Saturday 26 May 2012

A Cunning Infrastructure Plan

A plan so cunning you could stick a tail on it and call it
a Welsh Government Strategic Framework Analysis Thingy
(Pic : Blackadder Wikia)

Earlier this week, Finance Minister Jane Hutt (Lab, Vale of Glamorgan) unveiled the Welsh Government's Infrastructure Investment Plan, which outlines £15billion of infrastructure projects for the next ten years.

In addition to £44million of new projects for 2012-13 (listed here at A Change of Personnel), there's a "Project Pipeline" of major investment projects, which is to be "updated regularly".

What's planned?

The Project Pipeline Annex lists every project, with ministerial approval, valued at over £15m and due to start in the next three years. This is the backbone of the infrastructure plan. Some of these projects will have already started, but I'll go into more detail later.
  • At least £400m on next generation broadband
  • £125m on enterprise zones.
  • £200m on two major road projects (A465 Brynmawr-Tredegar & A477 St Clears-Red Crosses)
  • £240m on local authority highways maintenance over 22 years (explained in more detail later)
  • £270m on three major railway projects (Lougher bridge, Wrexham-Saltney & Cardiff Signalling Renewal)
  • £80m on new flood defences
  • £805m on thirteen "waste infrastructure investment" projects around Wales (capital & revenue funding)
  • £158m on three energy projects (Arbed II, Nest & Community energy generation)
  • £327m on three housing projects
  • £75m on regeneration projects in Merthyr Tydfil, Newport and Swansea
  • £456m on nineteen school/education projects around Wales
  • £1.22billion on twenty two health projects

The total cost of every project in the pipeline works out at just under £4.36billion, or £1.45billion each year for the next three years. If you take out the projects "subject to funding availability", then that falls closer to the headline £3.5billion figure - which matches the Assembly's annual capital budget.

Not all of this money will come directly from Welsh Government capital budgets. Some will come from other sources (EU, Network Rail, private investment). Here's the confirmed Welsh Government contribution for each as listed in the Annex.
  • Next generation broadband – To be confirmed
  • Enterprise zones – To be confirmed
  • £200m on two major road projects
  • £240m on local authority highways maintenance over 22 years
  • £84.5m on three major railway projects
  • £60m on new flood defences
  • £404m on "waste infrastructure investment" projects (in capital and revenue funding)
  • £111m on energy projects
  • £235m on housing
  • £11.5m on regeneration projects
  • £334m on education projects
  • £383m on seven health projects, with the other fifteen "subject to available funding".

A total of £1.95billion - or £650million each year - for the next three years. That's likely to rise once the broadband and enterprise zone contributions are worked in.

£3.5billion is something of a mirage.

A closer analysis

What's the difference between capital and revenue expenditure? Here's how I understand it, but I'll be more than happy to be corrected.

Capital expenditure is money to spend on "new things", or "one off costs". In Wales' case, the budget is determined by Westminster as part of the block grant the Assembly receives each year. Wales' capital budget has been cut by 41% as part of Comprehensive Spending Review – the sharpest fall of the devolved administrations.

Revenue expenditure, largely defined/listed as Resource Departmental Expenditure Limits (Resource DEL), is made up of "ongoing costs" and spending commitments – for example the day-to-day running of public services. In the same Westminster review, the Resource DEL budget for Wales was cut by 7.5%. This meant the Welsh Government has had to find equivalent savings.

However the Assembly cannot, under any circumstances, run up a deficit, or borrow like Local Authorities, the UK, Scotland or Northern Ireland can. A unique position in the UK.

How has the money been spent?

There are broadly two types of infrastructure, and the Infrastructure Plan makes the same distinction:

1. Economic infrastructure – Development that aids, generates or sustains long-term economic growth for its own sake. This includes roads, railways, energy schemes, telecommunications, ports & airports and some "hard" environmental schemes like flood defences and sanitation.

2. Social infrastructure – Development that improves quality of life or public services. This includes schools, hospitals, housing and regeneration.

£270million, part of a new borrowing arrangement between the Welsh Government and Local Authorities, is to be used on "maintaining local roads". This is - in my opinion - a worrying development (you can read more on this at Syniadau). I haven't included this as I consider it to be revenue expenditure as it's maintaining existing infrastructure - not creating any new infrastructure. You'll have to keep that in mind for the following.

