04The allocation of powers and resources to MCAs

If MCAs are to have a positive impact on local economic growth they need to have the necessary powers and resources in the three areas of transport and planning, skills and R&D.

The role of MCAs is then to co-ordinate activity within these policy areas, allocating resources according to their local needs and linking up different initiatives to maximise their potential in driving local economic growth.

1. Promoting local economic growth by joining up transport and spatial planning

Transport, together with spatial planning, has an important role in driving development within a city region. Local transport systems are crucial to the performance of local economies because they carry the majority of journeys people make to work, education and leisure every day. Commuting is a cost, in money and time, that workers must trade off against the higher wages and housing availability at either end of the journey.

An efficient transport system that makes journeys quicker and more affordable reduces this cost and generates two major benefits. First, it widens labour markets by putting more people within an acceptable commuting time, allowing efficient matching of people and jobs, and greater specialisation and complexity in local economies.

Second, an efficient transport system enables employment and business to cluster densely where they have the best access to knowledge, such as in city centres. More efficient transport systems mean that investments to level up innovation across the country can be focused even more tightly to where they can have the greatest potential impact, which is in city centres. More firms can cluster into local areas of excellence, while a wider pool of residents from further afield can access the higher wages and employment in these areas.

Local transport systems in MCAs can be made more efficient both by making better use of the existing infrastructure, services and funding, and by planning policy and economic regeneration plans. In the first case, raising the cost of driving and cutting bus fares reduces congestion and increases the passenger capacity of the road network, while making journeys for the majority of commuters affected faster and more reliable.

Focusing on slower but more frequent stopping services on rail services, or reducing rail freight paths during the working day, can allow many more people to use trains. Removing competition between modes, such as trams and buses, frees up capacity to be deployed elsewhere. Making ticketing, fares and timetables simpler across different modes can also make it easier for people to make connections across bus and tram, for example.

Transport systems can also be made more efficient by non-transport policy. Planning policy and economic regeneration plans affect where people live and work and thereby travel. Building thousands more homes in city centres allows more people to be able to walk and cycle to work.

But transport systems in England’s biggest cities outside of London are not taking advantage of such opportunities and are significantly underperforming. The city centres of cities such as Leeds, Birmingham and Manchester have relatively poor public transport accessibility. These cities also have the greatest potential outside the Greater South East to increase their rate of innovation and increase their value-added growth. But their current transport systems mean that there will be heavy costs of higher growth in these city centres. London’s public transport system carries nearly 20 times the passengers of each of these cities into the city centre. It also carries them more quickly on average.¹⁶

Cities in the UK today have little control over the infrastructure, services and funding for public transport. In Manchester, only around one-third of peak time public transport journeys into the city centre, and in Birmingham less than one in 10 commutes, are directly influenced by their transport authorities through their control of the light rail system. In Leeds, no public transport journeys or revenues are controlled by the city region. Cities reliant on public transport are reliant on regional franchises and local subsidiaries of national bus companies to keep their labour markets working.

To unlock significant improvements to city region transport systems and local economies over the next decade, MCAs need the following three changes to be made:

i) Spatial planning powers

Government must move statutory spatial planning authority from local authorities to metro mayors. Areas with underused or improved transport services should match that with significant intensification of development. This will improve the efficiency of the transport system, and generate higher fare revenues to invest elsewhere. All metro mayors should have the same powers to create a statutory spatial plan to which local authorities must conform, as the Mayor of London has.

ii) Funding and franchising bus services to London levels

The cost to Greater Manchester to taking up the powers given to it in the Bus Services Act 2017 is £134 million to purchase the bus depots and vehicles it considers important to foster a competitive bus franchising system.¹⁷ This provides a significant practical obstacle to cities considering taking up these powers, and one that London did not face when it moved from a publicly owned bus system to a franchised model. The creation of bus franchising will immediately support the institutional capacity of city region transport bodies. The Government’s £5 billion bus, walking and cycling fund (£2 billion was recently committed to walking and cycling) should include £1 billion for metro mayors to take up bus franchising quickly.

iii) Control over rail services

MCAs have been given greater say over franchises such as Northern and West Midlands Rail. These are now the single most important mode into every major city centre, and too important to be run between the Department for Transport, regional franchisees and MCAs with divergent interests and incentives.

