£400m flagship Welsh project needs more money to become reality

Wales Online

3 days ago

£400m flagship Welsh project needs more money to become reality
The Welsh Government may need to put more money into the planned Global Centre of Rail Excellence
Plans for the world's first integrated train and rail infrastructure testing facility, which promises to create more than 1,100 permanent jobs in one of the most deprived areas of Wales, are now unlikely to be realised without the Welsh Government making a bigger financial commitment.
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The £400m Global Centre of Rail Excellence (GCRE), first proposed by the Welsh Government seven years ago, is earmarked for a 700-hectare site – the size of Gibraltar – at Onllwyn in the Dulais Valley.
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The project would consist of two electrified 7km looped testing tracks for rolling stock and infrastructure, both designed to operate 24/7 year-round. It would also include train storage and maintenance facilities, a control centre, a 100-bedroom hotel, as well as training and R&D functions.
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The land, which the Welsh Government acquired from opencast company Celtic Energy, already has planning consent and, subject to securing finance, is shovel-ready.
A later phase, outside of the £400m fundraise, could also see a rail-related technology park, potentially privately funded.
The project has received expressions of interest from more than 200 firms looking to utilise its facilities, including Network Rail, Transport for Wales, and leading train manufacturers such as Hitachi and its Spanish rival Construcciones y Auxiliar de Ferrocarriles (CAF), which has a train-making factory in Newport.
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GCRE Ltd, which is wholly owned by the Welsh Government but operates at arm's length, has secured £50m from the Cardiff Bay administration and £20m from the UK Government, originally signed off by the former Conservative Westminster administration. This leaves it needing to raise around £330m.
Initial fundraising activities, conducted through a public procurement exercise, focused on securing equity investment. While the process was narrowed down to three potential institutional investors, including those in the US and the Middle East, a deal could not be secured.
GCRE, under its chief executive Simon Jones, then entered into discussions with a long-term debt provider for the project. While the potential interest rate on the debt was agreeable, the undisclosed institution is now unlikely to enter into a deal. GCRE is back out to market and remains hopeful of securing investment, whether in the form of debt, equity, or a combination.
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However, there is a realisation that it is highly unlikely a funder(s) would be willing to provide the £330m gap, and it will require the Welsh Government to commit additional capital as well as potentially providing guarantees.
While it is not clear what any additional requirement would be, having already committed and spent £50m on the project – which includes the acquisition of the site, running costs for GCRE, and enabling work to date – it would come down to affordability and the risk to reward appetite of ministers. The Welsh Government is already facing competing funding demands in areas like health and education. The project falls under the responsibilities of Cabinet Secretary for Transport Ken Skates. A decision could potentially be left to the next administration following next spring's Senedd election.
The UK Government could provide additional finance, but it could also give added confidence to investors and strengthen the business case by ensuring that all train operating companies and rail infrastructure equipment manufacturers utilise the facility. Rail operating franchises, as they expire, are already coming under state control and will sit under the new body, Great British Railways.
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The £400m cost of the project has been maintained through value engineering. However, inflation is a concern if work on the project does not start soon.
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An economic assessment by professional advisory firm PwC suggests that over ten years – excluding the planned later phase Sarn Helen Technology Park – GCRE could create 1,100 permanent jobs, with a £300m gross value added (GVA) impact on the local area over and £1.2bn over its lifetime. The project has also been forecast to generate a 15-fold economic return for every £1 invested.
GCRE is confident it will be able to put a number of private sector funding options to the Welsh Government following the summer recess.
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Mr Jones said:'The aim of development work to date has been to de-risk the GCRE project to a point where private investors could be attracted to finance the bulk of construction and, ultimately, take forward a business that could act as a new economic magnet for the region. Our intention is to operate GCRE as a successful business, but it's also an opportunity to show how that can be done creatively, working with government and industry partners in an active way.
'We knew how challenging the task would be. It has never been easy to attract major sources of private investment to northern areas of the South Wales Valleys, and GCRE is a development not without risk. Looking back, our biggest barrier was that we began our search at the very time when the UK's economic headwinds were at their strongest. The last few years have been a challenging time for every major project looking for large-scale capital funding.
'I indicated in January that initial feedback from investors was that, while they applauded the vision and could see the strategic need for such a facility, the construction and early-years commercial revenue risks of GCRE still remained the biggest barriers to commitment. Despite international interest from both the Middle East and the US – from the rail and energy sectors – we still have not secured the funding we need.
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'As a result, GCRE has taken longer to move towards the construction phase than we had originally intended. In recent months, that has led to some challenging headlines about the delay to the project and questions about its ultimate viability. There's no hiding from the fact that this isn't where we wanted to be.
'But I also know from my own background in major projects that it's not unusual, particularly for a development as large, complex, and novel as GCRE. One thing I know for sure, though: the prize is worth it. We must find ways to grow the economy in Wales, particularly in de-industrialised areas of the country, and GCRE is still one of the most interesting and creative home-grown ways in which we can do that.'
Mr Jones said he remains positive that the project will be realised for a number of reasons. He added:'First and foremost, we are still in discussions with potential investors. Now, with the support of the Welsh Government, we are exploring additional ways to get investment secured, and that work will continue in the coming weeks. This includes looking at ways to further de-risk the capital construction of the project and underpin the early years revenue risk of the facility.
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'The UK, like most countries, needs more large sites on which to develop new infrastructure of this kind, and with GCRE located on a site as large as Gibraltar, it's one of the complementary ways in which we can show a strong commercial return on the investments made.
'Third, the economic and social imperative of getting more projects like GCRE to succeed only grows with time. Everyone is heartened to see that work has now begun constructing the new electric arc furnace at Tata in Port Talbot. But there is no escaping the fact that the site will employ fewer people than it did in the past, and that many thousands of jobs could be lost as a result of the transition across the supply chain. The UK Climate Change Committee recently reported that more needs to be done to create alternative forms of employment in the region.
'The UK Government has certainly shown through its new industrial strategy that investment in new, place-based infrastructure is vital not only to kick-start economic growth but to build greater resilience in coalfield communities. Using the green industrial revolution to help give de-industrialised areas a new economic future has never been more vital and an important part of the next few months will be seeing what more the UK Government can do to support the Welsh Government's investment choices at GCRE.
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'What sustains the team at GCRE is the firm belief that the project is a transformational one—something that will help to rebuild local prosperity in an area of the South Wales coalfield through the creation of new jobs, identity, and pride for this and future generations. The task isn't easy, but we'll keep working flexibly with our partners to achieve that goal.'
Mr Jones confirmed that GCRE is also in discussions with a number of data centre and renewable energy firms with a view to potential investment at the site. This would sit alongside the train testing project. If the rail project is abandoned, the whole site would be available for alternative investment.
Even if the project secures the required private sector funding through a public–private partnership approach, it could still have implications for the Welsh Government's budget if the ONS continues to deem the business as being part of its accounting framework. This means that whatever amount is raised would be reduced from its block grant. A possible workaround could be reclassifying GCRE as a community interest company.