Statement attributable to a Heads of the Valleys Development Company spokesperson re Welsh Government Underwrite decision:
Further to the statement made by the Circuit of Wales on Tuesday, the team and its commercial partners reiterate the huge disappointment in the statement from the Welsh Government, where it failed to support this significant investment from the private sector in a region of Wales that by the Government’s own admission needs all the support it can get.
This is a real loss for the people of Ebbw Vale, the immediate community and a missed opportunity for Wales as a whole. This is a project that has been totally defined; it is fully financed (with finance in place) with construction and hiring ready to start immediately. At a time when the Welsh Government is trying to demonstrate that Wales is “Open for Business”, the rejection of this significant infrastructure project will do little to breed confidence within the private sector for future investment in the country.
In recent weeks the Cabinet Secretary has called for the development of more international calibre events in Wales and the requirement for new stadia/arenas. The Circuit of Wales could have been a shining example of what Wales has to offer with the development of a world-class venue capable of attracting the complete range of international and World Championship motorsport and sports events.
Since the minister made his statement in July 2016, we have met with his officials on no fewer than 28 occasions. We have explored the intricacies of our proposal, delved deeply into the Due Diligence undertaken on behalf of Welsh Government, and at no point during this process were any significant concerns raised. Indeed, this fact was confirmed in writing by officials to our major funder.
The Welsh Government press release issued on Tuesday by the Cabinet Secretary for Economy and Infrastructure was detailed in its content but was notable for its inaccuracies. It is important, therefore, that we point out that there are a number of misleading statements in relation to his decision that need to be addressed and we take this opportunity to respond to Cabinet Secretary Ken Skates’ statement point by point.
1. July 2016 Statement on Project Funding and Risk
Mr Skates stated in the chamber and in his written statement on July 27th that, “In July 2016 I told the company that I would expect to see at least 50% of the project funded and 50% of the financial risk of the project to be undertaken by the private sector and for the project as a whole to provide Value for Money for Welsh Government and the public purse”.
However, what was actually communicated by the Cabinet Secretary in the Chamber on July 13th, 2016, and what subsequently formed the basis of the entire project was: “We need to see at least 50 per cent of this project funded and 50 per cent of the risk underwritten by the private sector to justify value for money for Welsh Government and the public purse and they have accepted this principle. My officials will now work constructively with the Circuit of Wales team to ensure this project can be successfully delivered to benefit the local economy of Ebbw Vale and Wales at large”.
The key here is that these are different measures. As the Cabinet Secretary never mentions it, we assume this must mean that he accepts that at least 50% of the project is funded by the private sector.
He then concluded that, “the current proposal would see the Welsh Government exposed to more than 50% of the risk.”
The Welsh Government has been asked to underwrite less than 50% of the project risk. Indeed, the Welsh Government is only exposed to this level of risk during one 35-year phase of the project’s life. During the development phase, Welsh Government has made a significant financial contribution of £9.4 million of the approximately £55 million of development costs. This represents a minor share of the development risk and nowhere near 50%.
Next, during the construction phase of 26 months there is no guarantee from the Welsh Government. It only commences once the facilities are built and operational. Therefore, the Welsh Government is taking none of the major construction risk inherent with a project such as this. The guarantee only kicks in after this, lasts for a 35-year period and ends once the Aviva loan is repaid. Indeed, the Welsh Government is being paid a fee by the company to provide the guarantee during this period. Their own due diligence advisor confirmed to them that the amounts received from this fee would outweigh all future payments to Aviva by year 29 of the guarantee period. Therefore, they would only actually be exposed for 29 years.
Finally, the life of the asset extends well beyond the 35-year life of the guarantee and so the Welsh Government is taking none of the risks in the performance of the company after the guarantee period.
Combined, the private sector is taking substantially greater than 50% of the project risk. It should be noted that all of the development risk that Welsh Government has taken will be repaid at financial close with interest and a success premium, while a substantial portion of the private sector development is remaining in the project as equity.
With regards to his conclusion that the level of financial risk borne by the private sector is less than 50% he explains, “This is because the £210m underwriting element would carry a higher risk than other parts of the financing package.”
Mr Skates does not provide any further explanation as to why he believes this to be so. Indeed, for this statement to be correct Mr Skates must believe that the £210m carries a higher risk than the equity invested into the project. This is not possible as by definition equity is riskier than debt: it ranks last in the capital structure, has no interest charge and is not secured against any assets.
The risk of the financial guarantee to Aviva being called in any one year is considered remote by independent advisers. We can confirm that none of the downside scenarios requested by Welsh Government advisers showed that the guarantee would be breached.
