The Business of Cities

Transcription

1 The Business of Cities The private sector, Local Enterprise Partnerships and growth Nye Cominetti, Lizzie Crowley and Neil Lee October 2012 Document Title Goes Here (Use Document Title Footer style) 1

2 Contents Summary Introduction The changing architecture of economic development The consensus in favour of business leadership Businesses and strategic partnering evidence from past initiatives How are businesses engaging with LEPs? Implications for policy Contact details The Work Foundation aims to be the leading independent, international authority on work and its future, influencing policy and practice for the benefit of society through rigorous research programmes targeting organisations, cities, regions and economies in the UK and beyond. Organisations from across all industry sectors can sign up as partners to gain access and active involvement in research, thinking and practice. For further details, please visit

3 Summary The Coalition government has placed business at the heart of economic development. Shortly after the Coalition came into power, they established Local Enterprise Partnerships (LEPS), private-sector led organisations designed to incorporate business in the leadership of cities. Collaboration between different private, public and third sector bodies is important for economic development and the need for business involvement in economic development has become an unchallenged consensus. Yet, there are concerns about the new arrangements. We know very little about exactly how and why businesses are interacting with LEPs. This paper considers business engagement in LEPs. Drawing on anonymous interviews with business leaders involved in LEPs, and a review of the history of business involvement in similar initiatives, this paper makes a number of findings. The clock is ticking on business involvement. Many business leaders in LEPs are impatient and are ready to walk away if their LEPs do not make real progress on the ground soon. The government needs to give LEPS real power and resources soon or there is a real risk that business involvement will be jeopardised. LEPs have successfully attracted business members with valuable skills and experience. All business members interviewed had extensive experience within the local area, were high profile employers, or even had directlyapplicable skills relating to leveraging private and public sector interests. Unlike past initiatives, LEP business members are overwhelmingly motivated by a desire to support the local area. Only a minority of business leaders described receiving direct benefit to their business as a primary motive. Almost all business leaders cite gains to their business as a secondary motivation for involvement, as well as opportunities to network, gain information, and the prestige of having a seat at the high table. Businesses prefer LEPs to RDAs. There is consensus among businesses in favour of LEPs as the appropriate structures for economic development. Many had experience of working with the RDAs, and although many sought to commend the many good projects funded by them, there was agreement that RDAs became bloated and tried to do too much. Businesses believe they should play a significant role in economic development. Business representatives on LEPs help sub-regional working between local authorities. Local authority members are bound to represent their area, which 1

4 means potential conflict over how resources are allocated across the subregion. The presence of businesses helps depoliticise some of these decisions. We found examples of actions that would have stalled had not business members forced through a decision. Business engagement in LEPs needs to be widened to include a more diverse group of employers. The lack of SME representation is of concern, as is the fact that many business members were familiar faces that had been involved in multiple partnership arrangements in the past. Based on these findings, we advance a number of recommendations, including: Reform the Regional Growth Fund,, and add further rounds It further additions are made to the Regional Growth Fund (RGF), LEPs should be given a more central role in managing the fund. All bids to the RGF should be channelled through LEPs. This will ensure the economic development efforts happening within the 39 LEP areas are joined-up, and acting to support a broader strategy for the local economy. Currently any private sector-led bids are accepted, which means LEPs tasked with setting the economic strategy for the area and with taking action to improve the local economy do not have control or oversight over much of what is currently spent on regional economic development. Such reform would reflect the Government s commitment to localism the current system is highly centralised. A LEP-centred RGF would make local economic strategies more effective, and therefore put more power in the hands of the local areas. Increase the participation of small business LEPs must increase the representation of small businesses on their boards to increase their effectiveness. There are two possible ways to achieve this. First, Government may consider requiring that LEP boards achieve greater proportionality in their business representation, and in particular a greater representation of small business. Second, LEPs may consider offering small business owners some compensation for their time spent on LEP matters. This, however, will be a choice for each LEP, and may not be possible under the present funding constraints. Increase the capacity fund further The recent introduction of 25m in capacity funding for LEPs was a long overdue and welcome step. However, we suggest 25m is not enough given the scale of the task facing LEPs. The money will likely pay for no more than three to four well qualified staff. If as is likely more funds are not forthcoming, local authorities might demonstrate their support for their LEP by agreeing to pool (some) economic development staff across the LEP area, thereby generating savings for themselves while putting greater weight behind LEP level economic strategic decision making. Clearer accountability processes 2

5 LEPs need very clear structures for renewing board membership, and for evaluating the contribution of their board members. LEPs should consider establishing themselves as legal entities, which would allow them to raise finance, take on employees directly, and to enter into significant contracts. As LEPs become trusted vehicles for economic development, these functions may become necessary. Becoming a legal entity would significantly enhance the accountability processes in LEPs. 3

6 1. Introduction The UK needs urgently to create new private sector jobs and this need is particularly acute outside of London and the South East. Between 1998 and 2010 this effort was led by Regional Development Agencies (RDAs) who were tasked with narrowing the gap in regional economic performance. One of the first acts of the coalition government was to overhaul this structure and replace RDAs with Local Enterprise Partnerships (LEPs). LEPs are based over smaller geographies and are more closely aligned to functional economic areas. The terms of reference for LEPs were flexible, not imposed from Whitehall. But significantly, LEPs were to be business-led: in the context of falling public sector expenditure, the private sector would guide local economic development. This paper part of The Work Foundation s Cities 2020 research programme investigates business involvement with LEPs. In many cases, the new LEPs have been extremely successful in gaining business support: bringing important skills into economic development, helping decisions to be made quickly and helping local areas identify and start to address the barriers faced by local business. Yet businesses only feel that giving up their time is worthwhile if they are engaging with organisations with real powers and the ability to get things done. At present, many LEPs are doing neither. There is a real risk that unless the government properly resources and empowers LEPs, businesses will begin to walk away. In short, the clock is ticking on private sector involvement. The involvement of businesses in leading economic development activities raises a number of interesting questions, which in the rush to get the new structures up and working have not been adequately addressed. Specifically: What factors are driving businesses to help run LEPs? Will they stay motivated? What are the implications of business leadership of LEPs specifically, how are accountability issues being addressed? What do businesses bring to public / private sector partnerships? How well are the current structures working? This paper considers these questions, which are at the heart of the coalition s agenda for local economic policy. The paper is structured as follows: Section two Outlines how economic development has changed in the UK and how LEPs came about Section three Considers the rationale for business involvement in regeneration and economic development Section four Gives the lessons learned from past efforts to involve business in economic development 4

7 Section five Discusses how businesses are engaging in LEPs and why Section six Provides some policy recommendations for Government Methodology To understand how businesses are working with LEPs, business leaders on LEP boards (and on sub groups) were interviewed via telephone. In total 15 in-depth interviews were conducted. Interviews were between 30 and 40 minutes long and were semistructured. All interviews were anonymous to encourage frank discussion. Individuals names are not given therefore, but neither are details or their businesses or LEPs. Reporting such information would make identification likely given the relatively small number of individuals involved in each LEP. The interviews followed a desk-based survey of the relevant literature and evidence relating to business involvement in economic development and place leadership. About the Cities 2020 research programmep Cities 2020 is The Work Foundation s research programme looking at the drivers of urban growth over the next decade. The research is aiming to answer the following questions: What will the geography of the recovery look like over the next decade? What factors will enable cities to be socially and economically sustainable during the economic recovery and the period to 2020? What must policy makers do now to ensure success in 2020? The programme has to date published reports on inequality in cities, on the barriers facing high growth firms in cities, on the potential for new low carbon jobs in cities and on the rise of the knowledge economy in cities. 5

