Where next for the Levelling Up Fund?

Tom Stannard, Chair of the Institute of Economic Development, ponders where next for the Levelling Up Fund

In the early weeks of this year, over 100 projects were awarded a share of £2.1 billion from Round 2 of the government’s Levelling Up Fund (LUF) to create jobs and boost the economy.

Inevitably there were winners and losers, but the announcement provoked discussion about those regions receiving the funding, with ‘North v South’ headlines around the Southeast getting more regeneration money than the North East, Yorkshire and the West Midlands.

Taking a step back, the LUF is worth £4.8 billion across the UK over four years. Of this £1.7 billion was distributed to 105 projects through the first round in autumn 2021. The Round 2 announcement means there is £1 billion left in the fund.

So, where are we with the Levelling Up Fund, and what comes next?

Firstly, against the alarming backdrop of annual government funding to councils falling from £41 billion to £26 billion in 10 years, the LUF has certainly been a welcome key fund for driving capital projects supporting economic development in regions across the country.

It is a partial response to market failure, itself quite common in delivering regeneration especially in deprived areas, but the “viability gap” (support mechanisms which help governments with limited budgetary resources and insufficient capacity deliver much-needed infrastructure and services) is a common conundrum.

Whilst the Levelling Up Fund is far from only about that, in many areas, it contributes to closing this gap on schemes that are generally hard to get off the ground. However, substantial work, time and money has been expended by public and private sector organisations on bids to the LUF.

After more than a decade of suffering year-on-year real declines in funding, local authorities have been forced into a heavy work-intensive process to enter a lottery through which the winners may only receive a fraction of what they have lost.

Bids inevitably involve bought-in consulting support to design and cost the proposed approaches – outgoings that may see little or no return. Additionally, announcements are made after an interminable period when resource is stood down, and now inflation has created a gap between the amount of funding requested and the awards provided.

There is little political capital in announcing steady annual revenues to local government. Still, surely our local and regional communities deserve a steady and considered approach to allocating resources in all of their areas.

The Institute for Economic Development (IED) welcomes the commitment to funding

In general, the Institute for Economic Development (IED) welcomes the commitment to funding following Round 1 and in anticipation of Round 3. Round 2 alone saw over 500 bids, around 400 of which were unsuccessful. Many of these are on key priority areas for government, for example, town centres, job creation, and business incubation.

What is gone is gone, but the balance of projects alone is surely a good indication of what should happen next with the fund. There is a pipeline waiting to be delivered. DHLUC should start here. We should not allow the significant time and fees spent on bidding to date become abortive costs. Thus, the government should certainly consider supporting some of the unsuccessful projects for the £1 billion surplus LUF that remains to be allocated.

Government must consider the philosophy behind the Levelling Up Fund

The government also needs to give thought to the philosophy of LUF. If Levelling Up equals tackling poverty and deprivation, start transparently here and engage localities and regions who in partnership with local private sectors, know these conditions best and know the players involved in getting schemes to happen on the ground.

Hence the IED’s call for an alternative deprivation-based regional allocation approach, allocating the fund relative to regional inequalities and deprivation, starting with combined authorities and LEPs/their successors and leading a more devolved approach to allocations to capital projects with biggest benefits to GVA, sustainable job creation and inclusive growth.

Existential challenges face the sector. The limitations of LUF are driving a massive challenge in the construction sector, for example, one of the biggest contributors to GVA, net zero and job creation. It is also a huge contributor to social value, as the IED’s From the Ground Up – Improving the Delivery of Social Value in Construction report (published in 2020) showed.

But construction is facing twin challenges of the highest levels of insolvency and a burgeoning and alarming workforce mental health crisis with one of the highest levels of suicide in the country. Much of this is driven by the conditions of instability the sector is experiencing.

Whilst LUF is clearly not the only cause of this, protracted funding instability and the micro-competition culture that delays the release of capital to make schemes happen is clearly a major contributory factor. As a result of this the IED will be supporting The Save Construction Initiative, which launched in January, and Round 3 of LUF could make steps to help rectify this if it is intelligently allocated aligned to our priorities.

The stress of closing viability gaps cannot be met by local authorities’ PWLB capital borrowing alone, the risk has to be shared with the government, but on a larger scale with longer-term certainty provided. We should not miss the opportunity to deliver this going forward.

In the spirit of true partnership, the IED is ready and willing to support DHLUC and HM Treasury in designing an appropriate mechanism to achieve this in practice, alongside our objective to reduce unproductive and repetitive micro-competitions over the balance of this important economic development intervention fund.

And, of course, the IED is here to assist economic development professionals in the delivery of Levelling Up Fund projects and, indeed those which have missed out in this round.