Moving My Blog

All
We have decided to set up a group blog at Regeneris so others can contribute as authors. I will be putting future posts here  Id really appreciate your continued interest in our thoughts and ideas and hope you will subscribe to the new Regeneris Blog.
Thanks

Simon

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Getting Regional Growth Fund Bids Together

The bidding guidance for the Regional Growth Fund was launched in late October 2010. Colleagues in Regeneris are already supporting several applications using our extensive Treasury Green Book appraisal experience. The Round 1 process will, as we understand it, commit some £250million out of the £1.4 billion pot. The process will be highly competitive with RGF being held out as a potential source of funding for a wide variety of projects including infrastructure, direct support to business and property related interventions. My colleagues have drawn out the follwing observations from the guidance and forms so far:

  • First, robust Green Book value for money assessments will be key. The final assessment process, to which all Round 1 bids will be fast-tracked, will be based around a quantification of net direct private sector job creation, after allowing for the effects of displacement, leakage and wider employment multipliers. It is not yet clear whether applicants can put forward their own suggested metrics for gauging net impacts, or whether the appraisal process will impose standard ready-reckoners. Past experience shows that schemes will need to deliver at or below £40,000 public sector cost per net additional job.
  • Second, demonstrating an area’s need for RGF will also be vital. Whilst the guidance points to the use of DWP Labour Group analysis of reliance on public sector employment/claimant count data, there is much local areas can and should do to spell out the structural challenges their economies are facing and the need for help in supporting a transition process.
  • Third, making the case for infrastructure & property will be difficult, but not impossible. The bidding guidance explicitly states “projects that involve intermediate investments with no guarantee of sustainable private sector investment are not considered a priority”. Property interventions, transport schemes and wider place making initiatives will need to use robust methods of identifying, with some degree of certainty, the future private sector direct employment that will be created. The application forms are not particularly oriented towards intermediate investments.
  • Fourth, quantifying indirect and catalytic employment impacts could strengthen the case. Whilst the objectives of RGF are rooted in the direct provision of new jobs, schemes which also indirectly create job opportunities will be viewed favourably. Standard multiplier tools will help in quantifying these effects, but describing wider catalytic impacts is more difficult and rests on arguments about what shapes investment behaviours in locations. Describing the distributional impacts of employment created/safeguarded will also be important in offering reassurance that the new jobs provided can be readily accessed by those adversely affected by public sector job losses or already unemployed.
  • Fifth, what constitutes sustainable private sector employment will clearly differ across locations. Don’t be afraid to put forward schemes that either create or safeguard what may be considered lower value private sector jobs. In locations where public sector employment losses will be both severe and rapid what is required are interventions that can help generate a realistic stock of replacement private sector jobs. For many areas this will necessarily be based around back-office functions, leisure, retail and lower value manufacturing occupations.

We are looking forward to the Regional Growth Fund guidance roadshows which will, we hope, provide greater clarity on how Round 1 bids will be appraised. Should you require any support or advice on your Round 1 RGF bid, or a discussion about how best to gear up for later bidding rounds then please contact my colleagues Darren Wisher or Stephen Nicol in Manchester (0161 9269214) or Chris Paddock in our London office (0207 6087206).
The Regional Growth Fund Bidding Guidance and Application Forms can be found here.

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Sub-National Growth White Paper

Regeneris Consulting has published a briefing on last week’s White Paper which you can find here.  Below are some quick highlights:

LEPs

  • Anyone involved in LEP bids might now be wondering what all the fuss was about: we have a bit more clarity on what they are not going to be and the funding they won’t have access to.
  • Some LEPs may end up delivering services on behalf of central government, but will need to compete for the privilege – competition is likely to be stiff as well.
  • BIS has always been sceptical of the competition/duplication between RDAs on inward investment, trade support, sector support and innovation and is taking a firm grip of policy and resources – it will lead and won’t be passing its funding down to the local level, but is happy to listen to good ideas and inputs from LEPs.
  • We expect all areas will get a LEP, but wonder whether it really matters if somewhere remains LEPless.

New Sources of Local Finance

  • Although the Government won’t give authorities money to fund economic development and regeneration, they might let you keep more of your own local taxation.
  • Together the New Homes Bonus, Tax Increment Financing and the Business Increase Bonus could be a radical departure but are not without their risks.

