Blog

Contributions to debate on the following topics:

Minimum alcohol pricing: some arguments against

Professor Brian Morgan; October 2017

An interesting article in Monday’s Western Mail suggested that a policy on minimum alcohol pricing was desperately needed in Wales.  It also suggested that such a policy would be easy to introduce and the impact of the policy would be unquestionably positive.

However, the arguments against such a policy were not highlighted in the article.  In fact, the arguments are finely balanced and the policy may or may not be effective.  In the interest of generating a debate on this important topic, let me present some of the arguments.

Although excessive drinking is a social problem, we might question why some people feel that such a pricing policy is desperately needed in Wales in 2017.  Recent studies have shown that alcohol consumption has actually been falling in the UK for over a decade and binge drinking has become less popular, especially among young people. e.g.  ONS data for 2017 show the proportion of adults drinking alcohol is at the lowest level on record: only 56% had had a drink in the week before being interviewed – a fall from 64% in 2005.  Also binge drinking and harmful drinking have declined by 17% and 23% respectively since 2005. Indeed the proportion of young people who are teetotal has actually been rising over the period.

Evidence from Europe also questions the need for minimum prices.  Across the EU, alcohol consumption is higher in France, Germany and Spain than in the UK. Also the number of alcohol-related deaths are greater in these countries and the consumption of alcohol is more widespread throughout society.  But binge drinking is less of a problem in these countries despite lower prices for alcoholic drinks.

Binge drinking in countries like France appears to be a minor problem because the French drink in moderation – even though a bottle of wine can be bought for less than a bottle of mineral water.  Evidence from France suggests that the low price of alcohol may not be the most important reason for binge drinking.

Perversely, alcohol prices are very high in some Scandinavian countries but these high prices have not eliminated binge drinking – indeed in Finland the problem is on the increase despite very high prices.

These examples indicate that binge drinking is a cultural problem and that the policy response may need to be focused more on changing drinking habits in Wales through advertising and education rather than on setting minimum prices.  In other words, a similar policy response is needed to the one that successfully curtailed tobacco consumption in the UK – a mixture of advertising, education, social pressure and higher taxes.

In general, the anecdotal evidence on alcohol consumption does not appear to support a policy of setting minimum prices for alcohol.  However, the question remains: Will minimum alcohol prices, if introduced, have the desired effect of reducing binge drinking in Wales? In my view, probably not.

For example, minimum prices that are set above the market price would cause demand to fall and supply to increase resulting in a surplus of ‘no-frills’, strong alcoholic drinks on the market.  There will also be ‘pent-up demand’ or ‘repressed demand’ at prices above the market price.  This is the basic economic theory of market prices.  However, the ultimate success or failure of introducing a minimum price for alcohol will depend on how these anomalies work themselves out in practice.

On the demand side the first thing to ask is: who are most likely to reduce their purchases of alcohol as the price rises?  Consumers who are most likely to reduce their purchasing because of higher prices are those who receive low ‘marginal utility’ from drinking – i.e. those occasional drinkers for whom the enjoyment of alcohol is marginal. So if a minimum price is imposed, the decline in overall consumption from higher prices may very well be achieved by a fall in demand by those consumers that are of least concern to policy makers –i.e. the occasional drinker for whom the health impact of alcohol is not a real issue.

If this analysis is correct then the actual increase in price that will be needed to deter ‘hardened drinkers’ could be very significant– i.e. far higher than the suggested 50p minimum per unit.

Also if the 50p minimum fails to have the ‘right effect’ in reducing alcohol consumption by hardened drinkers then there will be a clamouring by various lobbying groups to increase the minimum price.  Indeed the risk is that prospective political candidates would use a pledge to ‘raise the minimum price of alcohol’ and it will become a political football – especially if the prospective rise in price appears to have little impact on the majority of voters.  If hardened drinkers continue to drink then there could be continuous pressure on politicians to raise the minimum price.

In addition, if there is a continuing demand for drink at lower prices, how will this demand for cheaper alcohol be met?  Illegal stills and illegal brewers could step into the market to supply hardened drinkers which would soon create a black market for alcohol and cause even worse social problems.

