Is the Regional Growth Fund (still) rubbish?

Much coverage this morning for the Commons Public Accounts Committee's criticisms of the Regional Growth Fund: 'It's slow to spend money and some of the jobs 'created' come at a high cost per job'. Time for a re-post of something from earlier this year, written in response to similar criticism from the National Audit Office:

"Reporting of the NAO report on the Regional Growth Fund has highlighted the fact that the 'scheme may cost up to £200,000 per job'.  A senior labour MP tells the BBC that they find these figures 'shocking'.

But before we get carried away, it's worth noting two things. First, the average cost per job isn't that different from similar schemes with comparable objectives (NAO is very clear on this). Second, before concluding that the £200k per job maximum is 'shocking' we might usefully look back at the maximum cost per job achieved by the RDAs. Upon quickly flicking through the PWC report (vol 2) I see that EEDA's innovation capital project was estimated to cost 213k per job (table 40); EMDA's tourism marketing managed an impressive £1m per job (table 71); the LDAs Centre for Fashion Enterprise cost £259k per job while its pre-commercial fund cost £217k per job (table 101).

As I have explained before, I take all of these figures with a pinch of salt. But it's simply not helpful to compare the maximum from the RGF to the average from other programmes and reach any conclusion about the effectiveness of the RGF. I am sympathetic with the NAO argument that one might question why policy doesn't pick the highest value for money projects - but this argument would appear to apply as much to RDAs as it does to RGF.

I am not a massive fan of the RGF. I have always argued that RGF should have (1) had money ring-fenced for skills and focused on people; (2) handed money to LAs (or LEPs) to do with it what they want; (3) spent the rest on projects that delivered highest value for money. I continue to think that this would be a better set up for the fund. But I don't buy the argument that these figures tell us that RGF is somehow worse than RDAs.

Of course it depresses me that governments invest in schemes that represent bad value for money - but that's politics for you."

Relaxing Planning Laws

Lots of discussion this morning about whether relaxing planning laws will help kick start construction. My feeling is that they'll help a little but not necessarily a lot.

Temporarily removing the need to reach agreement on section 106, e.g. to provide affordable housing, will lower the cost of development. To the extent this raises profitability some currently marginal sites may end up getting developed. The fact that the lifting of restrictions is temporary may also have some effect in shifting foward projects that would otherwise have occurred later.

In the short run, however, critics are surely right that the effects are likely to be limited if problems are more to do with demand conditions and the availability of financing.

That said, I find myself increasingly irritated by people pointing to the number of sites with permissions (enough for 400,000 homes we are told) as if this somehow proves that the planning system is not part of the longer term problem. First, many of these sites will be in areas that always had low demand. Remember , the UK planning system is incredibly unresponsive to price signals. So no surprise that these sites aren't being developed now demand has tanked. Second, when those sites are in relatively high demand areas, developers still have strong incentives to hold on to sites, because they know that the long term trajectory of house (and hence land) prices in those areas is upwards. In other words, holding sites becomes more sensible as the gap between current price and future expected price increases. And why do developers expect prices to increase more in the long run? Partly because demand will recover, but partly because the planning system continues to restrict the supply of land in places where demand is highest.

So critics are right that these reforms may do little in the short run. But they are wrong to suggest that the availability of sites with planning permissions somehow suggests that supply is no longer the major issue in the medium to long term.

(More) Planning Rule Reform

So, reports suggest that the government is going to come back and have another go at planning rule reform, possibly to make it easier to 'build on the greenbelt'.

This is clearly risky territory for the coalition. It's widely recognised that the politics are bad, but the economics aren't that great either. Sorting out the supply side of the market is fundamentally important long term, but it won't do much short term unless the government can come up with an effective way to boost demand. Underwriting £10bn of construction might help, although this is only a 25% increases on the £40bn already announced earlier this year. Clearly we are not yet feeling big positive effects from that much larger announcement.

In addition, it's a little depressing, although not necessarily surprising, that the government needs a second take on this so soon after it's previous reforms. There were a number of us who welcomed the direction of the reforms (particularly in providing incentives for local communities to say yes to development) but worried that the supply effects were more likely to be negative than positive - particularly given the decision to maintain so many constraints on development. Indeed, from my post on the NPPF in March this year:

"So much for the positives, what about the things it gets wrong? I think a fundamental problem is that the planning framework is backward not forward looking. We have a growing population and changing industrial structure and yet the draft framework works to limit us to living and working within an urban footprint that we inherited from the 1940s (if not before). This is particularly evident in terms of policy towards the Greenbelt. Towns expand in to cities by building on countryside and merging with outlying towns and villages. We are told that the Greenbelt policy is specifically intended to prevent this. In other words, the urban system we have now is what we have to work with. This severely hampers the ability of our set of cities to adjust to fundamental structural changes. It assumes that growing cities can expand by recycling old land, but many of the places that have strong growth potential are not existing cities, but larger towns. In short it makes the planning system about redevelopment more than new development. I understand the politics behind this (c.f. the natural trust) but the restrictions come at a cost in terms of economic growth."

