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Why infrastructure investment will PUTWALES in the fast lane; WALES IN MOTION PROFESSOR STUART COLE.

THE First Minister had regularly made the case that without borrowing powers there could no new M4 in South Wales, However, last week HM Treasury to move positively towards granting the Welsh Government the means to construct capital schemes The Chancellor of the Exchequer back in April this year identified the proposed the M4 relief road to the south of Newport as one of the investment projects which could 'kick start' the economy.

It would improve connectivity from South Wales to the rest of Europe. While agreeing its economic importance, the Treasury, quite reasonably from their viewpoint, wanted a revenue stream such as a toll to fund it.

This the Welsh Government argued would act as a disincentive to inward investment.

Then when the serious discussions began following the Silk Commission recommendations on borrowing powers the Government had a strong case based on economic regeneration and jobs. However, these borrowing powers are only the start of the process.

The rates of interest implied in the previous public finance initiative (PFI) scheme payments to private funders were over 15% per annum. The new powers will still allow for such schemes which are outside the public sector, but it allows considerably more capital funding to be procured for nearer 3% per annum. Having borrowing powers, however, does not imply unlimited funds being available for Welsh Government infrastructure projects. Borrowing would be through the Public Works Loan Board (PWLB) to achieve the best rate of interest on the capital borrowed (currently 2.5 % to 3%).

To ensure it did not exceed the UK Public Sector Borrowing Requirement (PSBR) it would also be subject to HM Treasury approval based on a robust revenue stream (tolls, block grant, new taxation powers transferred to the National Assembly), which does not put excess pressure on future current expenditure.

But assurances are required to ensure that block grant will not be cut in line with that borrowing as has been the case up to now As in all borrowing financial probity on behalf of the borrower and the lender is expected.

The borrowing should - as a house purchaser and their bank /building society would discuss in the case of a mortgage - consider what will happen if too high a proportion of revenue account expenditure is allocated to interest and capital repayments to the detriment of other current expenditure, Public authorities have in the past borrowed to fund capital and revenue expenditure (often for political popularity reasons) and found that within a few years have little current expenditure flexibility resulting from the proportion of the revenue account expenditure used to fund interest and repayment.

The M4 has been held as an example of how borrowing powers might be used.

There is, however, no direct link between borrowing powers and a six lane motorway at a cost of PS930m.

Borrowing should fund the best solution, which in the case the M4 case a motorway/expressway at PS380m.

Otherwise there is an opportunity cost from foregoing PS550m spent on other transport schemes, assuming the borrowing level of PS930m was approved by HM Treasury.

That unused funding could be allocated to additional rail investment not agreed with Network Rail, bringing forward rail schemes not currently under consideration by the Office of Rail Regulation, for example North Wales Main Line or other major road schemes (A465, A55) or a series of minor road schemes.

In considering railway investment the Westminster Government has Network Rail.

This is a private sector company (outside the PSBR) which can borrow on the financial markets if it can show the lenders it has a guaranteed revenue stream for the 30 year duration of the loan. Currently its borrowing debt is PS28bn rising at PS5bn each year.

Part of this is the PS500m investment in South Wales' railway electri-fication. That loan and interest is repaid by guaranteed revenue flows from access charges and more significantly from the Welsh Government and the Westminster Department for Transport.

Railway schemes elsewhere in Wales could be a part of the periods after 2019, but would be in competition with investment in England and (possibly) Scotland.

Or the Welsh Government could investigate a similar investment vehicle.

Effective borrowing powers are essential for any government to function properly.

The potential increase in infrastructure investment (at lower interest rates ) is essential for the wellbeing of the Welsh economy. ? Professor Stuart Cole, CBE is Emeritus Professor of Transport, Wales Transport Research Centre, University of South Wales


The Chancellor of the Exchequer back in April this year identified the proposed the M4 relief road to the south of Newport as one of the investment projects which could 'kick start' the economy
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Geographic Code:4EUUK
Date:Nov 7, 2013
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