On the supply side, the Government would effectively be raising price levels and increasing profit margins for the suppliers and retailers of alcohol.  [Perhaps that’s why the producing companies and the retailers are not actively opposing the policy?] It would be like bringing back ‘retail price maintenance’ for a small part of the drinks sector.

But the main impact will be to create an excess supply of the cheaper types of alcoholic drinks.  How will this excess supply impact the market?  Will innovative measures be introduced by retailers to off-load this surplus alcohol onto the market – e.g. offers like ‘buy one get one free’?  And remember that in the past, producers and retailers have introduced very innovative schemes to get around market restrictions on price.

Finally, in terms of social equity, it has to be accepted that a minimum pricing regime would be highly regressive – i.e. it would hit poorer households more than middle income households. It is certainly likely to be more regressive than simply increasing taxation on alcohol.  However, the latter option would at least provide an income stream to the Government which it could use to launch an educational campaign aimed at tackling this deep-rooted social and cultural problem.  At the end of the day, education is the only sensible long term solution.

[This article was first published in the Western Mail on 30/10/17]

 

Rail Electrification to Swansea

Professor Gerald Holtham; July 2017

Electrification of the railway between Cardiff and Swansea has been scrapped.  It is a victim of cost overruns on the electrification project between London and Cardiff and the UK government’s need to find economies having just promised one billion pounds to Northern Ireland for the DUP’s help in keeping Theresa May in power.

Predictably there have been cries of foul and complaints from Wales.  Sadly, however, no-one has come up with a positive suggestion.  So here is one.

If the UK government has any shame or conscience at all they should be mightily embarrassed at breaking their promise.  They have tried to cover the retreat by saying they will supply bimodal trains that can run on diesel between Cardiff and Swansea but that is patent rubbish.  The trains will be much heavier than pure electric ones and slower to accelerate.  They will not reduce travel times between London and Cardiff as much as pure electric trains would.  So Cardiff as well as Swansea will suffer.

The Welsh government has therefore got an excellent case for going to HMG and demanding the right to borrow several hundred million pounds,  itself to finance electrification to Swansea.  If bonds were issued on its behalf by the UK’s Debt Management Office as gilt-edged securities, the interest rate on them would be lower than the current inflation rate. Thirty-year gilts yield 1.85 per cent at the time of writing.   Paying back, say, £300 million pounds over 30 years would cost £13 million a year, less than 0.1 per cent of an annual Welsh budget of £15 billion.  And that proportion would fall over time with inflation.  Embarrassment would make it hard for HMG to refuse a determined initiative from the Welsh government, especially when the latter is picking up the tab.

Ah, you may say, but the electrification will cost £400 million, perhaps more if there are overruns.  Not a problem.  Firstly, lessons should be learned from the overruns on the cost of the London to Cardiff electrification, which was not well planned and chose expensive options.  Cost per mile of the Swansea extension could be quite a lot lower. Secondly, Cardiff and Swansea have both been promised City Deals with Cardiff receiving over a billion pounds from the Treasury if the Welsh government kicks some money in too.  Some of that money is to be spent (albeit very slowly) on the Cardiff metro.  But it is no secret that the Cardiff City Region has no clue yet how to spend the rest of it.  The Welsh government can insist that both city regions contribute, say, £75 million each from the city deals to complete the rail electrification.  This is an offer they can’t refuse because if the Welsh government declines to contribute to the deals they won’t get any money at all.  At present neither region has come up with better projects than improving the link between them.

Contributions from the city regions and a railway bond issue would finance the extension and give Network Rail no reason not to complete it. Apart from reduced travel times and lower energy costs, the project has other benefits for Wales.  A maintenance facility for electric trains was being prepared in Swansea.  Now that is being scrapped and maintenance will revert to London.  With electrification back on, the facility could be revived bringing back skilled jobs.

Some will complain that all this is not fair.  Central government should pay since the rail network is not a devolved responsibility.  Yes, yes. But we are where we are.  Sometimes Wales has to do more than moan that we are not well treated and get on and sort things out for ourselves.



 

The Social Care Challenge

Welsh economist Gerald Holtham and entrepreneur Tegid Roberts on how Wales can solve the social welfare situation in Wales.