Regional Growth Fund

  • Its small, but a bit bigger than expected, although likely to be stretched over a wider set of policy areas as a consequence.
  • The £1m minimum is quite low and with no initial sifting stage, government is likely to struggle to cope with the level of interest.
  • A premium will be placed on projects that directly lead to job creation by the private sector – the key value for money metric will be public sector cost per net additional private sector sustainable job. Boosting productivity and competitiveness or targeting higher value jobs are secondary.
  • Final decisions will be overtly political and taken by senior Coalition Government ministers – despite the concerns I raised in my previous blog, RGF allocations risk being spread across regions and projects that provide good news rather than being concentrated in real areas of need and opportunity.
  • The detailed guidance reads like an extended version of the old Regional Selective Assistance that helped existing companies invest in the assisted areas of England.

European Funding

  • Err, come back in 6 months time because we haven’t quite made our mind up yet.
  • But, the betting money is on existing RDA ERDF teams being largely transferred across to CLG in March/April 2011, but with LEPs playing a larger role in formal governance structures in each region.

And, that’s just about it. The rest is over to you.

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Allocating Regional Growth Fund

Regeneris Consulting welcomes the Regional Growth Fund announcement in the Comprehensive Spending Review but cautions it should be allocated in a targeted manner. Regeneris has done a quick assessment of where needs and opportunities are greatest to see which locations are best placed to take advantage of RGF. Using our simple assessment framework, Liverpool, Sheffield, Blackburn and Darlington are in the first ranking tier. They each rely heavily on public sector employment and have a clear economic gap with the rest of the country, but they all have a reasonably strong base of private sector employment in nationally important sectors on which to build. Other areas are close behind and should be supported, but there is a risk of RGF making little real difference to conditions on the ground if it is spread too thinly.

The Government has committed itself to £1.4bn of Regional Growth Fund investment over the next three years. We can now start to look at which places might be best placed to take advantage. Regeneris Consulting has undertaken a quick ranking of locations across England to identify where the money might end up.

Exact details on the eligibility and assessment criteria are still thin on the ground and should become clearer once the Local Economic Growth White Paper is published in a few weeks time. The Comprehensive Spending Review announcement has confirmed early indications that the Fund will be used to “support projects with significant potential for private sector economic growth and employment, supporting in particular those areas and communities that are currently too dependent on the public sector”. Lord Heseltine’s panel will have the final say in who gets what. Clearly resources should go to areas which come forward with convincing investment propositions that command support locally, lever in additional resources and set out a compelling path towards economic growth.

After CSR, there will be a lot of interest in, and intense competition for, Regional Growth Fund. Given RGF’s lofty goals and the long standing economic challenges candidate areas face, Regeneris Consulting would urge government to ensure that resources are allocated in a reasonably concentrated fashion. Only through focussed and sustained attention will the challenges facing these areas begin to be tackled. Change is more likely to occur where there is a base of growth-oriented private sector businesses on which to build.

Regeneris Consulting has done some quick analysis of local areas to see which places might be best-placed to secure Regional Growth Fund based on:

  • Need: reflecting the scale of the output gap[1] and the degree of dependency upon the public sector employment[2]
  • Opportunity: reflecting the extent to which employment is concentrated in those parts of the private sector where BIS has traditionally focussed its attention[3]

If the Regional Growth Fund is concentrated only on those places with the strongest dependency on lower value and public sector employment (high need) but where there is a reasonable base of private sector business upon which to build (high opportunity) then resources will be finding their way to just four high priority locations: Darlington, Blackburn, Liverpool and Sheffield.

RGF Needs & Opportuntities Framework

RGF Needs & Opportuntities Framework

 

Focusing RGF in this highly concentrated manner is unlikely to create the scale and range of re-balancing upon which the Government has set its sights. The scope of RGF should certainly be opened up to a second tier of places. Areas with high levels of need but with perhaps a smaller private sector growth base on which to build. This would bring in places in the North East (South Teesside and Tyneside, the North West (Lancashire, St Helens & Knowsley (East Merseyside) and the Wirral), Yorkshire (East Riding and York, along with Bradford) and the South West such as (Dorset, Plymouth and Torbay). Both Leicester and Southend-on-Sea would fall into the group too. No doubt other places with clear levels of need but a more limited base of private sector employment on which to build will also put forward compelling proposals which command attention.

Ultimately it will be for Lord Heseltine’s committee to decide how widely to spread RGF. The table below illustrates the number of places falling into each of our identified categories.

Number of Areas in Each Category
High Opportunity 17 9 4
Medium Opportunity 6 12 13
Low Opportunity 4 18 10
  Low Need Medium Need High Need

The more widely spread the RGF net is cast, the fewer resources will be available to each area. And, fewer resources will inevitably mean smaller impacts and less progress.

