1 RSA provides discretionary grants to businesses for investment projects that ..... Finally, there is a pronounced difference between large and small business.
Australasian Journal of Regional Studies, Vol. 7, No 3, 2001
261
HITTING THE TRIPLE BOTTOM LINE OR HITTING ROCK BOTTOM? REGIONAL POLICY DEVELOPMENT AND RESOURCE ISSUES IN THE LIGHT OF POLITICAL DEVOLUTION David Pickernell Welsh Enterprise Institute, Business School, University of Glamorgan, Pontypridd, Wales CF37 1DL, U.K.
David Brooksbank Welsh Enterprise Institute, Business School, University of Glamorgan, Pontypridd, Wales CF37 1DL, U.K.
Mark McGovern School of Marketing and International Business, Queensland University of Technology, G.P.O. Box 2434, Brisbane, Qld. 4001, Australia. ABSTRACT Economic and regional development policies have been particularly prevalent in Wales over the past 60 years. However, prior to the recent devolution of some measure of political power to the newly created National Assembly for Wales (NAW) the actual measures, both from UK and EU government sources, were predominantly top-down generated and administered. They were also targeted largely at specific locations and disproportionately benefitted certain types of firms, notably inward investors. This paper examines the, superficial at least, change in economic development policy in Wales, highlighted in the NAW’s National Economic Development Strategy (NEDS). Catalysed by devolution, Wales’s relative GDP per head continuing to fall, EU Objective One status for the poorest two-thirds of Wales, and increasing interest in indigenous firm development, the strategy aims at hitting the “triple bottom line” of economic development while sustaining the environment and building communities. However, as shall be seen, the lack of an explicit theoretical underpinning, general development policy resource constraints, and the previous policy foci, may limit available resources and create mindsets opposed to new directions. This Welsh experience is also compared with examples from around the world, including Australia, allowing conclusions on the likely success or otherwise of the NEDS as presently structured to be drawn.
1. INTRODUCTION Wales has long been subject to economic development policies. The UK generally was amongst the first European countries to adopt an official regional policy over 60 years ago, and more recently the EU has been developing a raft of regional policy programmes. Many of the resultant initiatives have been applied in Wales which received around a third of total UK regional preferential assistance to industry between 1990 and 1997 (ONS, 1998), as well as significant EU regional programme funds.
David Pickernell, David Brookshank & Mark McGovern However, despite these regional policy resources in Wales, Gross Domestic Product (GDP) per head figures in Wales remain well below the UK average (82% of UK), and have been falling for several years. Indeed, large areas of Wales (in particular the area entitled “West Wales and the Valleys”) now qualify for EU Objective One status (and the highest level of assistance), having GDP per head levels averaging less than 75% of the EU average. Simultaneously, Wales has recently obtained at least a measure of political nationhood as part of the UK-wide process of devolution, with the creation of a National Assembly for Wales (NAW). A main priority for this new institution is obviously economic development, which has as its focus the so-called National Economic Development Strategy (NEDS). The strategy has recently undergone another round of consultation and construction in the form of NAW (2001a), but when finalised is meant to provide an economic development blueprint for the next ten years in Wales. An analysis of this strategy and the associated issues is the focus of this paper. We next examine the theoretical context in which documents like the NEDS are constructed, before outlining the recent economic development policy history in Wales, the precise nature of the NEDS, as well as any initial potential problems with the document itself. A number of “external” issues impacting upon the strategy are then analysed, including devolution, existing development policies and programmes, and resource tensions and effects that are likely to result from changes in strategy direction. Finally, the issues that have been identified from the study as needing resolving are outlined. As will be seen, there are currently a number of confusions and tensions that may impede development if not swiftly addressed. There is also seen to be a need to learn the lessons from experiences in other geographical areas, such as Australia. If not then Wales is unlikely to reach its potential and indeed is more likely to hit rock-bottom than its implicit triple bottom line aims of economic growth, social justice, and sustainable and balanced development . 2. THE THEORETICAL CONTEXT Regional policy has traditionally aimed to reduce economic and social disparities between regions. These disparities are usually defined in terms of unemployment rate and income per capita, and are aggravated by structural changes, which have social and economic consequences (Armstrong and Taylor, 1993). The patchwork of areas designated for levels of assistance which accompany contemporary regional policy has created various kinds of assistance packages, with different objectives accompanying the central aim of improving the employment/income position of the designated locality (Begg and McDowell, 1987). Taylor and Wren (1997) in their evaluation saw issues related to unemployment disparities driving regional policy in the UK, with issues of regional competitiveness an adjunct to regional policy rather than the other way round. However, this seems to be changing now, certainly in the case of Wales, not least because of devolution. However, a number of issues now face the authors of documents such as the NEDS. A complex set of endogenous and exogenous factors influence economic