May, 2017

Social care, particularly for the elderly faces a serious squeeze in Wales, not to say a crisis. Local authority spending per older person has declined over the past seven years by around 13%, according to Joseph Ogle, Research Assistant, and Michael Trickey, Programme Director, at Wales Public Services 2025.

The latest figures for annual local authority spending on social services for the over-65s are just under £0.55bn (2016-17 prices). The proportion of elderly people in the population requiring residential care is projected to rise by 82% by 2035 and the proportion requiring non-residential care to rise by 67%.  Expenditure overall will need to rise by 75- 80% to account for that and if the recent deterioration in spending per head is to be reversed spending would need to double.

That is consistent with the finding of the Health Foundation which concluded that adult social care funding in would need to rise by 4% in real terms each year for most of the next two decades. Meanwhile the Welsh budget under austerity will grow much slower than that.

Absence of adequate social care provision not only leads to suffering in itself but often shows up as a crisis in the health service because elderly people with chronic conditions end up in hospital and stay there because there is nowhere where they can be safely discharged. That creates a pressure on available beds triggering problems elsewhere in the health system. It also results in time-consuming, soul-destroying haggling over resources between health and care service personnel.

 

Small sacrifice

With a small sacrifice Wales can tackle this problem via a system of enhanced social insurance. A very small levy on Welsh residents could feed a dedicated social security fund that meant everyone could be promised adequate social care in old age – a promise that cannot otherwise be made or kept.

It could improve the present situation where old people have to sell homes or other assets to fund residential care when they need it. And the fund would have other great benefits because it would have to be invested and could be used to boost social housing construction and the growth of promising Welsh businesses.

The levy would differ from a tax in that the receipts would not go into a general government budget. They would be hypothecated to a fund with independent trustees. A portion of those receipts would go to local authorities to expand social care provision straight away. The greater part of the receipts would be held back for future needs and meanwhile invested to grow over time and enable even greater social provision to be made in the future as the population ages.

That investment would mainly have to be in super safe assets like UK government bonds or the shares of blue-chip companies. But some could be invested in property. Funds could be made available to build social housing whose rents would pay back the money. A small part could be invested in growing Welsh businesses to help the economy as well as providing returns for the fund.

A by-product of tackling the prospective social care crisis would be the build-up of Wales’ own sovereign wealth fund.

If ever a policy met the objectives of the Future Generations Act, this would be it. The country would be saving to meet the old-age social care requirements of current and future generations and in the process investing in worthwhile assets and enterprises.

 

How might it work?

How might it work? There are currently some 1.4 million people working in Wales with an average income of about £29,000 a year. Income below £8,000 is not liable for national insurance contributions and would not pay the levy. That still leaves annual pay of £2.8bn (1.4 million times £20,000).

If Welsh workers paid a levy of just 1%, that could bring in some £280m a year. There are different ways to carve that up. At most £80m could go immediately to social care, leaving £200m a year to accumulate in the fund. That would be an immediate increase of 15% in social care spending for the elderly.

The £200m could be invested to provide a return; 5% should be achievable without undue risk. Meanwhile to bridge the care gap that immediate £80m allocation would need to grow at 11% a year.

If the fund started in 2019, that growth would take the allocation to £400 million and would enable care spending to more than double in real terms by 2035 closing the funding gap.

The money in the fund would be growing too, right up to 2035. After 5 years it could amount to over £1bn and after 16 years it could be at £2.6bn.

The fund would need to be over £2bn at that point to maintain the promise of care for all contributors into the indefinite future. Of the money going in each year (growing as nominal pay does), some could be invested in rock-solid government bonds, the largest part in blue-chip, high income stocks and a smaller part for social housing and/ or investments in Welsh growth companies.

Imagine the benefit if, for example, an additional £20m a year was being invested in social housing and nearly £10m in venture capital in Wales. Over a decade and a half these sorts of investment could amount to £400m.

The fund’s mandate would be set at the outset. It would have its own board of trustees and the investments put in the hands of professionals of proven competence. The fund’s existence would give people confidence that the levy was truly hypothecated to social care and could not be siphoned off for other uses.

 

Million prize once a year

Suppose investments are successful and the fund grows at least as fast as needed to underpin social care. To give levy payers a bit of fun the trustees could declare a dividend in the form of a premium-bond style pay-out to random winners. A £1m prize once a year would create public interest without making a dent in the fund.

Now when people claim some social benefits like old age pensions they have to show a record of national insurance contributions. Inadequate contributions mean a lower pension. Under the levy scheme younger workers would be paying in for much longer than older ones in order to secure the same promise of care in old age. To make the system fairer, younger workers should therefore pay at a lower rate than older ones, who will not pay for so long.

Obviously various schemes are possible. Workers under 35 would pay less than 1%, those in the 35-50 range would pay around 1 per cent and workers over 50 would pay a bit more up to a limit of 2%. On an income of £500 a week, just below the Wales average, the weekly payment would be between £1.75 and £7.

No one likes paying insurance premiums, even with a lottery ticket attached. Yet those seem reasonable sums for the assurance of dignity and care in old age and the knowledge that the country is benefiting from its very own community fund able to make investments that improve the economy and life in other ways.

Note: This article first appeared on Wales-on-line at: http://www.walesonline.co.uk/business/business-news/how-wales-can-solves-social-12999191#ICID=ios_WalesOnlineNewsApp_AppShare_Click_MailShare



A Case for public support for the Circuit of Wales

Professor Brian Morgan and the Mandix consultancy put a case for supporting the Circuit of Wales June 2017

Background

We were invited to review the existing research undertaken on the proposed Circuit of Wales (CoW) project and have been given access to the financial model that underpins the development phases of the project in its first eight years.  On the basis of this earlier work we have undertaken a full economic impact assessment using new data and taking into account recent developments in both the motorsport sector and the Welsh economy. [1]

Our balanced conclusion is that the CoW has the potential to make a significant positive contribution to both the local economy and to the Welsh hospitality and tourism product, but there are risks associated with the project.  Although we acknowledge these risks, we feel that the CoW has enough positive attributes to make the loan guarantee proposed by the Welsh Government a reasonable and worthwhile option for the Welsh economy.   Here is our reasoning:

Something must be done

If any part of Wales was to be targeted for a transformational investment project then the area surrounding the northern Valleys would probably be top of the list.  It has suffered significantly from deindustrialisation and the decline of the coal industry and this has been exacerbated over many years by chronic underinvestment in infrastructure.  Consequently, the area has relatively high levels of unemployment and poor employment opportunities. There is a shortage of high quality commercial and industrial property available for new businesses, along with a lack of investor-ready industrial sites.

Something is needed to create a step change in economic development in the Valleys and the time has passed for ‘tinkering around the edges’ (which is a good description of recent attempts to regenerate this area).  Something transformational is required to kick start the growth process and reduce the prosperity gap with the rest of the UK.  Something is needed NOW to reverse the decline in employment opportunities and introduce new investment.

It must be acknowledged from the outset that the CoW is not a panacea for the area’s economic problems.  It might have considerable potential to help kick start a process of regeneration but it is not in itself going to transform an area where economic opportunities remain scarce.  Reversing this cycle of decline will take a coordinated and interventionist approach to economic regeneration over the next decade or longer.  But the CoW might play an important part in the process.

One of the key points in favour of the CoW project is that it is ‘ready to roll’ – it is ‘shovel ready’ and there could be diggers in the ground during 2017.  In addition the project is also timely in the sense that the construction phase would coincide with the Brexit process which, because of the increased uncertainty involved, is holding back other private sector projects.  But investment is needed now and the Circuit could be up and running by the time that Article 50 negotiations are completed.

However, if a timely decision is made by the Welsh Government on the loan guarantee, then in two years’ time Phase 1 of the project could be almost complete, creating over 500 FTE jobs (equivalent to nearly 3,000 jobs on site during the two year construction period).  Also by 2020, after the construction phase is complete, there could be in place the basis for an international racing circuit attracting over 100K spectators and boosting the tourist product along the Heads of the Valleys road.  Alongside this investment other businesses could be planning to relocate or expand in the area, and, in addition, the Extreme Sports partnership could be up and running, with further impacts on tourism and jobs.