Government should devolve responsibility for these services and stations to the metro mayors so that they can control services and development around them to increase efficiency and maximise the contribution to the local economy.

2. A skills system better aligned with business needs

The development of a national system of qualifications covering both apprenticeships taught mainly in firms, T-levels and higher technical qualifications taught mainly in further education (FE) colleges provides an opportunity for better co-ordinating at a city level the courses run by FE colleges with the labour market needs of the city. Educational policy should, however, continue to be set at the national level.

The income of FE colleges comes from a range of sources, including apprenticeship funding, learner loans and commercial income. The two largest components however are: the adult education budget (AEB), which is ringfenced for the training of specific groups of adults, often those with low prior educational attainment; and grant funding to pay the costs of courses taken by 16-to-19-year-olds. Since August 2019, the AEB has been devolved to MCAs where they exist, accounting for around half of the £1.3bn AEB total spend in England each year.

The 16-19 budget for England totals around £5.6 billion a year. Around £2.9 billion of this goes to schools and sixth-form colleges and the remainder (around £2.6 billion) goes to FE colleges. The 16-19 budget is not devolved. Instead it is allocated annually to individual schools and colleges by the Education and Skills Funding Agency (ESFA) based on the courses delivered and the characteristics of the learners (e.g. their level of disadvantage).

Neither the AEB nor 16-19 funding has robust requirements attached for the money to be spent on courses that meet labour market needs. Colleges consider a number of factors when selecting what courses to offer. While the best colleges will consider local labour market need, few do this well, and learner choice and funding rates tend to be far more influential factors, not least because colleges must offer provision that, at least collectively, is financially viable in the long term.

It is thus wholly unsurprising that a mismatch often arises between the skills the labour market needs and those being supplied by colleges and other training providers. This mismatch is magnified by the fact that individual colleges (and schools, sixth-form colleges and independent training providers) in a local area are not required to work together to plan a coherent training offer. Instead, they compete with one another to attract learners, especially onto the courses with the highest margins (i.e. those that are popular and cheap to deliver). Where a college feels that there is a risk of a competitor stealing its market share of a low-volume, high-cost course (especially one requiring significant upfront capital investment), or that the margins from a specific course are just too tight, it may well not offer the course at all, regardless of its value to the local labour market.

Not only is this mismatch of skills supply and demand a drag on our economy’s productivity – with businesses unable to recruit employees with the skills they need – it is also a drag on social mobility, with many people finding themselves leaving education with qualifications that have little currency in the local jobs market. The current unco-ordinated approach to publicly funded training provision has demonstrably failed, with billions of pounds misdirected towards low-value training at the expense of the skills our economy needs. This has to change.

(i) Skills provision must be commissioned based on labour market needs.

But articulating local labour market need cannot be done at the national level: Whitehall is ill-equipped to understand the specific needs of, say, the manufacturing sector in the North East. Local skills plans must be based both on rigorous data, including, for example, demographics, job vacancy numbers and travel-to-work times, and the input of local employers, which crucially must include small- and medium-sized enterprises. Colleges and other training providers need to be brought into this conversation from an early stage too, not least because they often will have useful intelligence about why skills gaps have grown over time.

Once a clear articulation of skills need has been arrived at, a plan for delivering it must be developed. A large city region might have a dozen colleges and many more independent training providers in receipt of public funding for skills. We must move away from the current system of competition between these providers towards one of collaboration across a local area to deliver an agreed plan. This will sometimes require tough decisions: for example, perhaps deciding that capital-intensive provision would be better concentrated in a smaller number of colleges, resulting in some having to close their engineering departments.