Assuming the RGF pot were be to evenly split, the average allocation could soon diminish to pretty small levels over the life span of the fund if it is not targetted. The table below shows how average allocations over the lifetime of the fund fall rapidly as the eligibility criteria are relaxed. If just the four high priority areas receive all the resources then each should benefit to the tune of £350M. This is arguably too much for these economies to sensibly absorb in the time frame available. At the other extreme, if RGF is spread evenly across all NUTS3 areas, only £15M will be allocated to each area – far too small to make a difference to these long-term challenges.

A balance needs to be struck which allows strong investments proposals to come forward from all areas while targeting attention on a realistic number of places where change can really be occur.

Diminishing  RGF Allocations As Net Widens to Lower Priority Areas
High Opportunity £47M £108M £350M
Medium Opportunity £23M £37M £82M
Low Opportunity £15M £21M £52M
 
   Low Need Medium Need High Need

 For More Information on the approach and additonal insights, please contact Regeneris Consulting

Stephen Nicol s.nicol@regeneris.co.uk

or Simon Hooton s.hooton@regeneris.co.uk

0161 926 9214

www.regeneris.co.uk

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Market Failure In Business Support

The future of business support in England at least, appears set to be characterised by four dominating areas of focus:

  • Getting out of businesses’ way: reduce barriers to business formation, ease the regulatory burden on existing companies, simplify tax and employment obligations and reduce the overall cost of competing.
  • Better access to finance: opening up bank lending to small businesses and encouraging new sources and vehicles to come forward
  • Expanding trade & inward investment: the current macro-economic climate underlines the need to generate demand for goods and services from outside the UK. We also may need to corner more than our fair share of footloose international businesses to create new employment in the UK.
  • Innovation led growth: developing new and greener products & services, enhancing productivity based on Intellectual Property, and competing in higher value and more competitive markets all demands UK businesses step up their innovation commitment.

Business support will bear its fair share of cut-backs in the coming years and the themes above need to be pursued under tight financial constraint. Even with priority status, public investment will fall from current levels in these areas and new more creative, lower cost solutions will be needed. Regeneris Consulting believes that more attention is needed on market failure when designing public interventions in the future. Despite progress in better understanding the different types of market failure, further more practical applied tests and better use of evidence are needed to ensure a more robust and consistent approach at the investment decision-making stage. When few resources are available and private sector growth is fragile, the risks of crowding out and duplication are significant. Practically testing whether an intervention is justified demands answers to the following core questions:

  • Is there demonstrable evidence of a recognised market failure? We have set out descriptions of the main market failures affecting business support below, along with some key questions to assess their relevance. 
  • Can public sector intervention make the situation better? solutions must be designed to tackle the identified market failure, avoid mission creep, be of sufficient scale to make a real difference and, over time, lead to a sustainable long-term market based solution from which the public sector could exit.
  • Do the costs of intervening to the taxpayer outweigh the benefits to the economy and businesses? If not, the case for investing must be in real doubt.

At the core of most market failures lie externalities (or spillovers) i.e. costs and benefits unwittingly imposed upon people and businesses. Examples of negative spillovers include poor quality public realm, hazardous emissions and contaminated land, whilst positive externalities ar e associated with a strong base of R&D and a well-trained pool of labour. Externalities are not reflected in the price paid by the consumer or the costs of the producer and are imposed upon people and businesses not responsible for their production or consumption. Without a mechanism to allocate these costs fairly, there is no effective means of limiting/influencing their continued production through conventional market means.

The public sector has traditionally intervened to reduce the effects of negative externalities through the legal and regulatory system and endeavoured to harness positive externalities through economic development investment. For example R&D can generate positive spillovers far beyond the returns to the original investors and, despite a system of patents and copyrights, fears that new technologies can leak out to competitor businesses can limit investment in R&D. A highly trained workforce has clear positive spillover benefits for all businesses, regardless of whether they themselves have invested in training or workforce development. Concerns about losing trained staff to competitors (poaching) are likely to suppress investment in training to below the optimally efficient levels.

Spillovers can also be generated where there is a concentration of factors of production which a series of business require. If these factors such as labour supply, know-how, infrastructure, sites & premises, finance and even reputational issues exist in sufficient concentration, an agglomeration effect might be stimulated. Co-location of firms confer positive spillovers on others through a common labour pool, supply chain, or knowledge base and by collaborative interaction between businesses, suppliers and people. Under such circumstances economic growth may be accelerated over and above what might happen if the same scale of activity were more dispersed or the scale of activity were smaller. But this requires a critical mass to be reached and requires a concentrated programme of investment to exceed the sum of its parts. This logic is used to justify clustering initiatives, science park and city-centre redevelopment.

The potential existence of externalities is a really useful starting point to developing a rationale for public sector intervention, but it is often not enough. Externalities occur in many sectors, markets and locations, arguably too many for the resources available from the public purse. Further understanding is needed when designing business support schemes of what we have called, the Market Failure Drivers. These are the factors which prevent the market operating efficiently and can help guide public interventions onto those issues where a real impact can be made. The Drivers include Partial Public Goods, Information Failures, Coordination Failures, Scale Failures and Historic Failures.

Regeneris Consulting has reviewed the rationale for a wide range of business support schemes and the associated academic literature. We have developed a series of practical tests which the public sector could use to identify whether the market failures are substantive and whether they could be tackled through intervention. Please get in touch if you would like to hear more about how these complex concepts can be practically and easily addressed.

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Testing Times for LEP Success

LEPs will come into force over the coming months, charged with the task of stimulating economic growth and co-ordinating economic development in their area. As the 56 LEP submissions are being reviewed by BIS , attention can now shift onto what LEPs will need to practically do, and what resources and capacities they will need to meet their objectives.

IPPR North has started the debate with four welcome tests which capture the potential of LEPs to grow their local economies but which may need to be bounded by some realistic expectations. IPPR’s tests are sensible and important but the threshold for success need to be bounded by some realistic expectations of what they might achieve with the powers they are likely to be granted. If you are not familiar with the four IPPR tests you can find them here. Taking each test in turn, my comments are as follows:

Test 1) Empowering sub-national level demands a much more fundamental rearrangement of responsibility between central and local government than is currently being proposed. To fully pass this test LEPs will not only need to acquire asset management responsibility but also the ability to raise (or lower) tax, borrow, invest and underwrite debt. There is room in the current arrangements for a more bold and creative approach to economic development (which paradoxically might be more likely to surface with fewer resources to invest), but a real shift in power and resource management is needed to empower LEPs.

Test 2) To further social justice might require an even greater re-ordering of powers which would see responsibility for parts of the tax and benefits system, including setting minimum wage and securing control over the resourcing of the education system being granted to LEPs. Their achievements in tackling social justice will need to be calibrated against what can be reasonably expected with the limited power on offers to LEPs (and their local authority sponsors).

Test 3) Operate over a functional economic area which very much depends on LEPs encompassing both areas of opportunity and need, and ideally embracing a reasonable range of economic drivers. Neither economic growth, nor greater equality, are likely to come from introspective LEPs or from within a narrowly cast boundaries. Growth businesses and skilled employees have broad horizons which reach out beyond the confines of even regions let alone LEP boundaries. Defining a functional economic area is a life’s work in itself and LEPs need to quickly get onto the important task of identifying their assets, co-ordinating their activities with neighbours and central government and agreeing shared long term priorities.

Test 4) Pass an accountability test, although it is not really clear what this might add. It is never easy to argue against democracy but the role for accountability and partnership working in economic development is far from clear. The business-focussed RDAs endeavoured to engage businesses and found it hard enough. Will (what are turning out to be) public-sector focussed LEPs find it any easier? Businesses don’t tend to be hungry for democratic representation and have little time for the talking-shops which partnerships often descend into. It is not obvious that economic development would be significantly enhanced  by an injection of traditional local democratic accountability.

To really assess the success of LEPs, IPPR North should consider adding two further tests to their list:

1)      Effective Administration: successfully developing strategy, securing investment, managing resources and animating a range of disparate agencies is not easy or straight-forward. It requires skills, leadership and talent which are fairly scarce commodities:

  1. Foresighting economic challenges and opportunities requires research, analysis and expert insight into market conditions.
  2. Developing robust interventions which are deliverable, offer value for money, tackle real market failures, secure additional economic impact and have a fair prospect of sustainability demands technical project development and business planning skills.
  3. Corralling the energy, resources, dynamism and skills of other agencies and to collaborate with neighbouring LEPs calls for a special set of leadership attributes.
  4. And, delivering initiatives on the ground in line with regulatory and contractual obligations, whilst remaining responsive to changing conditions and alert to emerging opportunities requires strong management systems and capacities.

As many others have found, getting economic development right isn’t always easy and requires a long-term build-up of skills, procedures and insights, none of which comes cheap.

