The nature of the Welsh Government’s capital budget has changed in recent years as the UK Government has placed greater restrictions on the use of capital through the introduction of financial transactions capital. In 2019-20, 14.2 per cent of the Welsh Government’s capital budget was in the form of financial transactions capital. It is only for loan and equity investments in the private sector that this form of capital can be used and it must be repaid to HM Treasury.

In her evidence to the inquiry, the Minister noted that the Welsh Government has to pay back 80 per cent of the total financial transactions capital allocated by HM Treasury. This provides Welsh Government with the opportunity to provide interest-free loans or very low interest loans to the private sector to invest in relevant infrastructure, for example, housing projects.

The committee felt that the evidence received from stakeholders demonstrated the need for the Welsh Government to consider how financial transactions capital could be better used to support housing providers and also how local government capital borrowing powers could be used more effectively. This is particularly important given the evidence that capital infrastructure is deteriorating, and the committee recommended that the Welsh Government works closer with local government to deliver a more integrated approach to delivering infrastructure investment at a national and local level.

During the course of the inquiry, one of the key themes that emerged was the need for Welsh Government to plan for the longer term and to match funding sources to projects in order to provide a clearer picture of how much capital borrowing will be required in the future.

The committee welcomes the revised WIIP, given that it provides further details on the proposed infrastructure investments by the Welsh Government. However, during the inquiry, stakeholders highlighted the lack of clarity on how the Welsh Government currently prioritises projects at present. One witness suggested that any long-term investment plan should be published in full. The Minister did inform the committee that the Welsh Government has set up a National Infrastructure Commission for Wales to have that longer term view, looking five to 30 years ahead. According to the Minister, this group will be making recommendations on economic and environmental infrastructure needs in the longer term across Wales. In her response to our report, the Minister added that the Welsh Government would be responding to the new commission’s recommendations following the publication of its first report in 2021 and will be looking at how this can influence the Welsh Government’s approach to borrowing.

The committee heard evidence that risk varies across a project’s lifecycle and that the highest risk is in the construction phase. The risk should be assessed at each stage of the project and consideration should be given to matching funding sources to project risk at each stage. The committee believes that this would provide a more effective way of allocating funding than the Welsh Government’s current preferred method, namely to use the cheapest source of borrowing first that would also enable the Government to maximise available capital while minimising financing costs.

The inquiry also included a substantial amount of evidence comparing and contrasting private finance initiatives first introduced by the UK Government in 1992, and the mutual investment model, the MIM I mentioned earlier, which was recently developed by the Welsh Government to provide more than £1 billion to finance public infrastructure in Wales. The MIM is based on the non-profit distributing model of the Scottish Government and the Welsh Government worked closely with the Office for National Statistics and the European Investment Bank to develop the new model with the aim of ensuring that no debt liability is recorded on the Government’s balance sheet. This should mean that it will not be included in the Welsh Government’s capital borrowing limits and should provide Welsh Government with an independent borrowing stream.

The comparative analysis suggested that MIM represents an improvement on aspects such as community benefits and oversight of project contracts, but it is difficult to ascertain a significant difference between the two models. In particular, it is unclear how MIM minimises financing costs or how it offers greater value for money than previous PFI models.

One of the suggested benefits of MIM highlighted in the inquiry was the opportunity for the public sector to take up to 20 per cent of the total equity in a project and therefore a share in any returns. Taking equity in a project would also allow the public sector to have a representative on the project board as a shareholder and this would give the public sector the opportunity to influence project decisions. However, the committee felt concerned that the existing governance arrangements might not be sufficiently robust to effectively mitigate potential conflicts of interest that may arise as a result of Welsh Government being both a shareholder and a client.

We heard evidence that while the development of the MIM model attempted to address some of the issues around the complexity and inflexibility of PFI contracts, MIM contracts remain complex and reasonably rigid according to witnesses. The committee recommended that the Welsh Government reviews the level of expertise in place for managing these contracts periodically to maintain this expertise and ensure effective delivery throughout the lifecycle of any MIM projects.

Evidence also suggested that careful consideration should be given to the selection of projects to be delivered through MIM. Projects with complex requirements, high-tech assets or innovative projects are not deemed appropriate to deliver through MIM. Projects that are considered to be stable over time such as the building of roads, schools and hospitals are more appropriate for MIM funding. The committee was satisfied that appropriate projects had been chosen to be delivered through MIM and recommended that the Welsh Government continues to use MIM to fund projects that require continuity over the lifetime of the contract and where the private sector can deliver the greatest value for money.

Several other finance models were highlighted as part of the committee’s inquiry and Members believe that Welsh Government should continue to explore alternative methods of financing in order to be more innovative with the funding available and to unlock further private investment for capital projects in Wales.

Finally, the Welsh Government also told us that it was seeking prudential borrowing powers to support its capital infrastructure programme and the majority of committee members agreed that the Welsh Government should continue to petition for these powers.

I have run through the report very quickly. I'm looking forward to hearing the comments of Members and, of course, the response of the Minister. Thank you.