8 2. The changing architecture of economic development One of the first actions of the coalition Government was to overhaul the structures and organisations responsible for economic development in England. This section explains the changes, and argues that the newly created LEPs face tough, yet different, challenges. The current state of economic development d structures in the UK Under Labour, economic development was carried out regionally, sub-regionally and locally. Nine Regional Development Agencies (RDAs) were established in England in 1999 and 2000 (the London Development Agency was established a year later than the others) tasked with co-ordinating regional economic development, increasing the relative competiveness of their regions, and with narrowing the gap in regional economic performance. 1 Collectively RDAs spent around 2 billion per year mainly on physical infrastructure, business support initiatives and on skills. Towards their end RDAs had started to take on further responsibilities. Most notably, they had a role (in conjunction with local authorities) in designing spatial strategies, which included house building targets. On entering office the coalition Government abolished the RDAs. This was an explicit commitment in the Conservative manifesto. 2 The Liberal Democrats manifesto did not commit to wholesale abolition but did express a desire to reform RDAs to make them more focused on economic development and to scrap those RDAs that lacked the support of local authorities. 3 The Conservative party had two main criticisms of RDAs that they were expensive, and that they were unaccountable. Both criticisms were reflected in the party s broader commitment to cut the unaccountable quango state and root out waste. 4 There were also less political, functional criticisms. It was argued that RDAs did not operate at the correct spatial level that the nine English regions did not represent real economic geographies. 5 Because RDA regions were large and set across such 1 As economic development is devolved similar agencies exist in Wales, Scotland and Northern Ireland, but they have been unaffected by the recent structural changes. This report specifically addresses England, although the themes it covers around business engagement will also be relevant to the devolved nations in their efforts to engage with businesses. 2 The Conservative Party (2010), Invitation to Join the Government of Britain - The Conservative Manifesto 2010, Conservative Party, London. 3 The Liberal Democrat Party (2010), Liberal Democrat Manifesto 2010, Liberal Democrat Party, London. 4 For an example of this critique, see the Conservative Party Manifesto: The Conservative Party (2010), Invitation to Join the Government of Britain - The Conservative Manifesto 2010, Conservative Party, London. 5 HM Government (2010), Local growth: realising every place s potential. Crown Copyright, London. 6

9 boundaries, the argument ran, interventions that worked for one part of the region might be irrelevant or inappropriate in another part. Abolishing the RDAs was a controversial decision. The Government s official evaluation found they were delivering value for money and that each 1 spending was in the long term leveraging over 4 of private investment. 6 However, these assessments are subject to difficult assumptions about additionality (i.e. they rely on counterfactual assumptions about what would have happened in the absence of RDA spending) and there were in fact increases in regional inequalities over the period of RDA activity. 7 Local Enterprise Partnerships have been introduced as the RDAs replacements (box 1 sets out the key facts), and were designed to address the perceived weaknesses of RDAs. Where RDAs were perceived to be bureaucratic and expensive, LEPs have only enough money for small secretariats. Where RDAs were perceived to be wasteful, LEPs must engage in competitive bidding for centrally controlled funding pots. Where RDAs spent across arbitrarily defined geographic areas, LEPs are meant to operate across functional economic areas. Government ministers assessed proposals for LEP areas according to their travel-to-work score; that is, the proportion of the resident working population also living in the area. Yet, LEPs most striking feature is that they are led by business. Business engagement in local economic development is not new; many economic development initiatives and schemes over the years have involving businesses. It is clear, though, that LEPs represent a major step forward in the level of private sector involvement. Many previous initiatives and partnership arrangements placed substantial weight on business involvement and consultation. LEPs, by extension, are business-led. Box 1: Local Enterprise Partnerships key facts LEPs are collaborations of local authorities, businesses, and other local stakeholders such as universities and charities. They are not statutory entities as local authorities are and RDAs were, and yet still have proper accountability for delivery. 8 Purpose LEPs main task is to generate private sector growth. Their activity is set in the context of broader Government plans to rebalance the economy away from the public sector. LEPs, however are free to set themselves more specific targets. Functions LEPs are strategic bodies, which means they are supposed to set out the economic strategy for an area. Being strategic, non-statutory bodies, however, means 6 BERR/PWC (2009), Impact of RDA spending National report Volume 1 Main Report, BERR, London. 7 Crowley, L, Balaram, B, and Lee, N (2012) People or Place? Urban policy in the age of austerity, The Work Foundation, London. 8 HM Government (2010), Local growth: realising every place s potential. Crown Copyright, London. 7

10 they have no formal powers, and must rely on the local authorities and other agencies to put their strategy into practice. Size There are 39 LEPs in England. Each LEP area contains on average 1.5m people (1.3m not including London). The most populous LEP is London, containing almost 8m people, and the least populous is Cumbria, with 0.5m. 9 Coverage LEP geographies are formed of groupings of local authorities this means LEP boundaries do not cross local authority boundaries. The vast majority of local authorities are a member of only one LEP, but 37 local authorities are part of two. Governance LEPs must be business led. This means having a businessperson as the chair of the LEP, and a majority of businesses on the board. Beyond these basic stipulations, LEPs are free to set up their own governance structures. Most have a few sub-boards addressing specific issues; for example, a skills board. The 39 LEPs face different challenges One consequence of dividing England into 39 LEP areas, rather than the 9 RDA regions, is that there is greater diversity among the different areas. Firstly, they vary substantially in size, as shown in Graph 1. The London LEP is an exception, with around 8 million people. But even the second largest LEP, the South East, is around 8 times larger than the smallest, Cumbria. Most LEPs have between 0.5 and 2 million residents. Population change Population change over the last 20 years varies substantially across LEPs, and gives an indication of whether the areas have prospered or have been in decline. Some LEP areas have experienced substantial population growth over the period. The South East Midlands LEP area saw population growth of 19.5 per cent, Northamptonshire of 18.6 per cent, and Swindon and Wiltshire, and Greater Cambridge and Greater Peterborough of 17.3 per cent. Others have stagnated or even shrunk. Graph 1 highlights in red the two LEP areas that have seen population decline over the last 20 years: The Black Country and Liverpool City Region. The Black Country shrank between 1990 and 2000 but grew slightly between 2000 and Liverpool City Region shrank in both decades. Other areas have seen population growth so small that they have effectively experienced decline when set against population growth in England as a whole of 9.5 per cent. Areas with 9 Source: ONS mid-year population estimates for Accessed via Nomis. 8

11 population growth of less than 3 per cent over the 20 year period are highlighted in orange. Graph 1: : Population change in LEP areas over the last 20 years ( ) Cumbria Buckinghamshire Thames Valley Cornwall and Isles of Scilly Worcestershire Gloucestershire The Marches Oxfordshire Swindon and Wiltshire Tees Valley Northamptonshire Dorset Coventry and Warwickshire Thames Valley Berkshire Cheshire and Warrington Humber Leicester and Leicestershire Greater Lincolnshire Stoke-on-Trent and Staffordshire Black Country West of England Hertfordshire York, North Yorkshire and East Riding Greater Cambridge & Greater Peterborough Lancashire Liverpool City Region Solent New Anglia Enterprise M3 Heart of the South West South East Midlands Sheffield City Region Coast to Capital Greater Birmingham and Solihull North Eastern Derby, Derbyshire, Nottingham and Greater Manchester Leeds City Region South East London Population 2010 Population Millions Note: data is from Mid-Year Population Estimates (2010), accessed through Nomis. Red highlighting indicates LEPs where the population declined between 1990 and 2010, and orange indicates those whose population has grown by less than 3 per cent. 9

