Written evidence submitted by Deloitte (LRS0070)
Deloitte welcomes the opportunity to contribute to the Business, Energy and Industrial Strategy Select Committee’s inquiry on “Levelling Up” as part of its wider work on growth beyond COVID-19. This agenda is a key plank in the future positioning of the UK as a competitive, balanced, inclusive and productive economy and with COVID-19 driving short and long-term structural changes to the UK economy, it is an opportune moment to consider these challenges in the round.
Deloitte works with businesses and public sector organisations of all sizes across the UK and globally, providing consulting, financial advisory, audit, tax and risk advisory services.
Within the UK, Deloitte has a large and growing regional presence, with over 7,500 people across 19 offices outside of London.
Deloitte’s regional presence has grown in recent years and we have invested significantly in in building hubs of specialist skills and services across our UK-wide offices, including in technology in Bristol, cyber security in Reading, FinTech in Edinburgh, digital in Belfast and life sciences in Cambridge. Last year, for the first time, over half of our graduate and apprentice intake joined a non-London office.
Both our client work and our footprint as a large employer in our own rights gives us a perspective on the challenges and opportunities for the UK economy and provides us with insight and experience working with central, regional and local governments and business bodies, which is reflected in this submission.
Of particular relevance to the Committee’s inquiry is the report (Power Up: UK-wide growth) published by Deloitte in 2019. This looked at the role that skills and productivity can play in driving regional growth and featured qualitative interviews with over 50 business leaders, educators, local/regional government leaders in each of the regions and nations of the UK. Its key findings and recommendations, which overlap well with the scope of the Committee’s terms of reference, included:
- Business leaders stressing the need for investment in infrastructure and skills, particularly in the digital space;
- Focusing on developing skills for the workforce of the future, with co-ordination between business, educators and government and a focus on talent retention and attraction, particularly in sectors that have seen strong regional growth in recent years (such as creative, professional services and science and innovation);
- Devolution of powers and place-based strategies are central to inclusive local growth and regional strategies;
- Continued collaboration between policymakers, academia and business leaders can drive growth of regional ecosystems and economic transformation.
We hope that the comments contained in this submission are helpful to the Committee and we would be happy to share further thoughts on these topics as useful to this inquiry.
We have drafted our response as a collection of broad observations against each theme, rather than a line-by-line response to each individual question.
- Qualitative assessments of local government used to take place as part of a national performance framework, but these were phased out some time ago for a number of reasons - including time, cost and practical value. While they were not unhelpful in assessing value for money and the costs of local authority services - the target operating model today in local government is a more sophisticated version of that - the system did not embrace the diversity of local government and roles such as understanding and meeting community priorities, supporting growth and investment etc. Indeed, it is only in the last ten years or so that there has been greater national clarity about the statutory role of local government in these terms.
- We are not aware of extensive value for money assessments covering the costs of institutions and the delivery of wealth and job creation – our instinct is that these would tend to be very narrow anyway given the fragmented nature of responsibilities for job and wealth creation between national and local government.
- There have been successive reviews of the governance and value for money of Local Enterprise Partnerships (LEPS) given they have increasing amounts of public resource deployed to them. This included the Ney Review which recommended the creation of a stronger assurance framework but it not clear how effective these measures would be in either detecting governance failure of delivering value for money.
- This series of questions also points to the challenge around ensuring that the “Levelling Up” agenda is well defined by metrics and milestones. There are multiple different forms of measurement that could potentially be used to judge the effectiveness of regional and local government and the overall success of the “Levelling Up” agenda. These include GDP contribution, labour market participation, productivity, share of public spending, infrastructure investment (which has been the focus of most government interventions to date) or outcomes in health or education. Some will measure the impact on places, others will measure the impact on people. Clarity on which of these provide the benchmarks for success will substantially inform and improve major policy decisions, create tangible goals, target interventions and ensure that progress is measurable.
- Regarding cost benefit analysis, we have actively participated in HMT’s review of the Green Book for “Levelling Up”. We understand that the findings of this review will be made public in the Autumn at the same time as the Spending Review. We note that this will ensure greater focus on metrics that matter for areas of the country who might otherwise miss out on transformational investment. These principles can then be used in future monitoring and evaluation in the Magenta Book. Together this change is likely to lead to more investment outside London – by ensuring the case for investment can be better made on transformational potential than traditional value capture (which tends to be lower outside major cities) – and allow a more efficient allocation of resources. We also note that the interaction of department-specific appraisal and evaluation guidance with the Green Book is important here, as well as ensuring the right delivery mechanisms are in place locally to crystallise these benefits.