Hitting the Triple Bottom Line or Hitting Rock Bottom performance and competitiveness at the regional level. Thus, the formulation and implementation of such strategies is becoming as much an art as a science, particularly because there are no widely accepted rules for guiding the preparation of regional development strategies in a period of increasing economic dynamism, change and uncertainty. In addition, there are a plethora of theories concerning regional and economic development and competitiveness (see, for example, Higgins and Savoie, 1997). Birnie and Hitchens (1998) point out that since the 1970s there has been considerable debate amongst economists about the relative merits of traditional neoclassical growth theories (which emphasise accumulation of capital and labour) and recent endogenous growth theories (which claim increasing returns to technology and human capital) in explaining post-1945 growth patterns (also see, for example, Mankiw et al., 1992; Barro and Sala-I-Martin, 1995; Landes, 1998). In addition, The very idea of competitiveness for regions has traditionally been a difficult one for economists. Boltho (1996) argued that, despite years of trying, there were no agreed definitions of competitiveness within the profession, whilst Krugman (1996) observed that economists generally did not even use the word ‘competitiveness’. Indeed, he assessed the debate on competitiveness as being concentrated on simply representing long-term fallacies concerning international trade. In terms of the factors thought important to regional competitiveness, there are also a wide range of views. Vickerman (1989) identified the traditional factors of labour market conditions and transport costs as important in determining a particular region’s competitiveness. However, Steinle (1992) broadened these to include company size, research intensity, innovative capacity and export orientation as important determinants. Porter (1990) argues that successful regions need the presence of internationally competitive industries and firms able to innovate and sustain competitive advantage through R&D and training (non-cost competition), rather than merely price (cost competition). More recently, Cooke (1997) argued that future regional economic success was expected to come from firms that were active exporters, had competitive products and processes and were innovators through research and development. It is in the face of these continuing debates that Wales has been developing its NEDS. 3. THE NATIONAL ECONOMIC DEVELOPMENT STRATEGY The recent policy background to the NEDS is also one of flux. Predevolution UK government regional policy in Wales had become ever more topdown administered and targeted at specifically designated areas (such as the Assisted Areas) via discretionary policies (such as Regional Selective Assistance
David Pickernell, David Brookshank & Mark McGovern (RSA).1 However, more recently policy directions have begun, at least superficially, to change. This has been because of devolution within the UK, which produced the NAW. Additionally, the declining GDP per capita figures for Wales and changes in EU regulations regarding the size of regions eligible for regional funds, saw the granting of EU Objective One Status from 2000-2006 to the poorest two thirds of Wales (NAW, 2000a) titled “West Wales and the Valleys” (see Figure 1). There has also been an increasing interest in UK regional policy generally to more bottom-up approaches to development. This is perhaps most clearly seen in the increased emphasis on indigenous firm development and decreased emphasis on foreign inward investment. These threads have had to be drawn together in the NAW’s NEDS. The NEDS explicitly aims at hitting the “triple bottom line” of regional economic development, while sustaining the environment and building communities. The aims contained in NAW (2001a) consultation document are also ambitious. It looks to overcome Wales’s economic problems through a range of targets to be met by 2010. These include very specific targets for GDP, employment and business birth rates, as well as more vague aspirations as outlined in Table 1. Six main target areas can be identified. The most obvious are economic output, with subsidiary workforce / employment, investment, technology, profile, and policy targets. However, a number of explicit weaknesses with the document’s construction have been highlighted. For example, there are 1
RSA provides discretionary grants to businesses for investment projects that either create new jobs or safeguard existing employment in the designated Assisted Areas. Higher levels of assistance are available in “Development Areas” than “Intermediate Areas” to reflect their more severe economic and employment problems. RSA payments are typically made over three to five years, depending on progress towards job and capital expenditure targets agreed when the grant offer was made. RSA is available according to a number of criteria. Essentially RSA is given where the grant is deemed necessary for the project to go ahead within the area, the grant being the minimum necessary for the go-ahead to occur. The amount given is also restricted by EU and DTI costper job limits. RSA can be front or back loaded, but there are a minimum of two payments, and can be as many as three or four payments. Payments are made on capital spending. The first payment is made a year after the offer is made and 46 weeks later the second payment can be made. The payments are made retrospectively, after the capital expenditure has been incurred. Before the offer is made a thorough audit is undertaken, taking into account (although not formally) items like average salaries of employment created. When the first payment is actually made another audit / reappraisal is undertaken by someone different from the original auditor (in the Welsh Office there are different departments handling the audits). The project will be monitored for up to five years and money can be clawed back if the promised jobs are not created. The Welsh Office’s Industry and Training department is responsible for the application and administration of RSA funds.
Hitting the Triple Bottom Line or Hitting Rock Bottom suggestions that the triple bottom line philosophy is not sufficiently represented in these targets, particularly concerning communities.
