Future Local Part 6: At the centre of local economic life

In the sixth article in our Future Local series, Jennifer Glover asks how the role of councils must adapt to the changing economic circumstances brought about by the phasing-out of the Revenue Support Grant, devolution deals and Brexit. Other essays in this series may be found at Future Local: Where next for devolution?

All discussions of the future of local government in the UK are happening against a looming backdrop of economic uncertainty. The lifeblood of local government, the Revenue Support Grant, is being phased out, and instead councils will now be reliant on locally raised business rates. Devolution packages are seeing councils assume more responsibilities in some areas, but no-one quite knows how the new government will pursue the agenda going forward. Brexit has cast a shadow of uncertainty over the our nation's economic stability, as well as the direction of policy. Meanwhile cuts to local government funding continue to sting year after year and pressure on services mounts.

To continue to deliver local democracy and essential services, councils must now adapt to these new economic circumstances – and quickly. The countdown to 100% local retention of business rates has begun – all areas will have transitioned by 2020/21 with some regions already trialling the system. As such, councils will need to be at the heart of local economic life going forward, promoting growth, supporting businesses and always scanning for problems ahead.

Although the government has tentatively ventured into local economic growth schemes over the years, this has been in a very fragmented and opaque way as Lord Heseltine points out in No Stone Unturned. Now local growth is back at the top of the agenda, and councils find themselves reconsidering their role.

This is not to say that the future for councils is purely to serve the business community and drive growth at the expense of local needs. In fact, the best way of ensuring the market doesn’t gain undue influence in council decision-making is to keep economic oversight firmly in-house. With a firm grasp of the local economic landscape, it will be able to develop and be elected on the basis of a strong strategy, and any variations from this will need to be accounted for. Without this, councils may end up on the back foot, making ad-hoc decisions in response to demands from the private sector.

A council’s economic strategy will mean the difference between resilience and instability, low and high unemployment, and will have a huge impact on whether businesses flourish or fail. All of which will decide the future funding for service provision, as well as the level of need. Local government has had its autonomy gradually eroded over the last few decades and its institutions and expertise have adapted to meet these requirements. This new situation will demand a brand new outlook from councils, one that puts the local economy in the limelight in a way it hasn’t needed to be before.

Before looking outwards, councils will need to have a frank look in the mirror to see if they themselves are equipped for the task at hand. 

Part of this will be an organisational shift that places economy and business as a cross-departmental priority, rather than sitting, as it often currently does, within a self-contained team in a single directorate. It will be the responsibility of all officers and councillors to ensure their decisions contribute to a sustainable financial future for the local authority, whether their remit is social care, waste or highway maintenance.

Councils must be bold and able to make big decisions quickly and confidently, secure in the knowledge that they have the best information available. And if it doesn't already, internal culture will need to encourage and reward innovation, entrepreneurial thinking, and (to some extent) risk-taking.

Having business and financial expertise in-house will also be essential: to be able to interpret the information coming in; to know where resources will have the greatest impact; and to know what tools are on offer to help stoke growth. The first step is to identify any weaknesses in your organisation’s knowledge, for which you may require an outside perspective. Filling the gaps can then be done by bringing in experts or advisors, training existing staff and hiring people with specialist knowledge.

It’s always worth remembering that organisations in the public and the private sector are pioneering new approaches, piloting new tools and building new technology that has the potential to improve efficiency and promote collaboration. Delivering services people want and expect will increasingly require councils to be be confident with technology and to actively seek out best practice from across different sectors. Secondments between the civil service and the private sector are commonplace, and local government must also consider pursuing this approach. Fact-finding missions and idea-sharing sessions between organisations are also useful ways of ensuring new information is always coming in.

The key to building a sustainable financial future is for local authorities to sit at the centre of the web of local economic life. To build a strong network of key influencers and stakeholders, both to draw upon for information, and to encourage partnerships and referrals within the region. They will need to know exactly where the opportunities and challenges lie, and be able to act upon them rapidly.

