20 October 2006
Some depressed areas of the UK are set to lose out under a shake-up in EU regional aid. But how much of a problem is this? As Sally Gainsbury reports, the grants scheme has been something of a mixed blessing
Prosperity for all has long been one of the government's favoured catchphrases. But the European Union funding regime designed to kick-start local economies and bring jobs and growth to depressed parts of the union is facing a far-reaching shake-up.
Last year, more than £150m of public money was granted to business in Britain under the Regional Selective Assistance scheme. However, the admission of ten new members to the EU club in 2004, including eight former communist countries in Eastern Europe requiring substantial economic aid, means that the amount of funding available in the UK is being reduced from next year.
Consequently, some areas that currently receive funding are set to lose out altogether. But with the failure of many high-profile projects funded by the scheme, questions are being asked about the extent to which it delivers value for money to the public purse.
RSA is regulated by EU rules on state aid – designed to ensure government subsidies do not give unfair advantage to businesses over their competitors. Only designated 'assisted areas' qualify for the aid, most of which is allocated via the regional development agencies.
Member states are free to design their own criteria against which areas can be designated, but they must work within three rules. First, the EU sets what percentage of a member state's population can live in assisted areas. From 2007, the percentage for the UK will fall from 31% to 24%. Second, areas whose gross domestic product falls more than 75% below the average of the EU – known as Tier 1 areas – are automatically included. Lastly, from 2007, areas with better-than-average GDP and employment rates cannot be designated.
Despite the EU expansion, which has lowered the average GDP across the union and required the European Commission to target aid to the new arrivals, some UK areas still automatically qualify for assisted area status on the basis of their low GDP. These are Cornwall and the Isles of Scilly, West Wales and the Valleys and the Scottish Highlands and Islands.
The UK government has also pledged to continue assisted area support for the whole of Northern Ireland. That leaves 16.4% of the UK population eligible for Tier 2 discretionary coverage, and the Department of Trade and Industry consulted over the summer on where the remaining areas would be.
On October 10, Margaret Hodge, DTI minister for industry and the regions, published the final map (see opposite). Extensive areas in the Northeast and Yorkshire & the Humber regions qualify. The Northwest around Greater Manchester and Merseyside, and the West Midlands also stand to benefit. Unsurprisingly, London and the Southeast will receive almost nothing.
But six areas have lost their assisted area status altogether. One comprises two district councils in Cheshire, Halton Borough and Ellesmere Port and Neston. The others are South Manchester; North Warwickshire; Lowestoft in Suffolk; Brighton and Hove in East Sussex; and Edinburgh and West Lothian.
The DTI attempted to soften the blow by announcing a 'new package of measures' to help those excluded from the map. These include capped grants to small and medium-sized businesses and funding for research and development. But local authority sources told Public Finance these were already available and did not come with any extra money.
Areas that are going to lose their funding are understandably concerned. Dave Cargill, executive board member for European affairs at Halton Borough Council, told PF that it will threaten the progress already made.
'Without the designation, it makes life an awful lot more difficult, not just to attract industry into the area, but also to support the current industry here to grow and expand. That's the big problem. We'll still be able to do that to a small extent, but we could certainly do with the designation. We're a deprived authority rating 21 in the multiple index of deprivation.'
But even for those areas retaining their status, funding is no guarantee of economic success. In August, Korean electronics giant LG announced the closure of its LCD plant in Newport which produced flat-screen TVs. Three hundred and fifteen jobs will be lost and screens produced instead in China and Poland.
Under a 1996 deal, LG received a £247.2m state aid package, including £69.5m in RSA capital finance from the former Welsh Office and £160m worth of land and property from the former Welsh Development Agency.
In return, LG pledged to bring 6,100 jobs to Newport and £1.7bn of capital investment through three linked plants. But one never opened, the second shut in 2003 and employment peaked at 2,000 jobs.
For Kirsty Williams, Welsh Assembly member and Liberal Democrat spokeswoman on economic development, the case is just the latest example of what has been termed 'grant shopping' by multinationals. She says she would prefer such aid to be spent on transport infrastructure and on smaller local enterprises committed to their localities.
'The Welsh experience over the past couple of years has been of large multinationals and big names such as Panasonic, Sony and LG coming in with large grants. But when the going's got tough, we've seen those jobs shipped out to lower wage economies,' she says.
But LG defends its decision. A spokeswoman told PF: 'The closure was driven by the external pressure of market forces… It's not a relocation, it's about market pressures forcing us to look very closely at our production costs. These market forces are greater than us all.'
Brian Morgan, the former chief economist of the WDA and now a lecturer at Cardiff Business School, is critical. 'It was an inward investment too far,' he says. 'We just allow these companies to cherry pick grant aid from across the European Union, often competing with each other. They make maximum use of the grant and then move on, and we're just silly to allow them to do that.'
