6 Funding and resources for the new
bodies
Financing the new bodies
112. Annual funding for RDAs and the projects financed
by RDAs was of the order of £1.1 billion[155]
after spending reductions by the previous Administration, down
from a peak of nearly £2 billion.[156]
The Local Growth White Paper confirmed that:
"Local enterprise partnerships will be expected
to fund their own day-to-day running costs and will also want
to consider how they can obtain the best value for public money
by leveraging in private sector investment. Local enterprise partnerships
and proposed partnerships may wish to submit bids to the Regional
Growth Fund, but will not receive preferential treatment against
bids from other private or public-private partnerships."[157]
The White Paper also announced that the Government
would launch a Local Government Resource Review in January 2011
(after a consultation period), focusing on the possibilities of:
- allowing local authorities
to retain locally raised business rates subject to local business
approval;
- rewarding authorities whose business rate yield
increase exceeds a certain threshold by allowing retention of
the increase for a certain period (the Business Increase Bonus);
- tax increment financing, whereby local government
is allowed to borrow elements of the capital required to fund
development against the future revenue streams anticipated to
arise from that development.[158]
113. These ideas, together with other related concepts
such as accelerated development zones,[159]
regional infrastructure funds,[160]
and local government bond issues[161]
were suggested by several of the organisations which submitted
evidence to our inquiry. They were examined at length and largely
endorsed in the 2008 joint report by Core Cities Group and PricewaterhouseCoopers
entitled Unlocking City Growth: Interim Findings on New Funding
Mechanisms,[162]
which suggested there was already a need to go beyond business
rate supplements[163]
and community infrastructure levies.[164]
114. In general, evidence submitted to us recognised
the need to develop innovative approaches to finance, although
Cambridgeshire Horizons, which has been involved in exploring
them, cautioned against regarding them as a panacea.[165]
The IoD was strongly opposed to broad relocalisation of business
rates,[166] albeit
not to the concept of allowing local authorities to retain some
increased revenues.[167]
The FSB opposed diverting business rates to LEPs.[168]
British Chambers of Commerce was open to the idea of some business
rate increases, provided there was business accountability and
representation.[169]
John Cridland of the CBI agreed, saying:
the long view of the business community was that
it would put its hands in its pocket if it was convinced of the
benefit to the particular community and the economy of that community.
In return, it expected to have a vote; it expected this to be
a real choice, not something that could be required of it.[170]
115. The White Paper stated that the Local Government
Resources Review would need to consider a number of issues in
relation to business rate retention, including:
- how to fund councils where
locally raised funding would be insufficient to meet budget requirements
and control council tax levels, as well as councils who do not
collect business rates, such as upper tier authorities;
- the position of councils whose business rate
yield would be significantly higher than their current spending;
and
- how to ensure that proposals retained a genuine
incentive effect and reward for promoting growth.[171]
It continued:
Consideration of these issues should take into
account the national picture, due to the significant variations
in need and current business rate yield, in different parts of
the country. We will however consider a range of options to balance
this. For example, until 1990, the Government operated a 'London
pool'. The pool enabled a re-distribution of business rates from
London Boroughs with higher yields to those with lower yields
and significant pressures.[172]
116. We welcome the Local Government Resources
Review and its recognition that alternative funding models based
on potentially greater contributions from business would require
support and endorsement from the local business community. However,
variations between local economies must be addressed when considering
such models. Given the importance to local authorities and LEPs
of developing new funding streams, there is a risk of a gap in
funding unless the Review is conducted expeditiously and subsequent
legislation introduced as soon as possible.
117. Certain organisations, among them EEF[173]
and the FSB[174] agreed
with the Minister that funding was not the be all and end all
of LEP success and that activities that did not require funding,
such as influencing local policy direction, would also be important.
The CBI told us:
I hope we won't slip back to the idea that for
LEPs to provide any useful function they must have money. There
will be occasions when LEPs will need money, in the way that Adam
has already described, but I think it is secondary to business
and local authorities working together to set a strategy. The
funding issues flow from that.[175]
118. British Chambers of Commerce was optimistic
that business would meet the challenge of committing time and
know-how to the new bodies, on the basis that business will be
helping itself.[176]
Enterprise M3 agreed,[177]
and both it and Gatwick Diamond[178]
took the view that LEPs could and should avoid large overheads.
Both spoke of restricting running costs to the order of the low
hundreds of thousands of pounds per year.
