Home > Local Democracy, Terrible Tories > Clegg, Heseltine and the wasting of £1.4bn

Clegg, Heseltine and the wasting of £1.4bn

A prediction

I don’t really go in for political predictions, but here’s one I’m happy to make.

Sometime in the second or third week of March, just as the local election leaflets are being prepared, Nick Clegg will make the happy announcement that the government’s innovative new investment package, the Regional Growth Fund, is creating in the region of 100,000 new private sector jobs, with these jobs focused on areas where public sector employment percentages have been highest.

This, Clegg will claim, is a vindication of the government policies, and shows why you should vote for the Coalition on May 5th.

The background

This may seem a strangely detailed prediction from someone who doesn’t do predictions, so some background may be helpful. 

Regional Development Agencies are being abolished, as of 31st March 2011.  They, and their £1.9 bn annual budget (around £1.4 bn in the regions and £0.5bn in London) are being ‘replaced’ by Local Economic Partnerships (LEPs) with no funding allocated directly to them, and a 1.4bn Regional Growth Fund (RGF) to be spent over two years. 

That is, development and regeneration funding is being cut by around 1.2bn per year.  It’s been one of the quieter cuts, but ridiculously savage.

Clegg is chairing the Ministerial Panel, which will take the final decisions on which applicants get the money.  Applications for round 1 of 3 of the RGF closed on Friday, and decisions are due by the end of February.  It will almost certainly be Clegg who makes the announcements; Cable is also on the panel and it should be his call, but he is still sitting on the naughty step.

The bullshit

So far so good, but please don’t be fooled by the announcement when it comes.   The whole scheme is so full of bullshit to be worthy of the title ‘RGF heap of bullshit’.

First, from my review of the application form, the government is creating room for a deliberate elision, in its announcement, of full-time and part-time jobs.   A huge percentage of the jobs announced will be part-time, for reasons I’ll set out below, but I predict that the total number of jobs rather the more generally accepted Full-Time Equivalents will be announced; great care is being taken to gather this information in the application forms, even though this is not really necessary.

Second, what will be announced will not just be the direct jobs created by the money, but also the more nebulous ‘indirect’ jobs that the applicant claims will come along because of their project.

Third, and more seriously than the spinning of the data provided in the successful application data, is the whole stupidity in the whole funding process. 

I understand from a reliable source that as many as 6,000 bids have been submitted.    This is for a total fund of what I estimate will be around £600m of the total £1.4bn (the rest to be spent in rounds 2 &3).  While this may seem an extraordinary number, you just have to look here at the details of just the first five from Birmingham, and here for at least nine from Coventry.  Do the sums for all 358 local authorities in England and then add in all the bids that come in from businesses chancing their arm and other public and voluntary bodies just desperate for survival cash, and 6,000 seems about right.

The minimum eligible bid is £1m, but my hunch is that the average size of bid will be in the region of £10m.  Simple maths mean, then, that 0nly 1 in 100 bids will be successful, but even if it’s only 1 in 50, that still leave thousands of bidders out in the cold, having wasted thousands of pounds in staff time and consultancy costs putting in bids to a fund they never had a realistic chance of getting anything out of.  

5,000 failures, having invested an average of £10,000 each?  That £50m that might have been spent better elsewhere.  Government waste, anyone?

But what of the bids that do succeed? 

After a filtering process to weed out the majority of the bids, those with the best chance will be scored on a number of factors, including whether they come from areas where there are high percentages of public sector employment. 

The guidance coming from the briefing sessions, however, suggests that by far the most important factor in whether a bid succeeds is how many jobs will be created through the project.

This means almost inevitably that bidders who understand the process will be part of a ‘race to the bottom’, competing with each other to squeeze out as many possible jobs in their projections, to the point that they may become utterly unrealistic. 

Yet there will be a huge political incentive to maximise the number of jobs to be announced in Clegg’s announcement.  For one thing, Clegg will be desperate to say that the new streamlined LEPs are creating jobs at a much lower unit cost than the ‘bureaucratic’ RDAs.   While the RDAs have created jobs at a cost of anything between £14,000 and £27,000 (depending on how you calculate), Clegg will want to show them coming in at around £10,000, I would estimate (hence my calculations for about 60,000 FTE jobs, expanded to the magical six figure number by counting PT and FT jobs separately).

