Risky business?

They didn’t work particularly well last time, will it be any different this time? Rupert Greenhalgh argues the new generation of enterprise zones need a more intelligent approach

Much has recently been written about enterprise zones, from a replay of the lessons learnt in the 1980s Enterprise Zone Experiment Evaluation, to more contemporary views expressed by a range of think tanks.

I’m not going to repeat the full details here, as it will be familiar territory for many of you. Instead I will summarise some of the main lessons; and then move on to discuss a few things which, for me, suggest that enterprise zones will not be the ‘golden goose’ which so many areas will rely upon for success in the brave world of ‘new’ economic development.

The 1980s enterprise zones were expensive in terms of costs and benefits. The cost to the public sector was a mix of upfront costs on land and infrastructure and forgone tax revenues – which far outweighed any benefit. By subsidising firms to locate away from where they would normally locate, zones distorted market signals and imposed higher costs on the economy than immediately apparent, especially when zone designation and benefits cease.

Zones were reasonably effective – in some cases – in attracting business quickly, creating momentum within target areas, and a short-term vehicle for improving an areas offer for investment. However, without a longer-term commitment to investment in other endogenous growth factors (such as: workforce skills, local enterprise development; and public transport access) it’s far from clear that zones helped at all to boost the productivity and growth prospects of local economies.

So, looking at the latest round of enterprise zones, a few things still don’t stack up.

First and foremost is the scale and potential impact. Has anyone modelled the potential incentives (and impacts) on offer? I am not sure incentives for developers, inward and indigenous investors are significant to be a deal breaker. Surely firms (especially larger ones) have other factors driving investment decisions than the £55k listed in the prospectus? This seems more than a little modest; and relevant local authorities will be required to ensure that businesses do not receive greater levels of support!

Secondly, as identified in an excellent RTPI analysis, the potential for private companies and individuals to receive windfall gains from EZ designation makes it even more crucial that the process of site selection be handled in a transparent and accountable way. But who will lead the scrutiny of such decisions? Enterprise zones are a potential boon to some landowners. They must be prepared to reinvest in (and get partners to support) an uplift in the attractiveness of the area, so investors and local communities benefit from both the local subsidy and rising rental and property values.

Finally, less has been said about zones and reinvestment in the development of the local workforce and support for training and up-skilling. The uplift in business rates receipts as a result of the introduction of the enterprise zone must be used by local enterprise partnerships to reinvest in key local economic priorities. LEPs must ensure that local businesses are actively involved in the preparation and planning of enterprise zone strategies, but also that businesses take the lead role now in planning for the future use of the proceeds from zones. That is, to commission and invest in projects of benefit to the whole of the local economy – both within the zone and wider LEP areas – by pooling funding for training and local enterprise development, and supporting a move to more productive and resilience local economies.

Indeed, it is only if the combined effect of all this has an impact on the long-range moves by firms that any of the new zones will make any real difference to local economies. As in the 1980s, the real measures of success will be the generation of additional jobs and the extent to which the inward investment enhances local firm productivity and longer-term economic resilience.

The challenges for policymakers, local enterprise partnerships and enterprise zones will be discussed at the CLES Summit on 12-13 July. The outcomes of this debate will continue in a range of forthcoming blogs.