12 Skill levels among the local population One of the areas that many LEPs are prioritising is skills, for two obvious reasons. First, skills are a key driver of economic growth, and for the individual are a key determinant of employment outcomes. Any local economic strategy must involve skills. Second, skills are a policy area well suited to public-private collaboration - skills as a resource are demanded by the private sector and supplied (mostly) by the public sector. Many LEPs have representatives from skills providers (such as Universities and Further Education colleges) on the boards, and many have specific working groups beneath the board focusing on skills. Graph 2: : Qualification levels among the working age population London Oxfordshire Buckinghamshire Thames Valley Enterprise M3 Thames Valley Berkshire Hertfordshire Coast to Capital England New Anglia Stoke-on-Trent and Staffordshire Liverpool City Region Humber Tees Valley Greater Lincolnshire Black Country 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% NVQ 4+ None Note: data is from the Annual Population Survey (2011), accessed through Nomis. Qualification levels are not a perfect proxy for skills (many people have skills that are not recognised by a formal qualification) but they are the best available measure. LEPs have been ranked according to the percentage with a NVQ level 4 or higher, and the seven highest and lowest are displayed. Again, there is significant variation in skill levels across LEP areas, with some areas facing far greater challenges relating to skills provision than others. Graph 2 shows the spread of qualification levels among local working age populations. The graph shows that London, Oxfordshire, and Buckinghamshire Thames Valley LEPs all have almost twice the proportion of local workers educated to a high level than does the Black Country and Greater Lincolnshire (over 40 per cent compared to around 20 per cent). 10

13 At the opposite end of the spectrum, over half of all LEPs (22) have working age populations more than 10 per cent of whom have no qualifications, and in the Black Country LEP area the proportion is as high as 1 in 6 adults. Unemployment LEPs were formed in 2010, two years into the worst recession in the UK since the 1930s. Therefore, in the short term LEPs will be preoccupied with helping their areas recover, a task much harder for those LEP areas that have been worst affected during the post-2008 downturn. Graph 3 illustrates those areas where unemployment is highest and lowest, and by comparing with 2008 levels shows some of the areas that have been worst affected by the recession. Tees Valley currently has the highest unemployment rate in England, at over 12 per cent. In the Sheffield City Region, unemployment has almost doubled since the recession began, and now has the third highest rate. Graph 3: : Unemployment rate in 2008 and 2012 Tees Valley Black Country Sheffield City Region North Eastern Liverpool City Region Greater Birmingham and Solihull Greater Manchester England Buckinghamshire Thames Valley Thames Valley Berkshire Worcestershire Dorset Enterprise M3 Cornwall and Isles of Scilly Oxfordshire Mar-08 Mar-12 Note: data is from a model-based estimate of unemployment, which uses survey data from the Labour Force Survey as well as administrative claimant count data. Accessed through Nomis. The unemployment rate used is the percentage of all economically active people over the age of 16 who are unemployed. Data is for the whole year prior to the date shown. LEPs were ranked according to the unemployment rate in Mar 2012, and the seven highest and lowest displayed, with England as comparison. 11

14 LEPs are limited in their resources and powers Some LEPs therefore face far tougher challenges than others, yet all are equally restricted by stiff competition for limited funding, and by a lack of formal power. Graph 4: : Regional Growth Fund allocations (rounds 1 & 2) per capita ( /person) Tees Valley Coventry and Warwickshire Liverpool City Region Greater Birmingham and Solihull Cornwall and the Isles of Scilly Humber North Eastern West of England Sheffield City Region Worcestershire Leicester and Leicestershire Greater Manchester Derby, Derbyshire, Nottingham and Nottinghamshire, Cumbria Leeds City Region Stoke-on-Trent and Staffordshire Lancashire South East Buckinghamshire Thames Valley Greater Lincolnshire Cheshire and Warrington Gloucestershire The Marches Oxfordshire LEP Swindon and Wiltshire Dorset Solent Black Country Heart of the South West New Anglia Enterprise M3 South East Midlands York and North Yorkshire Note: Data provided by BIS. Data is for rounds 1 and 2 of the RGF. Per capita data is derived from mid-year population data for 2010 accessed through NOMIS. The RGF data shows the value of projects in these LEP areas. It does not imply that this money was allocated to projects associated with LEPs only 24 per cent and 42 per cent of successful bids from rounds 1 and 2 respectively cited LEP involvement. The orange bars signify areas where the data was suppressed because of the small number of projects in the area. The total spend in these areas ( 60m) has been averaged, and presented per capita. 227m of allocations 12

15 went to national projects which could not be associated with any LEP in particular. This spending is also not presented in the graph above. RDAs operated in a more benign economic environment and had greater resources and power. Collectively the RDAs spent around 2bn per year, during a period when the economy grew strongly. By contrast, LEPs have access to national funding pots worth just under 3bn in total, to be allocated over 5 years. In fact, the Regional Growth Fund the largest UK source of funding is not exclusively for LEPs. Any private sector led bid is accepted, and to date the majority of successful bids did not involve LEPs. (Box 2 on the following page sets out the sources of funding available to LEPs, which includes some European funding.) Many LEPs therefore face far tougher challenges than their regional forbears they are tasked with creating private sector jobs during a recession but have fewer resources to work with, and moreover, have no formal powers. The criteria that the Government has established for the Regional Growth Fund the main replacement for the money spent by RDAs every year are that successful projects or programmes create or safeguard jobs in the private sector, especially in areas currently reliant on the public sector. This should, in theory, match resources with need. But because funds are allocated through the competitive bidding process, there is no guarantee that any particular LEP area will be able to secure RGF funds. On the one hand this is good only best bids will be successful. It does, however, mean that LEP areas are vulnerable to the ability of their board and secretariat to submit successful bids. Allocations from the first two rounds of the RGF do not appear to have aligned support with need. Graph 4 (previous page) shows RGF allocations per capita from the first two rounds. It illustrates two things clearly. First is the very wide disparity in the allocations to the different LEP areas. Tees Valley LEP area saw per capita allocations ( 90) totalling almost twenty times the amount allocated to York and North Yorkshire ( 5), for example. Indeed, BIS reported that five LEP areas had received zero allocations, though they may have been included in some national-level allocations. These LEP areas were Coast to Capital, Greater Cambridge & Greater Peterborough, Hertfordshire, London, Northamptonshire and Thames Valley Berkshire. These wide disparities would be acceptable if they reflected the differing levels of need in different LEP areas. However, this does not appear to be the case. For example, the Black Country LEP area, which has the second highest unemployment levels and the lowest proportion of highly qualified people, receives half as much as the South East LEP area, which scores well on both. There is only a very weak connection between the money allocated in RGF rounds 1 and 2 and the areas that are most reliant on the public sector for employment. Graph 5 shows per capita allocations correlated with the proportion of local employment that is in the public sector. Helping regions with high public sector employment generate 13

