Analysis: A recipe for recovery and growth?

Fri 28th June 2013, 12:15 pm

Alan Aisbett from law firm Pinsent Masons delves into the implications of the comprehensive spending review for regeneration and growth funding.

Comprehensive spending review: growth measures

How is the Expenditure Allocated?

On 24 June 2013 the chancellor set out the Government's prospects for expenditure for the last (and overlapping) year of the current Parliament 2015-16. The headline for the spending round (Spending Round 2013) is the reduction in day to day revenue spending of £11.5bn in 2015-16, using this to fund an increase in capital spending of £3bn a year from 2015-16 until 2020 and to sustain the planned reduction in the deficit. It should always be borne in mind that the Spending Round 2013 is for 2015-16 (allowing for ongoing capital expenditure until 2020) and does not affect current expenditure plans between 2013 and 2015.

The focus of the Spending Round is on growth and the headline expenditure figures were supplemented by the publication on the following day by the chief secretary to the Treasury of Investing in Britain's Future. This explains how over £100bn of infrastructure investment will be allocated between 2015-2020. The expenditure is concentrated on transport, energy, science and innovation, housing, digital communication, schools, flood defences and local growth.

A significant proportion of the infrastructure expenditure is earmarked for large national projects particularly in transport and energy. Another large proportion is earmarked for more "quick fix" expenditure such as highways and schools maintenance and social housing. There is also funding for new schools although mainly completing the funding for the Priority Schools Programme, Free Schools, UTCs and Studios Schools.  There is also increased funding for flood defences. However, putting these to one side there are significant funding opportunities for local and regional growth orientated infrastructure projects and in the Single Local Growth Fund a new innovative approach to devolved funding. The role of Local Enterprise Partnerships is significantly strengthened as is the role of the local authority or combined local authority economic development function supporting their LEP.

Continuing Role of Private Finance

Before turning to individual sector expenditure plans, Investing in Britain's Future highlights the continuing need for private finance in infrastructure. In addition to policy certainty around pricing in the energy industry the Government is also endeavouring to create policy certainty at a local level by first, requiring Local Enterprise Partnerships to develop local strategic economic plans and secondly, the creation of the £2bn per annum Single Local Growth Fund between 2015-2020.

The utopia for financing infrastructure remains increasing institutional funding involvement. The NAPF Pensions Infrastructure Platform is gradually building up capacity recently acquiring its tenth investor each offering to contribute £100m but still leaving it currently £1bn short of its target. It has also recently sought expressions of interest for an investment manager. However, the main focus of pension funds is still likely to be on greenfield projects with the absence of construction risk and as such will not be a significant stimulator of construction or development inspired growth.

The Government announced the UK Guarantees scheme for infrastructure in July 2012. This amounted to £40bn worth of guarantees for infrastructure and a further £10bn in guarantees for housing (affordable and market rent).  The Spending Round announced three new guarantees (in addition to those already announced or given for Drax power station conversion and for the GLA funding of the Northern Line extension to Battersea) covering Hinckley Point (power station), Mersey Gateway Bridge and a GLA housing scheme in Tottenham. (it is assume with significant infrastructure requirements).

Recent announcements on the housing guarantees referred to the appointment of a THFC subsidiary as the aggregator or delivery body for the £3.5bn plus affordable housing guarantee scheme and that was followed by an announcement that an aggregator or delivery body would not be appointed for the market rent guarantees scheme with guarantees being given instead on a standalone basis.

It will be interesting to see the extent to which UK guarantees will be used for local and regional projects. The GLA housing regeneration project could be a blue print for unlocking difficult to finance regeneration projects through enhancing the public sector covenant and/or de-risking the project for institutional funders.  Market rental housing with the benefit of a guarantee could also be used as a regeneration finance gap funding mechanism.