Furthermore, at no point during the due diligence process was the company told by the Welsh Government that this was an issue and that the Welsh Government believed it would be exposed to more than 50% of the risk.
2. ONS and HMS Treasury
Mr Skates then comments that, “As a result, following discussions with ONS and HM Treasury during the due diligence process, it is assessed that there is a very significant risk that the full £373million debt of the entire Circuit of Wales project would be classified against Welsh Government capital spending.
The company was never informed or made aware of this ONS and HM Treasury advice during the due diligence process. We were promised by Welsh Government officials that we would be consulted if any significant issues arose during due diligence and given an opportunity to respond.
We were not notified that this was a serious roadblock prior to Tuesday’s meeting and never given a chance to respond. The Welsh Government has known about the latest structure of this project since well before February 2017 and could easily have obtained clearer guidance from Treasury and ONS prior to Tuesday’s meeting and informed us. We believe it is important for the people of Blaenau Gwent to have the details of these discussions with ONS and HM Treasury disclosed to the public. What were these discussions, who were they with and when were they undertaken?
Moreover, our own independent advisors have opined there is only a remote risk this will go on balance sheet.
Specifically, on the balance sheet tests the independent reports have confirmed that:
- the guarantee is for 48% of the total funding;
- the Welsh Government would actually benefit from a fee being paid to it each year by the company for providing the guarantee (£2.5m and then increasing with inflation);
- the Welsh Government does not exert enough influence over The Circuit of Wales (e.g. it owns no equity in the project) to call it a public body so the project finance does not add to government borrowing;
- the Welsh Government does not underwrite sufficient financing in substance because the total public support comprises less than 25% of the overall funding in real terms (using the Treasury’s own guidance and analysis)
We wholeheartedly disagree that the support for The Circuit of Wales would be on balance sheet and would require the Welsh government to limit its budget and compromise the building of schools and hospitals.
3. Jobs Created
With regards to jobs created by the project, Ken Skates has written that, “The due diligence interrogated the company’s estimate of 6,000 potential jobs to be created across all elements of the project and found it to be significantly overstated”.
The estimate of 6,000 jobs came out of the independent analysis undertaken for the Planning Application. Two reports were produced. One undertaken by the Cardiff Business School for the company and the second undertaken by the University of South Wales for Blaenau Gwent County Borough Council. Both of these reports estimated jobs created at around 6,000 – direct and indirect. The claim Mr Skates refers to came as a result of the two previously mentioned reports.
These reports were reviewed as part of the initial Due Diligence process undertaken by Government consultants Grant Thornton. Their report confirmed that these job numbers were reasonably reflective of the likely impact of the project. In addition to this, the reports (as previously stated) were used to support the planning application and up-dated versions were used for the Public Inquiry.
The decision to grant Planning and Approve the Deregistration of Common Land were based on the social economic impact of the project. Both these decisions were called in for review by Welsh Government Ministers at the time. Both decisions were upheld on the basis of, again, the social economic impact i.e. jobs created. It is interesting that Ministers at the time believed the job numbers but now they seem to not believe them.
As Mr Skates has stated “around the year 2024, the number of direct full-time-equivalent (FTE) operational jobs would be little over 100. In addition, the circuit development could create around 500 indirect FTE jobs through potential visitor spend, as well as approximately 500 FTE construction jobs while the track was being built.”
This is factually incorrect and indeed does not reflect the figures we provided during the due diligence process.
We would be happy to share this to all those who are interested. Our independent advisor calculated the jobs the project would create during 3 phases: a.) the construction phase in the first two years; b.) during an operational phase from year 2 to year 8 where the site would run motorsport (2 and 4 wheel) events, race team testing, automotive and component manufacturer test and development, corporate and other events (50% of revenue) and the extreme sports leisure activities (50% of revenue); c.) from the industrial automotive park, hotel and property development which would be privately funded in a separate process once the site was constructed and operational. The jobs figures are shown below:
- Construction phase (Years 0 to 2): 107 permanent jobs and 1,500 temporary jobs.
- Operational phase (Years 2 to 8): 521 permanent jobs and 3,309 temporary workers employed each year to help with the various events and activities.
- The industrial automotive park, hotel and property development: 3,730 permanent jobs
These numbers in the construction phase are reflected in our contractual arrangement under the s106 agreement.
To conclude, our third-party report stated that 4,358 permanent jobs and 4,809 part time jobs would be created by the circuit, technology park and property development. Even if we did make the claim of 6,000 jobs this does not support Mr Skates statement that, “both the circuit and the technology park, according to due diligence, would likely fall substantially short of the 6,000 jobs figure.”