Local skills plans should take account of all training paid for from the AEB and 16-19 grant funding. It should be noted that this includes the 16-19 provision in secondary schools and sixth-form colleges, and it is important that these institutions are included if any planning for an area is to be coherent. We must avoid a situation where FE colleges are restricted to only those courses that align with labour market need, while schools and sixth-form colleges are permitted to offer any popular courses they wish, as this would quickly see these institutions becoming over-subscribed with 16-year-olds wishing to study, for instance, sport science or performing arts, creating even greater pressure on the viability of FE colleges. Additional government investment of capital funding for skills provision (of the type announced at the 2020 Budget: £1.5 billion to refurbish college buildings) should also be dispersed in line with local skills plans.

 (ii) MCAs should be in charge of local skills plans.

A move to this type of commissioning model will require strong vision and leadership at the local level. In a welcome move, the FE White Paper published at the end of January, acknowledges the importance of these actions and co-ordination at the local level.¹⁸ But, while the FE White Paper suggests these responsibilities should fall within the remit of the local chambers of commerce, it is the MCAs that are best placed to take on this leadership role for their areas and it is they who should be charged with the production of local skills plans. In areas not covered by MCAs, alternative arrangements for the development of local skills plans will need to be implemented. While further work is required to establish whether a single solution can meet the needs of all non-MCA areas, the starting assumption should be that LEPs – either individually or in collaboration with neighbours (in order to achieve an appropriate geography for coherent planning) – should be strengthened such that they are able to undertake the role envisaged here for MCAs and develop local skills plans.

Outputs from the newly established skills advisory panels (SAPs) and the recently announced Skills and Productivity Board (SPB) – charged with producing labour market analyses at the LEP and national level respectively – will be important inputs to each MCA’s deliberations. As too, of course, will be the views of local industry.

AEB funding has been devolved to MCAs only since August 2019 and it is too soon to judge how well MCAs are managing this (approximately £650 million a year) budget to meet local needs for adult skills training. Devolution of spending decisions relating to the much larger 16-19 education budget needs to be implemented in a measured way. The Government needs to have confidence that MCAs have the capacity and expertise to undertake the far-from-trivial tasks of analysing labour market need and employer demand; matching this to appropriate training provision; and negotiating with training providers to reshape their offer while still maintaining continuous, quality provision.

In the short term, while the new system is bedding in, local skills plans created by MCAs should be submitted for approval centrally by the Department for Education. However, this should be done on the understanding that in the medium term – say three years – there is an expectation that MCAs will have autonomy to enact their skills plans without requiring formal sign-off by Whitehall. While the number and mix of courses offered locally would then be at the discretion of the MCA, the overall skills budget for each MCA would still be set centrally. To avoid unnecessary duplication of bureaucracy, funding receivable by individual training providers – set in the local skills plan – would still flow directly from the ESFA, as is the case now. There is no compelling argument for devolving administration of 16-19 funding to local bodies such as MCAs. National regulations around, for example, which courses are of sufficient quality to attract public funding, and arrangements for Ofsted inspections etc., would also still apply.

3. More resources for R&D

As we have seen, if regions are to produce higher levels of GVA per capita they need to have an economic base composed of firms that constantly innovate and create competitive advantage in global markets. And to create such a base a technology-based growth strategy needs to integrate into an efficient innovation ecosystem, public and private research, technology development, and organisations such as incubators and accelerators that can assist with commercialisation.

(i) Improving the Strength in Places Fund

In the UK there is also a need to allocate the Government’s support for R&D more evenly across the country if the country is to improve its rate of economic growth. In its recently issued UK R&D Roadmap, the Government said that it would ‘take greater account of place-based outcomes on how we make decisions on R&D in the UK, ensuring that our R&D systems make their fullest contribution to our levelling up agenda’.¹⁹

The Roadmap also said that ‘This could include building on the Strength in Places Fund’. As this R&D scheme, which was announced by the Government in its Industrial Strategy White Paper published in November 2017, was set up to support the development of regional technology clusters, building on this scheme would certainly be the most effective way of delivering the Government’s levelling up strategy.