16 private sector jobs growth is a key funding criteria for the RGF, so one would expect the allocations to reveal a stronger connection. It suggests that allocations are failing to align with need as determined by the fund s own criteria. Graph 5: : Per capita allocations in LEP areas correlated with the proportion of employment in the public sector Proportion of employment in the public sector 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% Per capita RGF allocations -rounds 1 and 2 Note: For source of per capita RGF allocations data see note for graph 4. Public sector employment data is for the year 2011, from ONS, accessed through Nomis. Box 2: Funding sources for LEPs Economic development spending has been centralised since the RDAs demise, and there is roughly a quarter of what there was. To fund projects, LEPs need to submit competitive bids to receive money from funding pots, which are administered by central Government. Regional Growth Fund. Worth 2.4bn over the period The purpose of this fund is to create and protect private sector jobs, especially in those areas reliant on the public sector for employment. LEPs are not the only bodies eligible for this fund any private sector led bid is accepted. Growing Places Fund. Worth 500m (with 50m going to the devolved administrations) and allocated in the financial year 2011/12. Set up to address immediate infrastructure requirements (e.g. gaps in transport, or in provision of utilities) and meant to provide short term boost to growth. All Growing Places Fund money was allocated to LEPs, using a formula based on population and employed earnings. 14

17 European Regional Development Fund (ERDF). The UK was allocated 3.2bn between 2007 and As recently as January per cent of ERDF funds remained unallocated. 10 Funds that have not been spent will be reclaimed, although the UK s specific rebate agreement means two thirds of any underspend will go to the Treasury. The disruption caused by the closure of the RDAs, who channelled the European funding, has contributed to the slow release of ERDF funds. ERDF funds require match funding (i.e. ERDF only contributes money where at least half of the money for a project comes from elsewhere), and RDAs spending was a key source of match funding. The Government is currently negotiating with Europe on the size and direction of allocations for the next ERDF spending round, due to start in Running costs: 25m core funding. The Government recently announced core funding for LEPs, worth 250k per LEP per year. This was a response to the recognition that the initial funding provided was insufficient. At the outset LEPs were allocated the following: 4m capacity fund, meant to help LEPs understand their area s needs and assess priorities for action. 5m start-up fund. One-off for to help get LEPs up and running. At the time it was expected after this initial cash injection that LEPs would fund their own running costs. Incentive structures for business growth It is worth noting that, on top of the various UK and European funding pots into which LEPs can bid, the coalition Government is in the process of introducing financial incentives to encourage local areas to promote local business activity. One mechanism to achieve this will be the local retention of business rates, a reform contained within the Local Finance Bill which is progressing through parliament. Business rates are a property tax on businesses, and form about a quarter of the funding that goes to local government. Currently, business rates are pooled centrally and redistributed according to a formula, which is complicated, but which is designed to assign funding according to local need. From 2013/14 local authorities will keep up to half of any increases in business rates income, giving them an incentive to encourage local business growth. This incentive will indirectly apply to the activities of LEPs via the local authority membership on LEP boards. However, the impact of this 10 House of Commons Communities and Local Government Committee (2012), European Regional Development Fund - Second Report of Session Volume I. House of Commons London: The Stationery Office Limited (London). 15

18 incentive may be small when set against the scale of on-going cuts to core local government funding and rising demand on services. Additionally, the Government has restored a policy last seen in the 1980s, and has created 24 Enterprise Zones across England. Twenty-one of the LEPs have an Enterprise Zone in their area. LEPs have a key role managing their local Enterprize Zones, and it was LEPs that were invited to submit proposals for the location of the Zones. Furthermore, additional revenue raised from the business rates in Enterprize Zones is expected to be channelled through LEPs. The main features of Enterprise Zones are: An exemption from business rates of up to 275,000 per business over 5 years. Central government pays the relevant local authority the difference. Faster planning processes, and investment in broadband. Local authorities keep all business rates generated within the area over a 25 year period. Local retention within Enterprise Zones therefore goes further than the broader new local rates retention system, under which only half of new rates generated are locally retained. Some Enterprise Zones involve tax relief on capital investments made by businesses. An incentive mechanism also now exists in housing, where the New Homes Bonus provides an incentive for local authorities to build more (or facilitate the building of) new houses. Central Government is matching the council tax for new properties for six years, doubling the income for the local authority. Moreover, beyond 1bn per year, money for these payments comes out of general local authority grant, which means it is effectively a redistributory scheme from low builders to high builders. LEPs do not have a direct mandate to encourage house building, although they may indirectly be interested in pursuing this if they believe this will contribute to private sector jobs growth. In this case, the New Homes Bonus would reinforce the above incentive mechanisms which apply to business growth. However, it is more likely that these two incentive schemes will come into conflict, since supply of land is scarce, and business premises competing with houses for space. Business rates and council tax values vary across the country, and whether a local authority (and indirectly, a LEP) is in the final instance incentivised to promote residential or business land use will depend on the specific returns each will generate through the incentive structures. City Deals for some Some LEPs are connected to a City Deal. The Government has made deals with eight core cities outside London which see some power and resources devolved to the city 16

19 level. 11 Deals have been made with Bristol, Birmingham, Manchester, Leeds, Liverpool, Newcastle, Nottingham and Sheffield. The Government has suggested it will begin negotiations for deals with a second tranche of cities. Of the eight cities with deals, only three have deals with geographies that match the local LEP s. These are Manchester, Bristol and Liverpool. Apart from Nottingham, all the other deals were co-signed by the LEP (indicating the LEP will work together with the city authority) but involve boundaries that are narrower than the LEP area. The LEPs in these areas can expect a strong say in the functioning of the City Deals, which are now a key policy lever in these cities. The city deals are all unique, and are based on the asks made by the different cities. Some notable features of the deals include: Greater Manchester s Earn Back scheme, where it can claim up to 1.2bn of the future national tax take if it stimulates economic activity through major investments. Locally designed youth contracts in Leeds, Liverpool and Sheffield. Tax Increment Financing (where cities borrow against future uplifts in business rate revenue) pilots in Bristol, Newcastle, Sheffield and Nottingham. A payment ayment-by by-results scheme within the skills system for Manchester and Liverpool. The Government is to be congratulated on its programme of City Deals, and on the recent announcement that twenty further cities will enter negotiations for transfers to powers to city areas. There is some danger that empowering city authorities that do not match LEP geographies will undermine joint-working among the different local authorities on LEP boards. On several LEP boards there are now groups of local authorities to whom powers and resources have been devolved and others who have not been subject to the same process. For example, within the Derby, Derbyshire, Nottingham and Nottinghamshire LEP, only Nottingham City Council was the recipient of new City Deal powers. However, devolution should not be rejected because it is structurally messy. This is inevitable. Instead, Government must ensure that wherever possible its City Deals acknowledge the importance of a city s wider economic hinterland, and give the LEP a central role in negotiating and managing the deal. 11 Full details are available in the Government s City Deals prospectus: Hm Government (2012), Unlocking growth in cities: city deals wave 1. HM Government, London. 17