A further independent report undertaken by Prof Brian Morgan in recent months estimates the job creation figure to be around 4,000.
4. Value for Money
Mr Skates’ statement did not reflect any commentary on value for money. Our Due Diligence supports a significant positive economic impact for the Welsh economy for every year under the guarantee. We would make over £1.9 billion contribution to Welsh GDP and approximately £45 million per annum through hosting international motorsport such as the British MotoGP, profiled in over 300 million households and watched in over 200 countries globally.
In addition, the positive economic impact of reduced dependencies, increasing taxes, increased business rates, increased direct investment and the significant transformational change in wellness in the hope and social welfare of the valleys demonstrates overwhelming value for money against potential annual exposure. A remote financial risk equivalent to less than two first class postage stamps, per person in Wales, per annum. Additionally Welsh Government will receive £130 million in guarantee fees that it can use towards additional social infrastructure throughout the life of the guarantee.
5. Additional Government Support for the Technology Park
Mr, Skates wrote that, “Based on our previous experience, we also believe the technology park proposal could well require significant additional public funding.”
We would like to emphasise that during our negotiations over the course of the last year with Welsh Government officials we have never asked for, or planned to ask for, public funding to develop the proposed automotive technology park. This has never come up in these discussions with the Welsh Government and they have never engaged with us over this issue. During these meetings we have always made clear that this would be 100% privately funded and the Welsh Government never questioned this.
The statement that these type of facilities have failed to attract follow-on industry is incorrect and inconsistent with the position taken by Welsh Government in its previous diligence, the planning submissions and the public enquiries. We have provided Welsh Government with a detailed list of engaged parties, and they have met with a range of industrial partners that wish to base themselves at Circuit of Wales with no requirement for support. There are a range of examples of the catalytic effect of these major infrastructure projects.
6. Commitment of the Welsh Government to build an automotive technology park
The Welsh Government announced that it plans to build “a new automotive technology business park in Ebbw Vale, with funding of £100million over 10 years, with the potential to support 1,500 new FTE jobs”
We are pleased that the Welsh Government agree such a development would create jobs. However, it is rather counter intuitive to propose this while claiming that our planned automotive technology park would fail to create sufficient jobs. Indeed, the Circuit of Wales park would have significant advantages:
- £150m would be invested versus £100m
- would require no public money versus 100% public funding
- would be built in 2 years not 10 years
- has received expansive interest from a number of leading automotive companies
- would have a state of the art motor circuit and proving ground for on-track and off-road testing
This last point is especially important and we would like to emphasise it. We know, based on our discussions with some of the world’s leading automotive brands and suppliers, that such a park will not be practical for manufacturers without access to a racetrack facility for testing on-site. This is the reason that companies such as TVR and Aston Martin have put their support behind The Circuit of Wales. Without this accompanying infrastructure, the Welsh Government’s proposed project will be at a significant handicap and potentially fail as they have in the past.
For nearly six years, areas of Blaenau Gwent have enjoyed Enterprise Zone status. In recent months they have the additional focus of Government initiatives on the requirement for increasing jobs, through initiatives such as the Valleys Task Force. If the track record of these two Government interventions for job creation are indicative of the likely success of the recently announced Government automotive centre then it is extremely ambitious. Indeed, the Minister was questioned in the Senedd on July 13th, 2016 about the level of jobs created by the Enterprise Zone, notably that between 2011 and 2014, 172 jobs were created, with only 8 jobs being created in 2015.
We have been subjected to the most rigorous and most intensive Due Diligence, focused on the commercial viability, the fundability, value for money, corporate structure, fit and proper personal investigations, examining and challenging our business case, and a wide range of external Due Diligence reports to support a £210 million contingent funding. We would expect that a £100 million investment of public funding would go through a similarly intense and rigorous market assessment, industry commitment and financial viability prior to approval. Given that this has only been on the political horizon in recent weeks, it is inconceivable that it has been subject to the same rigorous analysis as our private sector proposal.
To conclude, Mr Skates and the Cabinet have rejected our proposal for the Welsh Government to provide a limited financial guarantee to a world leading investor, with no need to invest any public money, or take any construction risk, whilst delivering overwhelming value for money.
The project is commercially viable even under downside scenarios, and the Welsh Government would receive a fee of £2.5 million per year, with the project delivering a net economic contribution to Wales of £45 million, every year for the future.
There appears to be a fundamental misunderstanding of the project risks born by the private sector and we encourage an early meeting with the First Minister to reconsider the decision.