In the third of a series of articles looking at how Brexit is working out for the UK, we consider the geographic impact and how that might affect future decisions by businesses to invest in the UK.
Where to invest: the geographic impact of Brexit
Directing money to the right places
The UK Government's "levelling up" agenda is about trying to boost economic activity in areas of the UK where investment has historically been lower. Aside from freeports (see section 2), two of the most significant initiatives intended to direct funding to these areas are the Levelling Up Fund and the Towns Fund, which are discussed further below.
The Levelling Up Fund
The Levelling Up Fund applies to the whole of the UK and will provide £4.8 billion of funding for new infrastructure, focussing on transport, regeneration and town centre investment and cultural investment (including visitor attractions). Specific awards have yet to be confirmed but priority will be given to bids from local authority areas deemed to be in greatest need. These are shown on the interactive map below.
The Towns Fund
The Towns Fund provides £3.6 billion to support deprived towns (this fund is for England only), focussing on urban regeneration together with improved skills and enterprise infrastructure and transport links. As at March 2021, 45 towns have had their funding confirmed; these are shown on the interactive map below. This follows on from the £2.45 billion Transforming Cities Fund launched in 2018, although that initiative was narrower in scope, focussing solely on transport.
Update 16 July 2021: since this article was written, the Government has confirmed finance under the Towns Fund for 101 towns; the interactive map below has been updated to reflect this.
UK Shared Prosperity Fund
Following the UK's withdrawal from the EU, the Government will also need to decide how to replace EU structural funding (averaging about £2.1 billion per year), once it tails off after 2022-23. This will be done via a UK Shared Prosperity Fund expected to launch in 2022 with a projected budget of £1.5 billion per year, which will sit alongside the Levelling Up Fund and invest in skills, enterprise and employment.
Both the Levelling Up Fund and the Towns Fund envisage bids from local government, not businesses. However, businesses are likely to benefit, for example through being contracted to implement regeneration projects or as a result of improved transport infrastructure. The UK Shared Prosperity Fund, by contrast, may include provision for support to be provided direct to businesses, particularly in the form of grants to SMEs. Such businesses will, however, need to consider carefully whether any such grants could be unlawful state aid.
The Government's White Paper "Planning for the Future" launched in August 2020 makes far reaching proposals to reform the existing planning system. It is hoped that these will make it easier and quicker to approve new developments, particularly (but not exclusively) in areas where the Government is keen to either boost economic activity (in support of its "levelling up" agenda) or to encourage higher levels of house-building. The White Paper contains the following main elements:
- local Plans to identity areas for Growth, Renewal and Protection in each Local Authority area (with presumptions in favour of sustainable development in Growth and Renewal areas);
- with regard to housing development, setting a national target of 300,000 homes with binding targets for each Local Authority;
- a new national Model Design Code to set standards for development, including green standards for buildings;
- replacement of existing planning obligations (s.106) and Community Infrastructure Levy with a new fixed rate levy set at local level based on the final value of the development;
These objectives are aimed at streamlining the decision making process and reducing the amount of negotiation and therefore uncertainty in respect of planning obligations and financial contributions attaching to individual planning consents. Local Authorities will be required to increase speed and efficiency of decision making and will have greater powers of enforcement. The identification of Growth, Renewal and Protection areas will not automatically grant consent in Growth and Renewal areas or completely ban development in Protection areas. However, it gives weight to the presumption in favour of sustainable development in Growth and Renewal areas and the need for restraint in Protection areas.
As part of the Budget earlier this year, the UK Government confirmed its plans to proceed with the establishment of 10 new freeports in different parts of the UK. Freeports are enterprise zones based around one or more transport hubs which offer some business benefits not available elsewhere (these include customs, planning and tax advantages and access to seed capital funding). As such, they may be attractive to certain businesses, particularly those involved in manufacturing, processing and logistics/distribution of goods imported from the rest of the world. The locations of the 8 freeports announced so far are shown on the interactive map below.
The UK Government views freeports as part of its levelling up initiative, through which it aims to boost economic activity in areas of the UK which have historically received lower levels of investment. This is broadly reflected in the list of 8 sites announced so far, which are: East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames. Two further freeports are also envisaged for Scotland and Wales, although the locations have yet to be announced (as this is a matter for the devolved administrations in those countries). That said, businesses interested in establishing within one of the new freeports may need to consider whether they could be in receipt of unlawful state aid (which, in a worst case scenario, they could be ordered to repay following a successful court challenge).
