Centre for Cities

Top 10 priorities for government as it takes forward Heseltine's recommendations

The Government’s response to Lord Heseltine’s report No Stone Unturned was announced today. It’s is a ‘once-in-a-parliament’ opportunity to support greater devolution to local areas.

Government has committed to 81of the 89 individual proposals, we have distilled the 10 most important reforms that central and local government must prioritise and seek to take forward beyond the forthcoming Budget and spending review. Informed by our independent research and analysis, not all of these follow Lord Heseltine’s recommendations to the letter. But taken together, we believe they represent the best opportunity free our cities to boost growth in the years ahead.

In particular, national Government should:

1. Create a single funding pot for local areas, aligned with European funding allocations to provide greater flexibility for cities to adapt policies to their local circumstances, a more efficient allocation of resources at a local level, a more effective allocation of European funding streams and more scope for local innovation in terms of service delivery and pursuing growth.

2. Be flexible about the institutional structures and geographies to which it devolves funding to ensure that funds are devolved to functional economic areas, rather than within administrative boundaries, and that the body making decisions about funding allocation is democratically accountable and committed to a long term growth strategy.

3. Resist the temptation to continue setting the agenda nationally, particularly in relation to LEPs, recognising that different areas need different kinds of support if their local economy is to thrive. Large Core Cities, fast-growing small and medium cities and cities struggling in a post-industrial economy all require different support. Government should be open to flexing policy according to different needs.

4. Implement an approach to funding allocation that relies more on incentives than competition recognising that there are challenges inherent in making all funds subject to competition, including the risk that all places pursue the same priorities. Incentives should instead focus on the fundamental capacity of areas to deliver, including a requirement for strong governance, meaningful engagement with business and a clear focus on local growth.

5. Tackle Ministerial and civil service resistance to devolution by adopting Lord Heseltine’s recommendation that Ministers and permanent secretaries should be associated with individual LEPs, as well as creating permanent, cross-departmental local growth teams of civil servants to join up government at local level.

6. Use Heseltine to set a long term local growth agenda addressing private sector concerns over a lack of certainty in relation to national and local policy frameworks that they feel is currently inhibiting investment.

Working together, national and local Government should:

7. Ensure that Local Government steps up to take responsibility for delivering economic growth. Local government and LEPs need to take a lead by taking advantage of all existing and new powers to support economic growth at a local level. When developing local strategic plans, LEPs need to ensure that they are realistic, strongly place-based, developed with partners, and backed with investment and a delivery plan.

8. Manage issues relating to limited local capacity to ensure that cities can find ways to support one another and draw on expertise from the private and third sector where necessary. Implementing Heseltine’s recommendation for senior sponsors associated with individual LEPs may help with this, as could the introduction of secondments from national to local government and making use of public private partnership arrangements.

9. Ensure that Heseltine builds on the City Deals programme by ensuring that new centres of influence and power are not set up to compete against one another. Local areas must decide on their own governance and institutional structures to implement these separate processes, while elements of the City Deals process, such as the Core Package, should also be available to all local areas provided they can satisfy minimum criteria.

10. Strengthen local leadership by working towards the difficult process of local government reform, attempting to simplify the current overly complex system to create a streamlined system that recognises functional economic geographies more closely. It is vital, however, that both national and local Government do not become bogged down on institutional reform at the expense of broader delivery on local economic growth.

We will be providing regular updates as the Government takes forward these commitments. 

Going for growth: why the Chancellor must aim for more than a “steady-as-she-goes” Budget

Five years into the longest recession in a hundred years, more than halfway through the Parliament…we need economic growth now. But what will – can – the Chancellor do to turn the UK economy around?

Press coverage to date suggests that this will be a ‘steady-as-she-goes’ Budget, trying to avoid the negative headlines of last March’s Budget (still described by some commentators as an ‘omnishambles’). Despite the UK’s downgraded credit rating and public interventions by the Business Secretary, there will be no abandonment of Plan A. Instead it’s likely that the Chancellor will be looking for cost-neutral policies that will make a big difference and will not be too unpopular – and there aren’t many of those around.  Bets are on housing, trying to boost lending to businesses via the Business Bank, some more infrastructure projects (perhaps supported by Qatar?) and then a few sprinklings of other policies, with childcare one that’s been discussed at length in the past few months.