- There is a need to consider the sub-regional and local government setup, both as a response to COVID-19 and to drive forward the ‘Levelling Up’ agenda. As such, there is an opportunity to re-think both national, regional and local government relationships and how these can best be aligned in a way that empowers local leaders to meet national goals.
- The Government’s proposed White Paper on devolution will be an important opportunity to send signals about how economic geographies will be equipped to deliver the breadth of programmes required and, ideally, give general impetus to greater delegation and devolution, which has largely stalled in recent years.
- Overall, the devolution of power, funding and fiscal responsibilities will be critical to the success of ‘Levelling Up’. England in particular still has one of the most centralised systems of government, with the national centre of government determining most economic priorities and exercising most of the fiscal controls that underpin delivery.
- That said, we acknowledge that not all areas are ready to take on the full extent of such responsibilities immediately. Fiscal equalisation arrangements are complicated and would need careful consideration to address the core issue of regional disadvantage. An immediate alternative might be more fully funding local authorities, even perhaps overfunding them in the immediate aftermath of COVID-19. Increasing overall funding for local authorities should, in particular, focus on assisting councils to access and develop economic planning and development skills.
- Overall we believe that greater devolution can help to energise local and regional decision-making; encourage business engagement and ensure that plans are suited to and informed by unique local needs. Local empowerment must also be linked to a new framework for achieving national accountabilities and a new approach of empowering places and communities can ensure there is alignment between national and local priorities.
- Policy areas such as transport, science and innovation, employment and skills, housing and health and social care are critical to local and national productivity and competitiveness. Delegating, devolving and joining these up at the local level will be a significant opportunity to drive growth and “Levelling Up.”
- There is no single or one-size fits all approach to delivery of these functions. Some will require intra- regional collaboration, as the Northern Powerhouse has done on transport and industrial strategy. Others – such as employment, skills and housing - require a focus at a defined economic geography level while some – such as health and social care - will require delivery at local neighbourhood level. These will include cities as well as towns, rural and urban areas and not all have the structures and processes currently to deliver all the programmes of the breadth and scale necessary. They will need to be incentivised to so.
- While each are well-intentioned, there is potentially overlapping and conflicting array of government bodies and business groups at all levels. This includes: local authorities, Local Enterprise Partnerships, elected mayors and Combined Authorities at the local and regional level, local and national business representative bodies, including chambers of commerce, sector-specific business groups and UK-wide business lobby groups, Then, of course, national government with its role across all of these.
- Our sense, drawn from the insight provided through our regional presence and our discussions with clients, is that this can be a very difficult landscape to navigate, particularly for smaller businesses and international investors and some bodies have more mandate to act and deliver than others. This need not entail wholesale restructuring of local government, but there is a case for simplification.
- There is, therefore, merit in undertaking a strategic review of this array of different bodies and organisations and the interplay between them, with a particular focus on improving business engagement and outputs. We also see scope for a form of structural overlay that could be applied to minimise potential duplication of efforts and create a clear and easy-to-use route for businesses in engaging with local, regional and national governments and stakeholders.
- The planned Regional Growth Boards may have a role to play in providing this. Ideally these would help to bring clarity and consistency across the local and regional government landscape and have the resources and skills to work effectively across existing structures, rather than adding an extra layer and increasing this already complex setup. They can also help to accelerate devolution and support different geographies by strengthening governance and collaboration where needed.
- We would also urge focus on the development of skills in local and central government. Attributes and capabilities such as leadership, assertiveness, risk management, business partnership and economic planning as a critical component of successfully driving economic growth. There are examples of best practice that could be drawn upon – Manchester has been a notable success – and perhaps a role for a model such as the Major Projects Authority (which focuses on officials’ project management and commercial skills) to help embed and develop skills in local leaders.
- The effective join-up between public and private sectors will be critical to the success of the “Levelling Up” agenda and post-COVID recovery.
- From our perspective, there is evidence that local and regional structures which have industrial strategies have been developed through extensive stakeholder engagement. Teesside and the Solent are currently engaging extensively on these terms and there have been similar exercises via the Northern Powerhouse on its sectoral analysis and in Greater Manchester on its local industrial strategy and Science & Innovation Audit.
- More broadly though, we believe that the interfaces between business and government at regional and local level be reviewed and updated if necessary. This is something that the proposed Regional Growth Boards could play a role in, as part of the agenda around simplifying and improving dialogue and engagement, and in providing a platform for aligning local and national policies and programmes – particularly skills and training.
Sustainable local economies
- “Levelling Up” and Net Zero are both flagship endeavours for the long term UK economic and can work in tandem and be mutually beneficial. Regionalising and localising efforts to attain Net Zero would play a significant role in advancing the “Levelling Up” agenda. Future government interventions and projects to drive regional growth can be focused on the green economy and clean growth to create initial momentum and focus both public and private sector organisations on a particular goal to work towards. Investment in public transport for example – particularly ‘smarter’ technology enabled services – can both drive economic activity, support high skills employment and reduce environmental impact.
