Welsh Government needs to be more innovative with funding sources
The Finance Committee of the National Assembly for Wales has undertaken an inquiry into the capital funding sources available to the Welsh Government and explored the effectiveness of its funding strategy.
In 2014 the Wales Act gave capital borrowing powers to the Welsh Government. This Act, along with the Wales Act 2017 and the fiscal framework, established an annual capital borrowing cap of £150 million for the Welsh Government.
In its inquiry, the Finance Committee wanted to establish how the Welsh Government is using the funding streams now available to it as a result of these fiscal changes and assess the benefits and risks of specific funding models that it uses.
The Committee found that, whilst the Welsh Government was using the new borrowing powers, stakeholders were unclear about how it prioritises projects and plans on a strategic basis. The Committee believe that if the Welsh Government planned on a longer term basis, and matched sources of funding to infrastructure projects, it would be easier to establish how much capital borrowing was required in the future.
The majority of Committee Members welcomed the Welsh Government’s efforts to seek borrowing powers, believing that such powers would enable a more comprehensive capital infrastructure programme to be implemented in Wales. They recognised the case made by the Welsh Government for an increase in borrowing to allow a rational approach to capital borrowing. The Committee would support the Welsh Government’s borrowing limits being increased to help deliver investment priorities.
The Mutual Investment Model (MIM) has been developed by the Welsh Government to provide more than £1 billion to finance public infrastructure in Wales. MIM schemes will see private partners build and maintain public assets. In return, the Welsh Government will pay a fee to the private partner, which will cover the cost of construction, maintenance and financing the project. At the end of the contract the asset will be transferred into public ownership. However, the Committee didn’t find a significant difference between MIM and Private Finance Initiative (PFI), specifically as to how MIM offers greater value for money than previous PFI models.
The Committee wanted assurance that MIM will provide contracts which are flexible, ensuring public bodies have influence over decision making. Additionally, the Committee found it was not clear how MIM minimises financing costs when compared to the UK Government’s PFI and its successor PF2.
Llyr Gruffydd AM, Chair of the Finance Committee, said:
“It’s reassuring to see the steps being taken by Welsh Government to fully use its new borrowing powers. However, we need to see evidence that longer term planning is happening. I also hope to see the Welsh Government being more innovative with funding sources, working with the public and private sector to drive forward infrastructure changes.
“Whilst there were some benefits to MIM, it was hard to see the differences with PFI, but hopefully we will see longer term improvements.”
The Committee makes a series of recommendations which include:
- The Welsh Government should consider infrastructure investment plans on a longer term basis, which prioritises and allocates funding sources to projects to ensure there is a clear picture of how much borrowing will be required in future years.
- The Committee recognises the case made by the Welsh Government for an increase in borrowing to allow a rational approach to capital borrowing and would support the Welsh Government’s borrowing limits being increased to help deliver investment priorities.. The majority of Members agreed that the Welsh Government should continue to seek prudential borrowing powers.
- The Committee notes the evidence on PFI and MIM, and agrees that MIM represents an improvement on aspects such as community benefits and oversight of project contracts. However, it is difficult to ascertain how MIM substantially differs from PFI. Additionally there was limited evidence presented as to how MIM offers greater value for money than previous PFI models.
Read the full report:
Finance Committee - Inquiry into the Welsh Government’s capital funding sources (PDF, 1009 KB)