2)      Making Tough Strategic Choices: balancing competing interests within tight financial constraints whilst maintaining an eye on long-term strategic opportunities and challenges demands LEPs set out really clear and tough priorities about what is important and what is not. LEPs will now need to quickly start the hard work of agreeing a set of short, medium and long-term priorities which (often new) partners can sign up to and put their efforts behind. No doubt agreements will have been made among local authorities on priority projects to bring them into LEPs in the last few weeks. The next phase will require them to refine their list of would like to do initiatives into a set of agreed investment priorities. LEPs will truly succeed when they can demonstrate a sharp focus on a manageable set of long-term strategic priorities which bring partners together and secure real change.

Building up the capacity and resources to pass these two additional tests will take time. The IPPR tests are important but I suspect these two will be the real deciding factor in LEPs’ success at changing the economic opportunities and prospects of their local areas. It can be done, but it will take time and concentrated effort and this will need, in the early years at any rate to be done against the back-drop of quite tough financial constraints.

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Reflections On Way Forward For Business Support

There is a growing body of evaluation evidence scattered across the RDA networks on the impact and performance of business support services over recent years. It would make sense to use the findings of these exercises to help inform the way forward as BIS contemplates how to reformulate business support.

Although no two services are the same, there are number of recurring and common lessons from our business support reviews:

  • The distribution of impacts may be uneven: a small number of beneficiaries often tend to secure significant attributable impacts and many others experience little discernible growth. There has to be some acceptance that different businesses perform and respond to support differently, yet there also should be mechanisms in place in all services to ensure those with the greatest potential are prioritised, which can partly be achieved by good quality diagnostics.
  • Securing change in behaviours, intermediate effects and bottom-line impacts: one would expect services to impact initially upon the activity and behaviour of entrepreneurs and SMEs (eg on production patterns, growth ambitions, management approaches) before effects on intermediate performance (e.g. increased productivity, new employees, new markets, new customers) and eventually bottom-line performance (turnover and profits) are noticeable. Although services need time to elapse for their full range of impacts to materialise, in many cases unless the supported businesses make quite quick and immediate changes following the support they receive, the likelihood of transformative downstream change is very slim. Services need to be configured to monitor the more immediate changes and to then use that to build up intelligence on what downstream impacts different interventions are likely to generate . There is often too little of this kind of intelligence-led delivery in services.
  • Market failure: over recent years more attention has been placed on market failure during the design and appraisal of support services. This has been welcome as it offers a better prospect of services which genuinely tackle those areas where the private sector won’t go and avoids wasteful and unfair competition. Despite this, further work is needed to really understand the different types of market failure in the business support arena and to develop tools to test for it. Regeneris Consulting has looked at this issue and developed some thinking on how this might be done.
  • Satisfaction levels do not correlate with impact: evaluations of services often find high satisfaction levels, but much lower levels of attributable change. It appears entrepreneurs and businesses are often grateful for the free/low cost assistance they get, even if it does not dramatically change the way they operate. Too many services have not really experimented with charging and so too often are not able to make the transition to a more sustainable and commercial delivery model when the public funding comes under stress.
  • Too little use of established private sector suppliers: in some services there is tendency to go out and employ a new team of staff (and associated overheads) to deliver a service before real consideration is given as to whether a more market oriented solution using existing private sector suppliers of expertise can be brought it. Although there are examples of such associate models and of vouchers to allow business to purchase their own support, there are still some big public sector dependent institutions out there which are now probably vulnerable and have not been used to competing in the private market place.
  • Geography matters, but not in the way some seem to think: the current debate about local vs regional vs national seems focussed on ensuring services align with local businesses needs. However successful support often has little to do with local geography and everything to do with expertise tailored to meet the specific needs of individual clients at the point of delivery. The real question when it comes to geography is an administrative one: what are the best levels at which to configure, contract and manage services. Local services run the risk of duplicating offers, being poorly thought through and very inefficient to deliver. National services can probably be much more efficient, although local partners will continue to generate new offers if they feel a remote top-down approach does not reflect their local priorities. Regional arrangements had the potential; to be the Goldilocks options – not too remote and not too small. There are also now real costs associated with dismantling the relationships, intelligence and capacity built up within the regional delivery apparatus . Careful consideration should be given to a dash for either local or national approaches, drawing on the evaluation evidence.
  • Solutions For Business was a step forward: although by no means perfect, the SFB framework provides a platform for making tough decision about the balance of investment in the future and the range of services to be supported. It provides a template against which evidence of performance and impact around the country can be assembled and compared. If there is a future for business support, the framework should be retained, refined and narrowed ,if needs be, but not abandoned.

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