Wainwright:JSC page.qxd 10/01/2012 14:49 Page 124                                     Enterprise Zones: Do they create    ...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 125                                                                         ...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 126          Wainwright                                     The concept of c...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 127                                                                         ...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 128          Wainwright                                 Table 2:   New Enter...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 129                                                                         ...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 130          Wainwright                                  58,000 of those job...
Wainwright:JSC page.qxd 10/01/2012 14:49 Page 131                                                                         ...
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Enterprise zones do they create or transfer value


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This recently published article considers whether any lessons have been learnt from the Enterprise Zones of the 1980s and whether providing economic stimuli creates, distorts or simply transfers value.

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Enterprise zones do they create or transfer value

  1. 1. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 124 Enterprise Zones: Do they create or transfer value? Received: 17th October, 2011 Simon Wainwright is a graduate of the University of Reading and a Fellow of the Royal Institution of Chartered Surveyors; he has more than 30 years’ experience in private practice in the UK and specialises in property investment, development and appraisal. His practice, J Peiser Wainwright has advised Canary Wharf Group and Land Securities on major regeneration projects with a combined value in excess of £2bn; he has also undertaken investment transactions in Enterprise Zones throughout the UK. Abstract This paper considers whether any lessons have been learnt from the Enterprise Zones (EZs) of the 1980s and whether providing economic stimuli creates, distorts or simply transfers value. Key issues include: — How do the 2011 EZs differ from their 1980s predecessors? — Land value as a residual, determined by the economic activity that can take place on a plot of land; therefore bestowing economic advantages selectively will distort land values. — Enterprise Zones will undoubtedly cause the displacement of existing jobs to more economically marginal areas. — Previous attempts at creating areas which enjoy economic advantages include Regional Development Agencies and Freeports; this paper examines what lessons, if any, can be learned from these that could be applied to EZs. — Could EZ benefits be applied across the entire UK? — The benefits of the 1980s EZs were largely captured by property and land owners rather than local businesses; who will receive the benefits from the current generation of EZs? — Jobs are as likely to be generated in the retail sector as the manufacturing sector; does this matter? — The success of the London Docklands Enterprise Zone can largely be attributed to improved transport infrastructure; such transport proposals are missing from the current proposals. Keywords: Enterprise Zones, value, advantages, Canary Wharf, Merry Hill, Freeport, Docklands, business rates, investment, jobs, infrastructure Enterprise Zones (EZs) were first economically successful British Crown Simon Wainwright introduced into the UK in the 1980s with Colony of Hong Kong. Some 30 years J. Peiser Wainwright, 20 King Street, the objective of creating designated later, the British Government has London EC2V 8EG, UK economic areas which were free of tax, reintroduced the same concept, but what Tel: +44 (0)20 7776 2930 regulation and constraints, where dynamic lessons have been learned from the earlier Fax: +44 (0)20 7776 2931 e-mail: info@jpeiser businesses could grow and flourish; the experiences, and what can be done to wainwright.com concept was modelled on the ensure that new jobs are created rather 124 Journal of Urban Regeneration and Renewal Vol. 5, 2, 124–131 ᭧ Henry Stewart Publications 1752-9638 (2012)
  2. 2. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 125 Enterprise Zones than simply transferred from neighbouring inferred that both rent and land values are areas? a residual sum, determined by the value The original 1980s EZs bestowed a that can be generated from one plot of wide range of economic and political land in comparison with the value that advantages on the businesses that located can be generated from another plot of in these designated areas; these included: land, taking into account the relative costs of production and transport between two — exemption from business rates (local locations, all other factors being equal. taxation) for commercial and industrial A practical example of this can be seen property in retail rents, where high street shops in — 100 per cent allowance for corporation the prime pitch command a higher rent and income tax purposes for capital than identically sized shops in a more expenditure on industrial and secondary location, as a result of the commercial construction additional revenue that can be generated — exemption from Development Land Tax from the relative differences in footfall and (since abolished) turnover. Today, many other factors also — a simplified planning