As we explained in our December 2020 briefing on ports, distribution and manufacturing, Brexit also has the potential to redraw the distribution map of the UK. In particular, it is likely to lead to:
- a shift away from roll-on roll-off traffic concentrated on the Channel ports towards unaccompanied containers using a wider range of UK ports; and
- a shift towards more imports arriving in bulk from non-EU countries (rather than in containers), again using a wider range of UK ports, not just the Channel ports.
Both these trends have the potential to create demand for new activity in areas within reasonably easy reach of ports of arrival. For example, products arriving in bulk may require additional storage and processing facilities.
Northern Ireland might be seen as offering opportunities for businesses wishing to supply goods to both the EU and UK markets, given that it is effectively treated as within the EU Single Market for the purposes of goods. A manufacturer based in Northern Ireland could potentially avoid much of the red tape which now faces manufacturers based elsewhere in the UK when exporting to the EU. However, that status is conditional on the existing arrangements in the Northern Ireland Protocol remaining in place. They are already the subject of considerable unhappiness in the Unionist community and consent must be given every 4 years to their continuation by a simple majority of Northern Ireland assembly members. This creates uncertainty which may undermine the attraction of Northern Ireland's "special status" when it comes to trade in goods within the EU Single Market and the UK Internal Market, particularly as regards longer term investments
When it comes to investing in Scotland and Wales, businesses might take comfort from the UK Internal Market Act 2020, which provides that goods or services produced anywhere in the UK must be permitted to be sold anywhere in the UK – subject to a relatively narrow range of exceptions. As pointed out by a number of commentators, such as Professor Stephen Weatherill, the practical effect of this is to severely limit the scope for devolved administrations to regulate goods and services in a way that is appreciably different from the rules that apply in England – because if they were to do that, businesses based in Scotland or Wales would probably be at a competitive disadvantage compared with more lightly regulated businesses in England. However, as Professor Weatherill and others also point out, this approach is likely to foster resentment of England as the dominant country in the United Kingdom, undermining the existing devolution settlements – and encouraging calls for independence (which in the case of Scotland, could result in the erection of barriers to trade with the rest of the UK, just as Brexit has done between the UK and the EU).
The UK Government will no doubt be hoping that the impact of the changes discussed in this briefing will be to increase the UK's economic growth overall. This may be challenging to achieve because any gains will first need to make up for the loss of trade benefits arising from the UK's withdrawal from the EU. However, it is not the only measure of success.
The vote to the leave the EU has been seen by many commentators as driven partly by voter discontent with unequal distribution of economic gains between different regions of the UK (with the South East and urban centres being perceived as benefitting at the expense of other regions).
The changes discussed in this briefing may help to regenerate areas which have historically suffered from lower levels of investment. This in turn could go some way towards addressing concerns about regional inequality. A key test will be whether this can occur through the establishment of new economic activity, as opposed to displacement of existing activity from more prosperous regions of the UK to less prosperous ones – in which case, "levelling up" for one area could result in "levelling down" for others.
Is the UK Government more willing to subsidise business than in the past?
As outlined in section 1, the UK Government has clearly earmarked substantial sums for investment in "levelling up" – but much of this is being directed at local authorities (although businesses may well stand to benefit either indirectly or in the form of public contracts to provide new infrastructure or services). Meanwhile the proposed £1.5 billion annual funding for the UK Shared Prosperity Fund – which is more likely to offer subsidies direct to business – appears to be below the historic level of the EU structural funds (over £2 billion) which it is designed to replace. The recently announced Subsidy Control Bill also sets out a regime which, though somewhat more permissive than the EU's state aid rules, effectively starts from the premise that subsidies need to be allocated in a manner which avoids or at least minimises market distortions. All these points suggest that, although the UK Government appears to be comfortable with higher levels of public spending than in the recent past, it has not radically changed its view on the desirability of large subsidies to the private sector.
As regards "levelling up", it is also worth noting that the Subsidy Control Bill contains provisions designed to deter aid directed primarily at relocation from one area of the UK to another (see textbox above). This suggests that the UK Government is alive to the potential displacement effect of its policies – although it remains to be seen whether its desire to demonstrate progress in "levelling up" will take precedence over its concern to avoid "levelling down" elsewhere.