Published on 24 October 2022
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Bending private spend – the case for Investment Zones

More public and private spending and investment needs to be attracted to ‘left-behind’ places to enable them to grow. This means central government departmental spending must be bent to recognise the specific needs in and opportunities for such places. Peter Tyler, Colin Warnock and Geoff White discuss how private investment might similarly be directed to need, especially given Government plans for Investment Zones.

Although it appears that not much will remain of the original Truss Growth Plan in the UK, the exception (at least for now) appears to be Investment Zones (IZ). These are designed to attract private sector investment into places.   They aren’t entirely new, being close policy relatives of previous Enterprise Zones and more recent Freeports. But they are not being targeted at ‘left behind’ places, with the government’s guidance on Investment Zones in England setting an expectation that they will be set up UK-wide. 

The Enterprise Zone experiment was kicked off by the Thatcher Government and has lasted in different forms and phases over forty years. Here we are again with a similar proposal. The proposed IZ incentives are broadly consistent with the original 1980s EZ design. The Government has not yet published the fine print but initial proposals suggest there will be business rates relief, 100% first-year capital allowance on plant and machinery, some form of building allowance and a simplified planning regime. So we can call on the lessons learned from previous zones to understand what makes for relative success in enhancing local economic growth and ensuring value for money for hard-pressed tax-payers.

Maximising growth and minimising displacement

One frequent criticism is that Zones simply move activity around from one place to another – displacement. There is some truth to this. The evidence is that, as a rough rule of thumb, around two-fifths of the jobs created on the EZs were displaced from elsewhere. However, the amount of displacement was minimised where investment was attracted with strong international trading potential and which supported a clear strategy for the local area in which the EZs were located. As might be expected, displacement was higher where activities like retailing and distribution were induced onto scarce investment Zone land.  

Displacement can be minimised by targeting the activities they attract and the areas to which they are attracted. Zone incentives are widely understood and appreciated by investors and developers and, used smartly, they can add to local economic growth. The early British zones were able to generate nearly 40 jobs and £1 million in private investment per hectare. By the end of their ten years life over 80% of EZ land was developed and around half of the floorspace was used for manufacturing.

The availability of rates relief was regarded by companies as one of the most important incentives of Enterprise Zones but the actual benefit it gave them varied considerably.  Companies inside the Zones tended to pay higher rents compared to similar premises in surrounding locations because the market internalised the benefit into the price paid for property.

A relatively under-appreciated feature of the earlier Enterprise Zones was the 100% capital allowances on investment in buildings, which led to an increased flow of funds into Zone sites from investors that would otherwise not invest in the areas. Many of these invested in property trusts set up in the City to attract investors seeking to reduce taxes on their investment income. Towards the end of the life of most Zones, 75% of the £200m annual EZ investment market was coming through EZ trusts, of which 90% was invested by individuals.

The new proposed IZs are less generous in not offering the 100% capital allowances on investment in buildings. It would make a lot of sense to improve the IZ package in this respect at least for those left-behind areas where the property market is most moribund: Investment Zones Plus!

Go early and loud… 

One thing is clear: Enterprise Zones are land and property-based initiatives that take time to work. The process is inevitably constrained by the ability to identify appropriate sites and attract and induce investment in them. A clear lesson from previous experience, particularly that of the Coalition Government in 2011, is that it is essential to assemble land in the zones that can allow a speedy and effective take-up of potential investment. It is highly desirable in the early stage of Zone life to focus as much as possible on land in public ownership as this avoids delay. Too often in the past zone authorities have selected sites for zone development that require substantial land remediation and new access infrastructure. Moreover, the private sector will tend to hold on to the land it owns to enjoy speculative gain from increases in its value after the initial development.

Zone incentives will not do all the work by themselves.  Effective EZs required local authorities to coordinate promotion and marketing of the opportunities and areas available, and offer practical support through, for example, ‘one-stop’ shops to assist companies, including help with training and access to finance.

…But play the long game

There has been very little consideration given to the benefits Zones can bring to the place-making process and the long-term restructuring of a local economy. Local Authorities will be able to keep 100% of the growth in business rates on their Zone sites over 25 years and this enables them to create Tax Incremental Financing (TIF) vehicles to finance new investment in infrastructure. This can be of substantial benefit when the UK local tax base is so weak and Local Authorities have to rely on discretionary (and often short-term) pots of funding to invest in new regeneration infrastructure. TIFs can greatly enhance investment in transforming physical infrastructure to meet the needs of new and growing sectors – such as environmental services, knowledge-intensive business services, information and creative sectors – in ways hitherto constrained by limited local resources.

Housing – really?

It would seem that the latest IZ proposals envisage a role in stimulating local housing development. This would be a significant departure from their predecessors and not a welcome one. There is no evidence that enhanced capital allowances are needed to stimulate the supply of new housing. For housing – and especially when associated with plans for simplified and accelerated planning – there is a risk that IZs will come with very high levels of fiscal deadweight loss (because the development would have occurred anyway) and displacement. 

There may be limited circumstances where IZs could play a role in residential development – involving brownfield land, estate regeneration with high abnormal costs, or in areas with exceptionally high land costs. They could be usefully focused on the delivery of only zero carbon social rent or affordable rent homes (the latter capped at Local Housing Allowance rates).  However, administratively this is a sledgehammer to crack a nut. It would be far easier – and far more cost-effective to the taxpayer – to let local control over affordable housing funding, in combination with the Brownfield Infrastructure Fund, do the heavy lifting instead.

In Conclusion…

Investment Zones have the potential to jolt some local areas out of their market failure trap by inducing private sector investment. They can be designed and delivered to maximise growth and minimise displacement, but they will offer much better value for money if properly targeted at areas and property types where market failures are most profound. They can supplement local investment to support net zero and innovation ambitions. But lessons from forty years of Zone experiments must be applied if they are to do so.  There is still time to take these lessons on board.


Image: Jorge Percival – The evening commute. Liverpool (Unsplash)

Authors

Professor Pete Tyler

Affiliated Researcher

Pete Tyler is Emeritus Professor of Urban and Regional Economics at the University of Cambridge, UK, and Emeritus Professorial Fellow of St Catharine’s College, Cambridge, UK. His research interests cover...

Colin Warnock

Colin Warnock is an economist specialising in the appraisal, monitoring and evaluation of economic development, housing and regeneration projects.  His evaluation experience spans four decades and includes enterprise zones, regional...

Geoff White

Geoff White is an economist who worked in HM Treasury and the Department of Trade and Industry before directing a wide range of policy evaluations with PwC, Public and Corporate...

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