Enterprise Zones … did they work then, will they work now?

Modern office building

by Laura Dobie

In this article we look at past and present incarnations of Enterprise Zones, their potential to create jobs and growth, and issues to address in policy approaches.

Past experiences and lessons learned

The Enterprise Zone concept emerged in the UK in the 1970s. They were conceived by the planning academic Peter Hall, with the idea that removing all obstacles faced by businesses, such as regulation and bureaucracy, would allow enterprise to prosper, prompting a surge in the number of companies, employment levels and incomes in areas which had been ravaged by industrial decline and restructuring.

Enterprise Zones were created in the UK between 1981 and 1996 and were mostly concentrated in areas of post-industrial decline on the outskirts of towns and cities. The policy, as it was implemented, departed somewhat from the original, free-for-all vision: the zones concentrated on built environment challenges and the use of capital-based grants and rebates to drive growth.

The incentives offered included:

  • 100 percent tax allowances for capital expenditure on constructing, improving or extending commercial or industrial buildings;
  • Exemption from Business Rates for industrial and commercial premises;
  • Simplified planning procedures;
  • Exemption from industrial training levies;
  • Faster processing of applications for firms requiring warehousing free of Customs duties;
  • A reduction in government requests for statistical information.

The Department for Environment’s final evaluation found that approximately 126,000 jobs were created, of which up to 58,000 were additional, and that additionality was highest for manufacturing and lowest for retailing and distribution activity. It estimated that the cost per additional job created was around £17,000 (£26,000 at current prices), assuming a ten year job life, and that over than £2 billion (1994/95 prices) of private capital was invested in property on the Enterprise Zones, a public to private leverage ratio of about 1 to 2.3.

However, Enterprise Zones have been subject to much criticism, and it has been argued that, overall, they did not produce a lasting recovery in investment and employment. (Danson, 2013, p17). Critics have highlighted the displacement effects of Enterprise Zones, i.e. that many jobs created in Enterprise Zones were displaced from other areas (Sissons and Brown, 2011), and the expensiveness of the policy (Larkin and Wilcox, 2011).

A report from Centre for Cities highlights lessons from the 1980s experience, and presents the following recommendations and observations to guide future policy:

  • Policies must act to minimise displacement and increase employment;
  • Reduce capital-based incentives that primarily benefit local landowners;
  • Ensure relaxed planning is executed – and recognise that it is not a barrier to growth in all areas;
  • Each incentive should be matched to a relevant goal;
  • Enterprise Zones will be most successful in places with real growth potential.

Enterprise Zones today

Enterprise Zones are at the centre of the government’s long-term economic plan and were reintroduced in 2012, aiming to create jobs and support businesses in 24 areas across England. While the Enterprise Zones of the 1980s sought to address urban dereliction, today’s Enterprise Zones are directed at different challenges: increasing firm productivity, reducing skills gaps, fostering firm growth and facilitating job creation. The structure of the economy has also changed since the 1980s, with fewer manufacturing firms, and government net debt constitutes a much greater percentage of GDP, reinforcing the need for Enterprise Zones which are more cost-effective than those of the 1980s.

The new Enterprise Zones offer a range of incentives, including:

  • A business rate discount worth up to £275,000 per business over a 5-year period;
  • Simplified local authority planning, for example, through Local Development Orders that grant automatic planning permission for certain development within specified areas;
  • Government grants to install superfast broadband;
  • Enhanced capital allowances in some zones – tax relief for investments in equipment.

The government has sought to address previous criticisms of Enterprise Zones through the guiding principles set out in its Enterprise Zone Prospectus:

  1. Opportunity – “focusing on areas of genuine economic opportunity”;
  2. Long-term viability – attempting to ensure the “long-term success of the area beyond the initial period of government business rate subsidy”;
  3. Strategic fit – Local Enterprise Partnerships will develop and implement Enterprise Zones which suit their local area and tie Enterprise Zones to their wider economic priorities;
  4. Minimising displacement – Local Enterprise Partnerships “will have a vital role in targeting the business growth that is genuinely additional”.

Will they work?

So far, the performance of Enterprise Zones is falling short of initial expectations, in terms of job creation: a House of Commons Public Accounts Committee report published in May this year concluded that the 4,649 jobs created by Enterprise Zones so far is “underwhelming”, given that the Treasury’s initial projection of 54,000 jobs by 2015.

The Centre for Market and Public Organisation’s (CMPO) working paper on place-based policies, which reviewed a range of initiatives including UK enterprise zones, highlights the need for more information on the kinds of policies which generate sustainable, longer-term benefits. Do Enterprise Zones work? also criticised the short-term nature of the economic benefits of the earlier Enterprise Zones, while a National Audit Office report published in December 2013 comments that the short-term financial incentives of current enterprise zones “create uncertainty for businesses”. The CMPO paper suggests that, while the evidence on the economic impact of Enterprise Zones is mixed, there are indications that infrastructure expenditure and investment in higher education and university research can yield economic benefits.

It has also been argued that the weakness of the incentive package could limit the impact of Enterprise Zones (Fothergill, 2013, p18). A London Chamber of Commerce and Industry report contends that the package of incentives that Enterprise Zones offer cannot generate sustainable economic outcomes on their own, and that they should be viewed as part of a wider set of measures that facilitate the regeneration of an area. It called for a more flexible and ambitious range of incentives and stressed the need for a specific body which is responsible for an enterprise zone’s regeneration. It also highlighted the need for an approach to regeneration which combines social aspects with economic outcomes through the development of the skills of the local workforce.

While Enterprise Zones have the potential to create jobs and boost local economies, previous experiences in the UK have highlighted problems with the policy, and the performance of current enterprise zones is falling far short of initial projections for job creation, which the Department for Communities and Local Government revised down to between 6,000 and 18,000 jobs by 2015. Enterprise Zones in their present form, therefore, may need to be combined with other measures to fulfil their potential and bring about economic and social benefits which are genuinely sustainable.


 

Further reading:

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