What is holding the project back? 

The financial package to deliver the investment has not yet been finalised.  Much has been made of the offer by the Welsh Government to provide a loan guarantee that would underwrite the capital investment needed to bring the project to fruition. It has been claimed that this guarantee is very risky and does not offer value for money.  The CoW is a risky, private sector led project but the Welsh Government guarantee has to be seen in the context of a policy intervention that is in line with existing regional economic development practice.

For example, although a WG guarantee of around £200m amounts to a lot of money, it has to be accepted that some form of grant aid is often required to underpin commercial investment in the so-called ‘Objective One Areas’ of Wales – the relatively poorest communities that have been eligible for the highest level of State Aid for decades.

Over the years, various forms of public sector financial support for investment have been introduced.  In the days of the WDA, the main form of support for private sector investment in the Valleys was provided in the form of Property Development Grant (PDG).  This meant that up to 25%, and sometimes more, of the capital cost of a project was eligible for grant aid as long as it was located in the most deprived parts of Wales.  The £400m investment that underpins the CoW project would certainly have been eligible for PDG – it would also have been eligible for support from EU regional development funds.

However, instead of PDG, the WG offered an alternative route – apparently because of the restrictions and uncertainties surrounding EU State Aids rules.  Instead of grant aid the Welsh government offered to underwrite the CoW investment in the form of a 100% loan guarantee, for which it will receive an annual credit guarantee fee.

Note that it does not confer a direct financial benefit, as the company has to pay a credit fee to comply with State Aid.  However, the guarantee is beneficial because it enables the company to access the necessary long-term investment funding that is often only available with Government support. Essentially it’s a mechanism for leveraging private sector funding.

In the long negotiations that followed the original decision to provide the loan guarantee, this surety has been reduced to 48% of the total capital cost in order to meet the stated metrics of compliance with State Aid: i.e. off balance sheet treatment and appropriate sharing of risk with the private sector.  It is worth pointing out that the difference in cost between providing an up-front grant through PDG or alternatively underwriting 48% of the capital investment with a loan guarantee over a longer period is not significant – indeed PDG would probably be more expensive – and we are effectively comparing one form of grant aid to another.  The essential point is that some form of public support is inevitably required to bring forward private sector investment in the more depressed areas of the economy.

What are the risks involved? 

The CoW investors agree that the project has to be classed as a higher risk investment.  After all, the CoW is a very large, long term development project that will require a number of important factors to be put in place in order for the investment to be successful.  For example:

  • it will need to be tightly project managed from the start to ensure that the construction phase is completed on-time and, hopefully, comes in under budget.
  • it will need to be expertly marketed and linked into other events in Wales to maximise spectator numbers and ensure the maximum impact on tourism.
  • it will need to develop good strategic partnerships with other private investors in order for the full commercial benefits to be reaped in terms of ancillary investments from other parts of the automotive sector.

This is a tall order, but it means that the development risks are known and to some extent calculable and manageable.

However, although the financial outcome is uncertain, the loan guarantee will only be drawn down once the facility is built and then only where the company experiences severe and sustained downside performance.  In this scenario, other private sector investors, (who will have already invested significant funds), will have lost all or part of their investment. So the largest share of the risks involved in the project is being borne – as it should be – by the private sector.

But an important point to note is that, with the guarantee in place, the racing circuit will definitely be built and the infrastructure will be put in place to run Moto GP automotive, cultural and action oriented events.  According to the financial model, the project has enough working capital to ramp up the main events to be held at the Circuit for the first three years of operation.

So whatever happens in terms of the financial outcome of the project, in five years’ time there will be a legacy in the form of a state-of-the-art racing circuit that can host various events, ancillary buildings that can be used for a number of commercial activities and top class facilities that can be used for testing vehicles.

What if actual spectator numbers are low?

If the projected spectator numbers and other predicted revenue streams are lower than expected then a financial restructuring of the company may be needed in five years’ time.   How much of a financial restructuring will be required in the event of low spectator numbers will depend on how far short the actual numbers turn out to be.

