How to do inclusive growth - Step 3: Leverage, target and align resources

23 November 2018

By CPP

11 minute read

This post follows on from Step 1 and Step 2.

Step 3: Leverage, target and align resources – practical examples to maximise investment in the pursuit of inclusive local growth

The objective here is for places to innovate to get the resources they need to pursue innovative inclusive growth, particularly given the ongoing local government funding climate. Whilst the recent Budget softened the UK central government’s austerity position - including and focussing extensively on additional NHS spending – places will need to find other ways to invest in social and physical infrastructure. Local government revenue support grant continues to be phased out and questions remain as to the future of business rate retention. How then can places support investment in integrated, high quality social and economic infrastructure, and - by doing so - create sustainable, inclusive growth?

Local authorities have been left to innovate in this area and there are ideas already emerging, building on what was learned from the Total Place pioneers and – in the most forward instances – harnessing financial and non-financial resources from across the public, private and philanthropic sectors. These whole-place approaches can finance investment across social and economic policy areas, programmes and projects all then aligned to support inclusive growth, as defined locally. Probably the most developed of these so far is the Bristol City Funds, linked to the City Office initiative (see Step 4), but others (including the North of Tyne Combined Authority, NTCA) are fast following suit.

Innovative and practical examples of local areas raising finance

The Public Works Loan Board in the UK is the primary source of local authority borrowing. But extra resources are beginning to come from a range of other sources, including:

  • Philanthropy. Plymouth has attracted a grant of £1m from the Esmée Fairbairn Foundation to support their inclusive growth agenda by supporting cross-sector collaboration with Plymouth’s third sector. Their aim is to create social capital and positive social change, including by connecting to Plymouth as a Social Enterprise City, supported by the Big Lottery Fund. The Barrow Cadbury Trust is supporting a programme of citizen engagement to help form the basis of the West Midlands Inclusive Growth Unit and to develop a platform for inclusive decision making across the Combined Authority.
  • Municipal bonds. These bonds can facilitate local government borrowing from private capital markets, such as Birmingham’s Brummie Bond, which funnels £45 million into low-cost housing development, or Warrington’s £150 million bond issue.
  • Levies on traffic or workplace parking. Congestion charges have been controversial, but there are other ways to encourage the use of public transport whilst raising funds locally. For example, Nottingham now raises £9 million a year from their workplace parking levy.
  • Social impact bonds (SIBs). SIBs can leverage in private investment on the basis of only paying for an agreed set of outcomes. Bridge Ventures is a leading SIB investor which has invested in youth employment schemes, as well as health and wellbeing. The risk with this method is ensuring sustained investment over time in difficult areas, so ultimately it may need be supplemented by government grant funding.
  • Community Infrastructure Levy (CIL). Whilst not a new area of funding, or one without issues, CIL is designed to create a clearer link between the benefits to the private sector of developments and their costs to government. It allows local authorities to charge developers for the cost of paying for the roads or services to support new developments, but these amounts (as with Section 106 agreements that preceded them) are often heavily negotiated (downwards).
  • Pension funds. Greater Manchester Pension Fund is the largest local government pension scheme in the UK, with £17.3 billion in assets under management. Local investment is limited to five per cent of main fund value and currently stands at less than half that, so there is potential for its scope to expand. Elsewhere, nationwide pension funds such as Legal & General (L&G) have used their investment arm to invest deeply in places, such as the Newcastle and L&G partnership, with a view to crowding in new sources of investments from other long term investment partners.
  • Crowdfunding. Charitably-led schemes facilitate investment – often in small amounts by members of the local community – in return for a share or service entitlement in the public service or development. Hastings Pier was bought in a similar way by a mutual group of local investors via a co-operative share issue. This can be a community led effort, but good accountability mechanisms must be in place given it puts individuals’ money at risk.
  • Locally owned utility companies. Swedish cities have had responsibility for energy now for three decades, and it has encouraged innovation and provided them with green electricity and a sustainable income. Bristol Energy or Robin Hood Energy in Nottingham are both in their early stages, but both have begun to create jobs, reduce emissions and tackle local fuel poverty. Other places are considering creating their own utility companies or have helped to set up local businesses backed by local government to compete with national shared services providers (and prevent local job losses).