But given the current state of the UK economy, and the lack of growth that has characterised the last two and half years, will this be enough? Politicians, economists and commentators from all sides seem to think not. The Chancellor is under pressure from the left and the right to take more radical action to kick-start the economy. 2013 will be a hugely significant year both economically, and politically, with a General Election looming large in 2015.

So, taking into account the circumstances that the Chancellor is faced with, what does our evidence base and analysis suggest a good Budget for the UK and its cities might look like?

First, it needs to invest more in the long term drivers of economic growth. Most economists broadly agree on what these are: high levels of skills; appropriate infrastructure; innovative businesses; strengths in a range of diverse industries; better management to improve the UK’s poor productivity. The Centre’s Cities Outlook 1901 showed how important it is to continue investing in these areas, especially skills. Previous Budgets have sustained investment in research and development, put a bit more money into infrastructure and talked about skills. This year a good Budget would be one that sets out a long term strategy that gives the private sector certainty about where to invest, and that sustains investment in key areas, especially skills and infrastructure, so that in three to five years, the UK will be in a better position to grow than it is today.

Second, a good Budget would inject some short-term fizz into the economy. Part of the problem is the time that projects take - Government has been bemoaning the lack of shovel-ready projects to put some backing behind. Another part of the problem is demand; despite all the work already ongoing to encourage more loans to small business or kickstart the housing market, demand remains fairly weak. So a good Budget would be one that would back some projects that can happen quickly and are likely to stimulate demand in a range of sectors. This may require the public sector to take a lead in identifying and de-risking these projects through up front investment, so as to make them attractive enough for the private sector to take forward. 

The Centre has already written to the Chancellor asking for three specific measures to be included in the First, a bold response to Heseltine that gives cities far greater autonomy over their economic development budgets, to help them better support local economic growth. Second, focusing investment in housing on the most unaffordable cities and sites that already have planning permission, while giving cities with weaker economies a different set of housing incentives to encourage refurbishment and replacement. Third, rethink the way that investment in cities is supported through reforming Urban Development Funds.

The Centre will be publishing a series of blogs in the run-up to the Budget, we’ll be live-tweeting and blogging on the day, and then we’ll be putting up rapid response commentary. And we’ll be following up with a whole series of papers in the run-up to the Spending Review, setting out how working differently with cities could make a big difference to economic growth. It’s an important time to be debating economic policy; if we can make more of our cities economic potential, it could help get us back on the path to growth.

Regional banks – how do they look in Germany?

Colleagues in the office and those who know me already are aware that I am extremely interested in regional banks. It is hardly surprising that the topic is in vogue given we suffered the financial crash in 2007 and that six years on the economy continues to stutter. There are also political shifts such as the rhetoric to ‘rebalance the economy’ and a greater emphasis on local economic growth.

The discussion has been ratcheted up today with Ed Miliband delivering a speech on this topic at the British Chambers of Commerce conference. The model in Germany is often cited but how many people actually know what it looks like? Well, for those who want a bit more information, read on!

The German financial system operates within a federal political system and is based upon three tiers of banking: 1. Public banks; 2. Co-operative banks and; 3. Private banks.

Public banks

Public banks are owned, run and managed by federal government, states, districts or cities and have a specific investment remit, for example development and infrastructure, with a long-term perspective. Importantly, finance is raised by issuing bonds that are guaranteed by the federal state. There are two sub-sectors of public banks: Sparkassen (savings banks) and Landesbanken (regional banks).

• Sparkassen are locally owned and run, often by cities or a group of cities (not for profit) and concentrate on universal banking (for example, loans to individuals and SMEs).
• Landesbanken are owned by savings banks via the federal system. The Landesbanken are effectively the central bank for the region’s Sparkassen (by providing liquidity) and also provide wholesale banking (i.e. to large organisations and/or cross region finance).

Co-operative banks

Co-operative banks include both credit unions and co-operatives and offer similar but differentiated products.

• Credit unions provide loans and finance to the individual and small businesses based upon a common bond under which the credit union operates. For example, the credit union could be location specific or profession specific.
• Co-operatives provide finance to individuals and SMEs but offer more democratic accountability as members can decide how the bank is run.