Figure 1: The Assisted Areas of Wales
David Pickernell, David Brookshank & Mark McGovern Table 1. The NEDS Targets to be Reached by 2010 Target Area
Economic Output :
Workforce / Employment :
Investment :
Technology :
Profile :
Policy :
Specific Target • Annual GDP growth in Wales to be on average 1% more than the UK each year • Output per head to reach at least 90% of the UK average • Output per head in the Objective One regions (of West Wales and the Valleys) to rise above 80% of the UK average • Business birth rates to match the UK • Increase in exports of 25% • 150000 more people in employment, 115000 in Objective One areas • Percentage of people of working age in employment to increase, reducing the participation gap between Wales and the UK and eliminating the gap between Objective One areas and the rest of Wales • Proportion of economically inactive 50-59 year old women and 40-64 year old men to fall from 40% in 1999 to less than 30% • Significant increase in inward investment over late 1990s level, with higher shares of value added jobs • The energy sector to make more use of clean production technology and business environmental management to be “second to none” • Welsh companies to make full use of world class telecommunications infrastructure • Welsh representation in knowledge-based sectors to be far higher • Business R&D to have grown faster than the UK as a whole over the period 2000-2010 • Wales to have a higher profile, clearer national identity and greater influence • Tourist industry to attract much higher shares of overseas visitors • Surveys of opinion makers and the business community abroad must show higher market profile • Made in Wales brand must be associated in international marketplace with high quality, advanced technology, reliability and good design. • EU and UK policies better tuned to Welsh needs
Source: NAW (2001a)
Hitting the Triple Bottom Line or Hitting Rock Bottom More fundamentally, there appears to be a lack of any explicit theoretical underpinning for the strategy. Northern Ireland (NI) and the Republic of Ireland (ROI) are physically close to Wales and have both faced similar economic problems to Wales in the recent past in terms of poor economic performance. Their economic strategies can thus usefully be compared with that of Wales. Birnie and Hitchens (2000) compared the strategies in NI and the ROI for the period to 2010. They criticise the NI strategy because it lacks a well designed economic model in the absence of policy proposals or explicit connections between policy instruments and desired outcomes. Consequently it was very difficult to evaluate the strategy’s impact. This is also a criticism that could be levelled at the NAW (2001a), which instead appears to be based on a SWOT analysis of the economy. In contrast, Birnie and Hitchens (2000) point out that the ROI’s strategy was underpinned by a model based on Porter’s (1990) Competitive Advantage of Nations theory. Much UK government policy is also based on competitiveness indicators, some of which were included in the NAW (2001a). This theoretical approach could thus have been used much more explicitly and extensively to structure the NAW (2001a) document, both as an underpinning and a way to then generate policy priorities and resource allocations. As seen earlier, alternative approaches and approaches were also available and the theoretical debate is ongoing. Instead, the NAW (2001a) document has avoided the issue entirely, despite its obvious potential importance to the generation of strategy. In addition there are already signs in the NAW (2001a) consultation document that suggest unofficial acknowledgement of the considerable difficulties in meeting many of the targets both in the subsidiary and economic output areas. A moving of the targets to fit the existing policy mix and policy implementation processes may be taking place. For example, NAW (2001a), in its section on reaching targets, suggests that because GDP tends to be a lagging indicator perhaps targeting economic activity would be better because of data problems and because higher employment levels would automatically raise GDP. Thus it is suggested that the headline target might, instead of GDP, be to raise economic activity rates to UK levels by 2010 (through 100,000 extra jobs) as this would raise GDP levels to 86% of the UK average. Such a jobs-based approach and the evident attitude behind it seems to indicate a continuation of at least some of the policies pursued in Wales over the last three decades. These were primarily built around attraction of large-scale inward investment, to soak up the heavy job losses in the declining coal and steel industries. During this time, however, GDP per head relative to the UK average was actually falling and has continued to fall almost continuously over the last twenty years to only 79.4% of the UK average today (NAW, 2001a). This suggests a tension between the old and new policy foci. As we shall see, there are inter-linked reasons for believing that, regardless of the weaknesses of the document itself, the great hopes of the NAW (2001a) document in meeting the triple bottom line may remain that: hopes.
David Pickernell, David Brookshank & Mark McGovern 4. THE EFFECTS OF DEVOLUTION IN WALES The Objective One Programme perfectly illustrates the issues now facing the newly devolved political structure in Wales. There are difficulties attached to the programme in terms of choosing policy priorities, allocating resources, and designing policies. These are affecting policy development processes and indeed the whole issue of governance. The main issues, however, have revolved around the financing of the Objective One strategy, and how this can affect other economic development programmes in Wales. Devolution is giving the recently created NAW greater discretion over the direction of regional policy resources (Raines, 1998). However, at the same time it must work within restrictions placed upon it by the regulations governing EU structural funds in general and Objective One spending in particular. EU structural funds provide grant aid for projects facilitating economic regeneration and revival in regions where declining traditional industries has led to serious economic and social problems. As stated previously, approximately two-thirds of Wales’s population (National Assembly for Wales, 2000a; Figure 1) qualify for EU Objective One status, having GDP per capita levels averaging under 75% of the EU average. Such status offers Wales the opportunity for £1.3Bn of EU funds up to 2006, together with matched funds from the UK government and private sector, to help revitalise the economy. However, the Objective One Strategy document, or “Single Programme Document’s” (SPD) targeted outcomes, from an amount of money (excluding matched funds) representing only about 2% of Wales’s block grant per annum and under 1% of its GDP (Hill, 2000), are ambitious. Aiming to raise GDP per head from 73% to 78% of the UK average by the end of the programme, the Objective One programme is meant to produce two-thirds of the increase via 43500 extra jobs and 35400 fewer economically inactive. The Objective One programme in Wales is also intended to fit within a number of existing Welsh and UK programmes and criteria. Indeed, an entire chapter within the SPD is devoted to illustrating how this “joined up” approach to policy making fits together. Currently, however, there are questions about how this will occur, not least because the NEDS has not itself been finally accepted. There is also the very important issue of funding the programme. EU Structural funds have become an important source of resources at a time of tightening budgets in the UK regions (Lloyd and Meegan, 1996) and the UK government has historically emphasised the role of the Structural Funds in partially reimbursing contributions to the EU budget (Barnett and Borooah, 1995). Previously, any funds Wales received from the EU structural funds were counted within the UK government’s contribution to the Welsh block grant, preventing Wales from gaining the full benefit of such funds. This has created conflict with the new Welsh Assembly because of the way in which Wales’s block grant was calculated and public sector matched funding generated (Bristow and Blewitt, 1999). One of the first tasks of the National Assembly for Wales will be to oversee the Objective One programme. This is an