119. The Federation of Small Businesses emphasised
that if LEPs are to be independent creatures they should not be
overly dependent on local authority financing, which in any event
would obviously be under pressure over coming years.[179]
120. However, Cambridgeshire Horizons said:
if the LEPs are really to make a difference to
some of these quite tough, tricky issues that we've discussed,
including things like EU funding, […] you can't just do it
on a voluntary basis. You need some executive function in place
[…] This goes back to the fact that you either grant fund
it or, if you're not going to grant fund it, give it the means
to raise money itself, and if you don't do either of those things,
this won't work.[180]
Tom Riordan of Leeds City Council agreed:
if we want to go for second prize, we don't need
the resources; if we want to go for first prize and for the areas
of the country really to boost the tax revenue of the country,
we need a bit of priming money to be able to do that.[181]
121. Several of the key LEP roles envisaged by the
White Paper[182] will
require an element of funding. Oxfordshire County Council, speaking
of those RDA initiatives that have provided real benefit to business,
told us: "At the very least such initiatives should be funded
during a transitional phase while they work to develop other forms
of sustainable business model."[183]
122. LEPs will not necessarily require large budgets
to run their operations, but they will need a degree of independent
financing which will take time to develop on a sustainable basis.
Innovative funding methods such as tax increment financing will
need to be trialled before being applied generally, and in any
case will probably not be suitable for all local economies. Furthermore,
the private sector might not be willing to stump up cash until
LEPs have a track record of success, so there is a risk of a short-term
funding gap. We strongly recommend that, where there is a demonstrable
need, the Government consider setting aside funds to support those
LEP start-ups which lack the initial capacity to establish themselves.
RDA assets
123. The Government's proposed approach to dealing
with RDA assets and liabilities is set out in Chapter Two of the
Local Growth White Paper,[184]
which states that the primary considerations will be to dispose
of assets together with their associated liabilities, and to achieve
the best possible outcome for the region, consistent with achieving
value for the public purse. A number of subsidiary considerations
are then listed, including that a reasonable balance be reached
between national deficit reduction, national policy aims, and
local ambitions/opportunity.[185]
124. Given that there will be no independent funding
stream for LEPs, RDA assets are potentially of massive importance
to the success or failure of LEPs, particularly as they might
be the key to leveraging in private funding. Unsurprisingly, evidence
to the inquiry contained a variety of views on the appropriate
destination for RDA assets: for their transfer to LEPs,[186]
for transfer to a national body,[187]
for transfer to consortia of LEPs,[188]
for transfer to the relevant upper-tier authority,[189]
and for transfer to the Homes and Communities Agency.[190]
That said, there was a clear view that there should not be a fire
sale of assets.[191]
125. RDA assets are substantial; the value given
in the White Paper (but before taking into account associated
liabilities) being some £500m,[192]
and inevitably the process of dealing with them will be complex.
Although the extent of the liabilities is apparently still being
determined , we were encouraged by the Secretary of State's assurance
that the Regional Growth Fund would not be used to deal with them.
He said: "There is no question of, as I think you were implying,
dumping the legacy costs on the Regional Growth Fund. That is
certainly not the intention." [193]
126. We believe that the transfer of RDA assets
should be assessed on a case by case basis. Given their potential
importance to future development projects, transfer should be
expeditious but should avoid any risk of a "fire sale"
at a time when land prices remain depressed. The process of disposal
needs to be transparent and should be open to scrutiny. If disposal
is used to pay off part of the national debt, the Government should
favour bidders who can demonstrate that their proposed use of
the relevant asset will benefit the local economy. We further
recommend that the wind-down plans of the RDAs be made publicly
available.
The Regional Growth Fund
127. The 'Focused Investment' chapter of the Local
Growth White Paper explains the Government's objectives for the
Regional Growth Fund, including rebalancing the economy between
the public and private sectors, and addressing market failures
through investment in infrastructure, strategic intervention where
it can achieve economic transformation and private sector growth,
and support for areas facing long-term growth challenges. These
objectives are broadly in line with the views of those submitting
evidence to our inquiry on where the RGF should be targeted.[194]
128. Consultation on the Regional Growth Fund ran
from July to September 2010, and the White Paper has expanded
on the Government's thinking on the fund's operation, as well
as setting out various ways in which the Government has taken
consultation responses into account. Notable among the latter,
other than the fund increase from £1 billion to £1.4
billion, was the extension of the fund's period of operation from
two to three years, in response to comments, including from our
witnesses, that two years was too short a period to allow economic
development projects to reach anything like fruition.
129. The RGF's independent Advisory Panel will have
its work cut out in endeavouring to stretch RGF funds to meet
demand. Local Enterprise Growth Initiative funds have been withdrawn,
as has the Grant for Business Investment in all but exceptional,
large-scale cases,[195]
and the entire RGF funding pot over its three year period of operation
approximates to the funding for RDA activity for one year. The
Government has, however, announced an additional fund of £200
million by 2014-15 to support manufacturing and business development,
with the focus on supporting potential high-growth companies and
technology commercialisation.[196]
Also available is the Business Growth Fund of £1.5 billion
which will operate over several years.[197]
The RGF is intended to complement, without duplicating, other
rebalancing interventions, such as access to finance, banking
reform, the Work Programme, and the Green Investment Bank.[198]
130. The White Paper indicates that the £1 million
minimum for the Regional Growth Fund received mixed reviews and
the Government has committed to a review of that threshold after
the first bidding round is ended.[199]
We heard a similar set of mixed reviews, with concern in particular
that rural sector project bids and rural sector SMEs, as well
as SMEs in general, could be left out in the cold as a result
of the relatively high RGF threshold.[200]
We note also that support for agriculture seemed to be something
of an afterthought in certain LEP bids.