Of the projects listed in the Project Pipeline Annex, there's a near 50:50 split between investment in economic infrastructure and social infrastructure - with a slight bias towards social infrastructure.

Of the Welsh Government capital actually committed to the projects (WG Support column), it's a 53%-47% in favour of social infrastructure.

Lets see which sectors in particular are benefiting.

Project Pipeline projected total value of capital investment by sector
(Click to enlarge)

This graph shows how spending has been allocated in the Project Pipline. As you can see, the single biggest group is health, closely followed - somewhat bizarrely - by Waste Management projects.

The Waste Management projects, such as Prosiect Gwyrdd in the Cardiff area, have a significant ongoing revenue commitment by the Welsh Government (over 15 years in many cases).

Also notice how little is being allocated to enterprise zones and new transport projects.

Fund (currently) committed by the Welsh Government by sector
(Click to enlarge)

This graph is based on money that's actually been committed (WG Support). Figures for next generation broadband and the enterprise zones are yet to be decided, but presumably won't be different from those estimated (£400m and £125m respectively).

Of the committed funding, it's education spending that seems to be the big beneficiary, with the Waste Management projects retaining with a large chunk and transport being untouched.

Many of the health projects fall by the wayside. Why are they included then in the first place? Is it a "this is what you could've had if the nasty baby eating Tories and their Lib Dem little helpers hadn't cut our capital budget by 41%" angle?

It's also noticeable how little is spent on regeneration, with some £20million of private funding expected to be found for the Newport scheme in particular.

But why on earth are the Welsh Government spending proportionally as much capital on waste management schemes as transport? And several times more than enterprise and energy combined.

How to the investment promises stack up?

Comparisons between projected and committed capital funds
(Click to enlarge)

Here's another graph, showing how the Project Pipeline wishlist - including projects subject to funding - compares with what's actually been committed by the Welsh Government. Once again the broadband and enterprise zone funds are to be announced - so don't worry about them.

Look at health and transport in particular.

The Welsh Government are significantly over-promising capital investment in health, and by and large, aren't providing much in funding for new transport projects – Network Rail still controls the purse strings to a great extent there.

They are also, effectively, promising to 100% fund all health capital projects - the only sector that seems to benefit from this approach. In one way, this is good news - it's a sign that the Welsh Government continues to reject PFI.

Many of the waste management, housing, education and regeneration schemes will also have alternative sources of funding – local authority capital budgets for example, EU funds or private investment.

For the Welsh Government to claim that this is a £3.5billion bonanza all of their own doing is rather disingenuous, don't you think?

Which leads us nicely into....


The cunning plan for "growth and jobs" is to wrap up every single major capital expenditure programme announced in the last few years, add a few flow charts and diagrams and re-announce and repackage everything in a single document.

There's absolutely nothing in the Infrastructure Plan that we didn't already know about.

I've made the point before on re-announcing announcements. In some cases there are re-announcements of the re-announced announcements – in particular some road projects.

Many of the projects go back as far as the National Transport Plan in 2008, rejigged slightly by Carl Sargeant (Lab, Alyn & Deeside) last year. There's quite a few mentions of work the Welsh Government have done since 2007 - in fact, a large chunk of the document is dedicated to regurgitating parts of the Economic Renewal Plan.

A lot of important "economic infrastructure" projects - including thirteen road projects - have been pushed back beyond the next three years. I wouldn't at all be surprised if these things get announced again by the end of the Assembly term.

Plans, strategies, frameworks, white papers, green papers....they just can't get enough.

How will all this boost the economy?

City Academies in England, many built by PFI, were a bold statement
by the previous UK Government on providing "inspirational surrounding" for pupils.
However, not all of them have produced successful educational results.
(Pic : The Guardian)

In short, I'm not entirely convinced it will.

I'm not an economist, but I'll try and explain my reasoning.

Which is better for the economy – that is the economy as a whole and sustained economic growth in the private sector – economic infrastructure, or social infrastructure?

If you build a new hospital, or a new school, you don't need to pay for it again other than running costs. The Welsh Government have taken the sensible direction of abandoning PFI to fund these things. But new schools and hospital replace or upgrade exisiting infrastructure. It's "new", but not "new" in the same way a new road, business park or railway line is.

However, building brand new schools, or hospitals has absolutely no bearing on whether performance in those areas are going to improve or not.

Schools and hospitals are shells - it's what goes on inside them, and how they are run, that will improve pupil or patient outcomes.

