RGF bidding war exposes a flawed approach

There are few surprises in first round of Regional Growth Fund bids, says Adrian Nolan. But it reinforces the same concerns

The Department for Business, Innovation and Skills has released a breakdown of the bids it has received from across the country for the £1.4bn Regional Growth Fund (RGF). It reveals a number of notable, but not wholly surprising, trends.

The first, and most revealing aspect, highlights the huge imbalance between supply and demand as places compete vigorously to gain access to one of the very few pots of substantial funds available. Overall, 464 bids were received asking for a total of £2.78bn – double what is available during the whole three-year lifetime of the fund. When you consider the first round funding pot is limited to £250m-£300m, the application panel will have a difficult job sorting out the bids that appear to have greatest economic value and potential to generate sustainable private sector jobs over the long term.

This situation raises serious questions over how much of a level playing field it is encouraging, and where the resources needed for local enterprise partnerships (LEPs) to really prosper will be provided. The competitive nature of the RGF may in fact lead to greater inequalities where some places in need are successful in their bids, and others are not.

Nearly two-thirds of the bids (64%) are asking for between £1m-£5m. This highlights the necessary shift in thinking from large scale projects worth tens of millions of pounds toward smaller ‘scalpel incisions’, where the aim will be for considerably smaller initial outlays to result in greater socio-economic outcomes. Policymakers are prioritising more than they have done so before, focusing bids where they believe the greatest impact can be made for the local economy.

There are key questions over the implementation and delivery systems of the proposed projects.  The government has been highly critical of RDAs, and therefore needs to learn past lessons where projects failed to meet expectations – many projects supported through RGF will be similar in nature.

Another notable aspect is the spatial distribution – and the striking absence in the bidding of England’s southern regions. Those from the midlands northwards (northwest, northeast, Yorkshire and Humber, east and west midlands) account for three-quarters of all bids. The highest proportion is from the northwest (19%), followed by the west midlands (16%). In southern England, only the Kent-Essex LEP area has submitted a significant number of bids.

This highlights the relative strength of the private sector throughout the south, albeit with pockets where extra impetus is required to stimulate jobs growth. Across the northern regions the combination of strong public sector growth over the past decade combined with weak private sectors, unsurprisingly, has resulted in a greater need for RGF support. This ‘northern facing’ direction of the fund will have been recognised by government from the outset, hence the RGF’s aim to help rebalance local economies as public sector employment shrinks. However, with too little to go round it will struggle to do that. The RDAs’ budget at one stage was around £2bn a year – compare that with £1.4bn over three years and the challenge immediately becomes clear.

Relying on the private sector to step up with its own investment to drive economic development has clearly been a divisive strategy, splitting opinion among commentators. The strained financial conditions mean businesses will rein in investment for the foreseeable future as their main concern is to strengthen balance sheets. This will severely limit the impact of RGF interventions, particularly in areas that have weak private sectors – limited public funds can only go so far in changing their fortunes and the lack of appreciation for these variations could ultimately harm the government’s ambitions for rebalancing the economy.

There is no denying that the RGF is a crucial source of funding. But places where the private sector is weak often have correspondingly weak labour markets and therefore lack the skills levels required to attract external investors and stimulate job creation. They need highly targeted interventions to tackle entrenched and structural problems and ongoing market failures – only then can we begin to properly rebalance the economy.