A relatively small shortfall might only require some fairly minor adjustments to the financial model.  However, a large shortfall in numbers might require a completely new financial model and even a new set of investors to take over the project.

This has happened in other large infrastructure projects like the Channel Tunnel – the original investors lost most of their investment but ‘Le Shuttle’ eventually turned out to be very successful.  As long as the scheme gets built to a quality level that allows the Circuit to host a series of international motorsport events, then the eventual owners only have to cover their running costs to make the Circuit viable and financially sustainable.

If the WG loan guarantee is activated, what will be the long term benefits to Wales? 

This will depend crucially on how much of the original development objectives have been realised by the time any proposed restructuring takes place.  For example:

  1. how many jobs will have been created in building the Circuit and running it for three years or more?
  2. what is the potential at this stage for the scheme to attract further investments and complete the original business plan in terms of industrial and commercial buildings and hotels?
  • will the circuit still have the potential to become the UK’s premier destination for motorsport?
  1. will the Extreme Sports partnership and facility be successful and sustainable in the longer term?

This highlights the risks involved but the analysis in our report suggests that the economic impact from building and running the Circuit in the first few years of operation will be significantly positive in terms of both jobs and GVA.

The main measure for employment opportunities are the number of Full Time Equivalent jobs (FTEs) created.  We have estimated that in Phase One of the project there would be around 3,000 jobs created over the period to 2020 – this is equivalent to over 500 FTE jobs, i.e. long term jobs.

But most of the long term jobs will be created in Phase 2 of the project, by which time the operations side of the project should be fully up and running.  In this phase a further 1,600 FTE jobs could be created through both onsite and offsite activities.

However, the economic impact of Phase 2 will depend crucially on whether the three commercial zones that will underpin the operational phase of the project are built and successfully operated.  So, in the best case scenario the CoW project, once it becomes operational, has the potential to create over 2,000 FTE jobs over the eight year development phase on which we have focused in measuring its total economic impact.

The other main measure of economic impact is the expenditure profile of the investment and the consequent uplift in Gross Value Added (GVA) for the regional economy.  Phase 1 will involve expenditure of over £400m but when leakages from the economy are taken into account (particularly when constructing a specialised race track where few local companies will have the expertise to become directly involved) we have estimated a net expenditure of around £218m in Phase 1.

Similarly in Phase 2, although leakages in the operational phase will be less than in construction, we estimate the net expenditure at around £470m from a gross expenditure of £700m. Once taxation effects and non-value elements are removed this leads to total GVA impact over Phase 1 and Phase 2 of around £450m once multiplier effects are taken into account from both onsite activities and off site activities.  This represents a significant, positive impact on the local economy.

However, although the uplift in both GVA and in employment opportunities are significant they are far from automatic.  Phase 2 of the project in particular will require a number of strategic investments to be made by third parties which are not guaranteed.  Consequently, it is worth stressing that at the end of the development period, the project may be underpinned by a completely different financial model to the one with which it began and there may even be new investors and owners involved.

But, on our understanding of both the financial model and the planned expenditure profile, in eight years’ time one thing is certain:– if the loan guarantee is put in place, there will be a state-of-the-art racing circuit built on the site; a number of high quality buildings will have been erected; and a lot of hard work will have been expended in trying to make the Circuit the UK’s premier destination for motorsport.

To get this far the CoW project has had to overcome considerable obstacles including getting consent for deregistering common land.  If it succeeds the CoW is likely to become a major tourist destination – not only for motorsports and related events but also for Extreme Sports enthusiasts.  It could also have a positive impact on other events-led activities such as food and music visitor days. It could also increase the visitor economy of Wales, adding additional spend and stay to those who have decided to visit Wales as an activity break destination.

Indeed, the opportunities are endless, but getting there will be very challenging – it is, after all, operating in a highly competitive sector with a new and largely untried product.  Our balanced conclusion is that the CoW has the potential to make a significant positive contribution to both the local economy and to the Welsh hospitality product.

Conclusion

It must be emphasised that the risks involved in developing the CoW are not insignificant.  However, they are calculated risks.  In terms of benefits, the Circuit will help regenerate a part of the northern Valleys that is in most need of regeneration.  It will create a significant uplift in GVA and an important expansion in employment prospects in an area where unemployment remains well above the UK average.

