End of round one

The winners have been announced – but will the Regional Growth Fund make a lasting difference? Adrian Nolan gives his assessment

Yesterday saw the announcement of the winning bids from round one of the Regional Growth Fund (RGF) process.

The fund is tightly targeted – which is a welcome development. There are a number of key headlines emerging from the announcement:

• The government expects 27,000 jobs to be directly created and safeguarded – and most importantly, close to 100,000 jobs in associated supply chains and local economies
• A total of 50 bids have been accepted across the country. The fine details such as value of the individual bids and expected employment benefits are yet to be released
• There is a clear north-south divide in terms of the number of bids and the impacts of employment, with nearly half of the accepted bids emerging from the northeast (14) and northwest (9) alone, together with around two fifths of the total direct jobs
• The original £250m set aside for round one has been increased significantly, to £450m
• This commitment from government is expected to leverage more than £2.5bn of private sector investment
• The winning bids represent just 10% of total applications, highlighting the considerable over-subscription for the fund.

So what can we make of all of this, and what does it tell us about the shape of economic development activities to come?

The prominence of the private sector
The vast majority of the winning bids emanate from the private sector. In some cases this is in partnership with the public sector but in the main monies will be heading straight into private sector budgets. This is not a surprise since we very much expected that, as government is keen on private sector led schemes to produce private sector jobs, this would be the case.

On face value there is also a good mix of bids which covers a range of target areas including apprenticeships, SME support, R&D and both higher and lower skilled jobs. This is across a range of sectors, with manufacturing and export orientated industries being prominent, where investment in people and facilities will ultimately raise productivity.

However, there are a range of concerns and actions that need to be considered by government.

1. To what extent does the creation of new jobs across the north of England in particular represent additionality – doing something which would not have happened anyway? Clearly, each case is unique but are the schemes those which the private sector would have embarked on anyway? If that was the case then government could be accused of just handing a large subsidy to the private sector. The government has to ensure that the jobs being created are additional and also not just short-term measures to increase levels of production post recession

2. Should we be expecting higher levels of private sector leveraging? On the face of it the £2.5bn private sector funding expected to be leveraged is relatively high, over five times the public investment. However, leveraged private sector funding emerging from Grants for Business Investment (GBI), which the RGF effectively replaces in Assisted Areas, frequently exceeded this. In the northwest and Yorkshire and the Humber over recent years (including during the recession) private sector leveraging often exceeded well over eight times the amount provided in grants, putting the ‘expected’ £2.5bn here into context. If leveraging is not sufficiently high through the RGF process then the wider benefits to supply chains and local economies will be limited.

3. The due diligence process is therefore critical. The process will test the market and financial assumptions, and the risks set out in the bids. As part of this process it will also be important to assess the robustness not only of the direct jobs created, but the 100,000 that are expected to emerge across wider supply chains, a difficult forecast to accurately make.

4. Government must ensure that there are clear targets for workforce development and apprenticeships to set in stone local economic benefit. Without this, and just being a ‘blank cheque’, then businesses could do what they wish with the money provided.

5. What about accountability and evaluation? With limited public sector involvement, it will be difficult to address accountability issues – how will these schemes be evaluated and if they do not go to plan who is ultimately accountable to the taxpayer? Governing this process effectively is critical.

Ensuring wider benefits
In order to work effectively, the investments need to have spillover effects in the localities they serve. There is a role for other actors, such as local enterprise partnerships (LEPs), local authorities and other public/private sector bodies in ensuring that collaborative work is undertaken and there are coordinating links between large companies and small businesses to encourage knowledge transfer and innovation. Networks are crucial and the better projects will encourage interplay between major firms and local SMEs. If RGF funds do not sufficiently support local supply chains, then the whole RGF process would be seriously compromised.

This is where the facilitating and local economic activist role of the local public sector becomes important, something that has not been deeply considered by government thus far. Local state can ‘conduct’ without always needing to ‘play’, ensuring that the investments are delivered within a wider strategic framework of economic and social benefit.

Protecting vulnerable areas
As the RGF is a competitive process, there are winners and losers. But what happens to the unsuccessful bidding areas which are most vulnerable to public sector cuts? The RGF on its own isn’t sufficient to deliver rebalancing, due to limited funds and not being sufficiently geographically targeted. Government must have more in its armoury to help those places experiencing multiple market failure which will not be able to recover from recession without more intensive and tailored assistance.

Joining up with other initiatives
At present the RGF seems to be operating in isolation from other key initiatives, such as enterprise zones. It is critical that all economic development mechanisms are joined up in order to avoid duplication and ensure maximum returns. LEPs must also play a key role – in round one the structures were not yet in place to play effective roles in the bidding process. However, we would expect that from round two LEPs will play a significant part. If they do not then this will lead itself to confusion and lack of effective local leadership.

Linking with the low carbon agenda
One of government’s key aims is to develop a competitive advantage in the low carbon sector, although there has been a distinct lack of discussion around this issue as part of the RGF process. If the government is serious about creating the conditions conducive to encouraging low carbon development, then the RGF is one vehicle which can be utilised as one of the ways to achieve this.

Moving away from grassroots economic development
The RGF is a good barometer as to the future shape of economic development under the coalition government. Clearly a significant trawl of the detail of the bids would be needed to understand how local communities benefit, and the £30m being allocated towards to the community development finance institutions via the CDFA is a positive move. But the sizeable shift towards the private sector shaping economic development (or growth) – and we can only assume it will be similar in round two – is a significant step change from traditional economic development practice.

Broadening the focus
The RGF is about a quick return on growth and jobs. There’s no problem with this, and there’s an understandable short term, social, economic and political need for this. However, sound growth steerage and good economic development harnesses the strengths of the public, private and social sectors to deliver prosperity across all of our communities, and in perpetuity. An appreciation of this appears to be lost.
A sophisticated growth strategy, of which RGF should be a key plank, would make a greater impact across all these inputs, and existing mainstream activity. Inputs to growth include the effective allocation of capital, labour and total factor productivity (i.e. other factors not captured by labour and capital and includes culture, institutions and innovation). Hopefully round two has a broader palette of criteria.