03What the regeneration areas should be trying to achieve
This section sets out what the broad goals of the regeneration part of the levelling up agenda should look like.
The ‘what’, the ‘where’, and the ‘how’ for regeneration is presented in three parts:
- What regeneration should be trying to achieve.
- Where it should target to best achieve those aims.
- How to deliver regeneration – overcoming market and policy failures, mitigating risk, and attracting investment.
Successful economic regeneration should change the offer a place makes to businesses
Places have weak economies because they struggle to attract or retain high-skilled businesses and workers in sufficient numbers. This results in low productivity, low wages, and poor career progression.
The goal of a regeneration scheme should be to change the nature of an area, so that it offers something different to what it has done in the past. From an economy perspective – which should be the principal aim of the levelling up regeneration policy, given the stated aims in February’s White Paper – this means creating environments that attract more productive types of business and higher-skilled jobs. The success of the policy should principally be measured on this and while this measure of success will differ across locations, depending on what is viable, the principal aim should remain the same.
There are other, non-economic benefits regeneration can bring that are not necessarily mutually exclusive to economic improvements, and can add to it when carefully considered, such as improving the feel of a place through good design. However, given that the root cause of the struggles of many parts of the country is their underperforming economies, the focus should be on economic outcomes, supported by these other goals.
The Government’s regeneration zones should focus on city centres
To do this, they should aim to improve the attractiveness of city centres to business investment. City centres should be the most productive parts of the UK economy because of the inherent benefits that city centres offer as a business location – access to workers and to knowledge are two main qualities that high productivity businesses look for, despite the costs of doing so.
Access to knowledge is particularly important for city centres. Specifically, it is the benefit of face-to-face interaction that dense city centre environments facilitate, as this aids the sharing of tacit information and the generation of new ideas and innovations.2 This takes place over a very small geography – various research estimates that they play out over distances less than one mile.3
This explains why there is a productivity premium for the centre of London, which is 18 per cent more productive than the rest of the capital and 59 per cent more productive than the rest of the country. This also appears to be the case in several other large city centres.4 It helps explain why the UK’s most productive companies have concentrated in city centres in recent decades.5
The problem is that despite city centres generally becoming more popular business locations in recent decades, many have still struggled because they are not offering the benefits to business that they should be. Outside of the Greater South East in particular, this has meant that cities overall, and the wider regions they sit within, have struggled to attract such businesses. So, for example, if Middlesbrough or Sheffield are to create much stronger city centre economies, they will need to improve their attractiveness to more productive services businesses in particular. Box 1 sets out how this relates to the six ‘capitals’ identified in the Levelling Up White Paper.
Box 1: City centres and the six ‘capitals’
The Levelling Up White Paper set out the six ‘capitals’ that it identified as being important for the overall economy. These capitals are physical capital, human capital, intangible capital, financial capital, social capital, and institutional capital.6 City centres bring at least the first four of these capitals together at scale, mixing physical capital together with skills and finance to come up with intangible capital – new ideas and information that push on the profitability of companies and the productivity of economies. Central London is an example of a city centre that does this well. Middlesbrough and Sheffield city centres are two of many in the UK that don’t do this as well as they should.7
Getting regeneration off the ground
Public intervention should aim to overcome the market and policy failures that restrict regeneration
The private sector will lead the redevelopment of an area where they can retain the returns from such an investment (i.e., the scheme is commercially viable). If these returns are not available, then it is for one of two reasons.
The first is that fundamentally there is no demand for the redeveloped space – this is why the private sector does not develop skyscrapers in deep rural areas.
The second is that there are a number of market or policy failures in place stopping private involvement. Table 1 outlines four broad categories of these failures which public intervention should aim to overcome.8
Table 1: Types of market failure in a regeneration project
| Market and policy failures | Explanation | Example |
| Coordination failures | Multiple actors being unable to coordinate to maximise the returns, whether private or social, of a project. | Fragmented land ownership within a regeneration site makes agreement more difficult to reach. |
| Under provision of public goods | Undersupply of a good that has a greater social return than private return. | Lack of public realm or public transport infrastructure provision, or non-remediation of contaminated land. |
| Planning and policy uncertainty | Risks inherent in the planning system, inefficient government procurement processes, and additional risk caused by political decisions and the actions of public bodies. | Land remains undeveloped due to uncertainty over whether a scheme on it will be granted planning permission. |
| Demand uncertainty | A lack of information, for example through a price signal for a better-quality office than is currently available in an area, increases the risk of development. | No one developer or occupier commits to a regeneration project as the first mover due to uncertainty over how successful the scheme will be. |
The regeneration zones announced in the Levelling Up White Paper will need to deal with these issues – which will vary from area to area – if they are to be a success.
Mitigate risk and attract investment
A regeneration project must be commercially viable to attract private investment. The demand, and the presence of market and policy failures such as those discussed above, determine where on a spectrum of commercial viability a project lies. The demand informs the returns investors can expect, and market and policy failures drive up costs and risks of the project. Figure 1 below provides a schematic of this spectrum.
The right-most side of the spectrum represents projects for which the private returns, relative to risks, are high enough to offset any market and policy failures that may exist. Examples of this would be new office buildings in central London that have been built in recent years, in which buildings have been knocked down and new ones put in their place without any direct public support.
The left-most side of the spectrum represents projects with low or no private returns relative to risks. If these projects are to go ahead, then they will require almost entirely public financing. For example, constructing a public library and park.
Figure 1: A Spectrum of Commercial Viability
Between these two poles are the spectrum of projects in which most economic regeneration will occur – and public-private cooperation can best maximise the private and social returns from a project. In this space between the poles, policy makers must overcome market and policy failures or otherwise be prepared to compensate with more public financing to get regeneration off the ground.