Weathering the storm

Author: Malcolm Cooper
Date: 20/06/2008
Publication: Public Finance

Six months ago, the credit crunch still seemed like a distant and very American problem.  This is no longer the case.  One medium-sized British financial institution has already failed, and its larger cousins have been forced to make very large debt write-offs and severely constrain lending.  What might initially have seemed a City problem, the consequences of which would be felt largely by high-riding brokers and investment bankers, is now darkening the horizon across the UK urban landscape.

The mortgage market, if not quite imploding, has contracted to the point where would-be borrowers are struggling to find finance, even at a time when house prices themselves are falling.  Large scale commercial and mixed-use developments, the flagships of Britain's urban renaissance, are now facing delays and possible down-sizing.

A chill wind is already blowing down the High Street, with falling consumer confidence being exacerbated by continuing inflation in food and fuel prices.  Finally, unemployment is beginning to edge upwards.  The financial services sector, the prime mover in jobs growth across most of Britain's cities, is already experiencing some job cuts, and the likelihood is high that these are only the beginning of a phase of systematic retrenchment.

What does all this mean for regeneration and, in particular, for Britain's cities?  The general answers are fairly stark.  Levels of funding, both from the public coffers and from private developers are only likely to fall.  In an environment where the availability of capital is restricted, housing affordability is unlikely to improve despite falling prices, and the Government will struggle even more than in the recent past to deliver on its targets for new homes and affordable housing.  Skills and employment policies, which have recently been focussing more and more on the long-term workless, are now also going to have to wrestle with falling overall employment rates.

These questions are clearly exercising minds at the highest level. The Local Government Minister John Healey has just commissioned a study on the global credit crunch and how this might impact on regeneration, voicing his determination to transform the UK's most deprived areas. ‘The tightening terms of credit, uncertainty in the housing market and slower economic growth could all have an impact on regeneration investments. I want to make sure we understand these risks,' he told a recent regeneration conference.

The study, led by Michael Parkinson of Liverpool John Moores University is intended to run alongside the DCLG's consultation on a new regeneration framework, which is itself due for publication in the summer.  Both pieces of work are extremely timely.  While regeneration is a long-term process with far-reaching investment horizons, the shorter term progress of individual regeneration initiatives could be at risk in a harsher economic climate.

It is then a gloomy picture.But there are a number of areas in which a shift in the policy balance might mitigate, if not completely cure, the pain.

At the overall regeneration policy level, there will need to be a change of emphasis from stimulating growth to building up resilience.  The way forward here should be a local one, within which local authorities and government agencies can play an important role.  With room for manoeuvre constrained by relatively scarce public spending and private capital, cities will need to re-prioritize resources towards supporting their existing areas of strength, or, in cases such as financial services where contraction is inevitable, to build up alternative bases of business and employment.

The current downturn does not yet look like becoming a global recession.

Local business support strategies could usefully be re-configured to provide support to both existing businesses and potential start-ups which could absorb skilled labour from other less robust parts of the economy. Retrenchment in the financial and business sector could could actually produce a need for new consolidated workspace in some of our cities.

There should also be a way forward on the housing front.  Demanding market conditions will require more adaptable and flexible housing in cities - to accommodate a workforce which will need to relocate to areas where jobs can be found.  At a time when fewer and fewer people have a realistic chance of owning their own homes, institutional development of the private rented sector could provide the flexibility to support local labour markets.

A larger rental sector, with more high quality, professionally managed houses and flats, could also play a role in stabilizing local housing markets.  This was one of the key messages of the recent All Parliamentary Urban Development report Delivering Urban Homes, and forms the basis of an upcoming study from the Centre for Cities and the Smith Institute.

Many cities already face substantial barriers when it comes to housing delivery. The Homes and Communities Agency needs to give urgent thought to the kind of additional support that local authorities require: for example, with skills and capacity issues to attract the right type of investment and encourage partnership working with the private sector. Local councils need to find viable ways to help developers of affordable housing spread their financial risk.

The challenge of reducing levels of worklessness, perhaps the arena in which regeneration-driven interventions have struggled the most to achieve real impact over the last decade, is likely to become even more difficult as the supply of jobs shrinks.  Through most of the recent period of employment growth, the count of those on economically inactive welfare benefits has been increasing and has only just begun to fall.  Cities contain 59% of the country's population, and provide two-thirds of the jobs - but they also  have 64% of the workless and 68% of benefit claimants.

There are no easy answers here.  It is clear, however, that worklessness is a brake on city growth, and a barrier to social inclusion.  Many cities are already prioritizing the reduction of worklessness as a key element in their economic development strategies.  With job supply tightening, it is all the more important to seek city-specific solutions to city specific problems.

