All change for the regions: Accounting & Business

Posted on September 21, 2010 · Posted in Accounting & Business

For all its determination to address regional imbalances of wealth, the last Labour government found the challenge much more difficult than it expected.  Rather than spreading affluence, ministers found that the expanding service economy sucked in wealth, and people, to the capital.

 

Now with a change of government comes abolition of Labour’s main instrument of regional policy in England, the Regional Development Agencies, or RDAs.  (The devolved nations of Scotland, Wales and Northern Ireland have equivalent bodies – for which their own governments are responsible.)  The exception is the London Development Agency, which Mayor Boris Johnson successfully defended.

 

In place of the RDAs come Local Enterprise Partnerships, or LEPs.  These are being formed by local authorities working with employers’ bodies.  LEPs’ areas of coverage will be sub-regional, often based around dominant cities, and they will have less power and influence than do RDAs. 

 

Gone will be RDAs’ focus on attracting inward investment, developing industrial clusters, providing business advice and supporting growing firms with grants.  These functions pass upwards to central government – though critics fear many of these activities will disappear.  Transport, skills development and start-up support will be taken over by LEPs.  Local authorities will be freer to make planning decisions without taking into account strategic regional concerns.

 

There were clearly problems with RDAs – not least their inability to counter London’s suction of economic activity.  They often became an additional chain in the link distributing grant aid from central government to those on the ground.  A study by Deloitte of regeneration spending in Leicestershire found that it cost £180m to spend £230m, in part because of RDAs.  And most observers believed that even if it was sensible to have an RDA to stimulate the economy in the deprived North East, it was unnecessary for the affluent South East.

 

RDAs also varied considerably in competence, says senior ACCA policy advisor Manos Schizas.  “RDAs were not uniform in their effectiveness, or the manner of their delivery,” he says.  “Yorkshire Forward and SEEDA [the South East England Development Agency] were found by the National Audit Office to be much less effective than RDAs in the Midlands.  In areas where they were less effective the impact [of their abolition] might not be so great.”

 

RDAs have made much of claims in a report from PwC that they delivered £4.5 in benefits from every £1 that they managed.  Schizas says the figures should be treated with caution.  “The report relied substantially on the assessments by the RDAs themselves,” he says.  “Once you strip away the assumptions of future growth of the businesses that the RDAs invested in, the benefit drops from a factor of 4.5 to 1.6.  And that doesn’t take into account the amount that the RDAs cost to run.”  He adds: “The impact of shutting down the RDAs will be a lot less than their supporters assume.”

 

But it was politics as much as anything that did for the RDAs.  Minister for Decentralisation Greg Clark explains: “The arbitrary division of the country into regions conformed to government bodies rather than natural economic areas. This [change of policy] gives the right of initiative back to councils and businesses to say how they wish to best organise themselves to pursue economic growth.”

 

This is music to the ears of many local authorities.  A spokesman for the Local Government Association explains: “The Government’s confirmation that town halls will play the lead role in local economic development, working closely with the private sector, is a victory for common sense. There is a real opportunity for councils to show the type of local leadership that our counterparts on the continent have been able to in the past and drive the economic growth of their areas.  

 

“It is time to create a model that puts councils and local businesses in the driving seat of improving the economic performance of their areas. This needs to take into account everything that makes a local economy tick and prosper, such as transport, infrastructure, housing, business support and skills.”

 

But despite the positive reaction from councils, there remain concerns, especially about the succession arrangements.  MPs are worried and the House of Commons Business, Innovation and Skills Select Committee is about to investigate the potential impact of the change in regional policy. 

 

“There are several issues,” says Adrian Bailey MP, chair of the committee.  “The first is finance.  RDAs are supposed to be wound up in 2012.  There is a 60% first year reduction in budget and 40% the year after.  That has an implication for businesses relying on grants and loans.  That is causing concern for small firms.  It could cause the postponement or abandonment of planned investments.  The replacement, £1bn over two years through the regional growth fund, is a considerable reduction [compared to] the budgets for RDAs.

 

“Then there is the mechanism for obtaining funding [from the new Regional Growth Fund, see box], which we understand will be bidding.  We have no quarrels about that.  But will it be determined on a project basis, or by divvying up the money per region, as now?  Some sections of the business community are very concerned about it being divvied up per region.

 

 “Then there’s a question about what will happen to RDAs in the mean time, for example their assets and the expertise that has been built-up,” he says.  “The danger is I see it that the best quality people will gravitate towards the best financed LEPs, so you will have an imbalance amongst LEPs.”