- In our recent submission to HM Government’s consultation on Freeports, we outlined how industrial transformation can be incentivised, to assist UK industries in transitioning to more modern activities. There are clusters of industry within the UK – major ports, manufacturing hubs, the petrochemical industries, for example – that could be at the heart of a transition to clean energy or advanced manufacturing. Empowering local leadership, providing funding and policy support and focusing on skills can drive both local/regional growth and broader UK strength in the low carbon industries of the future.
- Skills will be the backbone of economic transition, in clean energy and manufacturing and more broadly in driving growth of high skill sectors, such as health, IT and innovation, where regional economies are currently under-represented. Long-term skills policy – encompassing higher, further and vocational education, needs to be linked explicitly to regional growth strategies and future economic trends.
- Delivery of plans for both growth and environmental transition will be best located at the economic geography level, beyond just current administrative boundaries. In terms of leadership and delivery, our experience is that the most effective local and regional structure tend to differentiate between leadership and commissioning/delivery – they key to both is accountability, determining priorities and building relationships with communities and relevant stakeholders.
Targeted regional investment
- Focusing investment on “shovel ready” infrastructure projects are a key element in stimulating economic demand, particularly in the COVID-19 economic recovery. For maximum benefit, they can be linked to both the “Levelling Up” and Net Zero agendas and, in particular, focus on projects outside of London as a means of improving productivity and job creation in regional towns and cities. The challenge is striking a balance between investments that are quick wins in terms of economic return but also ensuring that they are linked to longer-term outcomes and are not just sporadic “quick wins.”
- Both national and regional/local government will need to be clear about the outcomes that public investment is seeking to deliver, how it plays to regional and local strengths ad opportunities and ties into a wider national effort to grow the UK’s distinctive strengths.
- Science and Innovation Audits are a good starting point to evaluating these, providing a dispassionate analysis of local strengths and weaknesses and looking at the scope of opportunities for innovation and longer-term industrial transition.
- Investment in digital infrastructure and skills should be high on the list of priorities. Both are needed to position the UK for the ‘future of work’ (as above, an existing trend that has been accelerated by COVID-19), improve regional connectivity as a spur for growth and boost wider UK competitiveness. These emerged as key priorities in Deloitte’s report on regional growth as outlined above.
- While R&D investment is a driver of local growth, innovation is broader and wider than high end research and its translation into industry. Not every town or city has a major university or cluster of innovative businesses or assets that drive research activity. Where this ecosystem might be absent, towns and cities should have a basic innovation capability, focused on developing skills, supporting young people and creating pathways into innovative industries. So again this comes back to focusing on skills and the role of further, vocational and higher education.
- The Shared Prosperity Fund provides an opportunity to focus clearly on place-based delivery, draw out the inter-dependencies between the full range of public funding, help to develop tailored local ecosystems around skills and employment and rethink the relationships between local and regional government and the national government. Taking such an approach, and thinking across existing boundaries and organisations, can help to create a joined up approach to innovation and transformational change.
- The British Business Bank has a strong to play in the “Levelling Up” agenda given its capacity for business investment. Deloitte recently co-authored, along with the ScaleUp Institute and Innovate Finance on the UK’s growth capital gap, a report looking at the opportunities for economic recovery and regional growth. That report made a number of observations and recommendations on the role of the British Business Bank, including:
- Expanding and building upon the British Business Bank and Scottish Investment bank to develop a network of National Development Banks to facilitate investments in line with societal and economic goals
- Establishing a formal network of British Business Bank regional offices with resources, budgets and a stronger regional presence – physically and virtually - closer to the market place and local investors.
- Enhancing and expanding existing schemes, venture debt and regional funds to bring local knowledge together with the British Business Bank’s expertise
- Many of these recommendations will be relevant to the Committee’s inquiry on “Levelling Up” and other topics related to businesses and economic recovery.
- All infrastructure projects must be accompanied by clear plans for capturing maximum local growth. These cannot, by definition, be undertaken in Whitehall.
- There is the opportunity to re-think how through Local Investment Frameworks how infrastructure and other projects can support wider investment frameworks which guide the public and private sectors to make investment decisions. This will not only support local growth but can also become a platform for the benefits of sustained local growth to be shared.
- Consideration should be given to how this initiative is staggered and implement on a region-by-region basis. Some areas, such as Manchester, are already well positioned to take this forward, others will need more time and capacity and can learn from the experience of those regions that pilot this in the first instance.