A key element of the proposals set out in the report is the creation of a national ‘Fund of Funds’ to maximise the coverage and leverage of Urban Development Funds (UDFs).
The structure of our proposed National ‘Fund of Funds’ is shown in the figure below. The point of the national fund would be to bring together several pots of money, such as the Regional Growth Fund, and match it to the UK’s allocation of JESSICA funds and potentially private institutional investment (e.g. sovereign wealth funds). This would create a national war chest for investment in our cities.
Underneath the National Fund would sit a number of geographically focused UDFs designed to invest in a particular city or groups of cities. Individual UDFs would take one of three forms:
- The UDFs already in operation, such as the Chrysalis Fund in Merseyside;
- A single city-region fund for those Core Cities that are large enough to support a UDF on their own but currently do not have access to one, such as Birmingham; or
- A multi-city fund for those cities that do not have sufficient scale to support a UDF on their own. Examples of such groups could be ‘mid-sized’ cities such as Sunderland, Coventry, Derby and Swindon that share similar economic characteristics and challenges.
How would the system work? Once assigned to individual UDFs, the money would then go through an additional round of matching to further increase its size. Match funding would come from other public sector resources, such as local authority funding, and private sector investment (although our consultation with stakeholders suggested that private sector investment is likely to be made at the individual project rather than UDF level). The UDFs would then make decisions on projects to invest in based on their likely commercial return and the public policy goals they are trying to achieve.
Our proposed model has two major advantages over how UDFs currently operate in the UK. The first is that it would increase the coverage of UDFs in the UK. Currently less than half of our cities have access to a UDF. The creation of a national framework of new UDFs beyond the nine already in operation would address this. Secondly, thescale of the National Fund would make investment in the model more appealing to institutional investors. Currently individual UDFs are too small to appeal to large investors such as sovereign wealth funds.
The recent Budget shows that the Chancellor is unwilling to increase borrowing to support growth via grants. The creation of a National framework for urban investment would enable him to instead co-invest with the private sector to support future economic growth in our cities.
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