Letting go of the reins

1 September 2012 Eight core cities have unveiled their new City Deal agreements with Whitehall. Now central government must loosen the purse strings, reports Aaron Weinman
July’s announcement of eight City Deals between central and local government has sent a clear message to local authorities: deliver effective and accountable government, and Westminster will transfer powers – and cash – giving real influence and decision-making powers to local communities.

These Wave 1 deals will give new powers and responsibilities to Greater Birmingham and Solihull, Bristol and the West of England, Leeds City Region, Liverpool City Region, Nottingham, Newcastle and Sheffield City Region – as well as Greater Manchester, whose plans were originally unveiled in March’s Budget.

Under the deals, the cities will be given much greater control over a range of local services (such as transport) and provided with the money to go with them, in return for making significant improvements to those services and unblocking barriers to growth.

Unsurprisingly, each deal will reflect the local requirements and biggest issues facing the specific authorities, as different regions come up with tailor-made solutions to their particular obstacles to growth. Nottingham is focusing attention on its creative quarter, for example, while Leeds is trying to heighten its workforce skills.

Meanwhile, Birmingham and Solihull’s local enterprise partnership (LEP) is planning to launch a single investment fund to finance new projects and programmes, and the low carbon agenda is a top priority for Liverpool. As a result, the pace of change will vary from deal to deal. “Regional integration is a dominant theme, but at different speeds,” says Philip Woolley, partner at consultancy Grant Thornton.

Nonetheless, there are some key themes common to all the deals – and much of it is based around pump-priming development and kickstarting infrastructure programmes.

This focus on infrastructure creates a significant need for private sector investment. Leeds is planning a local asset-backed vehicle, while Manchester’s transport proposals provide ample opportunities for private investors to contribute. Andy Brown, analyst at Panmure Gordon, says central government’s decision to devolve powers to these cities should motivate the private sector to invest. “Like any contract they’d get themselves into, investors realise if the authorities can trust these cities to get things done, it implicitly suggests they [the cities] would be better quality clients, despite the high risks associated with infrastructure projects.”

Private contractors will look to areas of growth when assessing investment opportunities, says Brown. And the City Deals are clearly designed to promote the necessary confidence and potential for growth that investors will find attractive.

In the short-term, however, plenty of obstacles remain which need to be negotiated to get projects up and running. Indeed, Gillian Thomas, partner at lawyers Hogan Lovells, says the opportunities for the construction sector are questionable in the short-term.

“It’s early days, but it’s hard to imagine construction projects being directly funded under the City Deals initiative,” she says. “It’s still difficult to identify just how involved the construction industry will be and whether the money attained will be used on projects which don’t have construction.”

Thomas says there is potential for dealflow as new businesses come to the area, leading to construction contracts, but this “remains quite remote from the idea and premise behind City Deals”.

“Any uncertain construction projects are high risk investment,” warns Brown. “There are plenty of initiatives out there, but large contracts are complicated, they take longer to be awarded. As history tells us, the construction sector has had things promised which have failed to materialise, so until something tangible in terms of a project is in sight, investment may be hard to accrue.”

Pinsent Masons partner Alan Aisbett stresses the need for patience. He says the potential for return is high but investors need to consider the longevity of projects and assess rates of return based on a positive future outlook.

“What investors need to realise is they’re investing in the development of some of the country’s most developed and economically viable cities,” Aisbett says. “Private investors’ monies will be vested all the way down the line to the ground level, so by thinking long-term, investors can see these potential assets as something worth selling later on.”

Opportunity knocks
So what are the opportunities out there for the construction sector?

Paul Woods, Newcastle City Council’s director of finance and resources, says its deal features an Accelerated Development Zone supported by a large tax increment finance scheme, with investment in infrastructure, low carbon energy, high-tech advances and environmentally friendly schemes.

“In our proposal we hope to utilise a 1.8km-deep geothermal borehole as part of a network of heat and energy centres to provide energy and coolant,” says Woods. “We’re excavating coal at one of our sites, digging foundations for future development.”

Meanwhile, Manchester’s proposal features a £1.2bn investment in growth maximising projects. Essentially, Manchester will be able to ‘earn back’ a share of tax take from the envisaged growth and invest it into further infrastructure projects.