Private banks

Private banks operate as private banks do here, in the UK. They have branches across the country (and, indeed, the world), and provide all the same services.

The UK does not have public banks but rather has a private sector led system. The difficulty in changing the system in the UK is that we don’t have a federal political system and so financial responsibilities are maintained at the national level. Moreover, public banks would also require institution building which takes time and money.

However, there are already many funding streams from central government to target specific industries – namely manufacturing or green technology – as well as specific financing ideas such as the Cambridge and Counties Bank (a partnership between the university and the county) which could benefit from such a targeted system. There may also be a role for quantitative easing to be better channelled into regions via a new finance structure.

One thing is for certain; if the idea of regional banks is to catch on in the UK the core principles need to remain and the institutions need to be tailor made to our political, economic and administrative system. Public banks in Germany have local knowledge of their economy which informs their long-run investment mentality and ensures local economic growth is championed above short-run profit.

Introducing Private Finance 2: Son of PFI

As part of his Autumn Statement, Chancellor George Osborne is tomorrow expected to unveil a wave of infrastructure projects including new schools, hospitals and roads, to go forward under a revamped version of the Private Finance Initiative, to be known as Private Finance 2 (PF2).

When in opposition, both Coalition parties were often critical of the last Labour Government’s use of PFI to fund long term infrastructure investment across the country, insisting that the details underpinning PFI contracts left the taxpayer exposed to higher costs over the long-term.

More recently, a 2011 Treasury Select Committee report deemed the benefits of PFI “illusory” and noted that, despite often incurring a higher cost of borrowing than traditional routes, Government departments had become “addicted” to PFI as a means of reducing up-front cost and moving expenditure off the public balance sheet. This prompted the Government to scale back new PFI investments and announce a review of existing PFI contracts in an attempt to renegotiate the terms upon which they were based.

However, since this announcement and against a backdrop of a faltering economy, the Government has been under mounting pressure to set out how it intends to reform PFI to support major public sector building works in the years ahead.

Details emerging today suggest we will soon know the answer. So, what do we expect to be new about PF2?

• Profit sharing – Under the revamped PFI, the Government will become a minority stakeholder in project companies, giving it a seat on the board and a share of profits. Reports suggest that this will typically equate to a stake of around 20%, but it could be as high as 49%.
• Transparency – It is thought that project companies will be made to publish details of profits and also make future taxpayer liabilities transparent.
• Tighter timelines – In order to speed up the assembly of a project pipeline and avoid a re-run of the PFI process where projects could take up to five years to reach financial close, it appears there will now be an 18-month limit on project negotiations.
• Room to re-negotiate – The Government is also expected to introduce new contract clauses to allow hospitals and local authorities room to renegotiate service agreements with other providers, if they are more cost effective.

The Government will hope that PF2 is capable of kick-starting major investment programmes across the country, but that reforms ensure the taxpayer is able to share in any returns made on projects, as well as underpinning delivery risk. However, until we know more about how these measures will work in practice as part of a broad programme of investment, it is impossible to know whether the flaws of the previous regime will re-surface.

As always, the devil remains in the detail.

Follow Ben on twitter: @BenCities

No stone unturned – Heseltine’s economic plan for the UK

With 89 recommendations, comprehensive is certainly one word you might use to describe Lord Heseltine’s Review launched today in Birmingham. Others may view it as an attack on Government. But Heseltine claims to be a “glass half full” man who sees his Review as an opportunity to rise to the challenge.

Heseltine points to the UK’s world class businesses and internationally renowned universities but urges “these are standards to achieve not grounds for complacency”. Jerry Blackett from the Birmingham Chamber of Commerce was clear in his introduction that “no one thinks the status quo is an option for the UK economy”.

Heseltine’s view is there is a better way. That way centres on reinvigorating local leadership across England – something Centre for Cities has long been calling for.

What’s included in the Review?

It’s difficult to summarise all of the Review’s recommendations in a short blog. Heseltine himself is reluctant to prioritise out of the 89 recommendations for fear of people losing sight of the others. His view is that every single one is a “contributor to growth”. If he did have one priority though, it would be to build a “universal understanding that the responsibility for growth lies with every individual”.