20 3. The consensus in favour of business leadership This section briefly argues that the reforms to economic development, and the creation of LEPs, have taken insufficient account of the issues raised by the business leadership of the new bodies. The main question is of accountability. This section suggests that these issues have not been given due attention because of the consensus that exists in favour of business involvement in, and even leadership of, economic development. Business leadership questions unasked Business involvement is a vital part of the Government s approach to economic development, and runs through the Government s Local Growth white paper, which in 2010 set out the model of economic development since introduced in England. To secure effective business engagement and ensure a strong focus on the needs of the local economy, it is vital that business and civic leaders work together. 12 The Local Growth paper also sets out the rationale for business involvement: local communities and businesses are in the best position to understand and respond to the opportunities and needs of their own economies 13 The reasoning is clear: decisions should be taken by those who know best, and businesses know best what policies, initiatives or forms of support will best help them prosper. But the Local Growth white paper ignores the issues raised by business leadership, including the accountability problem. The paper states that Governance structures will need to be sufficiently clear to ensure proper accountability for delivery (BIS, 2010), with no explanation of how, in practice, proper accountability is to be achieved, and to whom LEPs are to be properly accountable. This is surprising, since Local Growth states numerous times the importance of local accountability reflecting the coalition Government s commitment to the localism agenda. Two forms of accountability are relevant, and neither is satisfactorily addressed. First is accountability to the funders of economic development that is, to central government or other funding sources. This upwards accountability is currently achieved on a project-by-project basis, and depends on the auditing and performance evaluation process used by funding bodies. In the case of the Regional Growth Fund, BIS is the department responsible for monitoring the projects. However, the implications of a LEP failing to properly administer public funds are not clear. 12 HM Government (2010), Local growth: realising every place s potential. Crown Copyright, London. 13 Ibid. 18

21 The other form of accountability is to the people and businesses affected by the decisions taken by the LEP - downwards accountability. If LEPs are to achieve anything, they must have some power, which in turn places power in the hands of the business members who comprise half the membership of LEP boards. Yet businesses are not accountable to those in the LEP area who hope to benefit from the work of the LEP. Direct accountability to local residents is not possible for anyone other than elected officials. If businesses are to be involved, then accountability to residents must be achieved indirectly - via the local authority members on the boards. However, at present the chain of accountability from resident to local authority official to LEP board business member is not strong. That is, again, because LEPs are mostly not legally constituted bodies, and because the contracts signed with the business members involved are weak. Accountability of LEP business members to local businesses is also weak, but is more easily achieved. It depends on the processes by which the LEP appoints business members to its board. In the case of the West of England LEP, for instance, business members are put forward by a nominations committee comprised of the local arms of various national business representation groups, which also feeds back to the local business constituency. However, such processes in many other LEPs are much less robust. Given the lack of powers and resources available to LEPs in their first two years, accountability has not been considered a serious issue. However, it appears that the Government is starting to place more trust in LEPs. The recent announcement of 25m core funding comes on top of the various powers and responsibilities devolved to certain city LEPs, as well as existing funds through the Regional Growth Fund and the Growing Places Fund. It seems inevitable that the processes for ensuring adequate accountability both downwards, to the people and businesses affected by and reliant on LEP spending, and upwards, to the Government and other providers of funding will have to be strengthened. The Government s failure to address these issues is surprising, given that accountability was one of the main criticisms made of RDAs. The Government presumably would suggest that bringing powers to the local level (thirty-nine LEPs spread across England instead of nine RDA areas) achieves this accountability. Yet the devolution of power is illusory without robust structures in place to ensure that local residents and businesses can hold decision-makers on the LEP board to account. The emergence of a consensus That accountability problems have been overlooked reflects a consensus that has emerged over time in favour of business involvement in local economic development. 19

22 Many of the business leaders interviewed for this paper (more of which in section 5) echo this consensus, with one interviewee arguing it is pure common sense that businesses should lead LEPs. Given the significance of the private sector leading on forming local economic strategy, how has this consensus has emerged? Two reasons stand out. Firstly, over time, economic development has evolved because it has been shown to work better when businesses are closely involved in the design and even delivery of projects. Business involvement and leadership has been described as policy orthodoxy within economic development. 14 Whereas economic development once focused almost exclusively on the physical regeneration of a place, now practitioners recognise the importance of adopting holistic and integrated interventions that involve all parts of the local economy. This must include local businesses. Secondly, the UK s attitude to business has changed over the last 30 years or so. The country has grown comfortable with business influence in public services. Indeed, the private sector has become immersed in all areas of public services - health and education are two examples of public services that have seen an increasing use of and involvement of the private sector over the last 30 years. Economic development has not been immune to this trend. The clearest point of departure in this direction was the creation of Urban Development Corporations, also in the 1980s. Run mainly by individuals from the business world appointed by central government, UDCs were given local authorities planning powers within certain boundaries as well as dedicated development funds. The most famous example is the London Docklands Development Corporation, which helped transform the docklands area of East London into a booming financial district. 14 Syrett, Bertotti (2012) Reconsidering Private Sector Engagement in Sub-National Economic Governance. In Environment and Planning A, Pion Ltd, London. 20

23 4. Businesses and strategic s partnering evidence from past initiatives Despite the many initiatives that seek to give businesses a role in leading places, we know relatively little about how this works. There are important unanswered questions about how businesses engage in economic development: Why do businesses choose to engage in economic development? What encourages business to stay engaged in the longer-term? Do businesses from different sectors and places, and of different sizes, have different reasons for engaging? Do these different businesses face different obstacles to engagement? What are the implications of business engagement? What criticisms are made of business involvement in strategic leadership? This section and the next explore the answers to these questions. This section uses evidence from past initiatives both in the UK and abroad. The next section (section 4) uses evidence from interviews with current business members of LEPs. Why do businesses engage? Public-private strategic partnerships rely on the engagement of businesses. For partnerships to succeed this business engagement must be high quality and sustained. Designing successful partnership models therefore requires understanding what drives business engagement. LEPs, like other past partnership arrangements, do not pay private sector participants for their time. Whatever drives businesses to get involved must therefore overcome a prima facie reason not to engage: namely, the cost to the business of the time spent by what are often senior, valuable staff. So why do businesses engage? The balance of evidence suggests that self-interest is key to motivating businesses to engage with strategic partnerships, with the desire to help a place often a secondary motivation. 15 Motivations for engagement vary according to the characteristics of the business (i.e. by business size and by sector, among other factors) and according to the design of the partnership model. 15 The evidence on what drives business engagement is limited because assessments of partnerships tend to focus on their external impact. For instance, the Government s official assessment of RDAs (PWC, 2008) goes into great depth on the value generated per pound spent, but barely mentions the structures and working practices of the RDAs themselves. Furthermore, the common method of learning about businesses attitudes to partnership engagement is to ask them (as we have done in this report), and this of course is subject to the usual risks attached to survey data: it is difficult to know for a sure why a business chooses to engage. 21

