Brexit: City leaders face devo crossroads

What might happen to city regions going through the devolution process is explored in a research paper published by Metro Dynamics, the consultancy established by Mike Emmerich, former head of New Economy Manchester, and Sarah Whitney, ex-CBRE and North West Evergreen Fund advisor.

Below is an edited extract of Metro Dynamics’ 30-page report. Download the full report here

In the last couple of years, many of the UK’s cities have been undergoing a period of radical structural reform as powers and finances have been transferred gradually from national to local government. These reforms have culminated in the City Devolution programme, which now covers 10 cities and regions across the UK, and the creation of the Northern Powerhouse, to balance the London and South East economic powerhouse.

The possible economic impacts of Brexit include the loss of significant European Union funding streams such as ESIF and EDRF, jobs and investment linked to European trade, future investment in infrastructure and business, universities’ ability to continue to attract EU academics and students, and research and innovation investment.

The political uncertainty which is a by-product of the Referendum, creates short-term uncertainty about the prospects for the City Devolution programme. There is at least a risk that the process of devolution could be slowed or even halted as the political parties work through leadership changes and ensuing policy is realigned. For those places yet to start a formal City Devolution process, there is a worry the window may have started to close.

Whilst there are reasons to be concerned about the City Devolution programme, there are equally good reasons to believe it should be continued.

Firstly, the Referendum has revealed concerns about the nature of our national democracy. Voting patterns have highlighted divisions within our society. The results, and the ensuing political fallout, suggest that no leader of any single national political party can claim to be truly representative of the country. The UK needs progressive city leaders to help unify communities, and they will need the powers and finances implicit in devolution to enable them to do this effectively.

What Brexit means for European Structural & Investment Funds

ESIF provide funds to help local areas grow. The overriding aim of ESIF is to reduce economic inequalities both between, and within, European countries. ESIF supports investment in innovation, business, skills and employment in order to create jobs. The funding that makes up ESIF is largely divided into three separate funds, two of which invest in UK cities: the European Social Fund and the European Regional Development Fund. ESIF funding is vested through multi-year agreements and the current round covers the period from 2014 to 2020. Under the current agreement, the UK receives £1.8bn per year which is distributed across the country on the basis of an allocation set by the European Commission. The bulk of the funds are targeted at areas of the country with more pressing economic need, with Cornwall, West Wales and the Welsh Valleys receiving the highest allocation of funds per capita reflecting this.

The LEPs in these cities have funded a number of specific programmes, the majority of which are designed to support the development of specific skills.

The European Investment Bank is an important lender to the UK’s cities. The EIB is owned by the 28 member states of the EU. Alongside Germany, France and Italy, the UK is one of the largest shareholders with a 16% stake. The EIB provides project finance for major infrastructure projects including energy, transport, telecommunications, water, sewerage and solid waste, and project finance direct to industry. In the last decade, the EIB has invested more than £40bn into the UK, of which £5.6bn was invested in the last year.

Pending EIB approval in the North West

• Water and sewage infrastructure investment
• Energy efficiency, renewable energy and innovation investment

Until the EU withdrawal negotiations are completed, the future of EU direct funding will remain uncertain. This is compounded by the political uncertainty that could affect both the timetabling of existing devolution legislation and the viability of extending the City Devolution programme to other cities and regions of England, as scarce Whitehall resources are increasingly drawn into negotiating and planning for the UK’s withdrawal from the EU. The outcome of party leadership contests, a potential General Election and possible single party or coalition government outcome scenarios are frankly too complicated and unpredictable at this stage to map.

What it means for National Infrastructure Projects

The UK National Infrastructure Delivery Plan was developed to bring together the Government’s plans for economic infrastructure, housing and social infrastructure over the next five years. The Government committed to deliver the plan by 2020/21 which today sets out over 600 projects costing a total of £420bn, of which £100bn is to be Government-funded, with the remainder provided by private investment and EU investment, such as from the EIB. Whilst the decision to leave the EU will not directly impact on the Government’s commitment to invest £100bn in the plan, the decision does introduce uncertainty around the feasibility of securing the balancing figure of £320bn, which could jeopardise some projects. Investors crave certainty.

Investors may wait to see what impact the UK’s withdrawal from the EU has on the national economy and the value of Sterling. Of the 600 projects set out in the pipeline, about half are focused on cities. As illustrated in the following map, some of these projects are important enabling projects that open the door to further private investment. At this stage it would be imprudent to predict whether any specific projects are at greater or lesser risk, but at some stage in the not too distant future, discussions about the potential funding gap in the National Infrastructure Delivery Plan will become critical.

National infrastructure pipeline projects

• Surface access investment: A5036 to the Port of Liverpool
• Investment in Manchester Smart Motorways
• Substantial investment in Manchester Airport

Devolution Deals

To date, 10 cities or counties in England have agreed devolution deals with Government. Nine involve the appointment of a Mayor and one (Cornwall) does not. Mayoral elections in those nine places are likely in May 2017. However, for these elections to be held, secondary legislation will first need to be passed.