Bristol’s City Funds initiative brings a selection of these ideas together. Managed by Bristol and Bath Regional Capital, it is one of a new generation of local financial intermediaries leveraging public, private and philanthropic sources of finance, alongside potential opportunities for crowdfunded donations, providing grant and loan-based resources for specific objectives, linked to the City’s One City Plan with sustainable, inclusive growth at its heart.

Internationally there are further examples of ways to increase local government revenues, including the opportunity zone tax incentive as seen in the US. These allow investors to defer paying tax on capital gains from the sale of property if those gains are invested in Qualified Opportunity Funds. 90 per cent of their assets must be invested in businesses or property used in a low-income community. Despite being well-intentioned, the approach has not been without controversy. There can be tension between maximising investment through tax breaks and the goal of maximising tax revenues, as well as questions over the likely beneficiaries of tax breaks (i.e. potential for companies to be largest beneficiaries) and the distribution of risk where community development financial institutions (CDFI’s) are involved.

The role of local government remains key in innovative, place-based investment scenarios: aligning investment with its inclusive growth mission, setting the parameters for ‘the deal’ (e.g. eligibility criteria or other types of conditionality) and/or leveraging government funding (e.g. linked to devolved investment pots). The examples of alternative financing options above illustrate how different levels of government are identifying pragmatic ways of using existing powers and flexibilities to encourage such innovations. Innovations also vary between the same levels of government. North of Tyne’s devolution deal – for example – enables fully flexible capital/resource expenditure of £100m over five years. Other combined authorities have been so far restricted to capital expenditure out of their devolved investment pots. The newly constituted NTCA has been developing an investment assurance framework that reflects its ambitions for creating an inclusive economy across the constituent three local authorities – encompassing both an urban and rural settings in Newcastle, North Tyneside and Northumberland councils.

The ‘asymmetric geography’ of power distributed at different levels in the UK is symptomatic of our evolving constitutional landscape, within the devolved administrations and amongst England’s still nascent sub-regions. The UK’s comparative levels of centralisation mean that local or regional governments in other countries are often more familiar with devolved financial or fiscal powers. For example, in Germany cities have the power to buy land at existing use value. They can also raise the finance they need through long-term low interest loans from regional savings banks (Sparkassen). Money that in the UK would have gone from the end occupier, through a developer, to the landowner, is in effect diverted by local government in Germany to pay for good quality infrastructure, squeezing out the ‘unearned’ profit to the landowner.

This may be a glimpse of a new future for the UK too; recent research by the Centre for Progressive Policy has shown the extent to which enabling government to share in profit from land could help fund further affordable housing infrastructure.[1] The Communities and Local Government Select Committee recently endorsed our recommendations, and other think tanks – including Shelter, Civitas and the National Housing Federation – support the approach as an innovative funding solution to this intractable British problem.

Wrap up

Taken together, this list of additional ways of raising or earning revenue for local areas presents a piecemeal approach rather than a systematic one to solving the local funding problem. But these new approaches are becoming increasingly common in the face of continued pressure on local government finance.

The key to success will be that resources are aligned with the shared objectives of individuals, public and private sector institutions and are set by an inclusive process in which residents, businesses (large and small), universities and colleges, health and social care institutions, football clubs, arts and culture organisations and the full range of whole-place partners are involved in constructing a binding vision for the place. Then – as some of the most persistent and ambitious places are already starting to find – investors, developers and financiers committed to the long-term interests of the place will step up, lead and contribute to sustainable, inclusive growth. Those not on board with the shared mission might start to drift away, but in doing so, they will create less of the kind of economic activity that has such unequal effects on households, workers and whole communities. It is time to change the conversation and for finance and investment to be a part of the solution for inclusive growth.

Next time we look at the trade-offs between the potential institutional structures at local level in order to facilitate investment and deliver inclusive growth.