With their incorporation into a coherent overarching strategy, coupled with reform, there is a case to be made to retain Investment Zones and Freeports, regardless of who is in government, write Jack Shaw and Andy Westwood.
Despite the policy churn that has characterised regional economic policy in recent years, a dozen Freeports and a dozen Investment Zones are now being developed across the United Kingdom.
The first detailed proposal for Freeports surfaced during the Brexit campaign as a traditional ‘free market’ tax-cutting model in a proposal from then backbencher Rishi Sunak. There has been significant scepticism toward Freeports – partly from evidence of similar low tax, low regulation initiatives but also because of the imagined ‘Brexit dividend’ from these flagship policies. And parallels have been drawn to Canary Wharf, which despite its international success sits within the London Borough of Tower Hamlets – one of England’s most disadvantaged communities.
In the March 2021 Budget, the Government announced Freeports in England which became a central part of Boris Johnson’s ‘levelling up’ agenda, set out in the Levelling Up White Paper in 2022. And during the leadership campaign to succeed Johnson, Liz Truss pledged a series of ‘low tax’ Investment Zones – describing them as “full fat Freeports” – which were similar in design to Sunak’s model. Though Truss was shortly replaced as Prime Minister by Sunak, both Freeports and Investment Zones remain key policy objectives – with the latter now reinvented as a vehicle for research and development.
The core purpose of Freeports and Investment Zones according to their prospectuses is to create “hotbeds of innovation” and promote regeneration in “communities that need it the most” in order to drive economic growth across the country and support the creation of good-quality, high skilled employment as well as tackle the spatial inequalities that had helped drive the vote to leave the European Union in 2016.
But what are the prospects of the Government meeting these objectives and how will these two interventions operate in parallel? And as we approach a UK General Election, will they continue or will they be abandoned alongside a growing number of failed regional policy initiatives?
The Government has allocated each Freeport £25 million of seed capital to provide a range of incentives, including “tax reliefs, customs, business rates retention, planning, regeneration, innovation and trade and investment support”. Local authorities where Freeport sites are located will retain 100% of business rates growth over 25 years, giving greater certainty over-borrowing and the ability to invest in regeneration.
Figure 1: A logic model for the Freeports Programme
But there are several challenges to the achievement of the objectives established for Freeports. First, international evidence suggests significant risks of ‘deadweight’ and ‘displacement’ – activity that would have taken place in the absence of these incentives or that is already taking place elsewhere but may relocate to secure the subsidies. Measuring these effects are difficult and the Government itself has ‘low confidence’ that they can be adequately minimised, even if it has introduced a ‘displacement test’ which in theory allows authorities to deny employers relocating to Freeports business rates relief.
There are also concerns about the scale of Freeports given the role of proximity is a key driver of innovation. As a result, the distances within Freeports and between sites are both potentially problematic. Teesworks, for example, is the size of 2,550 football pitches, with some sites ten miles from one another. The Thames Freeport is made up of sites in Dagenham, Tilbury and London Gateway, which are nearly 20 miles between them.
Investment Zones, on the other hand, offer a more coherent direction of travel. Like Freeports, they seek to grow priority sectors, address inter- and intra-regional inequalities, and offer similar tax incentives and business rate retention over a 25-year period. Both Investment Zones and Freeports are eligible for up to three tax sites and in theory, their geographies can overlap.
Figure 2: Illustrative diagram of an Investment Zone
Source: Investment Zone Policy Prospectus.
However, Investment Zones are more likely to be drawn across tighter geographies – at 600 hectares, the maximum is a third of the size of the current Teesworks site – and they also include additional incentives for catalysing innovation activities, such as investment in skills and R&D. In this respect, Investment Zones build on previous initiatives such as Innovation Accelerators and University Enterprise Zones in the UK and Innovation Districts in the United States. They are also focused on sectors with significant growth opportunities, with priority given to digital technologies, green and creative industries, advanced manufacturing and life sciences.
Investment Zones are also attentive to the spatial core where tax site(s) are located, surrounded by a functional economic geography, and are more closely aligned with local economic strategies and institutions. The Government expects their spatial focus to be complemented by strong local leadership and research excellence – with universities required to co-sign Investment Zones submissions – as well as integrated with Local Skills Improvement Plans. This is not the case with Freeports, which are situated on undeveloped or underdeveloped sites with no clear rationale for how they relate to the communities which surround them.
Previous experience across the UK suggests that the central role of universities in Investment Zones will be a determining factor in the value that they add: for every £1 of funding, for example, University Enterprise Zone pilots generated £4.50 in return. Leveraging existing university assets and wider pools of university investment can increase the scope for knowledge transfer and deeper collaboration, and increase the number of firm-level patents and start-ups.
The UK can also learn from Innovation Districts in the US. The synergy between the University of Pittsburgh and Carnegie Mellon University and the Pittsburgh Innovation District, for example, provides the city with competitive advantages in robotics and immunology. This has been boosted further by additional place-based investment in infrastructure and R&D and through tax incentives and subsidies outlined in the CHIPS and Science Act, Inflation Reduction Act and Infrastructure Investment and Jobs Act.
While Investment Zones appear to be more suited for targeted industrial policy than Freeports, to have any significant success, both will need to sit within a broader, longer-term approach to economic policymaking involving coordinated partnerships between national departments and agencies on the one hand and local institutions with strong local leadership and sufficient capacity and capability on the other. This has long been absent in the UK context and has been exacerbated by ongoing policy churn, with more than 55 policies targeting local economic growth in England since 1975 according to the National Audit Office.
Further, the Government should look to provide clarity on the core rationale that underpins these interventions, given the significant gaps in the evidence base about the impact they may have on, for example, improving incomes and reducing poverty. This is why place-based interventions – though important in themselves – should still sit within a coordinated national approach. In the United States (US) and European Union (EU) investment in climate resilience and energy security, in the semiconductor industry, and on R&D more broadly, plugs that gap. However the UK Government remains wary of adopting such a strategic approach and is, as a result, increasingly an international outlier in this area of policy development.
For the Conservatives this could mean placing Freeports and Investment Zones within a wider industrial strategy. And for the Labour Party, it may require closely aligning these policies with its missions to become a “green energy superpower” and to have the highest growth in the G7. Both parties will need to invest further in these policies – especially given attractive subsidy regimes in the US and the EU – as well as catalyse private sector investment. And there should also be recognition that at least some cross-party consensus is necessary for long-term economic growth. In that respect, it is encouraging that there is some, tacit agreement between the two main parties on the principle of devolution, and the shape of regional institutions and their powers, which can help oversee and steer these programmes. With their incorporation into a coherent overarching strategy, coupled with reform, there is a strong case to retain Investment Zones and perhaps also Freeports.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.