Hitting the Triple Bottom Line or Hitting Rock Bottom important test since one of the reasons that devolution was championed was because increased regional autonomy could increase economic innovation and growth, though this is itself a controversial issue (see Harding et al., 1996). The budget (Welsh block grant) for the National Assembly was determined within the UK framework, utilising the so-called Barnett formula. This formula links changes in the size of the Welsh block grant (in direct proportion to the population size of Wales relative to England), to changes in English public expenditure on spending areas within the Welsh block. However, areas within the Welsh block included EU Structural Funds that were paid to Wales via the UK Treasury rather than directly. If the Barnett formula was used, Wales would not be able to access the full EU funds, because England’s regions are due to receive proportionately much less than Wales in terms of structural funds from 2000-2006. Thus, even though Wales has been awarded the structural funds from the EU, it would not be given the full amount by the Treasury as part of its block grant. According to Bristow and Blewitt (1999), this created two issues. There was the issue of how central government took into account the extra resources available directly from the EU via the Objective One programme. The recent UK Government Comprehensive Spending Review seems to have recognised the principle of excluding EU Objective One resources from the Barnett formula related Welsh block grant. However, there is also the associated issue of matched funding, since Objective One resources should be “matched” by equivalent resources from the private or public sector. Public sector match funding is usually financed through the block grant and the recent spending review did not alter this. It therefore appears likely that the matched funding will predominantly need to come from within the newly agreed block grants (given that private sector matched funds are likely to be relatively small). This is probably going to involve a re-focusing of regional policy and economic development related resources into the Objective One areas to provide the matched funds, producing important opportunity cost issues for the Welsh Assembly. Effective utilisation of the Objective One resources is likely therefore to produce issues of governance concerning control over policies, finance and indeed the entire focus of regional policy in Wales. 5. THE POLICY AND PROGRAMME EXPERIENCE There are also policy and resource issues related to the recent change in policy focus in Wales, from the attraction of inward investment via grant aid schemes (particularly Regional Selective Assistance) towards indigenous firm growth. The NEDS began to place greater explicit emphasis on the creation and growth of new indigenous businesses as a central policy focus in meeting its objectives. This in itself reflects a major shift in Welsh economic development policy. The NAW controls a budget of around £10bn. NAW (2001a) predicts that the specific economic development budget will rise from £260m to £410m in 2001-2, to £486m in 2003-4. This includes the EU contribution to Objective One funds (i.e. not the matched funds), administered by the Wales European Funding Office. NAW (2000b) stated that by 2003-4, £70m of the matched funding would
David Pickernell, David Brookshank & Mark McGovern Table 2. Expenditure Plans on Areas related to Economic Development 2001-2 Amount Proportion Scheme / Agency Target Area(s) (£m) (%) Economic Outputs, Welsh Development 132 9.4 Technology, Investment Agency (WDA) Profile, Economic Wales Tourist Board 20 1.4 Outputs Council for Education Workforce / 363 26.0 & Training in Wales Employment RSA 45 3.2 Investment Pathway to Prosperity 32 2.3 Economic Output Economic output, Wales European Workforce / 135 9.7 Funding Office Employment Enterprise Development and 12 0.9 Economic Output Support Tir Gofal / Agricultural 19 1.4 Technology Environment Environment, Planning 294 21.0 Technology Transport Workforce / Lifelong Learning 12 0.9 Employment Workforce / Higher Education 313 22.4 Employment Funding Council Community Capacity Communities First 20 1.4 Building Total 1397 100.0 Source : NAW (2001a)
come from the economic development budget. However, the entire budget excluding additional EU funds will have risen by only about £65m between now and 2003-4. This suggests that the existing economic development policies will be squeezed to provide the matched funds. The fact that the projected EU funding in 2003-4 is nearly £183m suggests that the remainder of the matched funding will have to come from related budgets. Table 2 provides an outline of spending on the economic development, industry and training programmes in Wales as indicated in NAW (2001a). One can see that nearly 50% of the resources shown in Table 2 are directed towards what we have broadly called the workforce / employment target and these are often for long term policies, with long term commitments. Administrative organisations that have long undertaken regional development projects such as the Welsh Development Agency (WDA) and Welsh Tourist
Hitting the Triple Bottom Line or Hitting Rock Bottom Table 3. RSA Grants Accepted by UK and Overseas Companies: Offers Accepted and Payments Made 1 January 1988- December 1998 Amount of Average RSA Number of Nationality % % RSA Offered, per Offer, Offers nominal £m Nominal £000s UK 561 65.2 269.3 42.8 480.0 France 21 2.4 24.0 3.8 1143.9 Germany 29 3.4 15.5 2.5 535.5 Other Europe 52 6.0 32.1 5.1 617.6 North America 111 12.9 110.6 17.6 996.8 Japan 49 5.7 52.4 8.3 1069.0 Other Asia 8 0.9 94.5 15.0 11813.1 Others 30 3.5 30.7 4.9 1023.6 Total 861 100.0 629.2 100.0 730.8 Source: Employment Gazette and Labour Market Trends Various Editions
Board will receive an estimated £150 million. This raises the question of how changes in policy direction can be undertaken where policy-funding inertia may exist. Given that matched funds for Objective One projects may need to come from such budgets, there will be obvious concerns about how Objective One and non-Objective One policies will fit together. In addition, Table 2 also shows the financial disparities between schemes. For example, whilst Regional Selective Assistance (RSA) was allocated £45 million, enterprise development and support was allocated only £12m and specific community building programmes such as Communities First, only £20m. Thus, the old policy focus can still be seen in regional policy resource allocations reported in NAW (2001a). RSA spending was the focal point of the previous regional policy focus in Wales : inward investment. Welsh economic restructuring during the 1980s and 1990s was based extensively around aggressive location marketing and the attraction of large-scale inward investment. This approach has been criticised as having few beneficial impacts on the local economy (Lovering, 1999). Nevertheless large proportions of the regional policy budget in Wales have been (and to a lesser extent continue to be) focused on attracting foreign direct investment. For example, Table 3 reveals that around 57% of the £630m in Regional Selective Assistance offered to firms in Wales between 1988-1998, has been to firms of foreign origin. In addition, larger grants have tended to be offered to foreign firms. Of the 65 RSA offers which exceeded £2m in the period 1988-1998 only 25 were to UK firms, and of the eight largest grants, (exceeding £6m and representing approximately one quarter of the total number of offers), only two were to ‘domestic’ firms2. 2
It is important to note that RSA is very much demand led, such that there is unlikely to be any explicit discrimination towards foreign projects over domestic ones.