regime where influence the differential in land values, planning permission was not required including differences in the specification for developments conforming with the of buildings erected on the land, user EZ published plan constraints (either legal or planning), — assisted HM Customs’ procedures technological advances, infrastructure, — a reduction in government requests for energy costs and business rates (local tax). statistical information It follows that if one takes two identical — Industrial Training Board levies did not and adjacent plots of land and bestows apply economic advantages on one but not the — prioritised telecommunication facilities. other, a difference will arise in both the rental and capital value of the two land The benefits were limited to a period of plots as a direct consequence. Occupiers only ten years, and they were designed to will be prepared to pay a higher rent on the stimulate economic growth and create parcel of land enjoying the economic new jobs: some worked spectacularly, benefits than for the same land without the while others did not. In March 2011, the benefits, on the basis that it is capable of British Government announced that a generating additional profits. The question further 21 new EZs would be created, but then arises as to whom this economic is it wishful thinking to assume that they advantage should accrue: the landowner in will emulate the success seen in the the form of additional rent, the occupier in London Docklands? The current debate is the form of additional profit or the whether EZs create economic growth or government in the form of additional distort the market by simply transferring taxation. In EZs, the objective has been for value from neighbouring areas. the advantage to accrue initially to the Ricardo formulated his ‘Law of rent’1 in occupier in the form of additional profit, in 1809; this states that the rent of a plot of order to stimulate economic development, land is equal to the economic advantage growth and the creation of new jobs; in obtained by using the land in its most practice, this has not always been the case, productive way, relative to the advantage as was seen with the dramatic rise in rents obtained by using marginal land for the and land values in the London Docklands same purpose, given the same inputs of in the 1980s, benefiting the landowner labour and capital. From this it can be rather than the occupier. ᭧ Henry Stewart Publications 1752-9638 (2012) Vol. 5, 2, 124–131 Journal of Urban Regeneration and Renewal 125
  3. 3. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 126 Wainwright The concept of creating economic The Queenborough property included a zones enjoying financial advantages and substantial area of open land used for subsidies is not new in the UK, and many storage which was directly comparable other policies have been used to try to with the open land used for storage in stimulate the creation of new jobs and Sheerness Docks; this is a good example growth: examples include Regional Aid of the differential in rent and land values such as that provided by the Welsh that can occur between two adjacent land Development Agency which, for a 30-year plots where one enjoys financial period from 1976 until 2006, tried to advantages. The rental differential between stimulate business development and these two comparable properties was inward investment into Wales. The success significant, with the rent on the property of the agency in attracting inward in Queenborough being sufficiently investment was recently the subject of a discounted to persuade Mazda to remain Commons Select Committee Inquiry,2 outside the Freeport area, despite the where the experience with LG Electronics financial advantages enjoyed by occupiers was re-examined. The Committee report within the Freeport area of Sheerness details the development of a new factory Docks. for the Korean company LG Electronics The new 2011 EZs will offer occupiers in Newport, Wales, which should have the following economic advantages: created 6,000 jobs when it was announced in 1996, being hailed the largest single — business rate discount worth up to inward investment in Europe. In reality it £275,000 per business over a five-year created fewer than 3,000 jobs at a cost of period £131m to Welsh public bodies, although — all business rates growth within the some £71m was subsequently clawed zone to be retained in the local area to back when it closed in 2003, leaving the support local reinvestment, for a period taxpayer with a net cost of £60m. LG of at least 25 years Electronics then moved production to a — government assistance to develop plant in Poland, which subsequently simplified planning approaches for the closed; production has now been moved EZ to China. — government support to ensure that Freeports are another example of areas superfast broadband is rolled out enjoying special economic advantages, throughout the zone, by use of public including deferment of HM Customs’ funding if necessary duties, EU levies and VAT on imported — enhanced capital allowances for plant goods. In the late 1990s, J Peiser and machinery investment to a limited Wainwright sold an industrial property number of EZs in Assisted Areas. investment in Queenborough, Sheerness, Kent; the property was leased to Mazda In announcing the new EZs (see Tables 1 and consisted of land and buildings used and 2), Prime Minister David Cameron to receive and store imported cars from said: ‘We are determined to do everything Japan, to de-wax, repair and prepare the we can to make Britain the best place in vehicles before onward shipment to the world to start and grow a business.’3 dealers. The rental value of the Mazda By confining these economic advantages property at Queenborough stood at a to a limited number of EZs though, they substantial disadvantage to adjacent are bound to divert business from the properties within the adjacent Sheerness surrounding areas to these more Docks which enjoyed ‘Freeport’ status. economically marginal areas. It is clear 126 Journal of Urban Regeneration and Renewal Vol. 5, 2, 124–131 ᭧ Henry Stewart Publications 1752-9638 (2012)