Further, the ridiculously short time available to sift and score the bids before Clegg needs to get on the telly, and due diligence processes put back to after that announcement is made, make it likely that projects with unrealistic targets will end up getting funded.

This isn’t just me second guessing. This is what a well respected  regeneration expert says:

RGF is simply intended to be a jobs creator and the rush to spend suggests that quantity will outweigh quality.

(See also here.)

The deadweight

It might be argued that projects that simply deliver jobs are to be commended, of course, but here we come to the biggest problem of the lot.

A key consideration in regeneration policy for the last 20 years or so has been the avoidance of ‘deadweight’.  That it, it has been recognised that we shouldn’t be funding development projects which would or should have happened anyway.

Yet massive deadweight is precisely what this RGF process will create. 

Most of the money will be fed directly through private sector firms and property developers to allow for the expansion of premises and therefore jobs in the quickest possible time to allow the Coalition’s political priorities to be met.  Yet at the same time as these firms use government as their cash cow, these same firms will be holding on to the massive corporate surpluses which, as Chris Dillow has set out, are the reverse of the public deficit. 

Lessons  unlearned

This is likely to lead, just as it did in the 1980s regeneration policy under the guiding hand of the aforementioned Heseltine, to the reverse of what the government claims it wants.  The private sector will leach off government, rather than engage in what it’s supposed to be doing – investing at reasonable risk to create profitable enterprise and, with it, jobs.

In Heseltine’s 1980s Liverpool experiment, for example, landowners who simply hung on to derelict land in Liverpool 1 and 8, safe in the knowledge that the price was steadily rising and the public purse would eventually pay up.  Following this same basic principle, bids for the RGF will have been prepared by property developers which show what funding is so desperately ‘needed’ by these cash rich corporates, on the basis of calculations about current post-recession land values and the gap between that land value and the investment costs. 

That’s not private sector risk taking. That’s money-grabbing.

During the 1990s, and especially with the advent of overly bureaucratic but actually strategically sensible European funding, the regeneration picture changed.  Money began to be moved away from costly competitive bidding rounds (though these continued to exist) towards a more strategic and consensual approach. 

As importantly, it was used to develop both social (community level training and education etc.) and physical infrastructure (e.g. roads/rail) of the type that simply would not have happened otherwise, and which created the broad environment for future growth of a private sector willing now to invest its own resources. 

The reasons that Liverpool and Manchester did pretty well in the 1990s and 2000s (though they still have deeply embedded problems) is that regeneration was, on the whole, done properly by people who understood the dynamics of it all, understood what was wrong with Tory policy from Heseltine 1981 through to the deeply flawed/partially successful City Challenge schemes of the early 1990s, and then made it better under the generous range of funds that came from Europe and the new Labour government.

Here though , with the Coalition’s RGF, we have a return of an ideologically boneheaded regeneration style which, while adopting ‘the private sector knows best’ mantra of post-Toxteth Heseltine, actually creates the conditions for restricting investment overall. 

Under a Coalition which sees the wasting of £1.4bn pounds of public money as a small price to pay for Clegg doing pre-election good news on telly, we’re seeing 25 years of regeneration thinking and learning set aside. 

The prediction reprised

They should be ashamed, but sometime in mid-March Clegg will stand up, tell us he’s created 100,000 jobs by abolishing Labour’s public sector waste. 

Sadly, many will be convinced.

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  1. Barney Stannard
    January 23, 2011 at 1:13 pm

    Astonishingly I think I probably agree with you here.

    It is interesting how this policy relates to the wider short run economic situation. The Coalition’s debt cutting policy is based on the idea that the private sector need to be confident of low long term interest rates and tax. They probably also sign up to one of the other arguments against fiscal stimulus – that government is very bad at picking winners and so will probably spend the stimulus money inefficiently.

    This policy obviously doesn’t fit with the second of those beliefs. But it also doesn’t go very well with the first. Interest rates and tax are not the only ‘environmental’ (to borrow the ghastly terminology of the management consultants) factors that affect firms investment and expenditure decisions. They also look at, inter alia, local infrastructure. If you move current spending away from roads and towards non-infrastructure, then the Ricardian businesses you are cutting the national debt for are going to look ahead and see future tax rises to pay for the infrastructure rebuilding and improvement and reduce current spending accordingly.

