Magic Money Tree: The Threat To The Big Infrastructure West Midlands Property Needs

West Midlands Mayor Andy Street says his team is preparing "catalytic investment" that will unlock property investment and jobs. The Midlands Metro and HS2 infrastructure are crucial.

But with costs on key projects already over-running by £125M, and a key Solihull HS2 scheme coded "red" due to fears funding is uncertain, do some very tough decisions lie ahead?

They are popping corks in Wolverhampton, and special cakes are being cut in Dudley: celebrations have already begun ahead of the start of construction on the latest £250M Midlands Metro extensions from Wednesbury to Brierley Hill which, according to a pronouncement this week from Dudley council, will "transform" the borough. 

Meantime in Solihull excitement is mounting as the first stages of the new HS2 interchange have won £9M funding to support design work.

Good news for long-awaited and much needed projects is a consequence of the £8B regional growth strategy agreed between the West Midlands' seven local councils and the government, a project being steered by Street.

However, a series of reports presented to the West Midlands Combined Authority for discussion at its meeting on 25 May suggest that some tough decisions on financing are looming as big plans crash into hard financial reality.

Value-Engineering Or Cuts?

The tough choices Street and his team face are illustrated by the decision to award £9M funding for design work on the HS2 station interchange at Solihull's UK Central site. The decision unlocks progress on a key piece of infrastructure for the 8.4M SF development.

A report from the WMCA's Investment Board discloses funding difficulties which touch Solihull's plans for an HS2 interchange. "The UK Central Interchange ... status is reported as red reflecting the position regarding the £205M matched funding element of the Birmingham International Station redevelopment proposal which is not secured."

The missing funding represents 71% of the resources needed for the programme, the report said. The "red" coding indicates the level of uncertainty surrounding funding — green is secured, amber is likely, red is unknown.

Since it is buried in Appendix 6 of a long, technical financial report it is unlikely to have been widely noticed.

And spending money on this project could hurt everyone else. WMCA Finance Director Sean Pearce in that report advised that spending the money on HS2 in Solihull would have an "impact [on] the proposal on other train stations in the region." He warned that "not all income streams which supported the West Midlands Combined Authority Programme were secured" and that the Urban Growth Co. and Solihull Metropolitan Borough Council, who were promoting the scheme, should look for alternative funding.

These serious warnings — which amount to saying you cannot spend the same money twice, and we don't in fact know how much money we have — resulted in a decision by the board which included the admission that "approval of this scheme might not allow all further schemes to be approved that were dependent on the West Midlands Combined Authority internally generated resources as contained within the Investment Programme." 

Overspends And Optimism Bias

A second report to the West Midlands Combined Authority reveals an even bigger problem of a £125M potential overspend on key projects in the initial £3B infrastructure allocations: Two major infrastructure projects already appear to face cost and funding problems.

"Forecast costs [are] greater than funding on the Metro schemes to Birmingham Airport and Brierley Hill," the report said. "However at this early stage of development it is assumed this will be value managed down as the project detail develops."

This sounds soothing, but as Appendix 6 shows, this is not a problem of small change. The Brierley Hill extension is estimated to cost £33.6M over the budget allocation. The cost of the Metro Birmingham Interchange is listed as £60M ahead of the budgeted figure.

In literally very small print the report explains: "The forecast out-turn for the Birmingham to Interchange and Brierley Hill Metro Extensions continue to exceed the original budget as a result of the inclusion of optimism bias into the initial business case estimates. No new funding has been identified to cover these variances."

A third scheme is also over-running but its future is more secure, the report discloses. The whole HS2 Connectivity Package is £31.8M over budget due to Wolverhampton Interchange, but the WMCA and Wolverhampton Council will cover the cost jointly.

Mathematical Problems

Speaking at the Bisnow Birmingham State of the Market event in April, Street said the aim of the West Midlands Combined Authority was to "think about catalytic investment" which can "begin the process" of property development and economic regeneration. He warned that the Authority "needed to chase the maths of your investments" to make sure they will pay back.

Finding the resources to complete some early projects could — on the evidence of the current reports — require some serious mathematical chasing.