  4. 4. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 127 Enterprise Zones Table 1: New Enterprise Zones (England) Enterprise Zone Location Hectares 1 Boots Campus Nottingham 40 2 Liverpool Waters Liverpool 60 3 Royal Docks London 122 4 Leeds City Region Leeds 142 5 Greater Manchester Manchester 150 6 Sheffield City Region Sheffield 168 7 Birmingham and Solihull Birmingham 68 8 Temple Quarter Bristol 70 9 Rotherwas Hereford 61 10 Northampton Waterside South East Midlands 120 11 Newquay Aerohub Cornwall & Isles of Scilly 55 12 Alconbury Airfield Huntingdon 150 13 Great Yarmouth & Lowestoft East Anglia 121 14 Daresbury Warrington & Runcorn 28 15 Humber Waterside Kingston-upon-Hull 375 16 Sandwich & West Essex Harlow 99 17 Science Vale Oxfordshire 92 18 MIRA Technology Park Hinckley, Leicestershire 87 19 Solent Daedalus Airfield, Gosport 82 20 North Eastern Newcastle 117 21 Black Country Black Country/Stoke-on-Trent 120 22 Tees Valley Tees Valley 170 Total 2,497 that there are no guarantees that the jobs commenced on the site of the former created in EZs will be new jobs rather Round Oak Steelworks (the reason for the than jobs which are merely transferred for original EZ designation) with an office economic advantage; there can also be no and business park known as the Waterfront guarantees in what sectors of the economy development, which created 3,000 jobs. these jobs will be. By 2008, many companies had vacated the An example of this point can be seen Waterfront business park leaving high today at Merry Hill Shopping Centre, vacancy levels and, by June 2011, the area Dudley West Midlands, which is the fourth was again applying for EZ status. largest shopping centre in the UK. The When Merry Hill Shopping Centre site on which Merry Hill is constructed opened, a number of national multiple comprised the former Round Oak retailers, including Marks & Spencer, C&A Steelworks, which closed after 125 years, and Littlewoods, closed shops in the and the adjacent land at Merry Hill farm. surrounding towns and opened in the new It was thought that the designation of the shopping centre. Surrounding towns such entire site as an EZ in the 1980s would as Dudley were turned into ghost towns as stimulate manufacturers to move into the a consequence, with dramatic falls in both area and construct new industrial units rental and capital values of commercial and stimulate growth. Richardson property. Developments acquired the site and, Another example as to how the original against local opposition, started the EZs did not quite evolve as they were construction of retail units on the Merry originally anticipated is Canary Wharf Hill farm site in 1984. The project where the industrial units at Heron Quays commenced trading in 1985 and was West (constructed in 1984) sit in sharp subsequently expanded, with further contrast to the adjacent 60-storey office phases being added on the site of the old tower at 1 Canada Square (constructed in farm. In 1989, construction finally 1987). For the last decade J Peiser ᭧ Henry Stewart Publications 1752-9638 (2012) Vol. 5, 2, 124–131 Journal of Urban Regeneration and Renewal 127
  5. 5. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 128 Wainwright Table 2: New Enterprise Zones (Wales) Docklands Enterprise Zone enjoyed in Enterprise Zone Industry terms of occupier costs. Today, in contrast, 1 Anglesey Energy Docklands office rents are at only a 2 Cardiff Central Financial services modest discount to City of London office 3 Deeside Advanced manufacturing rents. 4 Ebbw Vale Automotive 5 St Athan Aerospace Against this background, the new EZs of 2011 have been fashioned in order to try to avoid some of the distortions seen in the 1980s EZs. The stated purpose of Wainwright has acted on behalf of Canary the new EZs is to create new businesses Wharf Group in reassembling the Heron and jobs. Just like the original Docklands Quays West site through the acquisition of Enterprise Zone, the aim is to stimulate the industrial units, which now benefits the development of smaller industrial from a planning consent for a 195,000 units, but as both Docklands and Merry square metre (2,100,000 square foot) Hill demonstrate, ‘the law of unexpected office skyscraper. consequences’ sometimes takes In the case of Canary Wharf offices, it precedence. has been assumed that the jobs created If the benefits bestowed by EZs were being diverted from the City of stimulate new business activity and are London, but were they? In 1984, the beneficial for the economy, it could be planning authority in the City of London asked why are the economic advantages was not focused on growth; projects such confined exclusively to EZs, and why are as Lord Palumbo’s plan to build a Mies they not made available to all businesses van der Rohe tower on the site of the across the UK? The idea of a National former Mappin & Webb store at No. 1 Enterprise Zone was proposed by the Poultry were the subject of lengthy legal British Chamber of Commerce in a and planning challenges. Against such a recent article in the Sunday