Cultivating relationships with businesses operating in their area will become a priority, knowing their pain points, whether they relate to council interactions or not. For instance, a council may be busy pushing business rate payments online, but, if asked, business leaders may say that they prioritise quicker licensing application processing instead. Equally, they might say that they have a problem accessing finance; although this isn't related to a council service, it could provide advice or refer them to business advisors, to improve the growth opportunities of the area’s businesses. Whatever the messages, without this continuous dialogue it is impossible to know where the biggest gains are to be had.

Councils may consider hosting monthly sessions for key stakeholders to discuss issues and ideas on a regular basis. They may also look at providing signposting services – for local businesses as well as other firms looking to do business in their area. They may direct people towards the local Chambers of Commerce, the LEP, business advisory services, universities, workspaces, investors, or escalate to national level services. Having a close direct relationship with central government departments and agencies such as the Department for Business, Energy and Industrial Strategy (where ex-DCLG Minister Greg Clark now resides), the British Business Bank, the Department for Education, and the Department for International Trade (formerly UKTI), enables councils to play this referral role. Organisations which are already playing this role of facilitator are essential allies, such as the British Library which is setting up regional hubs for entrepreneurs, located in libraries.

And let’s not forget the most important part of the network: the citizens themselves. As economic growth becomes a core part of the local government agenda, residents should be actively engaged with setting the priorities and the vision. Here, again, is where making use of new technology comes into play, to inform, facilitate conversations, gather feedback and reach as wide an audience as possible. A large part of this will be to educate and engage people in what has typically been seen as a dry and technical topic, and show them how these decisions affect them. It might even be that having closer ties with local businesses provides an unexpected new route for democratic engagement, to hear from residents in their capacity as employees.

To foresee problems and opportunities on the horizon, councils will need to have a steady flow of information coming in from a range of sources – local, regional, national and international – and must be able to interpret how changes may affect the health of their local economy. Councils will need to become the go-to experts on their region, a hub of knowledge fed by information from Local Enterprise Partnerships, Enterprise Zones, Chambers of Commerce, universities, business advisors, investors, surrounding councils and others.

Councils will know, in detail, where the region's strengths and weaknesses lie; for instance, where their businesses offer a unique service, or where more skills education is required to boost employability. Finding and keeping staff with the right skills is a major challenge for many businesses, and will likely become more complex as Brexit negotiations continue. For the sake of maintaining healthy local employment levels and business rate income, councils have a role to play in assisting. For instance, ensuring there are enough houses and that it is a pleasant place to live and work may prevent a 'brain drain’, which some areas experience as people relocate to places with a better quality of life.

From this position as a local expert and advocate, councils will be able to speak confidently on behalf of the region and the region’s businesses when addressing the outside world. They will need to be actively working beyond their boundaries to attract larger companies to locate their operations in their regions and hire local people, and investors to fund business growth and infrastructure projects. Creating a strong and coherent ‘brand’ and vision to the outside world will help to achieve this. The UK’s ‘Northern Powerhouse’ concept is now understood globally and helps investors to understand what they’re buying in to.

As a major participant in the local economy in their own right councils will need to be aware of their own influence and power as an employer, customer and supplier. One of the largest aspects is commissioning and procurement, in which councils can leverage their buying power to negotiate contract conditions which fulfil secondary aims. They might be able to, for instance, apply pressure on a service provider to employ a certain number of local people from disadvantaged backgrounds, to provide apprenticeships or to sub-contract to local suppliers (see Camden's advice for suppliers as an example).

Preferential treatment for local businesses during the procurement process is not currently feasible due to procurement regulations, but as much of it is bound up with the EU there is speculation over how much of this will remain post-Brexit. However, thanks to the Social Value Act 2012, councils are required to consider the social, economic and environmental value of potential contracts for the local community, as well as achieving best value for money, so they do have some flexibility here. Supporting social enterprises and local startup businesses with the potential to create many jobs as they grow could tick some of these boxes while supporting the local economy.

Being sensitive to the constraints of businesses when designing the tendering process may encourage a wider range of potential suppliers to come forward. Businesses will want to minimise the time spent on pitches they never had a chance of getting; screening expressions of interest before inviting a full proposal can help with this. It's also important to be clear and specific about what is required from a supplier and transparent about the process and the time frames involved. Then, as a customer, it is important to follow good practice guidelines to ensure you won’t have a negative impact on the supplier, especially when it comes to paying invoices promptly.

