Written evidence submitted by the Institute of Directors (LRS0040)
We appreciate the opportunity to participate in this inquiry. We are constantly receiving feedback from our members on the priorities for business and the economy after Covid. As this is an evolving issue, where we have not directly responded to a question in your terms of reference we will provide further updates in due course.
About the IoD
The IoD was founded in 1903 and obtained a Royal Charter in 1906. It is an independent, non-party political organisation of approximately 25,000 members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum, with 70% consisting of directors from small and medium-sized enterprises (SMEs).
The IoD’s broader views on this theme are outlined in our recently published report Connected Economies, People and Places, from which this response is largely based. We would urge the committee to consult the report for an in-depth assessment of the challenges – and potential policy solutions – for the UK’s regional growth agenda
Inquiry Terms of Reference
Local structures/ Stakeholder engagement
The UK’s regional development policy currently lacks coordination. The central responsibility for regional growth policy is fragmented between several departments. With the loss of Regional Development Agencies, powers, responsibilities and funding allocations meanwhile have been differentially devolved to Local Authorities, Local Enterprise Partnerships (LEPs), and Combined Authorities, with varying central-local deals. The somewhat hodgepodge process of devolution so far has created a vacuum between the centralised decision making in Government departments and devolved deliberation in sub-national structures which can harm the agenda to improve regional imbalances
Gaps in regional oversight as well as incoherence in national agendas makes it harder to integrate policies across local jurisdictions. The regular chopping and changing of devolved institutions with different governments has also stifled long-term progress and institutional knowledge building. Moreover, some areas lack the dynamism to respond to the local economic impact of global, national, and technological change. This includes the loss of a major employer, which can impose a significant burden on localities without the resources to mitigate the risks.
Methods to improve the local-national coordination of regional growth policy could include:
- Creating an independent regional taskforce comprising of representatives from local authorities, business leaders, civil society organisations, and experts to identify remote areas, particularly towns or conglomerations that may have a quieter voice in the existing devolution system (or fall outside of clusters), and are also at threat of significant jobs losses due to economic change. It can play a key role maintaining focus on areas where growth and jobs may be vulnerable to future trends, and make mitigating recommendations such support for retraining and start-ups. This would enable the UK to get ahead of the challenges of longterm economic change, which has been a notable flaw of regional policy since deindustrialisation in the 1970s, and help address any gaps created by the deals/competitive funding based approach to devolution by recommending funding for areas on the basis of need alongside
- Developing a schedule of ‘regional Cabinet’ meetings between key government ministers and regional authorities to ensure better integration in the central national missions of the Industrial Strategy across Government and local areas, and to act on any taskforce recommendations.
- Committing to an Industrial Strategy with a long-lasting mandate, particularly by making the Industrial Strategy Council (ISC) like a statutory Office for Budget Responsibility institution, but for developing success metrics, monitoring, and advising on local and national productivity policy. This would ensure the Government’s implementation is more binding, for example by requiring it to respond to regular progress reports, and also enhance longevity and consistency for businesses across the Industrial Strategy beyond the parliamentary cycle. Relatedly, the ISC and Government ought to consider the viability of developing new challenges and missions to help build long-term economic growth partnerships between business, academia and local areas.
- The Government should outline a long-term plan for decentralization, and explore whether further devolution deals for our largest cities, combined local authorities, or an extension of the Metro Mayors system might be suitable for driving regional growth outside London. This includes powers to manage skills, education, business support, infrastructure provision and to raise, and retain, more finance. Relatedly, the Government or independent taskforce needs to identify areas that may require greater control and resources in order to implement their local industrial strategies, and be aware that differences in devolution powers and funding opportunities, between cities, combined authorities, and LEPs can also drive intra-regional disparities.
Targeted regional investment
Accelerating R&D investment could help support the UK’s economic recovery from Coronavirus. The Government ought to consider the crucial role of place as part of its long-term ambition to raise R&D spending to 3% of GDP. Innovative activities not only spur growth, drive knowledge spillovers and create high-skilled jobs; they also only emerge in areas that have the business infrastructure to support it. Developing innovative business hubs and innovation centres outside London will also be a key part of improving graduate retention outside the Southeast.
This should be supported by:
- Providing more funding to drive R&D-led regional growth by supporting innovative business clusters, for example through UK Research and Innovation’s (UKRI) Strength in Places Fund and the Industrial Strategy Challenge Fund. This includes:
- Increasing the scale and scope of Catapult Centres across the UK. The centres currently act as support hubs for sector-specific innovation, in various strategic locations, but they have limited reach. Creating local impact targets, increasing awareness and boosting their network across the country where new specialisms are emerging can help to drive regional agglomeration effects and the growth of new sectors and technology.
