City Dealings

1 May 2012 The government’s new take on localism offers plenty of opportunities, but also some unanswered questions, reports John Mills
As winter turned to spring, the Department of Communities and Local Government’s City Deals programme rose to the fore: pushing its head above the soil with announcements from Manchester and Liverpool. These ‘core cities’ have negotiated with government on how each will realise a central government priority: growth.

The deals offer major opportunities for the partnerships industry. Their remit spans school building plans, the creation of new enterprise zones, improving transport infrastructure, fostering a more productive working relationship between local enterprise partnerships and local governance, encouraging innovation and looking to create an effective leadership model.

For some of the eight core cities (Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield), it’s hoped that elected mayors, along with supporting legislation, will be a pivotal agent in driving local growth. And some, such as Manchester, may also generate innovative governance models to help deliver the deal.

Announcing Liverpool’s agreement in February, Deputy Prime Minster Nick Clegg said: “I firmly believe one size doesn’t fit all – whether it’s a mayor or… council leader, what cities have to show in return for a City Deal…is strong clear leadership.”

But questions remain over details, specifically how infrastructure-enabling finance structures will operate and what progress will be made in the short and medium term. A radical part of these plans is the potential for tax increment finance (TIF) to fund infrastructure and drive growth within a defined area. Already used across the US and Scotland, legislation to enable TIFs features in the Local Government Finance Bill, which is expected to pass into law in April 2013.

“TIF is all about [central government allowing] local government to harness incremental growth in local [business] tax as a consequence of development having been stimulated,” explains Alan Aisbett, of lawyers Pinsent Masons. “It allows the use of those additional revenues to forward fund capital expenditure.”

There are currently two TIF variants: Option One uses additional short-term levies and tariffs to ensure revenue equality between local authorities, while Option Two features a 10-year ‘reset’ function that recalculates business rate inflation to enable government to assess incremental growth accurately and apply levies and tariffs accordingly. It’s thought Option 2 will allow councils to more easily embark on infrastructure projects due to the 10-year timescale, but may not enable larger 25 or 30-year projects.

However, there could be risks attached to TIF. Stephen Carrick, director at Dickinson Dees, raises the issue of displacement. “One of the problems with a TIF scheme
– and enterprise zones sometimes have the same accusation – is that investment goes from one side of the town to the other side of the town where the TIF scheme is going on.”

Both Aisbett and Carrick highlight a further issue. “[What] happens if this growth doesn’t come about?” Carrick asks. “You’ll have councils borrowing quite a sizeable amount of money on future growth that never came.”

One way to alleviate the risks, he suggests, is to have a development partner involved to share some of the burden and generate a solid business plan.

Beyond TIF
Manchester’s deal is particularly innovative due to its ‘earn back’ scheme, which takes TIF beyond a specific enterprise area and expands the whole concept.

Jessica Bowles, head of city policy at Manchester City Council, describes it as “radical”, adding it is the centrepiece of the deal. “Essentially what earn back does is say that we will invest in capital infrastructure with a local fund, and we’re doing that to the tune of £1.2bn. We’re targeting that investment on those projects that will best target the economy and result in economic growth; taking a really hard approach to prioritising them.

“We will create a formula that allows Manchester to earn back the investment we’ve put in over a [30-year] timescale. We will reinvest those revenues back in further infrastructure investment that will continue to drive economic growth.”

Lord Peter Smith, chair of the Greater Manchester Combined Authority, adds sustainability is the ultimate goal. Bowles highlights the ambition behind the financing mechanism, but Manchester’s whole programme is significant. In addition to the £1.2bn investment fund, the deal includes a three-year transitional funding plan to expand the growth hub, new training incentives for business and the creation of 6,000 more apprenticeships.

There are also plans for a joint venture with UK Green Investments to develop a low carbon hub, and to position Manchester as a “beacon for high value inward investment from China and India”.

Further project details will emerge over time, but Lord Smith outlines transport as a significant area. One example is connecting Rochdale, north of the city, with growth areas around the airport in the south, via the Metro system.

On a wider level, he adds that Manchester has already shown a strong track record of working with the private sector and the city’s university.