There are several key themes running through the report, along with some stand out recommendations:

• PM-led National Growth Council – An overarching long term strategy should be underpinned by a strong governance structure. The Growth Council should drive the implementation of the Growth Strategy across all departments.

• A Single Funding Pot – A single funding pot for local areas to include significant parts of budgets held by central government that would be ‘more effectively managed by local leaders’ (including skills, housing, infrastructure and employment support). This goes with the grain of developments around City Deals and Community Budgets but would give city leaders much more discretion over how funds are spent locally.

• Putting local partners at the heart of economic policy – Local Enterprise Partnerships should be given resources (with the allocation of £250,000 new public funding) to develop local economic plans. LEPs should then bid for funding from the single pot. Where LEPs lack capacity they should be given support.

• Functional economic areas – Emphasis is also placed on LEPs ensuring their boundaries match functional economic areas – the most effective level for urban economic decision making and implementation. Heseltine also believes a more simple structure for local government should be created: all two-tier authorities outside London are encouraged to move towards unitary status.

• Public-private partnerships – Central to the Review is partnership between the public and private sectors. Recommendations around broadening the role of the private sector include the Chambers of Commerce receiving enhanced legal status to provide access to business support and local authorities building stronger relationships with private sector partners.

So where next?

There is a lot of support for Heseltine’s recommendations. As always there is also some scepticism, some surrounding the ability of Chambers of Commerce to provide effective business support and mechanisms for fair allocation from a single funding pot. A real shift of power to LEPs will bring with it more experimentation too. With experimentation comes the need for proper evaluation of what works.

What really matters now is the reaction from Government, and what we see in terms of action and implementation.

Heseltine acknowledges that many of his recommendations are not new. There are lots of references back to past initiatives and reviews. In some ways this is reflective of the lack of implementation and consistency. For Heseltine “inertia forms a substantial part of the blockage” when it comes to policy implementation. For those who think there’s merit in his plans, Heseltine urges people to “stand up and be counted” in order to drive change.

Follow Naomi on Twitter @Naomi_Cities

City Matters - my weekly cities reading list

I hope you enjoyed some, if not all, of my reading suggestions from last week.  I received some great suggestions via Twitter and email from fellow city geeks, which are much appreciated.

This week I’ve gone for a mix of the current, the old and the classic.  I hope you enjoy these and please continue to suggest others that I should read and recommend. 

• ‘Homeownership and Entrepreneurship’ by Philippe Bracke, Christian Hilber & Olmo Silva (2012) - highly relevant analysis of how buying a house influences whether someone is likely to start their own business.
• ‘Regional Economic Resilience, Hysteresis and Recessionary Shocks’ by Ron Martin (2011) - provides substance to the widely used notion of resilience and explores how places can and do respond to economic shocks and what this means for their long-term success.  
• ‘Abundance of land, shortage of housing’ by Kristian Niemitz (2012) – critiques some of the reasons offered to explain why UK housing costs have increased over the last decade before calling for a more ‘liberal’ planning system.  
• ‘Contrasts in Agglomeration: New York and Pittsburgh’ by Benjamin Chinitz (1961) - all I can say is read this and enjoy.  10 pages of great insight into how industry dynamics affect city success.
• ‘Soft City’ by Jonathan Raban (1974) – a travel writer’s perspective on what makes cities so appealing and revolting.  Includes a great chapter on anonymity in crowds that reminds me of travelling on the tube every day.

Follow @AndrewCities on Twitter

City matters - my recommended reading list

One of the many joys of working at the Centre is having the opportunity to read and think about some of the great research that is undertaken across the globe looking at cities, their economies and why they matter to the future wellbeing of individuals, businesses and communities (however you define it). 

Also if you’re like me, you rely on a very wide range of sources and contacts to alert you to all this great work.    

So in my very humble way I thought I’d start a weekly blog highlighting my recommended reading list of research on cities that I’ve come across that week.  My recommendations whilst obviously personal and subject to all my biases and judgment errors, will be guided by the following criteria: a) those I’ve actually read; b) contains or is based on research; c) is accessible to a wider readership; and d) I enjoyed reading them.