Times.4 It is background, it was not possible for the ironic that the announcement of the new City of London to accommodate an EZs in March 2011 comes at exactly the occupier seeking a 93,000 square metre time when Industrial Building Allowances, (1,000,000 square foot) plus headquarters another form of economic stimulus at that time, and it is arguable that, available nationally throughout the UK, without the office developments of this were finally withdrawn in April 2011. The size at Canary Wharf, such investment conclusion can therefore be reached that could well have been attracted to world the true objective of the new EZs is to act class cities outside the UK. Those who as a catalyst for change, to stimulate invested in the original Canary Wharf sites development in economically marginalised have seen exponential growth in the value areas, even if it is at the expense of of their property as a result of the success employment in surrounding areas. of the EZ; in many cases, such gains were This point has now been openly multiplied again by the planning admitted: in October 2011 at the relaxation in permitted changes of use Conservative Party conference, when from Class B1 (industrial) to Class B1 Business and Enterprise Minister Mark (office) use and by the installation of Prisk confirmed that it was ‘inevitable’ that mezzanine floors within the original the new EZs will cause the displacement industrial units, which did not require of some businesses. The minister said that planning consent. Table 3 highlights the he hoped the impact could be minimised relative advantage that the London by allowing Local Enterprise Partnerships 128 Journal of Urban Regeneration and Renewal Vol. 5, 2, 124–131 ᭧ Henry Stewart Publications 1752-9638 (2012)
  6. 6. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 129 Enterprise Zones Table 3: Office occupancy cost comparison, March 1983 Rent (£/sq ft) Rates (£/sq ft) Total (£/sq ft) City of London 26.00 15.30 41.30 Westminster 19.00 10.70 29.70 Reading 12.00 2.90 14.90 Croydon 11.00 3.85 14.85 Crawley 8.00 2.30 10.30 Milton Keynes 7.00 1.55 8.55 Docklands 6.36 0.00 6.39 Source: London Docklands Development Corporation. (LEPs) to retain uplifts in business rates to of the country by providing a be reinvested wherever they chose, which medium-term benefit to owners, occupiers would amount to a form of ‘tax increment and investors. The discount offered on financing’. business rates is now limited by European In trying to attract inward investment Union state aid law to £55,000 a year per into the UK, one of the relative firm, which equates to a maximum unit disadvantages that this country suffers from size of approximately 1,000 square metres is the high price of land suitable for (11,000 square feet), which should avoid industrial and logistics use relative to other instances of large multinational countries. This has arisen, in part, due to corporations such as LG Electronics taking supply constraints imposed by the excessive advantage of the concessions for planning system which EZs offer to short-term gain. remove and simplify. High land prices But in terms of land use control, it is combined with the higher cost of fuel for here that the usual controls imposed transporting goods, higher minimum wage through the planning system are being costs and higher taxation make the UK a relaxed. In many cases, the land contained less competitive place to do business and in the new EZs is in single ownership, serve to drive up the price of the goods such as LEPs, and it is thus possible for manufactured, imported, bought and sold, some measure of land use control to take relative to those from foreign markets. place through legal restrictions rather than The UK is certainly not alone in the through a more relaxed planning system. A global competition to attract inward public sector landlord is also more likely investment and does not have a monopoly to set affordable rental levels in order to on the economic benefits offered in EZs. attract the right type of occupiers rather A visit to the MIPIM annual property than pursue an open market imperative to conference and exhibition in France will achieve the highest level of rent at all reveal the significant number of countries costs, which could limit the type of uses seeking to attract inward investment by and could negate the advantage from the offering packages of tax breaks and economic concessions. benefits in designated ‘special economic If any lessons from the past are to be zones’. learned, there are three studies of the So what is different about the new EZs, success of the 1980s EZs that are worth and why will they attract new businesses? reviewing. A 1995 study5 found that there Well by placing a cap on the total amount were over 5,000 companies within the 22 of business rates discount, current policies EZs by 1990, employing 126,000 people; do seem designed to stimulate smaller after allowing for deadweight and businesses in economically deprived areas displacement, it was estimated that only ᭧ Henry Stewart Publications 1752-9638 (2012) Vol. 5, 2, 124–131 Journal of Urban Regeneration and Renewal 129
