Michael Gove’s return to government is likely good news for the levelling up agenda he set out in February’s White Paper. Recent reports have suggested the Levelling Up Secretary has already been pushing to revert former prime minister Liz Truss’s plans for investment zones back to the regeneration areas outlined by his department under Boris Johnson’s administration earlier this year. While this would be a positive move for economic growth and levelling up, there is still a major funding hurdle to overcome. This policy will need public sector investment to work, and it is not clear whether the Chancellor is going to make that money available.
Regeneration needs public investment to get off the ground
Regenerating an area can only succeed if it tackles market and policy failures that have prevented it from taking place there in the first place. Table 1 below shows examples of such failures.
||Examples of market and policy failures
||Fragmented land ownership
|Under provision of public goods
||Poor quality public realm and urban blight
Poor public transport access
||First mover problems
Uncertain future demand
|Planning and policy uncertainty
||Planning system uncertainty
Adapted from Bridgett S, Leeman T, and Breach A (2022): Making Places: The Role of Regeneration in Levelling Up, Centre for Cities
The first market failure, fragmented land ownership, can often make regeneration impossible as ‘holdout’ landowners drive up the costs of buying the land and make development more complicated. This can only be solved by a public body buying the land, either through Compulsory Purchase Orders (CPOs) or through the threat of them.
Our Making Places report looked at four regeneration case studies, in London, Bristol, Nottingham, and York, and found that public intervention to consolidate land played a big role in each one. The Government recognises this necessity as the White Paper indicates that Homes England could use its statutory powers for buying land and the Levelling Up Bill will streamline the CPO process, but these tools will still need public funding to succeed.
Areas that need regeneration also normally suffer from urban blight or poor-quality public realm, and need more public goods, like transport, which government must pay for. Though some public goods can be paid for privately (like in King’s Cross, where the single landowner invested in the public realm), the Government still needs to pay for expensive public transport and public realm improvements around the site.
Demand uncertainty, where investors are unsure whether there will be enough demand for a site’s floorspace to justify the development costs, is a third common barrier to regeneration. Public sector bodies, such as universities and local government offices, can mitigate this by being early movers to the site and acting as anchor tenants. This again requires public funding. An alternative solution would be to guarantee a minimum floorspace price or occupancy rate, but this leaves government on the hook for some of the cost should that minimum not be met by private demand.
If demand for space is low, as it is in many of the UK’s underperforming cities, then even more public funds will be needed to cover upfront costs and mitigate risks to attract private investors to fund the rest of the regeneration.
While overcoming market barriers will require public sector cash, there are some ‘cost-free’ actions government can take to resolve certain policy failures. For example, ministers should streamline planning tools, such as local development orders, to reduce the risks the planning system creates. However, this will not spur regeneration on its own – this belief was a big flaw in Liz Truss’s investment zone idea. Addressing policy failures needs to happen alongside addressing market failures if they are to bring about the regeneration of an area.
The Autumn statement must leave room for investment in regeneration
Michael Gove’s return to DLUHC seems to have put the Government back on the course he set for levelling up through February’s White Paper, and his push to scrap investment zones in favour of his regeneration projects is welcome. All eyes are now on the chancellor on Thursday to see how persuasively Mr Gove has been able to make this point.