Parliament has approved all the orders needed to establish the Greater Manchester Mayor and the election of a Mayor in Manchester will go ahead in May. Elsewhere, Statutory Orders to enable the election of Mayors have been laid in Parliament, or will be in the next few days, for the Tees Valley, West Midlands, Sheffield, Liverpool city regions and the North East. In the autumn, a second round of Statutory Orders are scheduled to be laid for each Devolution Deal. These will set out the detail of powers and funding to be transferred and further details of how local arrangements will work.

It is probable that these Statutory Orders will be passed, and that Mayoral elections in these cities will go ahead in May 2017. However, it is possible that Parliamentary procedure and timetables could be interrupted by the current political confusion.

This in turn could delay the Orders and could impact on either the date of Mayoral elections in the cities or the transfer of powers to those Mayors, or both. It is theoretically possible that a Mayor could be established, and the date of an election set, but that Parliament then fails to approve the transfer of any powers to that Mayor. Were there to be a snap General Election in the next few weeks, Parliament would be dissolved and even if the current governing party were returned to power, it would be very unlikely that the necessary legislation could be passed in time.

Devolution Deal Status as of 1 July 2016

• Greater Manchester Combined Authority: No further legislation is needed to create the office of the Mayor and deliver the terms of currently agreed current devolution plans. Mayoral elections in May 2017 should continue unheeded.
• Liverpool City Region: The Order to establish the office of the Mayor, and to provide for Mayoral elections in May 2017 are before Parliament or will be in the days ahead. But these have not yet been passed. Further Orders to transfer powers and funding will be required in the autumn. Government is committed to achieving this legislative timetable, but there is a risk that political developments mean that Orders are not approved or do not get Parliamentary time.

Inclusive growth

The voting patterns provide further evidence for the perception that recent growth in cities has not been shared uniformly. Those who live outside of city centres and wealthier areas are not benefiting directly from economic growth: wages are not increasing, job opportunities are not expanding and social mobility does not feel as possible. Going forward, much more concerted thought and effort is required to find mechanisms to share the proceeds of growth. This applies equally if not more to the corporate sector as it does to the policy makers. The doughnut of affected residents outside of several city centres need to be pulled more tightly into the fabric of the city.

City leaders

The Referendum vote changed the agenda for city leaders across local authorities, Combined Authorities, LEPs and businesses overnight. The drive for investment and inclusive economic growth is now central. City leaders will spend the coming weeks and months taking a citywide view of the total EU economic exposure: ESIF funding, EIB lending, Horizon 2020 (for research and innovation), impact on university student numbers and different scenarios of private investment funding, amongst others. Proactive leaders will start discussions with local businesses that trade heavily with the EU to understand the impacts. Work should begin to diversify city economies that are heavily exposed to EU trade in physical goods.

Should the City Devolution programme stall, for the legislative and timetabling reasons identified above, City Leaders should explore alternative ways of driving forward city renewal. There are a range of investment approaches that UK cities have, to date, barely explored. Most cities have yet to leverage the full financial potential of their balance sheets. Many cities have yet to make compelling cases for significant private investment: too often the ‘MIPIM approach’ is adopted where individual sites are put to the market, instead of a wholesale vision for a city extending beyond just real estate, which is more likely to attract large and sustained funding to be deployed in partnership with the public sector. Municipal bonds have rarely been used in the UK, despite the establishment of the Local Capital Finance Company. Investment banks have waited patiently for cities to approach with ideas for institutional bonds.

There are a raft of funds available to create Social Impact Bonds. In short, for those city leaders who are eager to act, there are a range of possible funding mechanisms outside of Government-funded City Devolution investment vehicles that could catalyse growth.

City investors

For investors in UK cities, the concurrence of economic and political events is unsettling. Foreign investors will need assurance that the political situation in the UK will stabilise, and that a future government will support major projects that require ongoing investment. The Sterling exchange rate over the coming months will play an important role in investment decisions.

And while the political context puts major infrastructure programmes in question, a raft of solid, smaller prospective projects requiring investment remain unaffected by recent events. The trade-off is they will be smaller in size and this may in turn impact potential returns. But as the Bank of England has heavily hinted, there may be further Quantitative Easing. These additional funds will need to be invested, particularly as further QE will lead to a further erosion of interest rates. It would be imprudent to suggest that all requests put forward by cities will justify investment. However, given the imperative to get current and future investment funds out the door, there will be opportunities for funds, or groups of funds, to create coordinated investment portfolios across individual cities or city regions that would make not only a significant impact in those cities, but also healthy returns.

Metro Dynamics provides strategic advice to those leading, growing or investing in cities and metropolitan areas. Contact www.metrodynamics.co.uk