And thanks to the General Power of Competence introduced in the Localism Act 2011, councils are now able to sell their administrative functions to other organisations, such as payroll and HR. This type of internal entrepreneurialism could support local businesses in reducing their costs and could provide essential functions for small or young businesses who don’t yet have the necessary expertise or capacity in-house.

Once the groundwork is done, the networks are up and running, and everyone knows what's working and what isn’t, it's time to start thinking creatively about how to support the business community.

1. Fuelling growth

Businesses need finance to survive – whether that's personal savings, bank loans, grants, equity investment or other sources. Depending on a company’s business model and the sector it works within, they may prefer different types of funding. A 40 year old business employing 200 people with healthy finances may apply for a bank loan to buy new equipment. But a new startup with ambitions to grow rapidly will struggle to be approved for a bank loan without any assets or a steady profit. So instead it might approach a venture capital firm looking for high risk, high reward investment opportunities in return for shares in the company. Meanwhile, a medium-sized business struggling with cashflow problems caused by late customer payments might sell its invoices to a business credit firm in return for instant cash to tide them over.

For a council to be able to provide the right type of support, it is important that it knows the demographic makeup of its business community. Does it have a university that is creating lots of businesses to commercialise high value technological breakthroughs? Are its high streets made up of independent shops or big chain stores? Which businesses bring in the most money in business rates, and which have the potential to do so in a few years? Are local businesses growing or shrinking?

Councils have been involved with providing direct finance to local businesses for a long time. This has usually come in the form of small grants for specific purposes (like Thurrock Council’s £3000 shop front rejuvenation grant and Kirklees Council’s £1000 Working Smarter grant to develop the workforce) or loans (like Coventry and Warwickshire’s business loan scheme). This type of intervention can support businesses who are rejected by banks or who fulfil the objectives of the council. In 2009, Essex County Council and Santander decided to set up the Banking on Essex programme to lend to small businesses who couldn’t access finance during the recession. Although it was shut down due to lack of demand in 2011 as the banks began lending again, it remains a great example of the type of innovative project councils can pioneer to meet a local need.

Many of these council grant and loan funding schemes have been partly backed by EU money so it remains to be seen if and how this will be replaced. However, the fallout from Brexit has meant that interest rates remain very low, which is good for councils and businesses wanting to borrow money cheaply.

2. Innovative financing

Increasingly, councils are also looking to a broader range of financing methods to directly support businesses in their local area. They might look at new ways of using their loan and grant schemes, using finance types that councils have not typically not been involved with (like equity), or exploring new and innovative funding types like crowdfunding.

Much as Innovate UK, the Government's science and innovation funding body, hands out grants for projects that meet specific innovation goals (for which a council could also encourage businesses to apply), councils could use their business grant schemes to meet their own innovation objectives as well as the businesses’. Council innovation grant funding has typically been offered to voluntary and community groups with slightly different aims, but there’s no reason the same model can’t work for private sector organisations too. For instance, in an effort to address problems facing the social care system, a council could provide grants to businesses which can offer an innovative solution, with the side benefit of supporting a local business.

Some councils are looking at making larger direct investments into businesses they see strategic value in, either in the form of debt, equity (owning a stake in the company), or a hybrid of the two known as venture debt. Kent County Council took the bold step of setting up an equity investment fund for Kent’s scientific businesses, a rare instance of a council making direct venture capital investments in a business. It’s worth noting that this is a complex undertaking, often risky and must comply with state aid rules, so may not suit every council’s needs.

Councils can also make use of venture capital fund managers to manage the council’s equity investments for them, rather than managing it themselves. Councils can put aside a pot of money with a specific set of criteria for businesses they wish to invest in, and the venture capital fund will do the rest. To drive forward the growth of the region, Nottingham City Council worked with fund manager Foresight Group to set up the £40m Foresight Nottingham Fund in 2013, which is made up of contributions from public and private sectors organisations including the Nottinghamshire Local Government Pension Scheme and credit agency Experian. The council does not manage the investments, but had significant influence over the criteria of the businesses it will target.