24 Business self-interest was found to be an important motivator in the following initiatives: The City Growth Strategy An assessment found that in both Haringey and the City Fringe ethical motivations existed alongside business self-interest, but self-interest was most important. 16 Once those businesses who were more motivated by self-interest decided they would gain little from the partnership their participation reduced. Business Improvement Districts A survey of the businesses involved in Coventry, Plymouth and Reading, found that the thirst for profit maximisation is the primary motivation for the political mobilisation of the private sector. 17 Self-interest and the desire to help a place are not mutually exclusive, of course, and indeed often push in the same direction. Many businesses, including most of those interviewed for this report, are attracted by the prospect of serving both their own and their area s interests at once. What sort of businesses participate? Larger businesses tend to engage more readily Large businesses are generally more able to spare the time of their employees than small businesses, for whom the absence of a high level employee is a greater cost. 18 Small businesses usually demand more direct benefits to their business and want to benefit sooner, again due to the greater cost of their involvement. This is unfortunate, since small businesses often have the most to gain from an improvement in their local economy small businesses often have a greater reliance on local markets than larger businesses. 19 There are benefits to having larger businesses involved. They are often better connected, and can through their own action have a greater impact on the area, simply because of their size. However, research has shown that it is a small number of highgrowth firms that generate most new employment and income. 20 High-growth is less likely to come from large, long-established local businesses. Therefore, the more that 16 Syrett, Bertotti (2012) Reconsidering Private Sector Engagement in Sub-National Economic Governance. In Environment and Planning A, Pion Ltd, London. 17 Cook (2009) Private sector involvement in urban governance: the case of business improvement districts and town centre management partnerships in England. In Geoforum 40 (2009) Syrett, Bertotti (2012) Reconsidering Private Sector Engagement in Sub-National Economic Governance. In Environment and Planning A, Pion Ltd, London. 19 Ibid. 20 Nesta (2009) The vital 6 per cent: How high-growth innovative businesses generate prosperity and jobs. Nesta, London. 22

25 partnerships can be tailored to support high-growth businesses (many of which start small), the better for the area. Businesses in different sectors have different motivations to engage Different types of businesses, and businesses from different sectors, react to partnership opportunities differently. One early theory suggested that the main driver of engagement is how fixed a business is in a particular area. 21 That is, if a business owns significant amounts of property or land in an area, they stand to gain the most from the increases in property and land values which are often the result of economic development activity. A similar theory suggests that any property-related business is more likely to have an interest in local economic development. 22 This means companies in construction and engineering, but also property related services such as engineering consultants, planners, and estate agents. This theory was perhaps more relevant to an earlier period when economic development was more focused on the physical regeneration, when economic development did involve significant property related activity. However, with newer models of economic development, which focus less on physical infrastructure, this connection between property services and engagement with partnerships is harder to draw. Box 3: 3 Strategic partnerships in the UK different levels of business involvement Business Improvement Districts present. BIDs have been used in many countries to encourage businesses to contribute to improving their business district in some way often this involves public realm improvements, but in other countries has meant employing private security. BIDs involve monetary commitments from businesses. This keeps them interested and stops free-rider problems. BIDs have been described as a success story a good solution to particular set of problems (Hoyt 2007). However, some BIDs have been criticised for blurring the line between the public and the private spheres by exerting too much power. City Growth Strategy tegy Arguably the first private sector led regeneration initiative. CGS was designed to create new sources of wealth, not to redistribute. The theory was that cities would succeed if their particular comparative advantages could be identified and encouraged. 23 An assessment of CGS found that while businesses in two of the CGS areas (Haringey and the City Fringe in London) did not engage 21 Logan, Molotch (1987), Urban fortunes: The political economy of place. University of California Press, Berkeley. 22 Cook (2009) Private sector involvement in urban governance: the case of business improvement districts and town centre management partnerships in England. In Geoforum 40 (2009) Bertotti (2008), Economic competitiveness and governance in areas of urban deprivation: The case of two city growth strategies in London. Middlesex University, London. 23

26 primarily for material self-interest, they soon drifted out of engagement when it was clear no material benefits to them would be forthcoming. 24 Regional Development Agencies Each RDA had business members on the board, but with less influence than businesses on LEP boards. Official assessments do not comment much on the significance or quality of the business involvement with RDAs. Single Regeneration Budget The SRB was established with the express purpose of bringing together the work of different government departments and agencies, and as such is the embodiment of the belief that economic development should be integrated and coordinated. Partnership working with the private and voluntary sectors was emphasised. Interestingly for LEPs, the official assessment of SRBs argued that It is not clear that the private sector is best placed to be the lead partner in a regeneration scheme. The private sector has a critical role to play but the best outcomes are secured when playing to the key strengths of the private sector and it often prefers not to be a lead partner. 25 City Challenge llenge Cities launched bids competing for regeneration funding from a central pot much like the system in place for the Regional Growth Fund. Also similar was a requirement that bids be a partnership between local authorities and local businesses. Sheffield s bid was unsuccessful because their partnership arrangement at the time were thought to be superficial. Training and Enterprise Councils These bodies were given control over skills and training spending in particular geographic areas, with some additional funding to support broader economic development. These boards were usually chaired by a private sector representative, and usually comprised of a majority of private sector members. Urban Development Corporations present. UDCs gave local authorities planning powers to specifically set up corporations in specific areas. The corporations were staffed by individuals appointed directly by central government many form the world of business. The most famous examples of UDCs include London Docklands, and Merseyside. The Docklands UDC successfully transformed the failing docklands area into a booming financial district. However, the main criticism of the UDC is that this transformation did little for the workers who lost out with the decline of the traditional docking work. 24 Syrett, Bertotti (2012) Reconsidering Private Sector Engagement in Sub-National Economic Governance. In Environment and Planning A, Pion Ltd, London. 25 Rhodes, J., Tyler, P. and Brennan, A. (2003) New Developments in Area-Based Initiatives in England; The Experience of the Single Regeneration Budget. Urban Studies, 40(8), pp

27 This is not an exhaustive list of strategic partnerships in the UK. Others include: Employment and Skills Boards, Local Enterprise Growth Initiative, the New Deal for Communities and Local Strategic Partnerships. Criticisms of business involvement in strategic partnerships As explored in the previous section, a consensus exists in favour of business involvement and even leadership of economic development initiatives, but there are nonetheless important criticisms which any such initiative must address. The main charge is that business-led partnerships are not, or are insufficiently accountable. This varies according to the design of the partnership, the levels of power exercised, and the mechanisms in place. But simply put, the criticism is that if an organisation behaves like a public authority (in the sense that it exercises power or spends public resources) it must, like a public authority, be accountable. There is evidence that this has been a problem with some past initiatives. Business Improvement Districts provide a useful case study (see box 2 for information on BIDs). BIDs have variously tried to achieve accountability through mechanisms such as sunset and reauthorisation clauses, external audits, and annual reports. These mechanisms attempt to restore the link between governed and governors indirectly, by making partnerships accountable to central or local government. 26 But there have been instances where BIDs have exercised too much power. In South Africa, where BIDs have employed private contractors to improve security in particular business areas, these contractors have encroached on the powers of the police. 27 In the UK a BID in Kent was condemned by a judge for attempting to ban an individual from entering the BID area. 28 These very blunt examples of accountability problems where a business-led partnership has sought to over regulate the public space, 29 to exercise hard power it did not have are unlikely to apply to LEPs in their current form, since they are strategic, not executive bodies. This may change as more powers and resources are channelled to LEPs. 26 Hoyt (2007), The Business Improvement District model: a balanced review of contemporary debates. Geography Compass 1/4: Ibid. 28 Ibid. 29 Ibid. 25