  2. Catherine Courte
    January 23, 2011 at 6:54 pm

    Remains to be seen how the State Aid rules will screw up the ‘pay for my new factory’ approach: SME-beneficiary stuff escapes but not corporates. And all the applicants have to do their own State Aid diligence, presumably cos Govt hasn’t a clue how they can get for-profit, non-deadweight job creation implemented without breaking EU regs. Oh, and even if the bids get through, the bidders have to fund their own due diligence, so potential for a lot more Council/LEP sponsored waste too.

  3. Sam
    January 23, 2011 at 8:10 pm

    I have visability on the bids being developed in one area and can assure you that there will not be 6,000 bids. I can see the calculation but the number will be far lower, around 750 to 1,000.

    This is still an extraordinary number and shows the demand is there.

    The RGF well intentioned but sadly is flawed for 3 reasons.

    1. The LEPs are conceptual rather than real organisations. They have no budgets or employees. The current RGF is not going to attract the best bids because no support services are in place to help companies apply. The form asks for strange public sector expertise like State Aid and Green Book (I don’t know either!).

    2. The £1m threshold is too high. Lots of great jobs can be created with less than £1m, especially if investment is targetted towards R&D / commercialising technological developments.

    3. The councils will fill the gap left by RDAs. The RDAs were over expensive but well intentioned. The councils have the wrong culture to foster economic development.

  4. paulinlancs
    January 24, 2011 at 5:59 pm

    Barney@1: Thanks, and first of all sorry for being a bit tardy getting back to your recent comments. I’ve tended to get to them late at night and promised myself i’ll respond in the morning…….

    I suspect one of the reasons we agree so easily here – and you make very good points – is that as i wrote this post I found myself slipping back into a previous mindset about the regeneration industry (where I made my living 1997 – 2003ish). I’m actually a whole lot more critical of the whole industry nowadays, but even from within the paradigm I used to work in the RGF makes little sense, for the reasons we broadly agree on.

    Catherine @2: Yes, the issue of State Aid is important; the post was already getting v long so I left it out, but I do fear that some of the projects approved will fall down at due diligence stage on this, or that, even worse we’ll have have projects going ahead without proper due diligence, alongside the wasted moeny you identify.

    State Aid regs are a pain the arse of course, but they are there for sound enough reasons, and the fact that so many projects may end up in trouble with them reflects the overall stupidity of the scheme.

    Sam @3: I have to say I was taken aback when my normally v reliable source said 6,000. I asked again (verbally, it wasn’t a typo)and was told this was definitely the correct figure, but I’ll be very happy to be prove wrong. Iy is, i suppose possible that the 6,000 referred to the totla number of possible bids or some such, and that my source got the wrong end of the stick.

    However, as i think you suggest, this doesn’t really detract from the mian points. 1,000 bids, and a success rate of 1 in 10 to 1 in 20, is still a ridiculous waste of resources, and my main points remain valid, I think.

    I agree that RDAs were not great, but I really can’t see LEPs going anywhere at all. I also agree that a decent way forward would have been through smaller minimum bids, but it would have been more coherent to let LEP develop strategic programms (like the SPF). This of course odes not create the immediate political outputs they are so desperate for.

  5. Barney Stannard
    January 26, 2011 at 12:03 pm

    Oh I’m far from uncritical of the regeneration industry. But I think the Coalition plan probably strips out much of what was good about it.

    On an unrelated matter, if the Q1 and Q2 GDP figures don’t show quite a rebound I think I will have to eat humble pie on the macro side. Unless of course I can think of some get-out-of-jail explanation. I think I might plump for the VAT rise…

  6. Alexander Rose
    January 31, 2011 at 11:14 pm

    Thank you for writing such a thought provoking post.

    As a public sector lawyer who has advised on hundreds of projects involving State Aid law, it is heartening to see the justifications put forward for these competition provisions. I agree that they protect us all by working to ensure public investment is targetted properly.

    There were a few points I disagreed with but the one I thought I should respond to was about large enterprises having an advantage in the bidding because they can buy in State Aid advice. From the RGF bids I’ve seen, businesses of all sizes are in need of clearer State Aid guidance.

  1. March 6, 2011 at 8:41 pm
  2. April 1, 2011 at 12:04 pm
  3. October 25, 2011 at 1:51 am

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