How will the Welsh economy fare without EU funds?

Go for a drive in the Welsh countryside and you’ll start to notice something on the road signs - clusters of yellow stars in orderly circles.

The EU has funded myriad initiatives and development projects in Wales - infrastructure plans, social welfare schemes and public realm spaces have all benefited from grants and funds from Brussels.

Yet despite all the money poured into Wales, the Welsh people voted to walk away from the union.

“We had areas that had benefited hugely from EU funding that voted Brexit but the funding didn’t translate into support,” says Chris Sutton, JLL’s lead director in Cardiff.

Books will be written about why but for now there are more pressing questions. Will the end of EU funding spell disaster for the Welsh economy or could it be the best thing that could have happened to Wales?

How EU funding is being put to use

The Welsh government has been allocated £1.35bn of European Regional Development Fund (ERDF) money for the period 2014-20. As of August this year, the government had assigned 66% of this for use in a number of projects, backed up with its own matched funding:

Even after Britain has left the EU, the funding will keep coming in. Allocated on six-year cycles, grants are ringfenced, so even when a nation pulls out of the union they will still receive the money. In this cycle alone, west Wales and the Valleys have been granted £2bn.

However, the mid- to long-term outlook is far less positive, says Vince Nolan, EU funding specialist and former senior manager of Deloitte’s Cardiff-based UK grants and incentives practice.

“Brexit has thrown stability into question and is having a slowing effect on a number of future investment decisions,” he says. “The Welsh government utilises part of its block grant to support indigenous and inward investment businesses and has done so since the 1980s.

“The lack of future EU funding for Wales, despite the now-distant promises of pro-Brexiteers that the devolved administrations will not be any worse off, may become an issue.”

Alternative funding

While distant promises might be enough to fight election - or referendum - campaigns, they are not enough for the economy. Of all the headaches the UK government has to contend with, finding answers - and in the case of the grants system, finding alternatives - is perhaps the most nagging, not least because of the sheer scale and diversity of funding from Brussels.

An astonishing array of individual pots exists: the European Regional Development Fund (ERDF), the European Social Fund, the Asylum, Migration and Integration Fund (AMIF), the fund for Employment and Social Innovation (EaSI), Erasmus +, the European Energy Efficiency Fund (EEEF), the European Fund for Strategic Investments (EFSI)… the list goes on. All have been used by the Welsh government over the years.

Some, such as the ERDF, directly affect real estate. Others have more intangible benefits, but Cardiff councillor and former PwC director of inward investment and grant services Ken Poole believes they are all potentially going to be missed.

“For example, there’s the Horizon 2020 fund, which is the main research and development funding programme. It was a response to the fact that Europe was falling behind the US and Japan in terms of R&D,” he says. “Many British investors have benefited from this, and universities working in collaboration with business will be concerned.

“It’s disappointing that the source of funding will no longer be available. Hopefully, that will be replaced with some other sort of funding.”

Conservative promise

In a JLL report published at the beginning of the year discussing the outlook for south Wales real estate, Sutton addressed this issue head on.

He wrote: “The guarantee by the UK government of funding committed under EU programmes to 2020 is welcome.

“However, there is a need for a replacement scheme. There is a case to directly intervene in those disadvantaged communities that, arguably, have been left behind by the economic recovery.”

Cue a commitment by the Conservative Party to step in - with a sideswipe at Brussels thrown in. Where EU funding had been “expensive to administer and poorly targeted”, the Tories would bring in a new system of funding for Wales, the Shared Prosperity Fund, that would be “cheap to administer, low in bureaucracy and targeted where it is needed most”, its manifesto said.

How a replacement scheme will work in practice - given how uncertain even the terms of Brexit still are - is anything but clear. Key details are still to be revealed, not least whether funding would come straight from central government or be devolved.

But Poole says that while the current confusion is far from ideal, this is also a “time for reconsideration” for Britain and for Wales.

“Exiting the EU does mean that from a UK perspective we may not be as restrained by the state aid rules,” he says.

“Projects will no longer need state aid approval. It does give the UK government and devolved governments an opportunity to take a fresh look at things and ask where some projects haven’t worked so they can go back and look at things again without needing to get permission from Europe.”

Despite the prospect of EU funding being withdrawn, Nolan argues that “all is not doom and gloom”, provided the central and devolved Welsh governments take the right steps now.

“We have city deals for Cardiff and Swansea councils that have been signed up to by a further 14 unitary authorities in Wales, which will work together to deliver transformational economic impacts. The UK government must reinstate the promised electrification of the Great Western Railway from Paddington to Swansea,” says Nolan.

“In addition, the UK government has yet to confirm its support for the Swansea Bay Tidal Lagoon energy generation facility. Economically, this could be a quick and easy non-EU win.”

Indeed, there is already plenty of real estate activity that is not entirely down to EU support, says Sutton.

Key role

“Cardiff centre is a success story; the city punches above its weight,” he says. “The cranes have returned to the Cardiff skyline. These are not restricted to Central Square [a 1m sq ft office-led scheme being developed by Legal & General and Rightacres], but the headline occupier transactions within Central Cardiff Enterprise Zone are located here.

“The challenge is to spread that prosperity to other locations such as Newport and Swansea. We need development and investment to take place in that second tier.”

For this to happen, says Sutton, concerted efforts need to be made to get the funding in place and delivered to the right places. Governments both national and regional will need to find ways to stimulate private sector investment with targeted grants, incentives for local authorities, and the setting up of substantial funds - even, Sutton suggests, sovereign wealth funds, to support the parts of Wales that have been “disenfranchised from recovery” to date.

This is where the property industry has a key role to play, believes Sutton. Among the needs of the left-behind areas of south Wales, employment property is critical.

“A UK direct development fund for employment property could look at the structured delivery of both buildings and sites, having regard to a demand perspective, a sector analysis and geographic spread.”

As far as political problems go, Brexit is arguably the most complex facing the UK government in at least a generation. But where some see huge risk, others see the chance of a lifetime; where some regard talk of brighter futures outside Europe as vague, others see it as changing the status quo for good and for the better.

Whichever view prevails, the Welsh economy needs a good Brexit - and a good deal after that if its disenfranchised areas aren’t going to slip further behind.

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