One of the big steps forward required here is to create and empower city-regional Employment and Skills Boards (ESBs) - and give them the tools and the resources to boost employment. A new report, written by the Centre for Economic and Social Inclusion for the Centre for Cities, recommends that the Government should build out from its City Strategies initiative to create ESBs for all city regions, giving them responsibility for:

• determining the spending priorities of the Working Neighbourhoods Fund
• delivery of European social Fund projects
• working with the Skills Funding Agency to prioritize adult skills funding according to economic need
• participating in the selection of contractors delivering employment services on behalf of the DWP. 

Overall, ESBs should have responsibility for working with employers to drive up skills through workforce development.

Tighter public spending and more challenging economic conditions will constrain British cities' room for manoeuvre and freedom to regenerate over the next few years.. Local councils, under pressure to make efficiency savings, will need to get to grips with their new economic development role, working more closely with neighbouring authorities and local businesses.

Cities will also need financial flexibility to target resources, boost resilience and ultimately strengthen their economies.  In order to sustain investment when times are difficult, they need more political and financial powers to give them more room to innovate when facing regeneration challenges.  Two specific policy levers suggest themselves:

1. City Regional Government: city economies would be best-served by statutory city-regions, with a package of powers and spending freedom at their disposal based around real economies.  The London model, including a directly elected mayor with strategic powers over transport, housing and skills, offers a potential way forward.
2. Borrowing Assistance making it easier for cities to borrow money for key economic infrastructure projects in city regions.  The Treasury could provide technical assistance to help city governments bridge market conditions and improve procurement efficiency to support local economies and deliver value for money.

Bringing city regions and financial institutions together under Treasury guidance to broker financing deals for infrastructure and housing projects could support the resilience of city economies - and lay the conditions for future growth.

It is critical that the government's new regeneration framework takes account not only of a less friendly economic environment, but also of the key role cities must play in meeting its challenges.  In order to respond to fast-changing economic conditions, local authorities need more freedom to fix local problems -  and new financial instruments for regeneration that will lay the groundwork for sustainable growth once the current storm has passed.

Liverpool and Sunderland: A Tale of Two Cities 

The port cities of Liverpool and Sunderland illustrate some very different regeneration challenges emerging from the credit crunch.

Both were cornerstones of the North of England's industrial success, Liverpool as a hub of global maritime trade and Sunderland as one of the world's largest shipbuilding centres.  Both cities have had to face a long period of readjustment to the realities of Britain's post-industrial service economy.

Both cities have already shown distinct signs of recovery.  Employment growth in Liverpool moved up from 1.1% per annum in 1001-2003 to 2.7% per annum in 2003-2005.  Gross Value Added growth was even stronger, moving up from 1.6% per annum in 2001-2003 to 5.2% in 2003-2005.  In Sunderland, the compound annual employment growth rate from 1995 to 2005 was 2.3%, while weekly earnings rose by over 5% per annum between 2002 and 2006.  In both cities, however, regeneration is very much unfinished business.

Liverpool, now in the midst of its year as European Capital of Culture, has made huge steps forward, but has arrived at a critical delivery point in the long-term regeneration of its city centre.  The first major retail units of the ambitious Liverpool One project have just been opened.  The complete site will include 2.4 million square feet of space (two-thirds of it retail), and is intended to create more than 4,500 jobs.  On the face of things, the timing of looks less than optimal, but preliminary indications are favourable. With a well-developed destination centre strategy, encompassing culture, retail and leisure facilities, already in place, and visitor numbers high, there is a chance that Liverpool could buck the downward economic trend.

On the other side of the North of England, Sunderland faces an entirely different challenge. It has had significant success in attracting new businesses to state-of-the-art, out of town business parks, and is launching a software development initiative.

But regeneration of its city centre has not yet really taken off.  The challenge the city faces is not so much turning new developments into sustainable sources of growth as launching the developments themselves.  With credit markets all but locked down, and developers disinclined or unable to take on new commitments, many areas are struggling to move projects on. However, developer interest in Sunderland remains strong and the city must look to the longer-term.

Neither city is likely to find the way forward an easy one.  Each, however, has an opportunity.  Liverpool is well-placed to attract more businesses - including some which might be seeking to consolidate sites for regional offices elsewhere in the country.  Such new arrivals will not only increase the productivity of the local economy but also bring in customers for the improved retail and leisure services.

Sunderland will need to be determined with its city-centre regeneration schemes.  The experience of previous property shocks suggests that developers come back quickly when the current downturn begins to ease, so Sunderland could position itself at the start of the next wave.

As local government minister John Healey has emphasised, "While we need to assess the influence of the curent market sentiment we also need to recognise that regeneration is a long term process and investment horizons are likewise long term.'

A version of this article first appeared in Public Finance.

Centre for Cities will be publishing a detailed review of the resilience of the financial services
sectors in Britain's cities. If you are interested in being involved in this project please contact Malcolm Cooper