If reports are true, it will be interesting to see if 'planning reform part II' does any better.

High priced London

According to the Economist, London is (once again) the most expensive city in the world for renting office space.

Business cycle fluctuations aside, no surprises here. As my colleagues Cheshire and Hilber (2008) carefully document, planning restrictions in England impose a 'tax' on office developments that varies from around 250% (of development costs) in Birmingham, to 400-800% in London. In contrast, New York imposes a 'tax' of around 0-50%, Amsterdam around 200% and central Paris around 300%.

Greenbelt 'under threat'

CPRE seem to have received plenty of coverage for their report highlighting a 'renewed threat' to the Greenbelt.

The report identifies projects "amounting to the development of a new town greater than the size of Slough over the next twenty years".

That's not a unit of measurement I find very intuitive. However, the BBC translates this as about 1,000 hectares. The Greenbelt is currently 1,619,835 hectares. So in a twenty year period the plan is to use a little more than half of one percent of Greenbelt land to help manage growth in UK cities. In terms of undeveloped land that's an even smaller percentage (because Greenbelt itself only accounts for around 12% of England).

It does make you wonder how government (local and national) can be expected to plan sensibly for the development of our towns and cities if using such a small area of land leads to accusations that they are betraying promises on the Greenbelt?

Mixed communities

Policy Exchange's proposals for selling off high value social housing to fund new building hasn't proved popular with supporters of mixed communities (similar arguments were made wrt to changes to housing benefits).

Perhaps a useful moment then to remind ourselves that the evidence for the benefits of mixed communities is, shall we say, mixed. In addition, these policies are certainly not costless (even for poorer residents who are supposed to benefit). If you want to read more on the evidence, take a look at our SERC policy paper on the effects of mixed communities.

Urban rail investment: lessons from Beijing

Posted by Wenjie Wu, LSE 

While British politicians argue about infrastructure, Chinese policymakers have been laying it out. Decades of heavy investment in urban transport systems have reshaped the face of most Chinese cities. Between 2000 and 2008 alone, for example, the Beijing city government invested about 52 billion CNY (c. £5.2bn) on new rail transit construction, with a subsequent investment of 105 billion CNY (c. £10bn) in the four years to 2012. 

Even in a mega-city like Beijing, this massive investment ought to have a substantial positive effect on local land values, as well as reducing urban congestion. By improving a city’s 'effectivedensity', new transport links help people become more productive or access amenities, benefits which should cash out in higher land proces, and thus property prices. In the case of London’s Jubilee line, for example, LSE research by Steve Gibbons and Steve Machin found positive effects from building the line to nearby house prices. SERC’s Gabriel Ahlfeldt has similar results for the Docklands Light Railway.

Has Beijing’s transport programme had this positive land market kick? In a new SERCDiscussion Paper, I attempt to find out – the first analysis of this kind I’m aware of for cities in BRICS countries.    

I use a ‘difference-in-difference’ methodology, making use of changes in land parcels’ distance to the network when new stations open, but also anticipatory land price changes that happen when investment plans are published. Also, I’m able to use vacant land parcel data during 1999 and 2009 in the entire urbanised area of Beijing, rather than pre-designed sample areas. I use GIS to construct precise proximity measures, and run a host of other cross-checks.

As expected, I find that new transport systems in Beijing have a big average effect on local land prices. For example, in 2008 a new rail station added 3.75-4.2% on residential land prices, for areas 1-2km from the station. Further away, these proximity effects decay in a possible non-linear trend over space. Importantly, shifts in local land values also vary widely according to local socio-demographic characteristics. For example, the value of proximity to new stations falls as crime rates increases, and rises substantially with employment accessibility and local residents’ median education level.  

Given the huge public investment in the city, the question of who gains is important. Certainly, developers and land-owners benefit from appreciating land values in targeted residential and commercial markets. My results also suggest complementary effects between public investment and private sector investment, as higher levels of economic activity should translate into higher future tax receipts. More speculatively, it suggests that improving local people’s human capital and life chances, alongside physical development, may raise the economic gains to developers.