28 5. How are businesses engaging with LEPs? The previous section used theoretical studies and assessments of past partnership initiatives to explore the questions surrounding the involvement of businesses in economic development partnerships. This section uses interview evidence from business leaders to do the same. 30 In some instances interview findings corroborate the evidence in the previous section, specifically on the problems around attracting involvement from smaller businesses. However, in one key respect they don t. Namely: the vast majority of business leaders are involved because they genuinely believe in the worth of LEP activity, and because they want to make a positive contribution to the economy of their local area. Finding 1: Big businesses are more likely to engage than small businesses The importance of having a mix of businesses (in terms of size, sector, and geography) was stressed by many interviewees. This was considered important because it ensures that: the needs of all businesses are well represented; that board meetings would have access to as many sources of ideas as possible; and that the projects and actions of the LEP can be dispersed among as wide a pool of external businesses as possible. However, there were relatively few examples of small businesses on the LEP boards that we interviewed. Those that would be classed as SMEs tended to be medium sized businesses (employing as many as 250 people) rather than small businesses (with 50 employees or fewer). Indeed, most of the representatives of large businesses interviewed use the large size of their businesses as a reason for their having a place on the board. We reviewed the size of the business represented on boards across all LEPs and found that LEPs are failing to recruit enough representatives from small business. We found that, of those businesses for which employment numbers were easily available, 63 per cent were large businesses employing over 250 staff per cent were medium sized, and 20 per cent were small employing 50 staff or fewer. 30 As a caveat, the points made in this section about businesses and LEPs should not strictly speaking be considered generalisations about all LEPs, but rather apply to the LEPs who took part in our research. The names of the LEPs in question have not been revealed here to as to preserve the anonymity of the business members that were interviewed. We chose to conduct anonymous interviews to give participants the opportunity to speak freely without fear of compromising their relationships with others on their board. We expect, however, that interviews with other LEPs would confirm our findings. 31 Of the 257 businesses represented on all England s LEP boards, 129 were large businesses (250+ employees), 34 were medium sized businesses ( employees) and 41 were small businesses (fewer than 50 employees). Information on business size was not available for 53 businesses. Sources used for this exercise included business website LinkedIn, company websites and business member profiles on LEP websites. 26

29 The businesses represented on LEP boards are therefore not representative of the business demography overall per cent of all private sector businesses are small or medium. SMEs also account for 60 per cent of private sector employment. 32 One interviewee explained the drawbacks of having mainly large businesses around the table: a lack of diversity in the board room and difficulty targeting projects at smaller businesses which are often the main sources of growth and new employment. That interviewee suggested that it is more difficult for the owners of smaller businesses to justify spending significant time away from the business. Others pointed out that those business leaders with greater pressures on their time would have found it difficult to justify contributing given the length of time it has taken LEPs to get up-and-running. It has been two years since LEPs were established, but much of this time has been spent formulating strategies and establishing structures. In most cases LEPs have (understandably, given the time and resource constraints) had little tangible impact on the ground. Finding 2: Most businesses are driven to engage through a desire to help the area, although benefit to the business is an important secondary motive As discussed above, analysis of past business involvement in strategic partnerships suggests that businesses are primarily motivated to engage by the expectation that their involvement will generate some form of return for their business. We would expect, therefore, the same to be true of LEPs. For the good of the region The evidence from the interviews presents a mixed picture, with a significant degree of variation across businesses. Overall, however, it is only a minority of businesses who cite direct business benefit as their reason for participating. The clear majority describe a desire to improve the local economy as their primary motivation. One business leader said: you can t be doing this unless you re passionate about [the region], another said getting involved was just the right thing to do, and another got involved because he was concerned about the impact that the closure of the RDAs would have on the region and wanted to ensure that their replacements were a success. The majority of LEP business members, therefore, contradict the evidence that has emerged from previous partnerships. More than one described the considerable time associated with participating, but said their work with the LEP was important enough to warrant it. One business member even said that the other directors in their own business considered time spent with the LEP an unnecessary distraction from their day 32 BIS (2012) Business Population Estimates for the UK and Regions

30 job. It is clear that this business member was motivated by more than their own business concerns. However, all the business members who were clearly motivated by wanting to do good for the region conceded that on some level they stood to benefit if the LEP was successful. There is a big difference, though, between those who expected to benefit directly, and those who merely expected indirect benefit. Indirect benefits can be described as a business benefitting from a general improvement in the local economic conditions. A direct benefit, on the other hand, goes beyond this, and essentially means a benefit that will accrue to their business and not others. Indirect benefits Businesses including those citing a desire to improve the area as their primary motivation generally acknowledged that along with other local businesses they stand to benefit from an uplift in the local economy. This should not properly be considered a source of self-interest, since they are incurring much of the cost (in terms of time) of generating an outcome welcomed by businesses across the board. And in practice, is impossible to separate this generic benefit from an altruistic desire to do good for the region. Direct benefits One set of direct benefits can collectively be described as access to information. Almost all business said this was a key reason for their involvement. They expected information at different levels. On a narrow level, businesses expected to gain from information relating to future public investment in the region, and where and when this will take place. In some instances businesses hoped to position their businesses so as to directly tap into new sources of investment, implying they expected monetary gain. On a slightly broader level, other businesses wanted to gain information about what general business support initiatives and strategies were in place, and how their business could benefit. This was somewhat curious, since it is clearly the role of LEP board members themselves to develop precisely such initiatives and to advertise them to businesses across the region. Citing this benefit as a strategic advantage for their business suggests they considered their business would be better placed to take advantage of initiatives and projects than non-lep member businesses. Most broadly of all, many LEPs expected to benefit from information relating to the long term strategic direction of the region, and intended to position their business accordingly. It was not always clear exactly what businesses meant by such positioning. Another direct benefit was prestige. Many businesses saw it as good to be seen to be contributing to the LEP, to be seen with a seat at the high table, and to be seen with access to the decision making process. Being considered to be strategically important 28

31 within the region was considered a considerable reputational boost. Connected to this benefit was the opportunity to network with other high profile business leaders. One business said they hoped to secure work from fellow board members, but in the main networking was considered valuable for its own sake. One further direct business benefit cited was the ability to address risks to their own business. In many cases businesses were worried about the supply of skills to the region, and more than one cited oft-referred-to too many hairdressers cliché. Finding 3: Businesses will not stay interested ed in the long-term if LEPs remain toothless While the evidence for what drives businesses to get involved in LEPs is mixed, the attitude of LEP business members to their prospects for their staying engaged in the long-term were quite clear. They were aptly summarised by one business leader who said if this becomes a talking shop if we aren t delivering real action on the ground for local businesses I will walk away. This view was expressed in every single interview. There was a split amongst the businesses over how long they would wait. Around half expressed acute frustration at the slow progress that their LEP had made to date, while others were patient understanding the severe constraints under which LEPs have been operating. What both groups had in common, however, was a clear sense that their continued involvement very much depended on LEPs making considerably more progress than has yet been achieved. In some cases, when pushed, business members suggested they would give the LEP as little as six months before critically reviewing the value of their involvement. Others offered more generous time frames. Finding 4: LEPs facilitate sub-regional working. There is a tension within LEPs. They are comprised of several local authority areas, each of whom expect representation at the board level. Yet they must make decisions, and design projects using scarce resources, for the sub-region as a whole. Inevitably, local authority members will push for the best for their area, which causes friction. Businesses on the other hand are not aligned to a particular local authority area and therefore have an important role in making the sub-regional partnerships work. Many business members cited instances where progress would have stalled and action not been taken, had non-local authority board members not been present to iron out geographic tensions. For example, in one LEP the board had a decision to make over where to locate its bid for an Enterprise Zone. The decision was stalled to the point of threatening the bid altogether, but was pushed through by the business members of the board. 29

