Written Statement - Cabinet Decision on the Circuit of Wales

The Cabinet met this morning to consider a decision on whether the Welsh Government is able to provide a financial guarantee to construct and establish the Circuit of Wales project at Ebbw Vale.

As Members will be aware, we have been working with the Circuit of Wales to support this project for a significant period of time as we recognised the stated potential positive economic impact it could have. It is a large undertaking and we have always been clear that any support provided by the taxpayer needed to be proportionate and fair.

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.

In February 2017 Circuit of Wales Ltd submitted its new proposal to Welsh Government, which was followed by a formal application in April 2017 requesting that we enter into a guarantee of a loan facility of £210m provided by Aviva Investors. This would create a long term annual expenditure liability to Welsh Government if the Circuit was to fail and the lender called in that guarantee.

Due to the very high risks involved in this project, in particular the long-term financial exposure to Welsh Government, an extensive period of due diligence was undertaken and the Cabinet was asked to consider the issues this morning. I am writing to Members now to inform you at the earliest opportunity of the outcome of those discussions, but will also be making a statement to Plenary this afternoon.

Extensive and detailed due diligence by external experts employed by Welsh Government has shown that due to the way the deal is structured, the current proposal would see the Welsh Government exposed to more than 50% of the risk. This is because the £210m underwriting element would carry a higher risk than other parts of the financing package. 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 £373m debt of the entire Circuit of Wales project would be classified against Welsh Government capital spending.

Over the next 3 years, this would have the same impact on Welsh Government budgets as if we had already spent the money - and would place a significant limit on our ability to deliver current and future projects to improve Welsh infrastructure, housing, hospitals or schools. To give an indication of the scale of the impact, this represents the same cost as building, for example, the planned new Specialist and Critical Care Centre in Cwmbran, 10 schools similar to the new Ysgol Bae Baglan in Port Talbot, or the equivalent of 5,000 new affordable homes in communities right across Wales.

With our current limited borrowing ability, Cabinet therefore today decided that the potential impact on the public finances of the current proposal before them was too great, when considering the many other priorities for the public purse, and decided that the Welsh Government is unable to offer the financial guarantee requested on this proposal.

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. It indicated that once the initial track and directly related development - which was presented to Cabinet today – had reached a steady state of trading 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 number of jobs is based on achieving the target number of events and any shortfall in the trading performance could reduce those employment opportunities.

The due diligence made clear that the main benefit to the local economy, and the majority of new jobs, would not be created at the circuit itself, but by separate businesses, particularly in the engineering and automotive sectors, clustering in the location as part of a proposed technology park to follow at a later date. In total, both the circuit and the technology park, according to due diligence, would likely fall substantially short of the 6,000 jobs figure. Based on our previous experience, we also believe the technology park proposal could well require significant additional public funding.

Recognising the economic potential this type of development would bring, and the fact that the people of Blaenau Gwent have waited long enough for the promised jobs, I’m pleased to be able to inform Members that the Cabinet this morning agreed to move ahead with a new and significant project. This will build on the lessons of the due diligence process, and use the approach assessed as having the greatest benefit in terms of local economic opportunities.

The Welsh Government is therefore today committing to building a new automotive technology business park in Ebbw Vale, with funding of £100m over 10 years, with the potential to support 1,500 new FTE jobs. We will begin this work with the delivery of 40,000 sq ft of manufacturing space on land currently in public ownership.

This is a standalone project to be delivered by the Welsh Government and local partners as the due diligence process demonstrated there is historically little evidence on an international scale of any track, on its own, acting as a catalyst for further local employment.

In addition, we will work with our partners to explore the potential of locating a South Wales Metro depot in the Ebbw Vale Enterprise Zone, and introduce programmes to support new and existing employers in Blaenau Gwent on skills development within the local workforce.

I look forward to answering Members’ questions in the Chamber later today.