David Pickernell, David Brookshank & Mark McGovern One obvious point to make is that whilst the amount has fluctuated year by year, the average of £60m is not high relative to some of the other budget items outlined in Table 2. However, as the example of the Korean company LG’s semiconductor plant in Wales illustrates later, RSA is often the focal point for additional resources (in time and expertise as well as finance) from organisations such as the WDA and Training and Enterprise Councils (TECS), who can also offer support. In addition, RSA has, for reasons linked to inward investment, been skewed towards certain sectors, as Table 4 indicates. Table 4 shows concentrations of RSA in particular broad industrial sectors over the last decade, most notably in electronic engineering and automotive components and transport equipment. These account for nearly 50% of the total RSA spend over the period, within which 55% of the number of offers and 70% of the total value of RSA has been to non-UK firms. These two sectors have also seen by far the highest average grants per offer. In summary, over £600m of RSA has been offered (and a first payment made) to companies in Wales over the past decade. Within this total over £300m has gone to key sectors of electronic engineering and automotive components and transport equipment, of which nearly £210m has been accepted by non-UK firms. These concentrations of regional policy assistance can have real impacts on the economy because of the different multiplier values of different sectors. For example, it has been estimated that for every direct job created in the electronics sector in Wales (a sector accounting for approximately one third of foreign manufacturing employment in Wales) a further 0.6 of a job is supported in the local economy as a result of the multiplier effects of local purchasing and wage spending. However, in the basic metals sector, where domestic firms have a relatively stronger presence, every direct job supports an additional 1.31 jobs indirectly as a result of local purchasing and wage spending (Brand et al., 1998; also see Brand et al., 2000; and McCann, 1997). Finally, there is a pronounced difference between large and small business support. For example, Evans (2000) points out that of the 561 payments of RSA between April 1998 and 2000, only 95 were for £25,000 or less, for a total of just over £1m. In summary, therefore, large proportions of regional policy resources have been focused on attracting inward investors into specific industries in specific locations. There are, however, continuing opportunity cost issues related to this previous policy that may impact upon the new policy direction and the resources available to pursue it. Three case studies of inward investors, LG Newport, Ford Bridgend and Sony, illustrate the ability of multinationals to lever resources from government, sometimes over long periods of time, and thus the potential for this to reduce the resources available for indigenous growth strategies in future. 5.1 LG Newport LG was offered £69.5m in RSA to create 6000 jobs by 2001 (Munday et al., 2000), an average in excess of £11500 per job. However, this was not the total in public aid that was offered in order to entice the LG project into Wales. Murdoch
Hitting the Triple Bottom Line or Hitting Rock Bottom (1997) estimated that the £1.7 Bn investment attracted £200m in grants and other incentives, seeing this as part of the bidding war occurring between UK Regional Development Agencies (RDAs). Tewdwr-Jones and Phelps (1999) concurred with this, estimating that LG had levered up to £247m in government assistance (including RSA), and also a subordination of the local planning systems to minimise the transaction costs facing inward investors. Indeed the case of LG demonstrated to them the increasing creativity of RDAs, forced to assemble packages of incentives to outbid rival regions, while the inward investors actively played RDAs off against each another. Phelps and Tewdwr-Jones (1998) saw a particular incentive for LG derived from the WDA’s customisation of the site and its ability to speedily obtain the requisite planning requirements. The WDA had submitted the application for LG for two adjacent sites at the prestigious Celtic Lakes Business Park outside Newport. One was to produce television monitors, tubes and other electronic equipment, the other was for a semi-conductor plant. In addition, non-RSA grants were also available, including Training and Enterprise Council (TEC) grants for training. These can be in excess of £1000 per job. LG has certainly benefited from TEC involvement in its training requirements. The LG project demonstrates an extreme example of the ways in which economic development resources have been levered to the disposal of an inward investor. The subsequent mothballing of the LG semi-conductor plant (and the 2000 best paid jobs) called into question the sustainability of such policies. This may be even more the case when one considers Tewdwr-Jones and Phelps’s (1999) calculations that even the LG cost-per-job figures (at over £40000 per job) were favourable compared with cases identified by the United Nations and earlier investments in the UK. The example of Ford’s Bridgend Engine plant demonstrates the continuing nature with which economic development resources can be levered by inward investors, further illustrating the stark differences between inward investors and domestic companies in their abilities to obtain assistance given the current rules. 5.2 Ford Bridgend The Ford Engine plant at Bridgend has been, from its inception, in receipt of large amounts of government assistance. Cooke (1980) pointed out that Ford had been able to obtain £75m in regional aid and £75m in interest relief grants (equivalent to £90000 per job created), the WDA supplying the 175 acre site. Since then records show an additional 60 Regional Development Grants (RDG), given during the 1980s (the scheme now defunct) totalling £9.654m. Johnes (1987) described RDG grants as given in variously designated development areas for capital projects, and under more recent schemes to augment productive capacity and materially change the process or product. The limits imposed were 15% of capital expenditure or £3000 per new job created, whichever was the greater. Two RSA grants have also been paid, a small one in the 1980s and a £10m in the 1990s, totalling £10.354 m and both to “safeguard” rather than
David Pickernell, David Brookshank & Mark McGovern Table 4. Regional Selective Assistance by Sector 1988-1998, Total Offers Accepted (and First Payment Made) Amount of RSA Average Amount Disp GDP/FTE Offered of RSA per Offer Income/FTE
Offers Sector N
(%)
Nominal £m
(%)
Nominal £000
GDP Emp Multiplier Multiplier
Wales=100 Wales=100
1 Agriculture, Forestry and Fishing
3
0.4
0.2
0.0
65
57
54
1.61
1.38
2 Extraction
5
0.6
0.6
0.1
127
104
172
1.45
1.78
