One of the first commitments made by the new government since the December 2019 election, and previously in their manifesto, is to rebalance the UK economy and “level up” the regions. In short, this means to raise the level of economic performance across the country and reduce regional inequality. Details have been minimal so far although next week’s budget may shed some light on the Government’s initial plans. But the key question is this: how can the Government achieve a more balanced economy, with inclusive growth at its core?
Today we are launching our paper aimed at addressing this question. We have concluded that in order for the Government to achieve its levelling up objective, the implementation of policies needs to be accompanied by an evolution in the way in which investment appraisal, and specifically the Green Book, works. Because without a change to the methodology and accompanying process it will be difficult for the end result to significantly change. Big one off announcements have happened before and are not enough, in order to successfully level up the regions, re-balancing needs to be built into the system.
There is a long term trend of under-investment in places
There is a trend in the UK of investment concentrating in already prosperous areas, with others being left behind. The chart below shows how more productive regions generally receive more transport investment per head:
Source: Analysis of ONS Regional Accounts and IPPR North analysis of Public Expenditure
Whilst important for keeping the economy strong, success seems to generate further investment, with less productive places falling ever further behind. This has led us to ask the question of how can policy development and investment promote sustainable growth across all parts of the country and not just the most successful areas?
The key current policy tool is HM Green Book: a toolkit designed to provide guidance on how to appraise prospective projects. But the Green Book is too often confused with a decision making guide rather than the technical tool it is and is used to make inherently strategic decisions. Meanwhile the Rebalancing Toolkit, aimed at providing strategic guidance, lacks clarity and does not contain sufficient detail to fulfil its aims.
This lack of strategic guidance leads to an over-reliance on Benefit-Cost Ratios (BCRs). BCRs are a useful tool, but the nature of them means the benefits are easier to prove in already successful places. There is also a lack of transparency around the whole process. Business cases are not routinely published, so appraisals cannot be widely scrutinised. We believe it is possible that the current system of appraisal processes in the UK contributes to the regional disparity in investment.
How can the investment appraisal process be improved?
We have proposed six changes to how appraisals are carried out, to ensure public sector investment is used to stimulate economic development across the whole of the UK. The first three relate to the strategic aims of investment and putting their analysis at parity with the economic aims.
Firstly, we are recommending the introduction of a clear strategic framework for assessing projects into the Green Book. Long term policy objectives of rebalancing the economy and reducing carbon emissions would here be made explicit in the Green Book, enhancing the strategic appraisal framework and reducing reliance on BCR scores.
Alongside stating the objectives, there should also be a clear framework as to how policy objectives will be achieved and what success might look like, supported by metrics which can be used to evidence success. There should also be provision to see where a project fits within wider place-making initiatives to rebalance the economy, showing how a particular intervention can be transformative as part of a wider programme. Essentially, enabling programme rather than project level thinking.
As part of this we propose formally incorporating the Rebalancing Toolkit (with changes) into the Green Book. The Toolkit’s present role as supplementary guidance limits its effectiveness and the extent of its use. Incorporating it into the Green Book would place it at the heart of decision-making.
We also then suggest a review of discount rates and time horizons. Currently there is a 3.5% discount rate for the first 30 years of all projects. Ideas to explore include different discount rates for different types of projects, reflecting lower interest rates and slower consumption growth in a lower discount rate.
Our final two proposals relate to the wider process and are a commitment to transparency by publishing business cases and BCR scores, opening them up to wider scrutiny by local government and the public, and a programme of capacity building to support business case development. Lack of capacity has been identified as a major issue in putting forwards quality projects in struggling areas. We are proposing that the Government invests in local authorities and businesses in struggling regions to enable them to bring forward compelling business cases which can gain policy support and funding.
The way the UK makes decisions about investment is too short-termist and underestimates the impact that strategic investment can make in struggling places. It reduces complex projects down to simplistic numbers and reinforces existing growth. This is not just about the formal guidelines, but the wider culture of how they are applied, a process often shrouded in mystery. We believe our proposals can address these issues and support good quality schemes that can rebalance growth and ‘level up’ the regions of the UK.
Read the full report here.