‘Never Waste a Good Crisis’: plugging the infrastructure funding gap in a post-Brexit Wales

The day to day conversations people are having on the subject of Brexit are set to continue for many weeks, months and, probably, years. Everyone is considering the impacts these dramatic changes will have on their lives, their families, their communities and future generations. The infrastructure community is no different. What will happen to funding? Will we be able to source the expertise we need? What about a rising cost of imported materials? Will we be able to afford to upgrade our infrastructure? Of course these concerns don’t just matter to those involved in the industry, they matter to everyone who depends on our infrastructure to live their lives and businesses. The main concern is cash. Without it, we can’t deliver anything, no matter how great our need or how high our aspirations.

So, when it comes to Brexit’s impact on infrastructure in Wales, plugging the funding gap is probably a good place to start. The UK’s impending exit from the EU has a number of implications which are more pronounced in Wales than much of the UK given the degree to which we have benefitted from redistributive funds. Three of the main potential consequences for future infrastructure projects are:

• A reduction in the amount of funding available for infrastructure projects, if EU funding is not fully replaced by UK government funding – and there is no guarantee that a UK Government will approach redistribution in the same way, particularly if you throw in a little politics!
• Fewer options/sources for the Welsh government and Welsh local authorities to obtain funding and/or financing
• UK-controlled funding being allocated according to UK goals and priorities, which may be different from Welsh and EU goals and priorities

So how do we currently get funding and finance?

The main sources of EU funding for infrastructure are:

• Connecting Europe Facility (CEF): the fund supports the development of interconnected trans-European networks in the fields of transport, energy and digital services.
• European Regional Development Fund (ERDF): investment in infrastructure is one of the key activities supported by the ERDF.
• Horizon 2020: the EU’s research and innovation programme. Some of the funds are for developments in infrastructure, such as improvements to transport.

In addition to funding, European financing is also available for infrastructure projects via the European Investment Bank (EIB) which lends money, on favourable terms, to projects that support EU objectives. It is a significant source of finance for UK infrastructure projects, lending €7.7 billion to the UK in 2015 of which two thirds (€5.5 billion) was provided to infrastructure. But the EIB’s capital comes directly from its shareholders, not EU budgets. And these are the 28 Member States of the European Union – soon to become 27!

So, what happens post-Brexit? Are there any guarantees? Remember the pledge of £350m a day for the NHS post-Brexit? Did anyone really believe that? An alternative fact maybe?

The UK will continue to receive funding from the EU as long as it’s a member state – this will still be the case after Article 50 has been triggered and negotiations are ongoing – for however long that may be. Legally binding contracts and agreements will be in place which will need to be honoured. So that’s the EU guarantee – time limited.

In terms of UK Government guarantees the picture is a little less convincing. After the Referendum, the Chancellor gave a number of assurances relating to the replacement of any lost EU funding. So, there is some confidence. However, in his Conference speech, the Chancellor announced that beyond the Autumn Statement, the Treasury will offer a guarantee to bidders whose projects ‘meet UK priorities and value for money criteria’. This could mean many things to many people. The Chancellor has since announced that the Treasury will provide a guarantee for all new structural and investment fund projects, signed after the Autumn Statement, and before we leave the EU, ‘where they provide value for money and support domestic strategic priorities’. So much clearer!

The UK’s access to EU funding programmes will be subject to negotiations during the EU withdrawal process. The UK may still receive funding from certain EU programmes even after it has left the Union. Some of the funds directly managed by the Commission, such as Horizon 2020, already include countries that are not EU member states. In addition, Norway and Switzerland take part in European Territorial Cooperation programmes (also known as INTERREG programmes) that are designed to promote cooperation between member states on shared challenges and opportunities. However, these funds are relatively small and both Norway and Switzerland are net contributors to them.

Discussions over the future participation of the UK (and Wales) in the Single Market could be of particular relevance here, as the transport, telecoms and energy networks are seen as key infrastructure sectors to be developed to support the functioning of the Single Market.

The EU Treaties provide for the creation of Trans-European Networks (TENs) across the EU in the areas of transport, telecommunications and energy infrastructures but the Welsh and UK Governments may no longer be bound by these obligations in the areas for which they are responsible. These obligations include a requirement for the UK Government to electrify both the north and south Wales main railway lines by 2030. Both projects are hugely significant to Wales.

So, could the EIB still lend to the UK after ‘Brexit’? In 2011-2015, 89% of the EIB’s €339 billion in total investment was invested in EU member states. The remaining 11% was spent outside the EU. However, as a result, any continued lending to the United Kingdom would have to be unanimously agreed by the EIB’s board of governors (the finance ministers) and so the UK’s future relationship with the EIB is likely to be a feature of exit negotiations.

It is unclear what approach the UK Government will take to fill any gaps left by any post-Brexit withdrawal of EIB funding. They may consider issuing ‘infrastructure bonds’ (a way to match private investors and pension funds with new transport and energy schemes) or the launch of a UK investment bank. Could there be a role for a Development Bank for Wales?

However, regardless of Brexit, most in the business community, especially the construction sector, and increasingly those in politics, are of the view that it’s time to get our infrastructure proposals in a better state and aligned with economic drivers so we gain maximum benefit. This is where the Welsh Government’s proposals for a National Infrastructure Commission for Wales come into the discussion. The Commission gives us a golden opportunity to get our affairs in order, to set out what infrastructure we need to grow our economy and why we need it. This should be followed by the how – how we deliver this infrastructure, how we plan the skills and resource we need and, critically, how we source the funds we need to deliver it. A clear infrastructure strategy will give us the clarity needed to attract more investment – from whatever source.

A reform of public sector procurement in Wales and the UK is desperately needed. Governments in Cardiff, Westminster and beyond have long tinkered with this but have consistently failed to tackle the cultural resistance of bureaucrats in the public sector to simplify, streamline, speed up and reduce the cost of procurement. Far too often they’ve hidden behind EU Directives blaming cumbersome procedures on Europe. Arguably, leaving the EU may do nothing to improve this situation unless these same bureaucrats change their spots. This must be addressed as a priority – and not just for the construction sector.

The Wales Act transfers significant additional powers to the National Assembly for Wales (although it takes a few back too!), including increasing its borrowing powers from £500m to £1bn. Whilst this is still a relatively modest amount, particularly when compared to Scotland and considering the investment needed in Wales, it is still a major step forward. The catch, however, is that borrowing needs to be repaid, which will impact on revenue and therefore spending on health, education and the rest. This means that, if we use these powers, we need assurance that the return on investment is real – another consideration for the National Infrastructure Commission for Wales.

Brexit uncertainty is certainly not good for business and it could be potentially disastrous if EU funding gaps are not plugged. However, arguably, many of the potential solutions should have been pursued regardless of Brexit – perhaps it’s fundamental changes like this which force the cultural shifts needed to do things better. As the saying goes, Never Waste a Good Crisis.