3 Food, Drink and Tobacco
73
8.5
31.6
5.0
433
82
170
1.48
1.98
4 Textiles and Clothing
31
3.6
11.0
1.8
355
73
83
1.33
1.29
5 Wood, Paper, Pulp, Publishing and Printing
96
11.2
47.6
7.6
495
99
110
1.55
1.63
6 Oil and Chemicals
66
7.7
35.4
5.6
537
137
266
1.50
2.32
7 Rubber and Plastic
106
12.4
53.8
8.6
508
96
97
1.43
1.44
8 Other Non Metals
17
2.0
14.2
2.3
834
102
126
1.50
1.64
9 Manufacture of Basic Metals Metals, Mechanical Engineering & other 10 Machinery 11 Electronic Engineering Automotive Components and Transport 12 Equipment 13 Other Manufacturing
15
1.8
9.0
1.4
600
130
149
1.86
2.31
124
14.5
65.7
10.5
530
83
93
1.43
1.41
130
15.2
192.2
30.6
1478
95
113
1.52
1.61
60
7.0
109.5
17.4
1825
107
128
1.49
1.66
23
2.7
17.0
2.7
738
92
78
1.60
1.50
5
0.6
0.8
0.1
162
74
52
1.70
1.43
14 Construction 15 Retail and Wholesale
30
3.5
12.7
2.0
422
82
68
1.47
1.33
16 Other Services
72
8.4
26.8
4.3
372
111
107
1.40
1.45
856
100.0
628.1
100.0
734
100
100
Total
Source: Derived from Employment Gazette and Labour Market Trends Various Editions, and Welsh Input-Output Tables for 1996
David Pickernell, David Brookshank & Mark McGovern create employment. Indeed (based on Cooke’s estimates) employment has not altered much since the plant’s inception, being around 1600 in 1980 and 1357 in 2000 (Ford, 2000), though it recently announced plans to expand employment and output. Thus essentially the £20m paid over the past two decades has been to maintain employment at initial levels at a cost of around £700 per job per year (excluding the initial grant payments). Through this period Ford has been able to use the existence of comparable engine plants in the rest of Europe to lever government grants, on a regular basis, for its new investment projects. For example, Wells and Rawlinson (1992) indicated that whilst in 1988 Ford’s Zeta Engine investment was all to go to Bridgend, in 1990 the second phase was switched to Cologne to spread the risks. This was in terms of guaranteeing production, but can also be seen as allowing them to play grant-giving authorities off against one another. Ford thus demonstrates most explicitly how multinationals can effectively use the rules for grant aid, and particularly RSA, to obtain economic development resources on a continuing basis over time. This indicates the possible hidden costs of initial inward investment projects, even if they are successful, in comparison with the more explicit costs of failed projects as illustrated by LG. In addition, however, these two case studies indicate the way in which inward investors seem to be able to lever resources. 5.3 Sony Pencoed The example of Sony is also instructive, because it illustrates the possibility of a pre-punishment strategy at work. Four hundred (of 1900) workers are to be made redundant at its Pencoed factory, as the factory moves from analogue televisions to digital technology products (video cameras, TVs and set top boxes) (Western Mail, 2000a). Sony has previously been offered over £15m in RSA in 6 applications since 1984. The fact that the work on analogue technology was being moved to Eastern Europe was blamed on exchange rates, TV price erosion and UK labour costs. However, it could also be interpreted as a warning to sponsoring bodies, given the company’s consistent and regular success in securing past grants, and rumours of a rejected RSA bid in the months leading up to the job loss announcement. Given that Evans (2000) found that between April 1998 and 2000 only 46 of 607 claims were rejected and nearly £125m paid out, this would seem a logical and viable strategy, particularly if it intends to make future claims for RSA to help pay for the upgrading to digital technology. Indeed, First Minister of the NAW, Rhodri Morgan has intimated that such assistance would be forthcoming in his comments concerning Sony following the job losses and the move to digital technology, stating that “The National Assembly stands ready to assist financially when suitable projects come before us” (Western Mail, 2000b). These examples illustrate a serious dilemma that Wales now faces. It has previously developed an economic development strategy based on attracting inward investment through a package of incentives including grants, but also involving the WDA, TECS and other Quangos. This has created an expertise in attracting inward investment that should not be undervalued. Nevertheless, it has
Hitting the Triple Bottom Line or Hitting Rock Bottom also created a dependence that Wales can only break by developing its own indigenous companies, as seems to have been recognised in more recent policy initiatives, including those surrounding Objective One. But Welsh policy makers obviously do not have as much expertise in this area as they do in the attraction of inward investment. Resources therefore need to be put into developing the new policy expertise. At the same time, however, it continues to face the need to allocate resources to some of those inward investors if it wishes to keep them and the jobs they provide. 6. RESOURCE ALLOCATION TENSIONS AND EFFECTS Because of the globalisation of the largest companies in Wales, every potential investment is likely to press for grant aid of some type or other, using the threats highlighted to obtain government resources. Further, as Ford demonstrated, they can do this on a continuing basis. However, there are opportunity costs associated with this, not least the Objective One Programme matched funding requirements and moves to promote indigenous firm development. This may jeopardise the NEDS. However, It also brings into question the RSA grant system and regulations, particularly if such resources can be diverted into other areas of economic development. As such it supports the study by Evans (2000) that also looked at RSA processes in Wales for grants under £100,000. Such grants largely go to small firms hit disproportionately hard by the administrative burdens placed upon them. In England and Scotland, new schemes for smaller businesses seeking grants up to £75000 (Enterprise Grant Scheme) and £100,000 (Invest for Growth) respectively have been put in place, with faster streamlined access to grant assistance for smaller businesses. In Wales such a scheme would divert only a fraction of the RSA budget (£1m out of £125m given between April 1998 and 2000 (Evans, 2000)). However, given the change in emphasis towards SMEs in Wales, this suggests that the diversion of funds from RSA may need to be much more substantial if the change in policy direction is to be effectively resourced. This, however, is itself a political issue, because RSA regulations and the resources that fund them come from the UK tier of government, and any changes would break the UK-wide nature of RSA. What also emerges from this is a potential mismatch between new policy requirements and old policy mindsets. The previous policy focus concentrating on inward investment, along with creating expertise in this area of regional economic development policy, may have produced a certain mindset for policy makers. The Objective One programme and NEDS may still be affected by these long ingrained influences in terms of implementation (or non-implementation) rather than the explicit policies themselves. Thus Wales has become an important test-bed for the change in policy emphasis and the need to adjust the policymaking and implementing process, from one focused on imposing solutions from outside the region, by governments and multinationals, to one where solutions come from the local communities and firms themselves. This is likely to be a real issue. In previous Objective One programmes, bottom-up approaches driven from local communities have also been hampered
