funds using FTC totalling £800million to date.

Tirion Group believes FTC could be used more effectively to support the development of mixed-tenure housing in the form of a publicly-backed rolling loan facility to reduce housebuilders’ debt exposure depending on the stage of development (100% loans for pre-construction and planning, 30% for construction).

The Welsh Government have said that it’s considering how to provide social landlords with a mix of grants and zero-interest loans to improve the viability of affordable and social housing developments.

3. The Mutual Investment Model requires more transparency on costs

The Welsh Government developed the Mutual Investment Model (MIM) as an alternative to PFI. Like PFI, the Welsh Government and private partners collaborate to build and maintain public assets, with the Welsh Government paying a fee to cover construction costs, maintenance and financing.

At the end of the contract, the asset transfers to public ownership and, unlike PFI, the public partner is entitled to a share of any profits generated and community benefits (i.e. local job creation, supply chains) are written into MIM contracts.

Borrowing via MIM isn’t counted as part of the Welsh Government’s borrowing limit and it’s being used to deliver A465 dualling, the next round of the 21st Century Schools Programme and the new Velindre Cancer Centre. However, there were concerns that infrastructure maintenance costs could be exploited by contractors seeking a premium to account for risks over a project’s lifecycle.

While contracts for such projects will always be complex, MIM avoids including soft services such as cleaning and catering within the contracts which has lead to improved flexibility compared to PFI.

The Committee thought it was difficult to determine how MIM differed substantially from PFI or how it offers greater value for money – though they acknowledged the benefit of greater government influence. They gave MIM a cautious endorsement for projects which require an ongoing commitment and where the private sector can deliver better value for money.

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