How does the UK maximise the success of its new Investment Zones?
As the UK Government launches what it calls a 'refocused Investment Zones programme'; , aiming to make the UK home to highly productive, research intensive knowledge industries, we recommend 5 actions that could help to shape successful schemes for cities and support economic strategy.
In a positive step, the UK Government has launched what it calls a “refocused Investment Zones programme….aimed at catalysing a small number of high-potential clusters in areas in need of levelling up to boost productivity and growth.”
Investment Zones are now being focused on growing knowledge-based clusters and innovation districts, which can become homes to highly productive, research intensive businesses. There is consensus across the political spectrum to make the UK a ‘science superpower’, and to grow clusters and sectors where the country has particular strengths. With growing momentum and ambitions plans around innovation districts in UK cities, the refocused approach to Investment Zones has great potential.
As cities and combined authorities prepare to respond, we suggest five actions that will shape successful schemes:
1. Identify the right locations and sectors
Identifying the right locations and sectors will be critical. The “core” spatial focus (where tax and business rates retention sites will be located) should be “where interventions should focus on facilitating co-location of businesses, fostering collaboration between industry and research institutions, and driving innovation in companies at the frontier of the target sector.” There should be a focus on one of five target sectors (digital, life-sciences / med-tech’ creative, green industries, advanced manufacturing). Positively there is scope to consider linkages and common features (for example around specific technologies and skills) across sectors, which is to be welcomed, recognising that our largest cities often have a related diversity of sectoral strengths.
This all points to the need for Combined Authorities to be hard-headed and evidence-based in identifying their genuine sector strengths, and the locations with the strongest research capabilities and greatest scope to crowd-in private sector investment. Based on the guidance in the IZ Policy Prospectus, this is likely to point towards the innovation districts in the centres of the core cities, as well as linked sites that have capacity and potential for large scale job growth and investment in functions like manufacturing or lab space that are not always possible to develop in city centres.
Places should also avoid the temptation to spread Investment Zones too widely across sites with weak functional economic linkages and places with limited research strength and investor appetite. Instead, proposals should set out how wider supply chains, skills and opportunities can be created across wider functional economic areas, linked to the “core” areas of spatial focus. Interventions could include business support and innovation initiatives, educational institutions and collaborations linked to the strengths of the core of the investment zone, and skills initiatives. This could be part of a wider approach to encourage inclusive innovation.
With growing momentum and ambitions plans around innovation districts in UK cities, the refocused approach to Investment Zones has great potential.
2. Adopt the right mix of incentives and public sector investment
It will be essential to get the mix of fiscal incentives and Government spending right, with places having access to incentives and flexible government funding of up to £80m over five years. The availability of flexible spending to support initiatives such as research and innovation, skills, local infrastructure, enterprise and planning and development can really help places support growth (the fact 40% of this spend will be revenue is particularly positive).
The proposals to allow 100% local retention of business rates growth in Investment Zones for 25 years is another powerful tool, which places could seek to use to create an income stream to borrow against to reinvest in local infrastructure and economic development. The Enhanced Capital Allowances can be an attractive incentive, particularly for investment in manufacturing and labs, but places will need to identify sites suitable for those uses. Other tax reliefs could include business rates relief, enhanced structures and building allowances, and employer National Insurance Contribution Relief. However, the cost of all these incentives (capped at £45m over five years) are to be deducted from the overall £80m financial envelope over five years.
The strength of the local innovation ecosystem, skills base and the availability of premises are likely to be more important for knowledge-based businesses than some small-scale fiscal incentives, which perhaps points to places seeking to retain more flexible spending. As the LSE’s Neil Lee has argued, the appeal of Investment Zones needs to be about more than cost efficiency, citing the fact that Google’s largest European R&D facility is in high-cost Zurich. Places should mitigate against the big risk that fiscal incentives cause displacement of economic activity, or deadweight (activity that would have happened anyway). It will also be necessary to consider risks under subsidy control law.
3. Accelerate planning and development by providing certainty
Places should introduce faster planning, not less planning, and focus on increasing the supply of the right types of commercial space. By setting out a clear and flexible spatial framework, places can provide greater certainty to investors, sending clear signals to investors, and help ensure the right quality of development with good public realm and green infrastructure. Robust design codes can also provide clarity and certainty and send the right signals to the market on the nature of ambition, the economically productive uses, and quality of development being targeted. Local Development Orders and / or Planning Performance Agreements have a role to play.
Councils, Combined Authorities, Homes England and the UK Infrastructure Bank should work together to develop right mechanisms for sharing risk and reward with private sector to get more office, innovation / lab, & manufacturing space built, which as the Centre for Cities has rightly said, is really needed.
4. Think beyond bricks and mortar – build the partnership and ecosystem
Beyond obvious investments in bricks and mortar, there should be a focus on developing the softer ecosystem that is required to commercialise innovation. One of the notable and very positive features of the IZ Policy Prospectus is how it emphasises the importance of government at all levels working with the private sector, universities and other research institutions, to create the right environment and culture of collaboration for successful cluster growth. As MIT has shown through its MIT REAP - Regional Entrepreneurship Acceleration Program framework, you need to identify activate a range of different actors and groups to be successful: universities and other knowledge producers; entrepreneurs; corporates; investors of risk capital; and government itself. In short, we need to do the D not just the R. This means that successful Investment Zones will need strong partnerships with the right players around the table and places should identify current gaps and weaknesses in their local ecosystem.
Universities are at the heart of the proposals, strengthening their civic roles, alongside their traditional research and teaching roles. They will need to engage with the Investment Zones proposals, align their own investments (including capital spend) and help lead development. Universities should consider taking equity in spin-outs; there are some suggestions that current approaches hold places back. Investment Zones have the potential to use universities to attract inward investment.
There is potential to adopt a mission-orientated approach, building partnerships and innovation initiatives around tackling societal challenges, such as responding to climate change, improving health outcomes, enhancing mobility and access to services, or tackling social exclusion. Firms respond to future profit, market and growth opportunities where there is societal need. These can be fostered by government and universities.
There’s value here to developing a network of testbeds in Investment Zones – these would enable innovators and entrepreneurs to test their proposed solutions and use cases in real-world conditions.
Universities are at the heart of the proposals, strengthening their civic roles, alongside their traditional research and teaching roles.
5. Develop strong local leadership and strategies
It is clear that successful Investment Zones will need clear, coherent and compelling strategies, based on evidence, realistic proposals and projections for future change, and around which partners can build a coalition and shared commitment. This will need to be positioned within the context of wider strategies and plans for growth, and critically where the private sector is likely to invest. Dedicated leadership and delivery capacity will be needed.
There is scope to learn from successful innovation districts globally, and also the ambitious CHIPS and Science Act in the US. Monitoring and evaluation plans should also be factored in from the start, with a clear theory of change, and particular attention needed on assessing displacement and substitution effects.
All this will require local authorities and CAs to focus on being convenors and catalysts, not controllers, to work with and through others to achieve a positive impact disproportionate to the powers and resources under their direct control. Investors, entrepreneurs, and R&D-intensive corporates. The real prize here is not the £80m of public sector investment; it is the potential to benefit from billions in private sector investment and create thousands of jobs.
Investing in a better future
Refocusing of Investment Zones on innovation and clusters is really positive, and the package of policy, fiscal funding available creates a major opportunity for the UK to adopt an ambitious development model, one that brings national investment to develop the breadth of local potential. This is a huge opportunity for our cities and city regions, and ‘UK plc’.