David Pickernell, David Brookshank & Mark McGovern by problems over management of the local initiatives, lack of local accountability, uneven capacity in different localities and funding arrangements (where matched funding has come in large measure from local authorities) that have mitigated against novel approaches (see in particular Turok’s (1997) account of community economic development policies in Western Scotland). Despite the problems Turok (1997) argued that such local programmes were interdependent with wider regional policies and thus careful consideration needed to be given to the balance between the two. It is therefore important to ensure that the analysis of the specific problems of West Wales and the Valleys undertaken in the SPD actually translates into programmes which tackle those specific problems, rather than being unduly subsumed within the All-Wales agenda that the NEDS obviously needs to create. The example of Merseyside’s programme is salutary, as its SPD was unduly constrained by the UK-wide policy agenda, leading it to adopt policies unsuitable for the region (Boland, 1999b). Lessons concerning policy implementation exist from around the world. Generally there is an increasing emphasis on the processes of policy implementation and management as keys to success. McGuire’s (2000) study illustrates this in the USA, particularly in relation to co-operation between the various tiers of government. Stewart (1995) also provides some potentially important historical lessons for Wales in his study of how new policy directions in New South Wales (NSW, Australia) were undermined by the existing processes of policymaking and implementation that were not changed in line with the new situation. In 1988, the focus was on promotion of export industries to provide economic growth. However, whilst a coherent policy based on leading edge sectors and organised using tripartite task forces existed, it was not integrated with public sector reform required to organise and manage these processes. This is a crucial lesson that Wales must learn if its own regional policies are to be successful. When the economic downturn overtook the NSW government, they were forced to focus on the development of investment projects, utilising an organisational form (Office for Economic Development (OED)) that could then cope with the narrower focus on exports and investment attraction (Stewart, 1995). More recent developments in NSW and other parts of Australia are currently being investigated, to hopefully further inform policymakers in Wales. The demise of the sectoral industrial policy certainly provides food for thought for Wales, given the UK government’s Department for Trade and Industry (DTI) present focus on clusters policy. In NSW, Government departments, industry and unions, and the Department for State Development (DSD) were to join as a “task force” to generate and drive development of 16 key sectors, the task force chairmen predominantly business people. However, the task forces were not co-ordinated with the organisation to implement their policies, resulting in “capture” by private sector interests of the still existing bureaucracy. Consequently, the bureaucracy withdrew into the focus on industrial projects in the wake of the economic problems of the 1990s, concentrating on delivering investment projects which created jobs, and dealing
Hitting the Triple Bottom Line or Hitting Rock Bottom with a limited number of foreign interests where it could help project acceptance (Stewart, 1995). This is broadly the same role that the WDA has undertaken in Wales over the past 20 years or so. This thus illustrates some of the possible problems inherent for Wales in attempting to undertake a new policy direction whilst still utilising the personnel and apparatus from a previous policy. It also indicates the need to build the capacity to support the strategies adopted. The more bottom-up approach, now affecting government thinking at a UK level as well as in Wales in both the Objective One programme and NAW (2001a), also has major implications for the way in which policy making is carried out and facilitated. The capacity to facilitate the changes in thinking required, the resources that may be needed to facilitate capacity building, and the issues of contested governance that may emerge, need to be examined. For example, previous EU Objective One programmes have been dogged by issues of contested governance between national governments and EU officials (see Boland, 1999a,b,c) for Merseyside, and Bachtler and Turok (1997) for a number of examples across the EU). Boland (1999b) particularly saw this problem at the SPD drafting stage, where the EC, UK government, and its regional arms dominated the process to the detriment of the local private sector and social partners, preventing real local input and policy ideas. Lovering and Thomas (1999) also saw this danger in the Welsh SPD, with the possibility of a top-down as opposed to bottom-up approach developing. This danger also currently exists with the NEDS. In addition, however, there are dangers inherent in the policy implementation process that may take place if capacity does not exist to provide effective local input. The value of capacity building in local communities, and the problems produced where this does not occur are again illustrated by reference to examples from around the world. For example, with regard to recent regional policy in Australia, Tonts (1999) saw national government withdrawing, leaving “selfhelp” as the only real option. As Tonts (1999) points out, some researchers have argued that devolution of responsibility for economic development to the local level presents opportunities of responsibility for communities to behave entrepreneurially and reverse long-term economic decline (see Sorensen and Epps, 1996). This can also increase public participation in planning and allow local communities to take ownership and control of their own futures (see Murray and Dunn, 1996; Sorensen and Epps, 1996). However, problems of zerosum games can also develop according to Tonts (1999), particularly if resources are limited and not forthcoming from higher levels of government. In response to this, therefore, some have argued for more integrated approaches to regional development, with communities working together collectively (Stilwell, 1994). Parochialism and localism have plagued such attempts in the past according to Tonts (1999) and it is here that federal and state governments can act as facilitators, equalising risk-taking, as well as taking management and resource utilisation responsibilities (Tonts and Jones, 1997). Curran et al. (2000) highlighted problems in the UK in getting small businesses to participate in local economic development, surely a pre-requisite