If you spent £Xm in capital on a brand new school, but have to make £Xm in cuts to the revenue education budget, what could that result in?
  • The economy is temporarily boosted by the school's construction.
  • Once the school is built, the construction workers are laid off.
  • The contractor picks up the government cheque, moving on to the next project.
  • The cuts in the education budget mean that the pupils - despite their shiny new school -aren't being taught to their full potential.
  • Economic and educational performance falls or stagnates over the longer term, perhaps boosted temporarily by "inspirational" new surroundings.

Now what if you spent it on "economic infrastructure", like a new road, a reopened/electrified railway line, or an airport terminal? In an ideal scenario:
  • The project needs to meet strict "cost benefit analysis" criteria to be considered, meaning some sort of "return on investment" needs to be guaranteed.
  • Improved infrastructure means commuters, business, logistics and tourists can move around more easily, quickly and conveniently.
  • It opens up land for development.
  • Interested developers part-fund new "social infrastructure" like schools, houses, clinics, cycle lanes as part of planning agreements, reducing capital burden on government.
  • The economy is still temporarily boosted through construction, but once the workers are laid off, or move on to the next project....
  • jobs are created in the opened land, economic confidence rises, spin-off services and existing local businesses have their trade boosted.
  • The economy grows slowly and gradually over time.

Now I'm not saying that the Welsh Government shouldn't spend capital on new schools or hospitals - that would be silly.

However, I think one problem is that capital spending in Wales has always been too focused on social infrastructure and social projects instead of key economic infrastructure. If the economy is going to recover - not just be given a temporary panic-induced boost - it needs long-term, strategic thinking.

The closest thing we've had to that is the Economic Renewal Plan, and that wasn't particularly exciting either, despite glimmers of hope like Sêr Cymru.

In public services like education and health, it's probably policy and poor management on the ground - not poor infrastructure - that's hindering performance. All politicians like to make grand "statements", and a new school or hospital is one way to do that, but that's all it is - a bauble.

New buildings won't get kids through their A-Levels or GCSE's and they won't reduce NHS waiting times.
If anything, apart from examples where new buildings and projects are essential, I would've preferred a large chunk of the capital expenditure in these areas redirected to the front lines to hire more teachers, reduce class sizes and transform the curriculum. That would really help economic growth in the long term – not having a new school with too few teaching assistants, crap school meals and tattered text books brought over from the old building.

Also in Wales, there's a tendency to spread investment thinly to make sure no area misses out. That's laudable to a degree, but it results in tiny, piddling projects that will provide nothing other than the equivalent of getting one group of people to dig a hole, and another to fill it in.

This is an infrastructure plan for jobs, certainly – contracted ones in construction over several years, perhaps in services as well.

But growth?

Unless there's a serious change of tact, change of attitude and change of ambition Wales can forget it.

Questions about future borrowing powers

A suitable use for borrowed finance?
(Pic : BBC)

If the Welsh Government attained borrowing powers to get "new money", there's one area they are going to have to focus on to match the project pipeline – those 15 health projects "subject to funding availability" - total estimated value of £840million.

The proposed improvements to the M4 around Newport would be another likely candidate - costing somewhere in the region of £500-800m depending on the options on the table.

So, as well as gobbling up around 40% of the Assembly's annual budget, there's the distinct possibility the NHS could gobble up a significant share of any borrowing the Welsh Government could (theoretically) make.
That's even after all the reorganisations, centralisation proposals, annual savings targets and bailouts....

The Welsh NHS is in danger of becoming a fiscal black hole, with spending directed towards "statements", with no noticeable improvements to patient outcomes.

I don't expect any new "economic infrastructure" with borrowing powers. I expect more "social infrastructure", and borrowing to cover what should be revenue funding - like the Welsh Government are going to do with local authority road maintenance.

Remember what I said about "return on investment" earlier? Well the Welsh Government are setting an alarming precedent with their local authority road maintenance borrowing scheme - I've mentioned Syniadau's piece on this further up.

Now "maintenance" should be funded out of revenues. It's an ongoing cost, not something you can spend as a one off - unlike a new road, hospital or school. It should be carefully managed and prioritised year-by-year. It's not "new infrastructure" and it's unlikely to have any sort of significant return on investment, other than delaying the date it needs maintenance again and perhaps reducing some long-term maintenance costs.

Borrowing to cover the cost of something like road maintenance is - to be frank - idiotic.