The Strength in Places Fund is a UK Research and Innovation (UKRI) funding programme that makes awards to local consortia representing ‘economic geographies’ across the UK that have existing research excellence and high-quality innovation capability. This is with the aim of supporting clusters of businesses that have the potential to innovate, or to adapt new technologies, to become nationally and internationally competitive. So far £236 million has been allocated to the fund to cover funding for the first two rounds. While there have been calls to significantly expand the programme, long-term funding is still unclear.

It is envisaged that full-stage grants will be between £10 million and £50 million over three to five years, and that £50 million bids will be exceptional. Proposals are developed through a two-stage process with those successful at the initial ‘Expression of Interest’ phase awarded £50,000 seedcorn funding to develop their full-stage bids. It is possible that projects can be extended, but this will depend on more funding being made available.

The first wave of the fund saw 23 seed-stage proposals selected for development into full-stage bids. Of these, six are from Scotland, Wales and Northern Ireland, 11 involve areas that are covered in part by an MCA, including the Greater London Authority or non-MCAs, while six proposals are from areas not covered in part by an MCA (see Box 1 for more details).

Encouragingly, a number of the projects appear to provide a relatively coherent package of investments in R&D, developing the necessary infrastructure (e.g. demonstration facilities/test beds) to facilitate its commercial application, building supply chain capabilities and workforce development, and a focus on building the connections between the various actors in the cluster.

On the basis of the progress made to date it would seem right for the Government to go ahead with the first round of projects while adjusting subsequent rounds to bring them in line more closely with their policy of seeking to level up the economic growth performance of the lower value-added per capita regions of the country.

There would at first sight, however, appear to be four changes that should be made to the scheme.

1. Longer-term funding options: a decision about the longer-term funding of the scheme needs to be made. Equally, the grants should be made for a period of 10 years. If universities and firms are going to recruit new people, start new programmes and fund new organisations to support the development and scaling-up of new technologies, they need the security of 10-year funding.
2. Focus on places that have potential: there should be changes in the criteria by which projects are judged. A key criterion must be whether there is already in existence a cluster that with support can be made globally competitive. It is a waste of money to put resources into a project that is simply aspirational. At the same time, the research proposals should be judged by whether they will help the cluster involved become globally competitive rather than simply by their research excellence.
3. Priority to be given to places that have the potential to level up: if this scheme is going to be seen as central to the levelling up policy of the Government, it should be restricted to mid to lower value-added per capita MCAs. The type of projects supported by this scheme need to have the backing of an MCA, and by restricting the grants to MCAs it provides an incentive for local authorities to become MCAs. It makes no sense to use this programme to support projects in the Greater London Authority area, for example, which already has a disproportionally high level of R&D funding.
4. Scientific judgement: the panel of judges of the projects seems to be largely composed of scientific research academics with one business person. There would seem to be a strong case for including a number of business people or venture capitalists with strong high-tech backgrounds, who could make judgements about whether realistically projects will be able to create globally competitive clusters.
5. Replacing EU funds post-Brexit: The less developed regions and nations of the UK have also historically benefited from significant investments in R&D through the European Regional Development Fund (ERDF). Over the period 2014 to 2019, ERDF invested £470 million in research and innovation as part of its £2 billion investment programme in the UK.

As part of the process of leaving the EU, the UK Government committed to creating the Shared Prosperity Fund to reduce inequalities between communities, replacing (at least in part) the lost EU Structural Funds (of which ERDF was a part). This provides a unique opportunity to reconfigure this type of funding programme to support levelling up across the UK.

The development of the Shared Prosperity Fund should ensure strong coherence and complementarity with UKRI’s Strength in Places Fund and commit a significant proportion of its budget to supporting the development of leading industrial clusters around the UK, where the investments required to unlock potential and drive regional value capture are outside the remit of the Strength in Places Fund and UKRI.