Little is said about PFI2 in the Spending Round. There is no indication of any broader or extended use beyond the now much limited use by the Priority Schools Programme and one or two other projects. However, the Spending Round does impose the promised cap on total on PFI commitments. This has been set at £70bn for the five years from 2015-16. HM Treasury Data for PFI in March 2012 forecast annual payments under the then current PFI projects peaking at just over £10bn per annum in 2017-18.  However the apparent headroom in the cap will be reduced by those projects still in procurement and the Priority Schools Programme.  It is difficult to see PFI2 making a significant impact as a procurement method. There are no published PFI programmes and no PFI credits (ring fenced revenue funding) for local or regional projects. It would seem therefore to remain as a procurement method only for a limited member of one off central government projects.

Local Growth

The Government has, since it took office, followed an economic policy to achieve broader based growth throughout the UK outside of London and the South East.  LEPs have been promoted to replace the RDAs, Growing Places and Regional Growth Funds established, Enterprise Zones initiated and City Deals agreed with the eight core cities outside of London which have now moved on to a Phase 2. Following the policy of Localism there has been a gradual if not spectacular movement towards the devolution of power and funding to local authorities and their LEP partners in relation to transport, economic development and regeneration. Gradually housing can be added to the list. The Spending Round continues with this gradual although unspectacular trend.

The most important announcement in the Spending Round was the introduction of the Single Local Fund (SLGF). Introduced at the behest of the Heseltine Review the SGLF is comprised of part former central government department budgets which have been collected together to form a single fund armed at local growth. The cash is derived primarily from DfT budgets (Local Authority Transport, Local Sustainable Transport Fund and Integrated Transport Block) but also includes funding from further education, skills and as mentioned previously New Homes Bonus.

The SGLF is an annual £2bn fund of which capital is £1.5bn. However, it does fall short of the Heseltine recommendation of £49bn over four years which could be devolved. However, it is a welcome start. The SGLF will be allocated to LEPs although there is no mention of the formula for determining allocation or whether there will be a competitive process.  It will be available to be spent on priorities LEPs and their partners have determined in their strategic economic plans.

Several local authorities, at present primarily core cities, are or have already taken on a much more holistic approach to infrastructure investment. Motivated by City Deals they have established a single investment framework across a group of local authorities within the City Region establishing investment priorities and allocating funding accordingly. Manchester has created infrastructure and housing investment funds, Leeds is pursuing a similar line and are creating a revolving investment fund for commercial projects, Sheffield has established the SCRIF and Birmingham, Greater Birmingham and Solihull Finance. One can only see this strategic approach encompassing investment as opposed to grant continuing and spreading wider to Phase 2 Core Cities and to individual LEPs.

SLGF will be supplemented by the allocation to LEPs of £5.3bn of EU Structural and Investment Funds for 2014-20. This will bring total funds under the strategic influence of LEPs and City Deals to 202-21 of £20bn (when Growing Places, RGFC £300m new round over two years), City Deals, PWLB cheap funding are added to the SLGF and EU funds not forgetting of course EZ business rates and other funds such as Local Infrastructure Fund which are available for growth.

Housing

Housing is rapidly being identified by Government as being infrastructure taking into account the contribution of housing construction to the local economy both through the provision of construction jobs and accommodation for prospective employees in other sectors.  Since 2008 the housing market has largely been in the state of rescue with significant stimulus measures ranging from Kickstart (2009) through to the recently announced Help to Buy equity loan and guarantee scheme.  Whilst this stimulus programmes will continue until 2015-16 the Spending Round focuses on affordable housing, the release of public land (building in additional "incentives" for government departments to dispose of surplus land) and market rent.

The Spending Round identifies a £3.3bn package to support 165,000 new affordable homes from 2015-16. The package is in part made up of £957m for three years from 2015-16 plus giving certainty on rents and cashflows for funders of rises of CPI plus 1% for 10 years.  There will also be a £400m affordable rent to buy scheme.  The HCA will also be able to charge fees for its regulation services.  All this is reinforced by the existing Build to Rent fund and that part of the Local Infrastructure Fund allocated to large scale residential developments.