“Where these opportunities present themselves we can take full advantage and make sure these benefits are spread right through the communities.”

Meanwhile, Liverpool goes to the polls in May to elect a mayor, and its City Deal will create a Mayoral Investment Board to oversee economic and housing strategy, create a new enterprise zone, build 12 new schools and improve skills provision.

Liverpool City Council does suggest, however, that the finer points of the mechanisms are still being discussed.

Sketchy details
Although the main parameters of the deal have been marked out, details are somewhat sketchy on how these cities will implement the Cities Deal scheme and particularly how the infrastructure developments will mesh under the programme’s banner. For example, there is uncertainty around the £150m that was made available in the Budget for so-called TIF 2 schemes.

“If you’ve got £150m for eight cities you have to use it quite sparingly and make sure that you focus on particular schemes,” Carrick suggests. “It’s a bit disappointing in that sense. There’s not the certainty that people would need to start the schemes up.”

Aisbett agrees that the £150m is “quite small beer”, adding that the amount may go “into development resources in order to bring these things forward. Although we’ll have to wait to see.”

There is, however, some market interest in the measures on housing and using a TIF or other investment model to stimulate growth. At the moment, though, the private sector is keeping a safe distance until a clearer picture of the opportunities emerges.

Although Manchester and Liverpool have released concrete details, other core cities are at various stages of negotiations. Leeds is expected to reveal details after its local elections on May 3rd, while Newcastle City Council is “optimistic” that a deal will come a few weeks after its mayoral referendum on the same date.

Less certainty emanates from other cities, though. Nottingham City Council, for one, is unwilling or unable to pass on any information on its progress.

Nevertheless, James Durie, a director at the Business West network, speaks of the eagerness and anticipation for the City Deals programme in Bristol.

While highlighting the fact that Bristol has the strongest per capita economy outside London, Durie details an extensive portfolio of projects and strategic aims that the City Deals could facilitate or contribute to. These include growth in an enterprise zone, transport improvements via the Greater Bristol Metro and nurturing the digital sector.

He also suggests 4,000 jobs could be created in the next four years. “Business West would encourage anything that better enables Bristol council to do what business feels important and anything that moves to deliver finance at a local level is good,” says Durie.

However, Carrick identifies a key frustration around the City Deals programme: what about the regions that aren’t ‘core’ areas? “They’re going to be looking at the situation and asking if they are going to get any additional powers,” he states.

Tom Bolton, senior analyst at the Centre for Cities research and policy institute, says that although it made sense for government to start with core cities, “[City] Deals need to go beyond the core cities as soon as possible and government has to engage with all the other cities in the UK.”

He highlights places like Preston, York, Milton Keynes, Cambridge and Reading, describing them as “the star performers when it comes to growth”. The Local Government Finance Bill does contain the opportunity for all business rate-collecting councils to enter into TIFs, enabling them to nurture growth on a more limited scale.

There are also questions around the remit of the mayor. For places such as Bristol, Newcastle and Liverpool, who are going to the polls shortly, will the mayor have a geographically-sufficient brief to encourage and coordinate growth?

As Manchester’s Lord Smith suggests, “We talk about an effective city economy that’s spread across all ten of the city’s districts.”

“Our research shows that metro mayors [rather than local authority mayors] could be an effective model of leadership,” adds Bolton, “with advantages of speeding up decision-making, working together and being better at working at economic area level.”

There’s genuine excitement in the cities that have announced deals, as well as from those who are suggesting that details will emerge soon. And things could be set to move quickly: Bowles suggests Manchester may start project work within weeks.

Nevertheless, questions still remain. Some in the partnerships arena feel it is too early to assess the potential of City Deals. “It’s all interesting stuff but there needs to be more certainty and detail,” says Carrick.

Politically, devolution is central. “Economic growth is what this country needs and certainly what Greater Manchester needs, and we’re not going to get it by civil servants hanging on to powers they’ve always thought they could use and exercise,” says Lord Smith. “They want to let go, give [power] back and make localism a reality.”

This page was last updated on:
13 July 2012.

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