On our calculus of the economic benefits versus the financial costs, the increase in the number of jobs, the expansion in GVA and the enhancement of the tourist product in this deprived area are likely, on balance, to outweigh the risks involved.

Post Brexit, lifting Wales off the bottom of the UK prosperity league table will require a much higher rate of both private and public investment.  Wales, especially the poorer areas, needs ambitious long term projects on the scale of the successful Cardiff Bay development and, currently, the Valleys Task Force is investigating how investments on this scale can be stimulated.  The CoW could play a prominent role in this investment strategy.

However, to be successful CoW will need to be well planned and professionally organised if it is to meet the challenge of managing the financial risks confronting the project.  If it succeeds in overcoming these obstacles then the Circuit could better position Wales in the British and international Motorsport Industry and the project could underpin a longer term and sustainable strategy to develop jobs in tourism, hospitality and automotive engineering in the Valleys.

And the evidence from the USA and Europe is that whilst the risks associated with Motorsport Circuits can be significant, especially in the earlier years as spectator numbers are being ramped up, they can develop into durable and positive assets that can ride out storms and maintain investor confidence. For example, Carolina Motorsports Park, USA, opened in 1999 and has continued to expand facilities and services. Further examples are outlined in the report.

So the underlying business model for the CoW has been tested in other parts of the world and found to be feasible.  The conclusion of our report is that there is a distinct possibility that with judicial management of the construction project, a good marketing strategy for the events and an ability to leverage in the investment needed for Phase 2, that the CoW can deliver long term and sustainable benefits to the Welsh economy.

 

(Note: This article first appeared in WalesOnline at http://www.walesonline.co.uk/business/business-news/welsh-government-should-back-circuit-13083115 in May 2017)

[1] For detailed methodology and the likely outputs from the project, in terms of jobs and GDP, see full report



 

An Infrastructure Commission for Wales

March, 2017

Risks and Issues to be tackled

An advisory NIFCW would add to the plethora of advisory bodies that already exist. It would also set up a body with a remit that covers areas that are too widely spread to be effectively integrated; and duplicate work already done by other bodies such as Transport for Wales and NRW. There is also the more fundamental question of what problems, deficiencies, or issues an NIFCW is designed to address. These would include a lack of stability in infrastructure planning; a lack of knowledge and research about the relative benefits of different developments, the influence of the political cycle, leading to short-termism and the urgent dominating the important; a rather random approach to the financing of infrastructure; and a doubt as to whether procurement is economically and socially efficient.

The General Context for an Infrastructure Commission

Government needs a strong means of grading bottlenecks or constraints, and setting priorities. An infrastructure commission is one possible solution but it is not a necessary one. The problems could be solved by stronger Cabinet Government, with all changes of substance required to be signed off in Cabinet or by a specialist Cabinet sub-committee. Together with this, a specialist research unit could be set up within the Welsh Government with the necessary resources, perhaps in the Economy Department. The influence of the political cycle is harder to tackle, but this is an argument in support of establishing an infrastructure commission with some degree of independence, whilst the financing arrangements could be resolved by an enhanced role for the new Welsh Treasury.

An infrastructure commission is not strictly necessary, nevertheless, it has certain advantages as an approach. Firstly, the research or cost-benefit studies it conducts would be in the public domain and would have more prestige than the work of an internal unit.  Secondly, insofar as different infrastructure decisions are lodged with different Government Departments, the location of an internal unit might be contested or give rise to turf wars between Departments and between Ministers.

Governance Context

The development of infrastructure for Wales should be done within the context of coherent local and regional plans that reflect differing local priorities. There is currently an opportunity to ensure that local, regional, and pan-Wales views and needs are all taken into consideration.

To implement policies in other areas, the government has to negotiate with Network Rail, companies owning the electricity, telephone, water, and gas grids, companies involved in the generation of electricity, and private companies running rail franchises, broadband or mobile telecoms services. Projects in all of these areas will be carried out by the private companies concerned.