- Amplifying the role the UK’s world-class university and research network can play in local growth, by:
- Supporting the commercialisation of university research alongside local businesses, by raising funding for initiatives such as University Enterprise Zones, Innovation and Knowledge Centres and other R&D facilities, to expand collaborative innovation workspaces to more higher education and research institutions across the country.
- Helping businesses to find R&D opportunities by investing in, and raising awareness of, Innovate UK’s Knowledge Transfer Network, and via an improvement in, and building greater awareness of, initiatives like UKRI’s ‘Konfer’—a digital innovation brokerage that helps to businesses find research partners.
- Leveraging the international networks of regional universities, business schools, and Catapult centres for investment opportunities.
The Government ought to consider how it can provide a nudge for growth, innovation, and entrepreneurialism to support underdeveloped regions (particularly those badly affected by Coronavirus) while ensuring any actions comply with the relevant state aid framework where value for money can be demonstrated, this includes:
- Improving investment allowances where there is a strong case to do so. For example, while London’s Shoreditch Silicon Roundabout continues to be the main hub for UK tech, digital start-ups are flourishing across the country, in particular in the South West, North East and Scotland. Yet many entrepreneurs outside of the Southeast find it difficult to access the angel investors and venture capital firms which agglomerate around the capital. Trialling different tax relief rates, such as for the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, may be one way of achieving this
- Considering how applying improved business rates reliefs and providing further investment allowances or tax credits for R&D, technology, building, machinery and equipment in disadvantaged areas of the country can be used to spur productivity growth. This can be tested through pilots, and by developing, or expanding, the existing offers in Enterprise Zones
The Government should follow through on its intention to guarantee and eventually replace ESIF with a UK Shared Prosperity Fund, beginning by consulting soon on its design. It should, at the very least, match what the country already receives from the EU. The funding allocations should also place greater emphasis on developing areas with high unemployment and low productivity (alongside supporting competitive areas), and improve upon current application procedures for EU regional/ structural funds.
It should ideally be coordinated in collaboration with local areas, drawing on regional national government deliberations and the proposed taskforce’s recommendations, to ensure funding also helps to connect neighbouring local economies with differing levels of devolutionary support. The ultimate design and delivery of funded initiatives should be driven by local authorities where possible.
The UK more generally needs to find the finances to replace EU funding streams which may be closed off in future, and raise further investment, which should involve assessing new funding channels, including by:
- Using the next Spending Review to set out an ambitious vision for regional investment post-Brexit and for the Coronavirus recovery. This should extend to a review of whether existing fiscal targets remain relevant and how they might be adjusted to create more scope for increasing public cornerstone investment.
- Investigating the creation of long-term investment vehicles. (Indeed, 80% of our members cite short-termism as a major hurdle for Government investment in the Industrial Strategy). This includes the prospect of independently administered economic investment funds, at a regional or national level (like a sovereign wealth fund), drawing on, for example, retained revenues, public sector pension funds, or income from commercial public assets (like an urban wealth fund (UWF) which pools property/ non-property income streams to reinvest in local communities). More generally, the government ought to evaluate how its existing funding streams can be professionally managed and reinvested effectively.
- Supporting local authorities to effectively and responsibly raise sustainable longterm finance, for example by:
- Evaluating further business rates, and other tax, retention; loans and bond issuance; and local investment funds (for example via UWFs) as potential sources. (A wider review of how the current tax system impacts regional growth, and an evaluation of new approaches, such as a Land Value Tax, would be a welcome additional step.)
- Driving long-term incentives to improve self-sufficiency in local areas, including through revenue retention, local investment funds and incentive programmes. Schemes like Greater Manchester’s ‘earn back’ City Deal, which allows it to ring-fence a portion of additional tax revenue from economic growth increases resulting from its local investment, might for example be evaluated and extended to other regions.
- Supporting the British Business Bank (BBB) to improve access to finance, including equity, angel and loan finance, for small businesses outside London and the Southeast, by:
- Ensuring EU originated funding for the BBB is at the very least replaced with a view to bolstering SME finance options in other regions. One approach would be to expand the bank’s Northern Powerhouse and Midlands Engine Investment Fund model – where fund managers work alongside LEPs (and equivalents in the devolved administrations) to allocate funds – to other regions.
- Encouraging the growth of business angel clusters outside London by supporting the development of investor skills and providing cornerstone funding.
Chief Economist, IoD
External Affairs Manager, IoD
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