Fourth term special 2: Our economic priorities stay the same

Despite the recent global recession, the economic priorities for the new Welsh Government’s fourth term remain remarkably similar to the ones that were highlighted in the IWA’s 2006 publication Time to Deliver prior to the Assembly’s Third Term – or indeed, to many of the economic recommendations made in 1999 at the start of the Welsh Assembly.

In 2006 it was emphasised that the main economic priorities were: (i) investment in infrastructure; and (ii) investment in skills development. To ensure these investments actually stimulated higher economic growth in Wales, they needed to be supplemented by a third element, mobilising business investment in the private sector.

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In 2010 the Economic Renewal debate extended this list to include the abandonment of  the overly bureaucratic business support model, Funding Support for Business (FS4B), in favour of an arms-length, private sector-led, delivery model. It also called for improvements in delivery mechanisms across the public sector and for progress on local procurement.

Unfortunately, these calls for a major re-focus on key economic development priorities in 2006 and 2010 fell on deaf ears. Instead, the Welsh Government proceeded along the path of ‘business as usual’. That is disappointing because the funding package available in 2006 was much more favourable to raising investment levels in these key areas than it is now.  Similarly, although FS4B was abandoned, there have been no moves to create an arms length delivery model.

So in 2011 the economic priorities for Wales remain roughly the same – increase investment in infrastructure and skills, coupled with a focus on raising business investment in the private sector and increasing productivity in both the private and public sectors.

Potentially the biggest economic driver is increased capital investment in transport and the built environment.  But transport has now been taken out of the portfolio of the Department of Business. Indeed, transport does not appear in any ministerial title. With a projected shortfall of 41 per cent in capital spend over the next few years, an important policy option would be to increase the amount of investment raised through public private partnerships (PPPs).

The Business Department could encourage investment in areas which would add specific value to Welsh infrastructure, especially where there is an immediate investment need. Examples include social housing, energy, integrated transport networks and broadband.  In addition, the Severn Barrage and other renewable energy investments offer unique opportunities for PPP schemes in Wales – schemes that would support the move to a low carbon economy.

With limited resources the Business Department could immediately identify areas where new investment will be targeted. These would include enterprise zones and city regions.  The government will need to be quick off the mark on enterprise zones. Bristol and areas near the Welsh Borders are already investing in these new opportunities to stimulate regional growth.  Zones are not a panacea for the Welsh economy but Wales will be at a disadvantage if we ignore this option. Enterprise zones will need to be implemented across a fairly wide geographic area to avoid displacement, that is the problem of firms closing in one part of a city and reinvesting in another part.

To avert this problem the zones could be linked to the development of city-regions. The Department could use enterprise zones to build up the institutional capacity of areas surrounding Cardiff, Newport, Swansea and Wrexham. The Heads of the Valleys region would be a good start. The aim would be to enable these regions to implement wider regional economic strategies in sectors that offer the most opportunities for harnessing economies of scale, such as waste management, integrated transport facilities and housing policy. There could be an important role here for the social enterprise sector in supporting this policy.

The main driver for skills development is the public education system, but again, this is largely outside the remit of the Department for Business. However, the Department could seek to highlight the fact that business issues are not being effectively addressed by schools and colleges. And, outside the traditional education system, the Business Minister should be seeking to raise investment in work-based learning. Firms that invest in upskilling their workforce should be given priority in accessing other areas of business support, such as soft loans and consultancy support.

A related area would be the development of a pool of business mentors. As Sir Terry Matthews stated recently, “Seasoned business people need to get involved in young companies and help them be successful”. The new Department for Business should be building links with Welsh entrepreneurial talent aged 30 and over, and involving them in business support networks. The focus should be on mobilising entrepreneurship and supporting our young companies.

A crucial business skill that really needs honing is finance. New and existing businesses in Wales should be supported to become ‘investor ready’ through being in a position to successfully apply for loans and equity finance to assist business growth. The demand and supply of finance is critical and this brings us to the final pillar of any growth programme – private sector investment.

Although there are few policy levers available in this area there are some important things the Department of Business needs to do.  The first is to stick to a broad sectoral strategy. Certain technology areas, such as IT, biotechnology, and environmental services, are likely to experience higher growth rates than the mainstream economy. Tourism is also an important sector in Wales and, along with the strong creative sector, has a major role to play in the design, marketing and branding of successful products. The Business Department could be radical here and support business clusters by promoting the privatisation of Finance Wales and tasking it with improving the supply of seed capital in these targeted sectors.

A dynamic and expanded role for Finance Wales will be a critical driver for business growth. Finance Wales has become one of the success stories of government intervention. But first it needs to become more proactive in developing a Venture Capital Trust and better at matching fledgling companies to specialist funding houses. It should be tasked with coordinating regular investor road-shows of Welsh companies in the major financial centres. The benefits of a spin-out for Finance Wales would be to reduce the chances of political interference. It would also incentivise the partners to produce sustainable returns on investment.

One very important low-cost action to raise business growth would be for the Business Minister Edwina Hart to reduce red tape by introducing a more flexible, risk-based approach to regulation. That is, well-behaved firms should be inspected less often than those which have a record of breaking the rules. She could also announce that, where the issue is devolved, she will not introduce any new regulation – whether from Cardiff, Whitehall or Brussels – until her Department has identified and abolished an existing directive. There is scope for this approach to be fast-tracked in any new Enterprise Zones. Successful businesses in Wales can then invest more time and resource into finding, winning and keeping customers – which should be the main objective of the new Department for Business.

In addition to business investment, infrastructure and skills, the other important ingredient of productivity growth is innovation. This requires investment in skills or new processes that streamline and simplify production systems and encourage the adoption of new techniques. Greater use of innovation vouchers would be a useful start for raising productivity in the private sector and improving competitiveness.  In addition, the positive spillovers from inward investment can be an important source of competitive advantage and increased productivity in the host country.  So a successful strategy to attract global investors to Wales will be a necessary component for raising the growth rate. Poor performance in this area since 2004 suggests that an arms length delivery model will be needed to implement this strategy successfully. The Business Department could focus on working closely with this institution to maximise the economic impact of inward investment by promoting local sourcing and embedding the inward investor into the local economy.

Finally, public service reform will be a vital ingredient to ensure that economic priorities are delivered during the fourth term. To this end, reducing the risk averse nature of the civil servants in her Department and placing an emphasis on timely decision making would help raise productivity across the public sector.  These changes would also help the Department to become better at using procurement to foster sustainable growth and increase investment in the private sector, especially in terms of green public procurement.

Despite some successful policies like ProAct, the experience of the first three terms of devolved government highlights how difficult it is to raise GVA per head in Wales relative to the UK average. The productivity gap is a key component of the shortfall in prosperity, but imaginative policies exist to address it. During the fourth term, economic policy should focus on providing the skills and financial resources that businesses need to become more competitive and expand.  It should further support business growth by targeting investment in hard and soft infrastructure through enterprise zones and city regions.

However, many of the economic challenges facing Wales will continue far beyond the next term and initiatives to improve infrastructure, raise skills and boost business investment will take time to impact on the economy.  Therefore it is important that the Minister takes a long term view and invests for the future – and not simply focuses on issues that will influence the next election.