131. With business support funds necessarily constrained,
the Government must ensure proportionate support for all sectors
of the economy, consistent with its overall objectives. Where
the criteria for certain funding mechanisms, such as the £1
million threshold for the RGF, might effectively exclude certain
sectors, it has to ensure that other funding routes are clearly
identified. Furthermore, the RGF must be clearly demarcated from
major national infrastructure investments.
132. Although the Department has clearly attempted
to make the guidance accompanying the RGF as accessible as possible,
the process for applying to receive RGF funding will still be
time-consuming and may often require professional advice.[201]
We are concerned that the very areas that most need to receive
RGF funds will be among those with the least resource to pursue
a successful application. When we put this to the Minister, he
did not consider this to be a significant obstacle:
"I do not think it necessarily means that some
areas will be unable to operate these LEPs without a pot of administrative
funding from central Government."[202]
133. If that means that the Government will be supporting
less prosperous areas in getting their RGF bids off the ground,
we welcome the assurance. If it does not, the Government should
think about this as a matter of urgency.
134. The bidding process for the Regional Growth
Fund will need to be kept as simple as possible to allow less
prosperous areas and less well resourced projects to compete fairly.
The Independent Advisory Panel deciding on bids has to be alive
to this, and should take this into account. Looking behind the
surface to the potential of less well presented or even less well
thought out applications should be part of the Panel's role.
155 Excluding London. Back
156
Source: RDA annual reports Back
157
Paragraph 2.14. Back
158
Local Growth White Paper, paragraphs 3.30ff Back
159
Defined localities within which business rate retention is permitted.
The Leeds City Region bid makes reference to a proposed ADZ for
the Aire Valley with possible initial funding from the Regional
Growth Fund. Back
160
Suggested by SEEDA, which has experimented with the concept already,
as explained at Ev 157, paragraph 21. Back
161
Suggested by Network Rail, LEP45 and the Regional Studies Association,
LEP86. Back
162
www.regenmomentum.co.uk/pdfs/Unlocking_City_Growth.pdf Back
163
As provided for in the Business Rate Supplements Act 2009. Back
164
As provided for in the Planning Act 2008. Back
165
Q 146 [Plant] Back
166
Q 78 [Ehmann] Back
167
Ev 139, paragraph 1.8 Back
168
Q 104 [Cherry] Back
169
Q 104 [Marshall] Back
170
Q 104 Back
171
Local Growth White Paper, paragraph 3.36. Back
172
Paragraph 3.37 Back
173
Ev 125, paragraph 25 Back
174
Q 104 Back
175
Q 104 [Cridland] Back
176
Q 111 [Marshall] Back
177
Q 146 [French] Back
178
Q 121 [Gresham] Back
179
Ev 128, paragraph 19 Back
180
Q 146 [Plant] Back
181
Q 146 Back
182
See paragraph 2.7. Back
183
Ev w168, paragraph 4 Back
184
Paragraphs 2.43 to 2.47 Back
185
Paragraph 2.46, bullet point 4 Back
186
For example, Centre for Cities (Ev w36). Back
187
For instance, South East Economic Partnerships (Ev w224). Back
188
For example, Pennine Lancashire Chief Executives (Ev w175). Back
189
Such as CEDOS/ADEPT (Ev w27). Back
190
For example, the National Housing Federation (Ev w143). Back
191
See, for example, Devon and Cornwall Business Council (Ev w71). Back
192
Paragraph 2.28 Back
193
Evidence session on Comprehensive Spending Review, 26 October,
Q 81. Back
194
For instance, IoD (Ev 139 and Q 105); Centre for Cities, Ev w36;
Cambridgeshire Horizons (Q 151). Back
195
Local Growth White Paper, paragraph B.34. Back
196
Ibid., paragraph 4.33 Back
197
Ibid., paragraph 4.11 Back
198
Ibid., paragraph 4.3 Back
199
Ibid., paragraph 4.17 Back
200
See, for example, National Farmers Union (Ev w135), Commission
for Rural Communities (Ev w54, paragraph 2.4, University of Lincoln
(LEP 58), Regional Studies Association (LEP86, paragraph 7)). Back
201
Annex B to the Information for Applicants, containing extracts
of EU state aid rules, alone runs to 20 pages. Back
202
Q 260 Back
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