32 In this instance a lack of direct accountability was a benefit. With no re-election to worry about business members are much more free than their local authority counterparts, and face no constraints to making decisions based on a sub-regional, rather than local authority level. Finding 5: LEPs have proven to be effective at attracting business members with valuable skills and experience,, although there are too many familiar faces All business members interviewed had extensive experience within the local area, were high profile employers, or even had directly-applicable skills relating to harnessing private and public sector interests. Almost all interviewees reported being impressed with the ability of their fellow board members, finding this a source for optimism that the LEP would be successful. However, there are two points of concern. The first is the lack of SME representation on LEP boards. This has been mentioned already. The second relates to the danger that LEPs are attracting board members who, while undoubtedly suitably skilled and experienced, are familiar faces. Many business members had extensive prior experience of working with public-private partnerships, or of working for business representation organisations such as the Chambers of Commerce. In a sense this is to be welcomed, for working effectively at the juncture of the public and private sectors requires a particular skill set, and the experience of the familiar faces is an important resource. However, recruiting familiar faces limits the pool of potential candidates. Perhaps more importantly, it likely limits the freshness of the ideas the LEP generates. The type of ideas and projects LEPs must invent must be very different to those that were sponsored by RDAs. As outlined in the introduction, the challenges are greater, and the resources less. It is a whole new way of operating, and the solutions from past economic development efforts are unlikely to apply. Ironically, most business interviewees stressed the importance of recruiting a diverse, fresh board, and usually believed they had succeeded. And yet most were also able to list many examples of previous partnerships they had worked with. 30

33 6. Implications for policy The clock is ticking for local enterprise partnerships businesses patience is strained, and unless LEPs receive proper funding and powers there is a genuine risk that businesses will walk away. If LEPs are to drive economic growth across the country, the government needs to match rhetoric with finance, and finance with accountability. Having overhauled the old system of economic development at great cost and with much disruption caused, the Government must now back the new system it has created in its place. Reform the Regional Growth Fund,, and add further rounds The Government has not yet given any indication that there will be any additions to RGF spending. An extra 1bn was added to the fund early in 2012 due to the high demand for funds. It is possible that the Government will choose to make further additions to the fund. If so, we believe the RGF should be reformed, with LEPs given a more central role in managing the fund. If the money devoted to economic development is to remain small, we believe that the current model of competitive bidding is appropriate. This ensures the limited funds go to the highest quality bids. However, the Government should require that all RGF bids are channelled through LEPs. This will ensure the economic development efforts happening within the 39 LEP areas are joined-up, and acting to support a broader strategy for the local economy. Currently any private sector led bids are accepted, which means LEPs tasked with setting the economic strategy for the area and with taking action to improve the local economy do not have control or oversight over much of what is currently spent on local economic development. In the first two rounds of the RGF only 24 and 42 per cent (respectively) of successful bids were associated with LEPs. 33 It is unrealistic and unfair to give LEPs such responsibility for their local economies while not giving them control or oversight over the tools to put their strategies into action. Reforming the RGF to make it a LEP-centred fund will give greater local control over economic development, and will therefore better reflect the Government s commitment to localism. The current system is highly centralised central Government departments have complete autonomy over how to allocate funding. A LEP-centred RGF would make local economic strategies more effective, and therefore put more power in the hands of the local areas. 33 Source: contact at BIS who provided RGF allocations data. 31

34 Increase the participation of small business LEPs must increase the representation of small businesses on their boards for three reasons. First, small businesses form the vast majority of all businesses, and their particular needs must be addressed by LEPs. Stronger representation is necessary to understand the needs of small businesses. Second, small businesses are diverse, and recruiting their owners to LEP boards will ensure that the boards have varied members with different sources of expertise and different backgrounds. Third, our interviews revealed that LEP initiatives and activities rely strongly on the business networks of those involved in the LEP for their success. Successful LEPs must have highly connected boards, and specifically they must be highly connected to the small businesses in the area. There is no doubting the importance of large businesses, and large local institutions, in local economic decision making. These businesses and organisations are in many instances anchor institutions, which means they themselves have a significant impact on the area and its economy by being large employers, sources of much spending within the area on supply chains, and potentially also having cultural or historical significance for the area. However, large businesses are already well represented on LEP boards, as are other important institutions such as universities, airports or major local charities. It is representation of small business that is lacking at present. There are two possible ways to achieve greater representation of small business. First, Government may consider requiring that LEP boards achieve greater proportionality in their business representation, and in particular a greater representation of small business. Second, LEPs may have to consider offering small business owners some compensation for their time spent on LEP matters. This, however, will be a choice for each LEP, and may not be possible under the present funding constraints. Increase the capacity fund further The recent introduction of real capacity funding for LEPs was a long overdue and welcome step. LEPs are now entitled to 250,000 per year to run their day-to-day activities. However, we believe that this figure is still too low. We estimate that this will likely pay for no more than three to four highly qualified staff. Three to four staff on a secretariat with responsibility for areas as large as LEPs (with responsibility for, on average, roughly a million residents) is not enough. However, if as is likely more funds are not forthcoming, local authorities might demonstrate their support for their LEP by agreeing to pool (some) economic development staff across the LEP area. Economic development is not a statutory function for local authorities, and as such economic development activity is being pressed hard by the present cuts to local authority budgets. Pooling some economic development staff could be an opportunity for local authorities to generate some cost 32

35 savings, while putting greater weight behind their sub-regional level economic strategic decision-making. Clearer accountability processes LEPs need very clear structures for renewing board membership, and for evaluating the contribution of their board members. LEPs at present receive no specific guidelines on internal processes, and as such these vary between LEPs. As the Government places more resources and power in LEPs hands, it must ensure that these bodies are internally robust and accountable. Firstly, LEPs should consider establishing themselves as legal entities. Most LEPs (with the exception of the Solent LEP) chose not to establish themselves as legal entities due to the complications and time involved time the Government s Maoist reforms did not allow. 34 However, remaining unincorporated places limitations on LEPs. In particular, they cannot: raise finance, apply for grants or open bank accounts take on employees enter into significant contracts take on a lease or purchase property. 35 As LEPs become trusted vehicles for economic development, these functions may become necessary. Crucially, becoming a legal entity would significantly enhance the accountability processes in LEPs. The Institute for Directors noted last year that informal bodies as most LEPs are do not offer an inbuilt mechanism to ensure LEP accountability to local stakeholders. There is a danger that such a loose governance framework could be seen as serving an insider club of well connected local individuals, thereby harming the perceived legitimacy of the LEP in the eyes of the wider community. 36 Our evidence has shown that the insider club characterisation is presently true of some LEPs. The majority of business members had served on multiple public-private sector partnerships in the past, and were very familiar with several other faces sat around them on the board. As LEPs take on more powers and more funding, it is vital that their accountability structures improve. 34 Vince Cable, referring to the abolition of the Regional Development Agencies. Quoted in: The Guardian (2012), Vince Cable: Abolition of development agencies was 'Maoist and chaotic', 12 November Institute for Directors (2011), Local Enterprise Partnerships: a proposed governance framework. 36 Ibid. 33

36 Contact details The Work Foundation 21 Palmer Street London SW1H 0AD This report is part of The Work Foundation s Cities 2020 research programme, which is kindly supported by: All rights reserved The Work Foundation (Lancaster University). No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form without prior written permission of the publishers. For further information please contact info@theworkfoundation.com. Trading address: The Work Foundation, 21 Palmer Street, London SW1H 0AD. Registered address: Landec Ltd, University House, Lancaster University, Lancashire LA14YW. 34