 

But, concedes, Bailey, in some respects LEPs may be better placed than RDAs – for example in working with local employers to increase the number of apprenticeships on offer.

 

The Institute for Public Policy Research (IPPR) – despite its influence with the Labour Party –is willing to give the new policy a fair chance.  Katie Schmuecker, senior research fellow for IPPR North, says: “If you look at the list of functions that LEPs are potentially going to have to work with there is the potential that they will be quite important.  They could still be an important way of co-ordinating economic development in areas outside London.  I think the big question is the amount of resources available to LEPs.”  She adds that creating a clear framework for local authority involvement will be the other crucial issue.

 

Professor John Goddard, Emeritus Professor of Regional Development Studies in Newcastle University’s Centre for Urban & Regional Development Studies, is more critical.  The abolition of RDAs is “very unfortunate in view of the coalition’s aspirations to rebalance the economy”, he suggests.  “The RDAs had the key role in developing new industrial bases in some of the regions, they have been critical in mobilising universities for economic development, attracting new investors, taking a strategic view of reinvigorating the manufacturing base.  I don’t see how the rebalancing objective can be achieved without a strong mechanism.  I don’t think localisation is the answer to that.”

 

In dumping RDAs, argues Goddard, the UK is moving in the opposite direction to the lessons from international experience.  “In all our competitor nations, Germany and elsewhere, the state is very involved in developing the new and renewable value sectors,” he argues.  “There’s not much evidence that the UK Government’s approach will work.”

 

Professor Goddard sees the move towards LEPs in clearly political terms – as a return to the past, where the last Conservative government set-up Training and Enterprise Councils with similar responsibilities and territories to LEPs.    “It strikes me as a very similar agenda to the 1980s,” he says.  “It’s just a joke that the Liberal Democrats have been taken in by it.”

 

Goddard is equally critical of the attempt to drive job creation through localised reductions in employers’ National Insurance contributions.  He doubts that employers will be able to move or create operating bases to take advantage of this.    “I just don’t think the private sector supply capacity will respond particularly in the key industries,” he says. 

 

Without RDAs in the most deprived regions – particularly in the North East, where there is strong support by business for its RDA One NorthEast – something similar will need to be created to replace it, argues Goddard.  ACCA’s Schizas makes a similar point: there will still need to be regional mechanisms for delivering European Union regional funds after the RDAs have been abolished.  Adrian Bailey also stresses this, but says that MPs are unhappy that it is unclear what this new structure will be, or how it will operate.

 

While there are risks with the new policy, there are also clear potential winners – the big cities.  If the move towards LEPs is seen alongside the incoming Government’s drive to create elected mayors in all of the major cities, we can expect to see stronger ‘city-regions’ emerge.  It is a change of direction that is strongly welcomed by the Centre for Cities think-tank.

 

Paul Swinney, its analyst on regional policy, says: “Our line has been there should be more devolution to cities and that cities should have more power.  Our view is that each city should have its own mayor and any move towards that we see as positive.  I think each LEP will focus on a functional economic area, so [for example] Sheffield will cover Doncaster and Rotherham, leading to greater collaboration.  We would hope that co-operation will lead to better outcomes for all the local authorities.”

 

Swinney adds: “We believe the priority for LEPs should be on the main cities.”  He recognises that secondary urban centres, such as Carlisle, could be marginalised by this process, despite local deprivation, but he believes that this is the right policy response.  He explains: “Places like Carlisle are not so important because they won’t generate the number of jobs in the future that the major cities will.”

 

Box

 

All change for the regions

 

England’s regional development agencies (RDAs) are being wound down, their funding cut immediately and local enterprise partnerships will replace them.  A Regional Growth Fund has been created for two years – with funding of £500m a year, compared to the £2.2bn that went to RDAs in the 2009/10 financial year.  Government regional offices are being abolished.  New businesses in targeted areas will receive a job creation subsidy through a reduction in employer National Insurance Contributions.  Qualifying employers in England will not have to pay the first £5,000 of Class 1 employer contributions due in the first twelve months of employment for the first 10 employees hired in the first year of business.  The devolved governments will be encouraged to adopt the same measure.  The UK Government will publish a paper on ‘rebalancing the Northern Ireland economy’ to reduce its dependence on the public sector.  One option is for corporation tax in Northern Ireland to be cut to 12.5%, in line with that in the Irish Republic, and the declaration of the province as an ‘enterprise zone’.