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....

Hello-ello-ello-llo-llo-lo-lo-o!

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....
• ....new 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:

Greece.