It is assumed that the £3.3bn will be in the main an extension of the current affordable housing programmes ie. at affordable rather than social rents.  The Government will also be looking to stretch the subsidy as far as possible.  No doubt this will involve an in depth analysis of what registered providers are willing to offer themselves to access the funding and efficiency savings which could make the public subsidy go further. Will the affordable housing funding be tied into LEP priorities?  Clearly there will be areas of housing need where the funding will be directed but some of the funding could be used to target areas of growth in conjunction with other LEP local authority funding or HCA and local authority assets.  The Spending Round also announced that £400m from New Homes Bonus will be pooled within Local Enterprise Partnership areas to support strategic housing and economic development priorities.

So far as market rent is concerned there is no addition to the Build to Rent Fund which is in the course of allocation by the HCA and the housing guarantees programme for market (if not affordable rent) will proceed on standalone scheme basis without an aggregator or delivery body.  Finally, absent was the much heralded opportunity to ease the  borrowing ceiling for local authorities within the housing revenue account.  The Treasury are obviously concerned about the borrowing consequences of such an easing financed by gradual uplift in rents.  This leaves local authorities limited to using their headroom or some sort of off balance sheet service concession or operating lease (although accounting principles for lease are due to converge under IFRIC shortly).


Transport

The expenditure for transport is focused on roads and rail. A significant part of the roads expenditure is focused on "quick win" expenditure for the Highways Agency and local authorities on highways maintenance (pot hole filling). However £18bn of the £28bn of expenditure to 2020 will be focused on investment in major projects including improving the A14 (£1bn), adding capacity to motorways and upgrading the national non-motorway network. As will be mentioned below Local Transport expenditure on roads will largely be devolved under City Deals and the Single Local Growth Fund. It is hoped that the national investment will dovetail with local devolved investment to achieve outputs in GVA terms (which tends to be the current approach of the DfT).

Finally in relation to roads the Spending Round adopts the recommendations of the Cook Review turning the Highways Agency into a "regulated" network manager.  The Government will retain strategic guidance but create certainty of funding in return for which the Highways Agency as network manager will deliver "bottom up" agreed outputs.  It will be reformed either as an independent wholly owned Government Company or a non departmental public body. Perhaps this new structure will be the pre-cursor to a wider Regulated Asset Base approach to funding found in other regulated industries and utilities.

Rail is dominated by HS2 where the Government has set an Olympic style funding envelope of £42.6bn for construction costs and £7.5bn for rolling stock. However, perhaps equally as important is the announcement of an HS2 Taskforce chaired by Lord Deighton to capitalise on growth opportunities across the country arising from HS2. Clearly Local Enterprise Partnerships and their local authority partners should play a key role in unlocking these opportunities with the potential for using LEP allocated funding alongside. In bringing together the HS2 opportunity and local landholdings with capturing growth from these opportunities will be a vital part of the investment to be re-invested elsewhere. Pre-planning of financial and legal structures will be important to maximise potential returns from the public sector investment and avoiding haphazard developments where gain for the area is not optimised.

The balance of the expenditure will be focused on major rail projects some of which are growth orientated such as Crossrail, Bedford to Oxford line and the Northern Hub in Manchester. There is also the interesting challenge in ascertaining the feaseability of funding half of the cost of Crossrail 2 from private sources.

Energy

Energy is largely focussed around pricing for renewable, funding of Hinckley and shale gas.  However, there is also the welcome announcement of the allocation of additional capital of £800m to Green Investment Bank in 2015-16. The Government has also activated the GIBs ability to borrow allowing up to £500m of Treasury borrowing.  Whilst GIB investments are across Green Energy most of the City Deals and several of the LEP's growth plans have energy as an important plank for local investment and growth. Several of the core cities are looking at the potential of joint investment with the GIB and also using expert internal resources to work up projects.

Alan Aisbett is partner at Pinsent Masons, specialising in PPPs and local government issues

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