Delivering local economic development in an era of budget scarcity

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The UK’s Chancellor of the Exchequer (Secretary to the Treasury), George Osborne, yesterday released his Autumn pre-budget statement – setting out his intentions when he sets the UK government’s programme for tax and spend from April 2016. Of course, there were budget reductions, particularly for central government business programmes and local government (whom will be expected to generate their revenues from local taxes and asset sales by 2020). Two weeks ago, I presented at the UK’s Institute for Economic Development Annual Conference on how local economic development can be delivered in an era of scarce public resources. This article summarises the main arguments that I deployed last week.

Budgetary pressures vs. the opportunity of localism

Of course the public expenditure cuts have been significant and will continue to be. Local government and local organisations will be under severe budgetary pressure. Despite this the economic challenges and opportunities facing our cities and regions remain. Whilst there is no question that public services are severely pressurised by past and planned budget cuts, the new powers of localism and local power in the UK represent an opportunity. For me, there are four serious issues:

  1. You can’t afford not to take local economic development seriously as local services will be increasingly dependent on local business tax revenues, with local government authorities being able to retain all of the local business taxes
  2. Can’t assume the local tax base will rise smoothly: As Annette Hastings from the University of Glasgow said in the presentation previous to mine – only a small proportion of local authorities had experienced an increase in business rates revenues since 2010.
  3. The need for deal makers, and an entrepreneurial approach: we will need to change the modus operandi of local economic development to one where, as well as the social and economic benefits, their are solid financial benefits to the local community and local services
  4. Are current local economic development approaches, arrangements and services fit for purpose? There is a new paradigm for all localities now – the need for very effective leadership to carry communities and businesses along a vision and strategy; and the need to delivery hard results fast – securing jobs, business investment, and local tax income

Local economic development isn’t always dependent on cash handouts from government

There are a number of sources of resources and investment – that have been tried and tested in the UK and elsewhere:

  • Pro bono: business support, mentoring, advice – we’re probably all familiar with business mentoring and coaching now. We can probably extend pro-bono provision to specialised business services and technical advice. Many market providers engage in free consultation sessions with new clients anyway
  • Revenue streams: user charging, congestion charges. Its normal for a business to pay an ‘arrangement fee’ for a bank loan – should it be any different for the public sector? many years ago, growth businesses paid £1000 to join a growth business programme (the West Midlands Mustard Programme), and this also helped to filter out the businesses that weren’t serious about growth. We’re used to this through things like bridge tolls, but could we extend this principle to other services?
  • Borrowing/loan vehicles: public works loan board (UK) finance, Bond issues. The rates are so low on PWLB finance. Cambridgeshire County Council recently combined PWLB finance for a new railway station at Cambridge Science Park, with user charging receipts (train tickets and parking fees) to produce a viable development vehicle
  • Creditor/loan issuance: business/property loan funds (issue is access rather than cost so charge commercial rates). For example, many property developers had trouble raising all the finance for their projects during the recovery phase after recession. The issue was not the cost of finance, but the availability of it. Still, many organisations lent at very low rates for commercial projects – why?
  • Reduce traditional grants: Forgivable loans / repayable grants. Should a business in this day and age, that has any chance of success, be paid grants? Why should the public sector pay grants to firms that pay dividends or returns to other investors? We’re probably entering an era where it is becoming less acceptable to disburse grant aid. We need alternatives
  • Capturing value uplifts: TIFs, planning levies, property valuation tax, local development levies. We are more and more familiar with these in the UK, but are only beginning to implement them.
  • Risk-sharing: PFIs, BIDs. There’s mixed experience of private finance initiatives, especially with regard to the balance of public:private risks and the total costs of services/infrastructure. Nonetheless, in the UK with a government that refuses to borrow more – we will need alternative investment sources for large economic development projects.
  • Incentives: tax relief, interest rate relief (e.g. EZs). Ok I’m not such a fan of reliefs, partly because they are now so small in the UK as to be very limited in their ability to influence a location decision – there must be a lot of deadweight spend now.

I’ve read a lot recently about how local authorities will be able to use control over local business taxes to reduce these taxes as incentives for inward investment. I think this needs careful consideration. Firstly, not many major investors will be attracted by the maximum £275,000 rates relief allowed under State Aid Rules – this is not a deal breaker for them. Secondly, its probably better to use these new revenue streams to back financial vehicles for investment in infrastructure, the local business environment, and skills – the top location factors for many new business investors.

Could local actors better use their existing assets?