Peer-to-peer lending and crowdfunding platforms are increasingly being used by local government to support local businesses. For instance, peer-to-peer lending platform Funding Circle is working with councils including Camden and Lambeth to manage council investments into businesses they want to target. This can provide a range on benefits, including the ability to outsource the due diligence and investment management, supporting the local economy, and the potential to earn more interest on their investment than offered in an ordinary bank account. Crowdfunding has also been used with success in areas such as Dorset and Plymouth, where the councils are offering matched funding for any local social impact projects which raise money from the 'crowd’.

3. Supporting the wider environment

As well as directly supporting businesses, the wider environment must also be taken into consideration. Is there enough office space for new or expanding businesses, and are there enough affordable homes for their employees? Do local businesses have the opportunity to network with others in the area? How does the transport infrastructure affect their ability to operate? Are the region's universities collaborating with businesses for student placements and for R&D projects?

This could mean making use of council assets like offices, libraries or event venues as flexible work space for local startups or to host networking and partnership events. It could mean revisiting the planning system to make sure it works for pop-up businesses who want short-term leases on high street commercial space and ensuring the business rate collection process can deal with periods of weeks and months. Pop-up shops have been helpful in rejuvenating town centres in some areas including Hackney which offered a rent-free pop up shop for six months, and Croydon which is soon launching its own ‘Boxpark’ (shipping containers stacked to create a series of temporary retail venues) similar to those already in Shoreditch and Brixton.

Business Improvement Districts (BIDs) have proved useful in some areas to fund the infrastructure that businesses want and need to operate in the area. These work by taking a levy from businesses located within a designated zone, and are voted for by the businesses. Their remit can be general, as in St Andrews’ BID, or it can be specific, as in the case of Nottingham’s Retail and Leisure BID.

Universities definitely have their part to play too. As well contributing to bringing bright young minds into the area, hi-tech companies are more inclined to locate near to universities with a strong research reputation and history of successful collaboration with businesses. Edinburgh City Council is a key partner in the Edinburgh Bioquarter, a biotech research site where academics and businesses work together. Scotland is already internationally recognised for its life sciences expertise and Edinburgh Bioquarter builds on this success and attracts talent, businesses and investors in the city. Local authorities would be wise to work closely with their local higher education institutions to make the most of their potential.

Although there are lots of mechanisms for councils to begin getting involved in their local economy more actively, as we have explored, there is still a lot of uncertainty surrounding the future of local government finance.

We're still waiting for signals from the new government on its priorities for devolution. Will we see stronger devolution packages if the requirement for mayors is loosened? Will areas without new devolved powers struggle more without the Revenue Support Grant? Could a more rounded form of devolved power be on the table going forward? And what might happen if the devolution agenda stalls or is scrapped?

100% business rate retention causes its own problems too. Despite being reliant on business rates to budget for essential services, local government won’t have any say over the policy which informs the valuations. For instance, in the last Budget small business rate relief doubled to 100%, wiping off millions from the business rate takings overnight. Whitehall continuing to hold the policy reigns will hamper councils’ ability to future-proof their finances. The business rate system is also widely acknowledged to be in dire need of reform, with critics complaining of a lack of transparency and fairness, and these changes do little to address these concerns. On a local level, councils must be wary of relying too heavily on a small number of businesses for the majority of their rate income, which could give these businesses the ability to hold the council to ransom or to bankrupt the council if they fail.

Having said all that, this is undoubtedly an exciting time, as councils are given the tools to realise their strategic vision for the region. Combined authorities have the potential to really build on these plans with a freedom that has previously been reserved for Whitehall. 

As well as the more practical ideas that can be implemented in the short-term, as the landscape changes there may be scope to implement some more ambitious projects. Combined authority structures may enable the creation of regional versions of national schemes so that they are more accessible to local businesses. For instance, following the model of the Government's British Business Bank, which supports SMEs through a variety of different funding types and targeting specific groups, councils could pool their resources to create regional versions which meet the needs of their local economy. Similarly, regional-level versions of UKTI (now subsumed within the Department for International Trade), which supports businesses looking to export and expand overseas and helps to attract foreign investment to the UK, could help support local businesses in a more targeted way on their doorstep.

With all these changes to contend with, councils are in for an interesting time (to say the least). But hopefully through the uncertainty will emerge a truly devolved way of thinking about local services, people and businesses.