Proposals for an Infrastructure Commission

Given the considerations discussed above, what would the Commission look like and how would it fit in with Welsh Government functions?

Financing and Political Considerations

Firstly, we do not think that the NIFCW should take over the planning of infrastructure finance, which should be a Welsh Treasury function. Some specialist expertise in the modalities and details of project finance could, however, be a useful part of its capabilities.

We do believe that the Commission should have specific expertise in procurement for certain types of infrastructure project with skilled staff seconded from Government. That would give the NIFCW the character of an executive agency, whilst policy decisions remained the prerogative of Government.

The NIFCW could provide advice and research to inform policy decisions and help determine the best means of achieving broader Government objectives, though final decisions would rest at the political level. The NIFCW would then be the centre of skill and experience in procurement and project management to deliver the projects.

This approach would have to be in tandem with a change in attitude at Welsh Government level to the process of making decisions, and in established financing arrangements.

Operational Structure for NIFCW

The NICFW, to be useful, would be stand-alone with its own executive and a supervisory board on which the government would be represented.  The Commission’s work would be confined to projects of national scope, whilst acting in a coordinating role with City Regions. It would have a high-powered research capability combining technical and economic expertise to assess the cost-benefit ratio of different infrastructure projects (acknowledging uncertainties and incommensurables), while its reports would be published.

Decisions on infrastructure development would remain with the Government but decisions between alternative means of achieving the same broad ends would be informed by the work and opinions of the NIFCW.  The Commission could also be the repository of procurement and project management skills that would deliver projects determined by Government. Note that these would cover only a part of all infrastructure, however, namely transport, and flood and coastal defence.

The separation of policy from execution has its dangers but also considerable advantages.  The danger comes if policy is made without the input of people with practical experience of execution. However, this danger can be overcome quite readily if policy-making is intelligent and takes appropriate advice at the appropriate time. The advantage is that Ministers who have determined on a good policy are not automatically blamed for execution failures over which they have little control. The management or Commission board can assign, or take responsibility for significant failures, and personnel can change.  If a policy is implemented contrary to published NIFCW advice, however, the political responsibility is clear.

Multi-level Governance Relationships

Projects currently falling under the auspices of Local Government or due to fall under the auspices of City Regions would not be in its remit.  We propose, however, that intelligent use of proposed structures such as the City Regions is made. We propose that each city region (3 in total) should have an infrastructure executive agency. Each agency would work to develop coherent, regionally focussed, plans for infrastructure development, including a strong advisory/planning role in areas such as housing.

However, these agencies could seek input or advice from the NIFCW, and would be required to keep the NIFCW informed of their own plans so that they could be harmonized with each other or with national plans where necessary. It would be expected that the NIFCW would work closely with the regional equivalents set up by City Regions but with a clear division of responsibilities.

Accelerated investment would require partnerships with Local Authorities (in the guise of Combined Authorities /City Regions) and innovative approaches to public/private financial co-operation. The government will need to address its own incapacities in integrating planning as illustrated by the case with the WIIP, which was compromised by Welsh Government Departmental rivalries and short-term finance pressures.

Given the adoption of a tri-regional infrastructure executive agencies structure plus a national NIFCW, consultation could start with Agencies, Departments, Local Authorities/ Combined Authorities and business on a “wish list” of projects. The NIFCW then determines inter-infrastructure issues, estimates rough costs, and rank projects for draft plan, which is then signed off by Welsh Government Cabinet. Regionally-based steering groups/working parties could be set up for each project in order to:

  • specify project in detail
  • decide institutional structure and finance responsibilities
  • determine costs

Detailed plans would be reviewed by the NIFCW and re-ranked if necessary. After which, the final sign-off by Cabinet is given, and the project may then proceed to implementation, overseen by the NIFCW and/or the appropriate regional infrastructure agency.

Concluding Remarks

Such a scenario would require that financial planning has to accompany physical planning, requiring, in turn, greater Welsh Treasury control of the Welsh capital budget. The infrastructure planning agencies would have to overcome the political distaste for “quangos”, whilst political and/or local rivalries will have to be overcome. The infrastructure bodies would also require a major job of management and co-ordination where failure would be high-profile.