Of course I agree that making the most of public assets is about more than just selling them off  and that he smart move is to use these assets to generate net revenue streams. Public assets extend beyond hard assets such as buildings and land to soft assets such as public organisations’ roles as major employers, their roles as one of the principle engagement points with communities (be they businesses or residents), or their human capital.
I’ve seen some regular and novel uses of public assets in a variety of ways, for example:

  • Improving the revenue generating capacity of publicly owned land – e.g. ground municipal car parks – constructing multistories with retail and commercial space wrapped around them
  • the use of redundant public buildings or public or private office/industrial land and space for incubators and workspace. Examples include ideaspace in Cambridge and the types of development that Allia have been involved in
  • Role as major employer – e.g. NHS skills escalator type approaches
  • Role as principle engagement point with local residents and businesses – e.g. collection of local business rates/ engagement with households using public housing or claiming housing benefits
  • Business leaders – use as lobbyists for infrastructural investment; use as champions for focused initiatives
  • Business assets – in places like Lincolnshire, private businesses have offered accommodation and reception facilities to host 3D printing suites. Businesses in Cambridgeshire have offered their estates to develop local skills centres for their own apprentices, and other apprentices.
  • Soft assets – Globalscot levers the global Scottish business diaspora to act as advisors and informal ambassadors for Scottish businesses. There have been some effective transport investment campaigns that have used the business voice for lobbying (A47 Alliance, Norwich in 90).

There are other ways to raise revenue, or reduce your exposure to future costs too

In Cambridgeshire, a Public Works Loan is part financing a new railway station at Cambridge Science Park, which is financed by revenues from additional ticket sales and car parking charges. Many specialist Non-profit organisations are running business incubators and workspaces on a sustainable basis (which can be revenue neutral for property owners or local authority). 20 years ago, high growth business support programmes charged a joining fee (the West Midlands Mustard Programme). In Cambridge, the inward investment service has been almost privatised – and is now part of The Cambridge Network.

Lessons going forward

There a number of lessons from this brief discussion of local economic development in an era of budget scarcity:

  • Development organisations with good commercial sense: In order to create and enhance better and more attractive business locations (thus increasing the likelihood of enhanced business rates income) – public organisations need to become or create ‘development organisations’ with good commercial sense. I’ve seen this happen in places like Cheltenham for retail and town centre commercial redevelopments (e.g. Cheltenham Development Task Force)
  • Hypothecate: Want to increase business rates/local taxes or charges? Hypothecation of additional business charges/taxes will make this easier – i.e. you have explicitly identified an item of expenditure that the new income will support that speaks to business priorities
  • Business will pay: if it makes good commercial sense – in the short or long term.
  • Find the best delivery agents: The not-for-profit sector can be really good at this, particularly if the requirements or functions are focused or specialised
  • The economic development professionals’ skillset is even more essential: the combination of economic knowledge, entrepreneurial drive, business experience, public policy, relationship management, project development, communications and PR – are all needed to try and lever in resources and assets from external sources, and to develop and implement propositions which can enhance the local business tax base

The entrepreneurial local economic developer: back to some fundamentals

This is intended to be a bit of a wake-up call. Successful local economic development is not an administrative task. It is entrepreneurial, whilst combining knowledge and influence in both public and private sectors. It is about driving through established processes with a determination to deliver the best outcomes and results. It is not about inflexible delivering pledges to local communities and businesses – it is about working out the best way to deliver results, listening to the businesses and communities who know a thing or two about how best to do this.
To be successful at local economic development whilst also creating a more attractive and growing local business (and hence tax) base, you need to recognise that:

RECOGNIZE THAT ‘HOUSEKEEPING’ IS NOT ENOUGH…

  • Strategies – programmes – project development – initiatives – grants – EU funding: this is the housekeeping stuff everyone should be able to do already

BUINESSES FOLLOW CONFIDENCE….

  • Confident, well thought out and effective actions demonstrate capability for further growth and development

SHOW SERIOUS CONSIDERATION FOR YOUR AREA AS A BUSINESS LOCATION

  • If you take your local economy seriously – businesses, talent and investors will take it seriously

ALL THIS REQUIRES SIGNIFICANT LEADERSHIP FOR YOUR LOCAL ECONOMY

  • You will need some serious leadership qualities and efforts to increase confidence in your area as a business location and perhaps persuade your business base to pay higher business rates/taxes for better infrastructure.

Local economic development is a lot more than an administrative function, right?

Many localities get this, and have been doing this for years, or are embarking at more serious and considered approaches.
It may be the case that any new revenues will be used to shore up decreases in funding for essential public services. Even if this happens, it is vital to succeed at local economic development and to improve the prospects of business rates revenues and revenues relating to property developments and uplifts.

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