‘Circuit of Wales is a calculated risk, but it’s a risk worth taking’
The Welsh Government should back the Circuit of Wales project because it could help kick-start a revival in the Valleys economy, writes Brian Morgan
IF ANY part of Wales was to be targeted for a transformational investment project then the area surrounding the northern Valleys would probably be top of the list.
It has suffered significantly from deindustrialisation and the decline of the coal industry and this has been exacerbated over many years by chronic under-investment in infrastructure.
Consequently, the area has relatively high levels of unemployment and poor employment opportunities. There is a shortage of high quality commercial and industrial property available for new businesses, along with a lack of investor-ready industrial sites.
These economic problems have been with us for decades. Indeed as long ago as 1936, Edward VIII when visiting the area said: “Something should be done to get [local people] working again.”
And sadly this is still the case. Something is needed to create a step change in economic development in the Valleys. Something is needed now to reverse the decline in employment opportunities and introduce new investment.
It must be acknowledged from the outset that the CoW is not a panacea for the area’s economic problems. It might have considerable potential to help kick start a process of regeneration but it is not in itself going to transform an area where economic opportunities remain scarce.
Reversing this cycle of decline will take a coordinated and interventionist approach to economic regeneration over the next decade or longer. But the CoW might play an important part in the process.
One of the key points in favour of the CoW project is that it is ready to roll - it is ‘shovel ready’ and there could be diggers in the ground this summer, constructing the circuit.
It is worth emphasising that the CoW investment was first proposed in 2010 and the project is still awaiting a decision from the Welsh Government.
However, if a timely decision is made by the Welsh Government on the loan guarantee, then in two years’ time Phase 1 of the project could be almost complete, creating over 500 full-time equivalent jobs (equivalent to nearly 3,000 jobs on site during the two-year construction period).
Also by 2020, after the construction phase is complete, there could be in place the basis for an international racing circuit attracting over 100,000 spectators and boosting the tourist product along the Heads of the Valleys road. Alongside this investment other businesses could be planning to relocate or expand in the area, and, in addition, the extreme sports partnership could be up and running, with further impacts on tourism and jobs.
Much has been made of the offer by the Welsh Government to provide a loan guarantee that would underwrite the capital investment needed to bring the project to fruition. It has been claimed that this guarantee is very risky and does not offer value for money.
The CoW is a risky, private sectorled project but the Welsh Government guarantee has to be seen in the context of a policy intervention that is in line with existing regional economic development practice.
For example, although a Welsh Government guarantee of around £200m amounts to a lot of money, it has to be accepted that some form of grant aid is often required to underpin commercial investment in the so-called Objective One areas of Wales – the relatively poorest communities that have been eligible for the highest level of state aid for decades.
The CoW investors agree that the project has to be classed as a higher risk investment. After all, the CoW is a very large, long-term development project that will require a number of important factors to be put in place for the investment to be successful.
However, although the financial outcome is uncertain (as is the case with most demand-led investments) the loan guarantee will only be drawn down once the facility is built and then only where the company experiences severe and sustained downside performance.
In this scenario, other private sector investors, (who will have already invested significant funds), will have lost all or part of their investment. So the largest share of the risks involved in the project is being borne – as it should be – by the private sector. Also, private sector institutions have assessed the risks and are still prepared to invest.
If the projected spectator numbers and other predicted revenue streams are lower than expected then a financial restructuring of the company may be needed in five years’ time. How much of a financial restructuring will be required in the event of low spectator numbers will depend on how far short the actual numbers turn out to be.
A relatively small shortfall might only require some fairly minor adjustments to the financial model. However, a large shortfall in numbers might require a completely new financial model and even a new set of investors to take over the project.
This has happened in other large infrastructure projects like the Channel Tunnel – the original investors lost most of their investment but Le Shuttle eventually turned out to be very successful.
As long as the scheme gets built to a quality level that allows the Circuit to host a series of international motorsport events, then the eventual owners only have to cover their running costs to make the Circuit viable and financially sustainable.
It must be emphasised that the risks involved in developing the CoW are not insignificant. However, they are calculated risks. In terms of benefits, the Circuit will help regenerate a part of the northern Valleys that is in most need of regeneration. It will create a significant uplift in GVA and an important expansion in employment prospects in an area where unemployment remains well above the UK average.
Post Brexit, lifting Wales off the bottom of the UK prosperity league table will require a much higher rate of both private and public investment. Wales, especially the poorer areas, needs ambitious long-term projects on the scale of the successful Cardiff Bay development and, currently, the Valleys Task Force is investigating how investments on this scale can be stimulated. The CoW could play a prominent role in this investment strategy.
However, to be successful CoW will need to be well planned and professionally organised if it is to meet the challenge of managing the financial risks confronting the project. If it succeeds in overcoming these obstacles then the Circuit could better position Wales in the British and international motorsport industry and the project could underpin a longer term and sustainable strategy to develop jobs in tourism, hospitality and automotive engineering in the Valleys.
Brian Morgan is Professor of Entrepreneurship at Cardiff Metropolitan University