  7. 7. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 130 Wainwright 58,000 of those jobs (46 per cent) were investors simply attempt to take advantage additional to those which would of the available tax allowances and reliefs. otherwise have been created in the local As can be seen from the three studies areas, and that 54 per cent of those jobs identified in this paper, many of the jobs were displaced or ‘deadweight’. The created in the 1980s EZs were simply additional jobs were highest among the being transferred from elsewhere; there is manufacturing sector and lowest among no reason why this will not happen again the retail and logistics sectors. with the latest generation of EZs. The Work Foundation’s study6 shows With relaxations in planning controls, that, between 1981 and 1986, some there also seems little to direct the sectors 63,300 jobs were created in the 1980s of the economy in which development EZs, but of these only 13,000 were will take place, and occupiers are as likely actually new jobs. The report concludes to be car showrooms and retail outlets as that in the London Docklands Enterprise they are to be manufacturing businesses: if Zone, the Docklands Light Railway was this stimulates employment and growth in the main catalyst for the increase in these designated areas, it is a value employment within the zone, from 7,000 judgment as to whether or not this is people initially to 90,000 people today, significant. with 80 per cent of the jobs created being If EZs are seen as a panacea for current displaced from elsewhere. economic ills, the question remains, why The study ‘What would Maggie do?’7 confine these financial advantages to EZs, concludes that the 1980s EZs and why not make them available across the UK, ie why not re-create the — did regenerate some areas of dereliction conditions that caused Hong Kong to be — did not deliver a high number of such a spectacular economic success on a additional jobs national basis? The answer is that the — cost the public sector £26,000 current economic environment is such (inflation adjusted) for each job created that the country cannot afford the loss of — moved jobs to areas of low productivity tax revenue that this would cause. Both which was not beneficial to the labour wage rates and working conditions national economy combined with current health and safety — most importantly, captured most of the legislation already imposes a high cost benefits for the property owners rather burden whereby the country simply than local businesses. cannot compete on equal terms with China in manufacturing industries. If the The report concludes that government EZ advantages were available on a national should introduce a new area-based basis, they would also fail to stimulate strategy focusing on investment in people, development in the more economically skills and business growth, termed ‘Local marginalised areas of the UK, with Growth Zones’. investors preferring to consolidate investment in the most prosperous regions. CONCLUSIONS Another benefit of the proposal to Without full regard to the issues of land create the new EZs is that they constitute ownership and control, the designation of a low-cost solution for the public sector. EZ status will undoubtedly result in a The principal public sector cost is the transfer of value from the surrounding reduction in tax revenue that will be area as existing businesses, occupiers and experienced over a ten-year period, but 130 Journal of Urban Regeneration and Renewal Vol. 5, 2, 124–131 ᭧ Henry Stewart Publications 1752-9638 (2012)
  8. 8. Wainwright:JSC page.qxd 10/01/2012 14:49 Page 131 Enterprise Zones this should be paid back from tax revenue the commitment to roll out superfast after the business rates moratorium ends. It broadband in the new EZs, but other is the promise to retain the business rates infrastructure investment will be required if growth in the local area to support local any of these areas are to be a long-term reinvestment for a period of at least 25 success.Yet, if nothing else, the new EZs years that is causing the most interest: should help kick-start regeneration in effectively this is a form of ‘Tax Increment some economical marginalised and Finance’ that is being promoted by the disadvantaged areas of the UK. government, and the proposals to promote Tax Increment Finance schemes will not References and Notes be confined to EZs. 1. Ricardo, D. (1996), ‘On the principles of political economy and taxation’, Chap. 2, Prometheus Looking back on the success of Canary Books, New York, NY. Wharf, one should not forget the 2. Corrected transcript of oral evidence HC 854-V roller-coaster ride of boom and bust to get taken before the Welsh Affairs Committee on to where it is today. In reality and as Tuesday 14th June, 2011. 3. London Evening Standard (2011) ‘Government correctly identified in the Work reveals new “enterprise zones”’, news report, 17th Foundation report, it was the sizeable August, available at http://www.thisis infrastructure investment made through the london.co.uk/standard-business/article-23978798- government-reveals-new-enterprise-zones.do (last Docklands Light Railway and later through accessed on 6th December, 2011). the Jubilee line underground extension 4. Sunday Times (Business), (2011), p. 5, 25th that really put the Docklands Enterprise September. 5. Department of the Environment and Cambridge Zone on the map. It is therefore apparent Economic Consultants Richard Ellis and Gillespies that capital expenditure in the form of (1995), ‘Final evaluation of enterprise zones’. public sector infrastructure investment is 6. Sissons, A. and Brown, C. (2011), ‘Do Enterprise what is really required to stimulate Zones work? An Ideopolis policy paper’, March, The Work Foundation, London. development activity in economically 7. Larkin, K. and Wilcox, Z. (2011), ‘What would marginal areas. This is in part recognised by Maggie do?’, Centre for Cities, London. ᭧ Henry Stewart Publications 1752-9638 (2012) Vol. 5, 2, 124–131 Journal of Urban Regeneration and Renewal 131