Local authorities should either find the money through savings, re-prioritise their capital budgets, wait for central grant money, or yes unless it's safety critical – leave it.

Once you start borrowing to cover revenue expenditure - without any return on investment - you start totting up large deficits, then large debts, with little to show for it. This is the path the UK Government have been treading for some considerable time - in particular the John Major, latter half of Tony Blair and Gordon Brown eras. Wales should not, and must not, even think of starting to tread the same path – within the Union or no Union.

"Deficit reduction" is exactly what it says it is – a reduction in the amount the UK is borrowing. But that borrowing is continuing to cover the UK's revenue and capital expenditure. The UK's national debt is likely to still rise despite the "harsh cuts".

Now, can you imagine what would be happening if the UK didn't have the advantage of being able to inflate some of this debt away, or try to boost the economy with sovereign fiscal powers like quantitative easing?

There's another place that's been following a slightly more extreme path to the UK's, taking it to its logical natural conclusion, but without those said advantages:



  1. Nice to see something written in so much detail, Owen. I'd just like to pick up on one point, namely the distinction between economic infrastructure and social infrastructure.

    I wouldn't automatically put schools, hospitals etc into the "social infrastructure" category. A new school wouldn't be built only because of the "qualitative" improvement. In many cases, particularly with old buildings (and this probably applies more to buildings from the 50s, 60s and 70s than to pre-WW2 buildings) the capital expenditure will be offset by revenue savings in the long term, in the main because of energy costs. This applies to major refurbishment projects too. In 2009 there was an outcry over the proposal to spend £41.8m on refurbishing the Welsh Government's main office at Cathays Park; but that capital expenditure was projected to save £5m a year in revenue expenditure and would therefore pay for itself in maybe 10 years. So there is often a hard economic case, rather than simply a social case, for capital expenditure of this sort.

    However, I fully accept the main point that capital investment of this sort is not going to boost the economy by very much, apart from while the building work is being done.

    But it might also be worth asking to what extent the projects put into the so called "economic infrastructure" category will "aid, generate or sustain long-term economic growth". We mustn't automatically assume that they do. To take the topical example of rail electrification, I would say that the primary argument for it is that it reduces revenue expenditure, because electric trains are much cheaper to maintain than diesel trains. I'm not sure that boosting the economy is a major part of the equation, although it might be part of it.

  2. Taking a step back to look at the bigger picture, it appears to me that it's relatively easy to make improvments to what we already have, but far harder to look at investing in something that we don't currently have. So it's quite easy to think in terms of dualling a road or railway, because the formulas are already there (leaving aside the question of whether they're adequate). The small things are easy; it's the big, new, different stuff that is harder. As one example of this, nearly all the rail schemes we have centre on small extensions of existing lines, but the big, strategic idea of creating a complete rail network for the whole of Wales would never feature – not because it's "uneconomic" but because there's nothing to measure it against.

    I'd also say that the criteria we use are sometimes too narrow. Again, to take the topical subject of electrification, the talk is of presenting a viable "business plan". But that is to look at things purely from the standpoint of whether Network Rail (who get their money from rail operating companies) can make money out of it. I would say that the equation should be wider, to look at things that cannot be "monetized" from the point of view of running that one business alone. Two factors I would like to see taken into account are CO2 emissions and the reduction of pressure on the road/motorway network. These won't make a penny of difference to the "business" case of running the rail network, but would make an overall difference: for example it might change the decision about whether an expensive or cheap scheme is needed for M4 relief at Newport. That takes vision from government rather than relying entirely on the balance sheet, and it looks to me as if Cheryl Gillan is using the balance sheet as a substitute for lack of vision..


    That's what I think is so badly missing from the way the Welsh Government thinks. Because responsibilities are split (e.g. it is responsible for road infrastructure, but isn't responsible for rail) it cannot take the strategic decisions that are necessary for the overall growth of the Welsh economy. To do this, it would need to have more powers and responsibilities than it currently has, especially taxation powers.

