Written evidence submitted by KPMG UK (LRS0054)
We welcome the opportunity to respond to the committee’s inquiry on levelling up. At KPMG, we are committed to playing our part in strengthening opportunity for all across the country – not only as a major regional employer in all regions, but also as a trusted adviser to our extensive network of local clients.
Our insights in this submission are based on the many conversations we have with businesses looking to grow across the UK – from small family owned firms, to larger regional SMEs with the potential to scale up further, and major national corporations seeking to expand their regional footprint.
We hear loud and clear from them that the need to level up the UK’s economy continues to grow. The underlying pressure to do so has been there for a while, and many welcome the growing spotlight on the importance of regional investment. Covid-19 has further exacerbated many of the social and economic imbalances across the country.
Our regions, and the businesses within them, can play a major role in the UK’s long-term recovery. Despite the turmoil of recent months, many businesses still want to invest in their local area. In order to do so, though, they need the right conditions to be in place locally.
When it comes to local and regional structures, many businesses we speak to say that what they need more than anything else is clarity. Clarity on where local power lies, and how they can navigate through a complex system of local government. Clarity on where funding is available, and how they can access it at a local level. And clarity on long-term regional investment priorities, so that they can adapt and capitalise on the benefits of new local projects.
We have focused our submission on two areas of the committee’s terms of reference that will be crucial for achieving this clarity and, in turn, delivering local growth – current local structures and collaboration, and targeted regional investment.
Current local structures and collaboration
Much of the levelling up agenda in recent months has understandably focused on identifying priority areas of investment as we seek to recover from the Covid-19 pandemic. That is entirely right, and many businesses want to see this work continue in the coming months.
Yet if we are to realise our ambitions for local growth, we first need to ensure that the devolved powers in each region are set up in a way that facilitates collaboration – both between different tiers of government, as well as with local business.
While the UK continues to have a highly centralised structure of government, the gradual shift towards placing local people in charge of the issues affecting them – including through the establishment of Combined Authorities and metro mayors – is welcome.
We have seen the benefits of these local powers in recent years, with local communities across the country having a greater say on how their area is managed.
It has, however, resulted in a complicated and fragmented system when considered as a whole, with a range of different structures existing across England and each area at a different stage of their devolution journey. Many businesses, looking to further invest their local area, often struggle to navigate the different tiers of government and understand who to engage with – whether it is the Combined Authority, local authorities, LEPs or others.
As it stands, while there are some strong examples of different tiers of local government working well together, the complexity of the system can sometimes encourage competition between structures rather than incentivise collaboration. This is particularly true when it comes to funding, as a result of funds being distributed across multiple structures and authorities.
A fundamental overhaul of local structures is not required – this would be incredibly disruptive, negatively impact on local growth, and create more confusion amongst businesses and the general public about the respective roles of Metro Mayors, council leaders and other bodies. Many existing structures are relatively new organisations and need more time to establish themselves.
What we do need, however, is clarity on the relative powers and funding of each tier of local government. The upcoming Devolution White Paper is an opportunity to set the tone for regional structures going forward, and to simplify responsibilities and funding at a local level to help promote regional investment. We would welcome efforts to:
Targeted regional investment
A clearer and more efficient set of local structures will also help regions to identify their priority areas of investment as we enter the Covid-19 economic recovery.
We already know that the current crisis has exposed regional vulnerabilities. Regional economies with a narrow concentration of certain industries have been most at risk from the pandemic, with those reliant on transport manufacturing, travel and international tourism likely to see the greatest economic damage this year.
Our recent Economic Outlook (June 2020) has found that the West Midlands could be the most heavily impacted region this year, with a 9.1% drop in output compared to 7.2% for the UK, as a result of high concentration of heavily impacted industries in the area. This picture is mirrored when we look at the economic exposure at a local authority level.
In the longer term, all regions face challenges in delivering the growth and employment opportunities that are required to make a success of the levelling up agenda. The government’s ambitions to strengthen investment in the regions is therefore welcome, but we need to ensure that the focus is on long-term transformational projects.
An initial focus on ‘shovel ready’ projects might provide some quick wins for central and local government, but they are not the long-term answer to regional growth. By their very nature, they are projects that have already obtained the necessary approvals and are ready to go.
This significantly narrows the pool of potential infrastructure upgrades that government can back, favouring small upgrades, such as road upgrades, over transformational projects that tend to be more complex and involve wide range of stakeholders with competing priorities.
Instead, we need to take the opportunity to assess each region’s growth potential and identify long-term investment priorities for each area. Individual regions are best placed to understand their own economic needs, as they have already done through the development of Local Industrial Strategies.
We now need to make sure that there is a clear process for each region to identify their own unique strengths in the post-Covid landscape, as well as ensuring there is an honest recognition of the limitations of each region. We can learn a lot from regions, such as South Wales, who have picked winners, even where this has alienated some sectors, rather than competing on the same ground with other regions.
This will require a ground-up approach, with local structures working with universities and existing assets in the area to identify these regional priorities, which should be underpinned by supporting data from central government.
This activity should fit within the broad parameters of a refreshed Industrial Strategy set by Whitehall, which should provide an overarching framework for growth. Once this is set, regions should be provided with the space to consider how to implement it based on their own economic needs.
We recognise that there are already numerous examples of this process working well – in many areas, Combined Authorities are working closely with local authorities, LEPs and wider business and political stakeholders to formulate ambitious growth plans for their region.
However, freedom to set their own investment priorities is not sufficient on its own. We have seen from the creation of Local Industrial Strategies that individual regions can have clear visions for the future, but unless they are matched with greater devolved funding it is difficult for them to make a real impact on the ground. We run the risk of similar initiatives becoming no more than heavily bureaucratic processes unless this imbalance is addressed.
More devolved funding, with flexibility for delivery, is therefore required if we are serious about empowering regions to lead their recovery from the impact of Covid-19 and beyond. Not only will this funding provide impetus for each area to focus on long-term priorities, it will also help to engage local businesses who have otherwise disengaged from the Industrial Strategy process as a result of limited funding being attached.
Similarly, as we enter a new relationship with the EU and look to secure new trade deals with our international partners, ensuring that we have clusters of expertise in different parts of the country will be increasingly important to attract Foreign Direct Investment. Allowing regions to have more flexibility to establish their own priorities and enhance their existing economic strengths will help to encourage a greater spread of inbound investment across England.
Wider common priorities
We would expect to see this process result in a more diverse range of local growth strategies, with a move away from different regions trying to compete on the same ground. This would be welcome by many of our clients who stand to benefit from a clearer set out long-term regional investment priorities.
At the same time, we recognise that there still exists a number of common challenges that local areas will face in the coming months and years. While these challenges will manifest themselves in different ways in individual areas, these are issues that are regularly identified by our clients are fundamental barriers to growth.
Several of these common challenges are set out in more detail in our recent report, UK regions: a framework for growth (January 2020), and though identifying the full range of interventions is beyond the scope of this inquiry, we would highlight the following in particular as priority areas post-Covid: