What is the capital funding situation in Wales?

Published 14/01/2020   |   Last Updated 27/05/2021   |   Reading Time minutes

The Finance Committee recently undertook an inquiry into the capital funding sources available to the Welsh Government and how these sources can be used effectively to maximise available capital.

What are the current capital sources available to the Welsh Government?

The Welsh Government has a range of funding sources which can be utilised for capital investment:

  • Conventional capital funding from UK Government (including financial transactions capital)
  • Borrowing through the National Loans Fund or a commercial bank
  • Borrowing via government bonds
  • EU funding
  • Tax revenues
  • Mutual Investment Model (MIM).

What is the Welsh Government’s capital funding strategy?

The Welsh Government has previously stated that it would use the cheapest form of capital first when utilising its funding sources. However, evidence submitted during the inquiry did not view this as the most effective strategy to maximise the capital available.

The Committee heard that the Welsh Government should give more focus to matching funding sources to project risk across a project’s lifecycle. This would enable the Welsh Government to minimise financing costs. Capital Law noted that:

…an effective funding strategy depends on multiple sources of funding (ranging from conventional funding to public/private partnership models such as MIM) appropriate to the relevant point within a project’s lifecycle.

The Committee recommended that the Welsh Government give further consideration to matching sources of funding to project risk.

The Welsh Government published its long-term investment plans in its Wales Infrastructure Investment Plan (WIIP) in 2012, which has been updated over time. Evidence suggested that this could be improved by prioritising large capital projects and target dates for achieving them. The Committee also heard that the Welsh Government should plan further ahead and identify sources of funding for infrastructure projects to better understand the level of borrowing required in the future.

What is the Mutual Investment Model?

MIM is a public-private partnership (PPP) which utilises private investment to finance capital projects in Wales. The Welsh Government stressed that MIM is different to previous Private Finance Initiatives (PFIs) implemented by the UK Government as unlike PFIs it is designed to promote the public interest, including wellbeing and value for money.

The Committee did agree that MIM is an improvement in terms of community benefits and oversight of projects but stated that it was ‘hard to establish a significant difference between the two models, specifically as to how MIM offers greater value for money than previous PFI models’.

The Committee further commented:

Additionally, it is unclear how MIM minimises financing costs when compared to the UK Government’s PFI and Public Finance 2 (PF2) and we hope to receive an analysis of these costs when appropriate.

The Committee recommended that the Welsh Government ensures projects delivered through MIM are fully transparent, clearly identifying project costs and related data to determine whether the model provides value for money.

How did Welsh Government respond to the inquiry?

The Committee’s report made nine recommendations as a result of the evidence submitted during the inquiry. The Minister for Finance and Trefnydd accepted all recommendations in her response to the Committee on 8 January 2020.

Article by Christian Tipples, Senedd Research, National Assembly for Wales