£12m pre-devolution ‘legacy’ loans will cost £100m to repay
LOANS totalling £12m financed from UK Government borrowing to support economic development bodies in Wales pre-devolution will end up costing more than £100m to repay.
And despite interest rates on UK Government gilts being at record lows the Welsh Government is unable to refinance the debt it inherited on more favourable terms.
The loans were issued by the Treasury back in the 1970s and 1980s on behalf of then secretaries of state for Wales, who then lent to support the activities of the now-defunct Mid Wales Development Corporation and the Development Board for Rural Wales.
Reflecting the interest on UK Government gilts at the time, they have an average interest rate of 14.8%.
The loans, which totalled 54, were taken out between 1974 and 1981 with an average 60-year repayment term.
To date they have incurred £72m in interest payments with just £1m of the capital paid off, meaning there is still £11m outstanding.
The debt, from the National Loan Fund (NLF) overseen by the Treasury’s Debt Management Office (DMO), still has £20m of interest to repay over an average remaining repayment term of 15 years.
There are currently no UK Government bonds that predate 1992, which shows that the gilts that financed loans to the Welsh secretaries of states have been refinanced by the Treasury on more favourable terms, without the lower financing costs being carried through to the Welsh Government.
The Treasury’s position is that the NLF cannot make a loss, while not addressing the fact that it has already made a significant margin on the original loans. The Treasury said that gilts issued at the time couldn’t be tied to any particular end beneficiary, but formed part of wider governmental budgetary considerations.
However, leading economist Gerry Holtham called the Treasury’s position “outrageous” with the UK Government having the ability to refinance its debt at lower rates, but with the Welsh Government being trapped into the historic high rates of the 1970s and 1980s.
He said it was unacceptable that one part of the public sector could profit at the expense of another.
Mr Holtham said: “The National Loan Fund have been making a fat profit on this loan for the last 20-odd years and since 1996 at least. The idea that Wales should be paying nearly 15% for another 15 years when the Treasury can borrow at 1% or 2% is outrageous. The Treasury has the power to play fair if it chooses. It’s had its pound of flesh, now it’s insisting on blood too.”
The Welsh Government was asked why it hadn’t sought to refinance the debt with the ODM, or having already paid more than £70m in interest, requested to have it written off.
It said in a statement: “The ‘legacy’ loans outstanding in respect of Development Board for Rural Wales and Mid Wales Development Corporation are with the National Loans Fund, which cannot make a loss.
“Therefore, where early repayment settlements are considered, the value to be paid represents the present value of the future payments of principal and interest of the loan which would have been paid to the NLF if the original repayment schedule had been met in full.
“In summary, there is little financial saving when repaying loans to the NLF.”
In a joint statement on the debt the Wales Office and the Treasury said: “It is correct that there are no longer gilts in issue dating back to the 1970s that would mature in line with the profile of Welsh Government loans.
“However, the gilts we refer to in the context of these specific loan maturities are notional and simply illustrate the general financing constraints and opportunity costs DMO faces funding every loan the NLF extends.
“Any finance provided by the NLF triggers a sequence of borrowing commitments across its life based predominantly on gilt issuance.
“While it might appear that a series of sequential borrowing decisions should allow refinancing, a principle behind NLF lending terms, over and above the legal duty to ensure the NLF does not incur a loss, is that each loan advanced has a financing opportunity cost on the date of issue represented by the lending rate initially agreed.
“Because of the opportunities forgone
on the date of issue this cost remains unchanged throughout the loan term irrespective of whether prevailing rates rise or indeed fall.
“Furthermore, DMO today (and the Bank of England before DMO was established in 1998) does not issue (nor has generally done so in the past) individual gilts to finance any given specific loans, and it would be impossible to identify all the sequential decisions about debt issuance since the 1970s that were impacted by the Welsh Government loans.
“In short, when gilts are issued, the funds raised are not hypothecated to specific loans or other general government outlays. Gilts are issued in order to finance central government cash expenditures in the financial year – including the refinancing of maturing debt and to fill the ‘gap’ between new expenditure outlays and current government revenues – through the NLF.”
Under the Wales Act 2017, the Labour Welsh Government administration has the ability to borrow up to £150m a year for capital, via the UK Government issuing of gilts through the NLF. It also has the ability to borrow £200m a year for resource expenditure, which it has
never used.
With interest on UK Government debt at record lows, the Welsh Government’s only use of borrowing for capital was a single transaction of £65m in early 2019.
In contrast, while with a bigger capital borrowing capacity of £450m a year, since the Scotland Act the Scottish Government has borrowed £1.6bn in capital and plans to raise a further £300m in low-interest-bearing debt by the end of the current financial year.
The Welsh Government has no plans to use capital borrowing in what remains of the financial year to the end of this month.
The legacy loans came under its direct responsibility in 2006 when it merged the Welsh Development Agency, which it solely funded, into its civil service in 2006.
Prior to devolution in 1999, the cost of the debt would have been the ultimate responsibility of the Wales Office and its funding through the Barnett Formula.
The legacy borrowing doesn’t count towards the aggregate borrowing limit agreed under the Wales Act 2017, which allows the Welsh Government to borrow up to £1bn.