David Pickernell, David Brookshank & Mark McGovern for indigenous development. Instead, quangos such as TECS have supplanted their own structures (Peck, 1995; Bassett, 1996). According to Curran et al. (2000), this calls into question policies based on local affiliation and intrasectoral networks, unless such networks can actually be created. Foley and Martin (2000) also saw a renewed emphasis on community-led regeneration in UK policy. However, their study found that whilst civil servants and community representatives acknowledged each other’s skills within proposed partnerships and there was a common recognition of the challenges, there were also several problems. First, community partners often did not include important local actors such as schools, councils, health authorities or police forces. Second, there were often power struggles evident. These occurred, not between central government and local communities, but rather between these two groups and the local councils sandwiched between them. Chatterton and Bradley (2000) also note the tensions inherent here, particularly when accountability structures for policies continue to rest with statutory bodies rather than communities themselves. They also criticise the focus of such UK policy on specifically designated geographical areas, seeing this as also highlighting the potential for conflict between the goals of sustainability, social inclusion, and economic competitiveness. Additionally, and importantly they question the adequacy of the resources available to tackle local deprivation (see Hall and Nevin, 1999), both in human and financial terms. They argue therefore that questions remain about the extent to which initiatives based on areas are really open to action from below. In the light of this, Taylor (2000) argues that cultural change, particularly from public bodies, is required to address the inevitable tensions in moving from “government to governance”. These include tensions between public accountability and policy flexibility, participation and representation, and consensus and diversity. She therefore argues for investment in community development, for local people developing their own activities, networks, and alliances with each other and authorities and learning how to deal with their own problems. Second, she argues for institutional capacity building to support community representation, citing the beginning of such policies in the UK to do this. Unfortunately, as yet the important strategies in Wales, such as Objective One, have been slow in supporting this. For example, of over 280 projects approved by June 2001 totalling nearly £200m (not including matched funds), only 18 (around £6.5m) were for projects designated under community economic regeneration (Economic Development Committee, 2001). Only fourteen projects (£5.5m) for community capacity building had been approved. Overall, despite the Objective One strategy designating 9.6% of funds to community economic regeneration, less than 3.5% of the total allocated had actually gone to this priority. This is an important issue that needs to take into account when finalising both the strategy and the resource priorities that finally appear in the NEDS.
Hitting the Triple Bottom Line or Hitting Rock Bottom 7. THE ISSUES TO BE RESOLVED The NEDS outlined in the NAW (2001a) contains a number of fundamental issues that need to be resolved. There is no explicit theoretical underpinning for the strategy driving policy or resource allocations. Concerns exist over the pool of economic development resources and how they are likely to be used in new policies when large proportions of such resources are obviously already committed to existing priorities. The devolution process has also left the NAW with a potential resource dilemma over the split between economic development resources focussed on the Objective One regions compared with non-Objective One areas. The new nature of the NAW, its perceived need to prove itself, as well as the resource dilemma described above, may also have a possible by-product of seriously hampering bottom-up community led development projects, if the Assembly becomes too involved in a policy making as opposed to policy facilitating role. There are also continuing resource and expertise issues linked to the clash between the old policy focus on foreign inward investment which may still make considerable demands on scarce funds, and the new NAW emphasis on the creation and growth of new indigenous businesses, which will undoubtedly also make huge demands on financial and managerial resources. On top of all this there exists a potential incompatibility between the old policy mindset based on quite narrow regional policy objectives of attracting jobs via inward investment and the much broader requirements set out both in the Objective One Programme and the NAW (2001a) document. This suggests a need to build policy development and implementation capacity both at the top and also at the level of the community, which at present does not appear to be happening. This paper thus clearly illustrates the problems currently facing the NAW in Wales. If it is to provide the strategic “kick-start” to economic development in Wales then the NEDS needs to be speedily completed and implemented, but also take into account and deal with the conflicting issues outlined. Instead, another consultation document (NAW, 2001b) entitled “A Winning Wales” was very recently put out and the final version (NAW, 2001c) has just been approved. This leaves unsolved exactly the same fundamental issues affecting regional and economic development policy in Wales as NAW (2001a), and indeed now reads more as a list of the assembly’s existing spending commitments (including additional spending areas related to economic development, such as transport) than a strategy. Crucially, it lacks any means of evaluating the success or failure of the “strategy” in meeting its targets. One can only hope that the promised annual process of updating the strategy document can start to resolve the vital issues outlined here. If not, then Wales may indeed hit “rock bottom” before it hits the “triple bottom line”.
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