Kru Desai, head of local government at consultancy KPMG, advised on Manchester’s deal. “Not only are local funds being established, but public sector finance is being leveraged to enable the area to tap into private funds,” she says. “On this note, the role for LEPs is potentially critical, at least as the forum through which private sector dialogue can be marshalled and integrated into wider discussion.”

LEPs assist several aspects of the cities’ proposals. For example, in addition to investing in improving the skills of the local workforce, Leeds will inject £200m of local resources into its transport sector.

Follow the leader
Another innovative dynamic is Greater Birmingham and Solihull’s LEP, which has prepared a proposal combining the support of nine local authorities, in a bid to promote private sector leadership. Birmingham and Solihull’s deal includes the creation of an investment fund which will manage, recycle and leverage public and private sector streams to help deliver its infrastructure goals. If executed as proposed, the fund could leverage over £15bn from the private sector, securing infrastructure projects over the next 25 years.

Taking in more than just England’s second city, the LEP has the potential to deliver benefits to a large area, provided its resources aren’t hoovered up by focusing on Birmingham’s inner city needs.

“LEPs create the potential to pull two incomes down one stream, particularly when you have scenarios like Birmingham and Solihull feeding off each other,” Aisbett says. “Such an initiative pulls places alongside each other.”

While it can be a good thing, it also threatens to leave some parts of the UK behind, as those with City Deals flourish, and those without struggle to attract investment.

Central government is planning to launch a second round of City Deals, which would in part tackle concerns around twin development tracks – one for the favoured ‘core cities’ and another for the ‘poorer relations’. But will it be too late? There is a danger that the original eight cities may form ring-fences around their regions, leaving the second tier with little opportunity to entice investment, and consequently hinder growth.

Newcastle’s LEP with Gateshead, for example, seeks commitment from central government to ring-fence the extra business rate income on four defined growth sites for 25 years. The danger here is that it could entice investment from neighbouring
conurbations, like Sunderland. In Newcastle, Woods insists this is not the case. “The level of displacement was considered to be relatively low,” he says.

“We’ve listened to what people have said and what we’ve proposed isn’t an enterprise zone with discounted business rates or capital allowances, which could have enticed businesses to relocate.”

Rather, he argues Newcastle’s deal should benefit the surrounding area. “The growth in Newcastle and Gateshead from businesses attracted to the region would bring benefits of employment opportunities for the region and create spin-off benefits in neighbouring towns and cities,” he explains.

Coventry is one city currently facing up to the danger of being left behind by the fact neighbouring Birmingham has a City Deal. The council is among those cities hoping to be in the second wave of City Deals, most likely through the Coventry and Warwickshire LEP. But chief executive Martin Reeves is relaxed about the threat posed by larger cities getting their deals in place first. Like Woods, he emphasises the importance of working collaboratively with Wave 1 authorities.

“We’re also thinking about Birmingham – what we do is mutually beneficial to both of us and it’s in our best interests to think wider than just the LEP areas,” he explains. “There is only a threat of ring-fencing if Coventry and Warwickshire deny the obvious,” Reeves says. “If we deny the importance of how we can work with Birmingham, then it becomes a potential issue that could see us left behind.”

According to Aisbett, the potential to distinguish one city from another is something each place will relish. He says City Deals give the cities opportunities to be leaders both in the country, and within a certain niche.

“Private investors have a chance to invest in development and focus the cities’ minds on achieving individual growth,” Aisbett says. “Cities should have their own economic focus and remain realistic, as there is no point competing with the others. Rather they should worry about forming their own identity, separating themselves from the rest.” Such collaboration could even see projects started under the City Deals programme being spun out into mutual organisations – another of the government’s pet initiatives. Centres of expertise built up around, say, transport services could be spun out to provide consultancy and advice services to other authorities.

But while such concepts may be a long way down the line, the potential success of each and every City Deal will come down to one question: is central government yet ready and willing to let go and allow the wholesale devolution that the concept implies?

Coventry’s Reeves believes the scale and ambition in each proposal will determine whether the government is convinced to take the leap.

“The question is, do the politicians believe the prize they are getting by letting go is big enough?” he says. The answer to that will in turn be down to the ambition of local authorities. “With the economic situation and the big challenges facing us, we must think creatively about the relationship between central and local,” Reeves continues. “We need to grab it and embrace it.”

This page was last updated on:
7 November 2012.

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