    To give one example of how taxation powers make a difference to infrastucture decisions, look at waste management. You, Owen, noted that an unusually large part of the capital expenditure programme is on waste management. The reason for this is landfill tax, and specifically the fact that it is rising so fast that anything is now better than putting waste in the ground. It started at £7/tonne in 1996, and when Labour came to power they put it up what was then a huge £1 each year. But that is nothing, because it is now £56/tonne and will be going up by £8/tonne each year (and you have to pay VAT on it as well). In my opinion this is a good thing, but it is a perfect example of government using an "artificial" tax to discourage a particular undesirable outcome (no different from tax on tobacco). The benefit-to-cost ratio to justify this capital investment programme for incinerators is almost entirely a result of this strategic decision. The sad thing is that incineration is only half a step better than putting it in the ground, and a better strategic decision would be to tax pollution from incineration as well so as to encourage investment in even better forms of residual disposal such as plasma gasification.

    If a similar decision were made to tax polution/emissions from diesel trains (we tax road vehicle emissions in various ways, but not those from other forms of transport) it would virtually guarantee that all railway lines in Wales would be electrified.

  3. Thanks for the comprehensive reply, MH.

    I agree that there's often an economic case alongside the social case with regard "social infrastructure". Unfortunately, however, the one-off costs are usually the only publicised headline, while revenue savings are ignored. I've perhaps been guilty of that in this post too.

    You're also right that it shouldn't automatically be assumed that "economic infrastructure" will boost the economy. I think it comes down to business cases, as you say - whether an intial investment delivers proportionally greater economic and fiscal benefits - including savings in running costs.

    I loathe "business cases", as sometimes it places the price of something above the value, but at least it should prevent "white elephants". I also agree that there needs to be a wider set of criteria to judge projects on, but my worry with that is, for example, a much needed bypass (i.e Newtown) would be delayed or dragged through the courts for non-transport reasons. Come to think of it, a scheme like that probably could anyway.

    Wales has always been rather conservative when it comes to "completely new" projects. Other parts of the UK haven't been prevented from pursuing them - whether it's High Speed 2, or the M74 completion. That doesn't mean I'd ever expect a high-speed rail link from Llandudno to Cardiff, but maybe Cheryl Gillan sees electification as one of those "small extentions on an existing line" instead of a critical part of national infrastructure, with the advantage of avoiding the need to procure duel-fuel trains. As you said, there's a conflict between split responsibilities and strategic thinking/planning.

    I suspected that landfill taxes (and the threat of EU fines) were the reason behind the waste management capital budget. Do we know if landfill taxes have been put up to, rather conveniently, balance budgets, not discourage outcomes?

    I'm not knocking it - the Welsh Government has a pretty strong record in this area. But there does seem to have been a rush, almost coming across as a panic, to complete as many projects as possible in a short space of time, probably as you said due to the rise in taxes. It seems an odd priority during a period of stagnation, and as I said, while local authorities and Wales continue to perform relatively well when it comes to recycling and waste management.

    It does look as though most of the food waste schemes in the Annex are anaerobic digestion plants. It's Prosiect Gwyrdd (by far the most expensive) in Cardiff that hints at being an incinerator, to handle "residual waste".

  4. Capital investment has limitations when it comes to the overall economy. Think of all the construction work that went on in the 90s, the low slung buildings, "enterprise parks" and so on. Alot of it was speculative work done by the private sector, some of it by the state. Putting up buildings in the business park sense of things doesn't guarantee they're going to be filled.

    However Wales' particular conditions suggest there is a considerable backlog in construction projects, especially from making the right decisions not to use PFI.

    One thing I have concerns about is what MH flags up about there being an "economic case" for things like new rail projects. Even for electrification to Swansea the UK Government says there needs to be a "business case" for it; it needs to be guaranteed that the footfall is there to make the money back. A sound investment principle, if you like. But I think that misses the point of creating or stimulating activity *that isn't there yet* by delivering infrastructure improvements (faster and more comfortable trains for starters). Especially in Wales which is such an underdeveloped country, it seems we (or the UK) would have to put in these new rail (or road) lines before they became economically viable, predicating them on future economic viability.

  5. Anon 10:15 - You're absolutely right that speculative development doesn't guarantee function. It begs the question if Wales has been getting the right share of the "right kind" of speculative developments down the years. We've had plenty in housing, low-grade offices and smaller business units, but nothing bolder than that. I can understand why though.

    There does seem to be something "chicken and the egg" about the approach to "new infrastructure" in the UK. You need the economic case to build or finance it, but in most areas you can't build up a competitive economy without it. There's only a handful of places in the UK that would justify it on economic case alone, and most of the developments will be in and around London. That leaves Wales where we'll always be in the long-term in the UK - at the bottom or the back of the queue.