Wales is not alone in finding it hard to retain grant recipients. At the end of August, Thomson Travel – awarded £1.4m by the Scottish Executive in 2000 – announced that its Glasgow call centre would close later this year, losing 450 jobs. The past decade has seen similar high-profile failures in the shape of Siemens in North Tyneside and Samsung in Billingham, on Teesside.
The National Audit Office has also cast doubt on the success of the scheme. In 2003, it found that the Department of Trade and Industry had overstated the number of jobs created, as a proportion of these would have been created in those areas anyway, while others were effectively displaced from other areas of the UK. Moreover, the average cost per job created was £21,000, compared with a target of £5,000 for low-skilled jobs.
Since 2002, assisted areas grants have been administered by the English Regional Development Agencies, the Welsh Assembly Government and the Scottish Executive. Following the NAO's criticisms, the English scheme was rebranded as Selective Finance for Investment. A spokeswoman for the DTI told PF it introduced 'new, tighter criteria for assessing the impact on productivity and skills'.
The Scottish and Welsh schemes have not changed their names but the changes in eligibility are sparking controversy. In Wales, some areas are losing their assisted area status altogether, while Flintshire County Council's eligibility has risen from just 12 electoral wards to 40. It now has the largest coverage of any Welsh authority.
Flintshire borders the impoverished Denbighshire County Council, which lies within the West Wales and the Valleys area. Sixteen of Denbighshire's 27 qualifying wards have an incapacity benefit claimant rate of more than 10%. By contrast, some of Flintshire's wards have a claimant rate of just 5.1%.
Kirsty Williams says she has 'grave concerns' that some prosperous areas qualify for aid, 'yet some of the most deprived areas of Cardiff and very poor rural areas are missing out'.
Such controversies will inevitably arise because of the arbitrary criteria used to identify worthy areas, says Heleen Jalvingh, European officer at the Local Government International Bureau. Flintshire qualifies, despite the relative wealth of many of its wards, she explains, because it can be deemed as contiguous with Denbighshire, which is in one of the three UK areas automatically qualifying for assisted area status. Other areas fall out, though, due to an EU 'filter' that excludes areas over a certain GDP level.
'But where those areas lie depends on where you draw the population boundary. So some pockets of extreme deprivation – in the East Midlands for example – will not qualify,' she explains.
Despite these problems, the assisted areas regime has its defenders, drawn from an unlikely alliance of the private sector and the trades unions.
Nigel Wilcox, regional development director for Ernst & Young, where he has worked as an adviser for both RDAs and companies seeking funding, argues that the public investment is a real spur to jobs and economic growth. He disputes the NAO's finding that it costs £21,000 to create one job, saying that the figure was based on both cash grants and grants in kind in the form of infrastructure development, which is a benefit to the wider economy over the longer term.
He agrees, however, that it can sometimes be hard to determine whether or not a grant was needed. To qualify for funding, companies must prove their planned projects would not go ahead without the assistance. A valid argument, for example, would be that labour costs in the developing world would make production too expensive in the UK, unless funding made up the difference. The grant can be substantial, up to 30% of the total capital investment required in the most deprived areas and 10%–20% in others.
Wilcox concedes that the process is not perfect. 'There are companies that have gained grants where the argument they put forward was somewhat spurious. But if that is the case, the grant still achieved its aim of attracting investment to a less developed area. And the government will have got its money back – in terms of taxes, income tax and taking people off the unemployment register – within about a few months.'
One local government head of economic development told PF that in his city two multinationals had recently been awarded grants to create service sector jobs. The number of posts they required was so high and at such a skill level, it was doubtful that they had many options as to where they went.
'So we're talking about giving these companies a hell of a lot of money as a reward for coming to a place they were probably going to come to anyway. It's like a sweetener that they don't really need,' he says.
Although Wilcox agrees that this can happen, he defends regional development agencies and the government against the accusation that they are outsmarted by private business. 'It's a bit of a game of poker when it comes to very large capital investments. If you look at Nissan, for example, which got a grant recently for a reinvestment to stay in [the Northeast], they would have claimed that they would have put their plant elsewhere. Now it's a brave government that says “we don't believe you, we're going to call your bluff”.'
Perhaps surprisingly, the Trades Union Congress agrees. 'Naturally all business will try to maximise what it can squeeze out of the government,' says Kevin Rowan, TUC regional secretary for the North. 'But in most cases it is money well spent. These plants form part of the supply chain and have a significant impact on surrounding enterprises as well.'
Rowan's view is typical of many involved in the funding regime: although it does not always function perfectly in practice, they still regard it as a useful means of economically regenerating deprived areas.
For the unions, the important benefit is jobs, and as Rowan's Southwest colleague Nigel Costley puts it, the usual union suspicion over marrying public funds and private profit does not apply.
'We do like the idea of the state being able to intervene to make a difference.'
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