So my initial list is:

• ‘Education or Creativity: What matters most for economic performance?’ by Emanuela Marrocu & Raffaele Paci - combines Glaeser’s ‘human capital’ and Florida’s ‘creative class’ ideas into three separate groups – creative  graduates,  bohemians and non-creative graduates – and looks at the effect of these groups on the economic performance of 257 regions across the Europe.
• ‘Defining a Great Street’ by Kaid Benfield - photo-based consideration of what makes a great street drawing on city streets from across the US and Europe.
• ‘When Migrants Rule: the legacy of mass migration on economic development in the US’ by Andrés Rodríguez-Pose & Viola von Berlepsch – fascinating analysis showing the lasting effects of migration in the late 19th and early 20th century on the current economic performance of US counties. History matters!
• ‘Great Britain’s Second-Order City Regions in Recessions, 1978-2010’ by Tony Champion and Alan Townsend – compares the jobs performance of UK’s big city regions in the current recession to show how much ground cities have lost  and how this differed from previous recessions.
• ‘New Geography of Jobs’ by Enrico Moretti – brilliant rich and insightful exposition of why and how the modern economy benefits certain people and places more than others.  He also has some interesting things to say about urban manufacturing.

I hope you like them.  Please feel free to add to my list and let me know other research that I should be reading.

Follow @AndrewCities on Twitter

 

Pound Land: What might austerity look like over the next few years?

Last week, the leaked Housden Memo said the Chancellor is drawing up plans to announce a further £10 billion reduction in welfare cuts. The memo points out the next spending review—set for 2013, though still up for debate—will need to see welfare reduced by £10 billion through 2016, otherwise other areas such as education will need to be cut further. 

Whether the cuts amount to £10 billion in the end is less important than the notion that additional cuts are in the pipeline. Some of these cuts will affect national welfare spending (such as JSA), but it will affect local government spending as well. Looking back, these four facts below put the Housden Memo in perspective.

1. Local government's spending cuts to date are less than half of what is being proposed by the additional welfare spending cuts (both national and local). Since the 2010/11 Spending Review, local government’s revenue spending has fallen £4.4 billion (to £99.9 billion in 2012/13). That means local government’s spending power has fallen 8.7 percent (excluding reductions in education and highways/transport). 

2. A £10 billion drop in welfare funding would be the financial equivalent of a 10% drop in local government revenue spending.  Assuming education and transport are excluded, that is equal to a 20% decrease in local government spending (2012/13 local government spending power is £50.7 billion) on things like social care, housing benefit, and police.

3. Local government is saving for rainy (or rainier) days. Even in the wake of cuts, 80 percent of local authorities increased their reserves level in 2011/12. In total, this was £2.6 billion for 2011/12. Though, whether local government is willing to or should dip into their reserves to replace funding shortfalls is yet to be known.

4. Any cuts to national welfare budgets will hit local government budgets too. The Housden memo highlighted cuts to welfare in particular rather than specific areas within the local government remit. But, the cuts are very likely to include welfare programmes run by local government. Currently, the top areas of local government spend are:

• 34.9% education: has been relatively protected in funding
• 18.4% social care: expenditure rose £300 million from last year

Implementing £10 billion in welfare cuts is likely to have uneven effects across different functions of central and local government. While education has been largely protected compared to other areas, it is also local government’s largest bill, so that makes it more susceptible to cuts. A 1% cut in education funding is the financial equivalent to almost a 2% cut in social care of over a 3% cut in police funding.

In sum, local government’s spending power has fallen almost 9% since the 2010/11 Spending Review. The Housden Memo suggests further cuts could be equivalent to 20% reductions from 2012/13 budgets. Any further cuts that are passed on to local government will put pressure on them to find new ways to fund local services, be it through council tax, business rates or (less  likely) reserves. But, it is likely the cuts will fall on a wide range of spending areas to meet Government’s deficit reduction targets.

Finance and Growth: Two new developments

 

HMT offers lower borrowing rates to local government

Certainty is one of the most valuable assets financial planners can have, sometimes more valuable than money in the bank. And, to be honest, there is not much one can be certain about in the financial markets these days. 

HM Treasury has shown just how valuable certainty is in the current lending and borrowing climate. On 2 August, HMT sent an open letter to local government Financial Officers setting out the terms of the offer they first made in the Budget five months ago.

       The offer: 20 basis points discount on loans from PWLB.

       The catch: local authorities must ‘provide improved information and transparency on their                    locally-determined long-term borrowing and associated capital spending plans.’

In other words, local government can access debt more cheaply (in a time when they need to be investing in more capital programmes) in exchange for government having more certainty about the pipeline of borrowing coming their way. Overall, this is a win-win scheme for local government.

But, as we have argued in Banking on Growth, central Government’s control over local government funding affects their ability to borrow. Better borrowing rates should be accompanied by localised funding streams. That would be a really big step towards helping local government fund capital projects that support economic growth.

 

Devolved Transport Funding

Government took a small but positive step towards localism with their commitment to devolve major local transport funding. This consultation means that allocation of funding for new local roads, public transport schemes and local rail station decisions could be made at the local level.

Currently, decisions on capital funding for transport schemes are overly centralised: Government must approve all schemes over £5 million. 

Now, the government is proposing that ‘from 2015, local transport bodies will be able to decide for themselves how to spend their money on priorities best suited to their local needs without Whitehall approval.’   

The new Local Transport Bodies will also define their own boundaries, likely aligning with those of LEPs. Doing so will facilitate decision making at the level of the local economy and give LEPs more teeth. 

However, there is still a long way to go before local government has more influence than central government over local projects.

• The allocation of the £1.7 billion in local transport funds will be decided by formula rather than competitive bidding, so projects which may have high impacts in an authority may not get funded if resources are distributed based on population or the area’s contribution to GVA, for example, rather than transport need or return on investment.
• Local government lacks the ability to raise new finance to fund infrastructure projects, keeping the real power (money) in the hands of central Government.
• The transition comes with many strings attached, including the need for strong governance and finance arrangements, accountability and value for money.

More local decision making and less red tape for local transport bodies is very good news. But, the degree of control Government maintains over projects that affect and drive local economic growth should not be lost in the equation. What is being presented now continues to be devolution-lite. 

 

Capital Accounts: How will local government fund infrastructure in an age of austerity?

Wednesday, we received news that UK GDP contracted by 0.7 percent. David Cameron has said that more needs to be done. I agree – and much of that should be done in cities to respond to the local economic conditions.  However, despite the rhetoric around the localism agenda, central government still retains its firm grip on the purse strings. Shrinking budgets and limited flexibility leave local authorities with much to do but few resources to do it.

The Centre for Cities’ latest report, Banking on Growth, highlights a key challenge to supporting growth: how will local government pay for capital projects that can unlock economic growth during this age of austerity and with limited financial powers.

Capital projects managed by councils include roads, schools, housing, and waste infrastructure—the very things that help our cities run effectively. About 80 percent of local government’s capital spending is in these areas, putting them in charge of investments that can support economic growth.

But, the spending cuts and recession have brought significant budget challenges to many councils across England. Councils’ revenues are declining year-on-year due to lower capital receipts and shrinking government funding, but capital spending cannot fall as quickly due to the long-term nature of capital finance commitments.

The gap between how much central government gives to local authorities for capital projects and how much authorities spend has more than doubled since 2006/07 from £4 billion to £9.3 billion. This makes paying off existing loans an increasing challenge for authorities before they even think about borrowing for new capital projects. 

New borrowing by local government has fallen since the recession. Public Works Loan Board advances dropped by more than half from 2007/08 to 2010/11. So, local authorities are having to be especially prudent given their lack of control over funding, and this will have an effect on their ability and appetite to invest in future projects that will create jobs and contribute to the economic recovery.

So what needs to change?  While there are limits to devolving funding in the short term, our work highlights two things that need to be done now:

• First, local government needs to continue to explore new funding and finance mechanisms that don’t require central government funding or underwriting of debt (e.g., bundling budgets within local government, pooling across authorities or bringing forward pension fund investment).
• Second, local and central governments must work together to find ways to fund local infrastructure projects while operating under deficit reduction targets.

Our work, as always, is ongoing.  Next we’ll be looking at the advantages, pitfalls and barriers to the range of financing mechanisms local government can use to support economic growth.