by Alastair Balls [*]
Alastair Balls is a former Senior Economic Adviser to HM Treasury and former Northern Region Director for the Departments of Environment and of Transport. Most recently his main involvement in the economic and social regeneration of the North East has been in the setting up of the Centre for Life in Newcastle which brings together scientists, clinicians and educationalists to promote the advancement of science and life sciences in particular and inspire people of all ages, to explore how they can help to tackle the big issues which face us all.
The North East over the last decade had the highest unemployment in the UK, the lowest employment rate and the lowest growth. More recently, at the end of October 2020, the North East region again had the highest unemployment rate in the UK (6.6%), and the lowest employment rate (71.8%). Unemployment in the 18-24 age group was at 10.5%. All these figures will be affected by Covid-19 and the impact of Brexit . For instance if 50% of those furloughed fail to get their jobs back it could push unemployment in some groups to 20%, a figure never experienced in modern times.
All this is compounded by a raft of data on social conditions in the region – from health, to housing, to social care – and major infrastructure deficiencies influencing the ability to match average economic performance in the UK. And many other disturbing statistics relating to educational attainment, skills, business start-ups, innovation, productivity and capital investment; all impacting on economic performance. In simple terms the North East has a low value-added economy unfit to meet the challenges and opportunities in the future.
There is a need to look to the long-term – what people will be doing and where and what infrastructure will be needed to make the regional economy successful by 2040: success being measured by a regional growth rate at least at the national average. There are a number of key challenges facing the North East which must be resolved if the region aims to be a winning region by 2040; they center around education, infrastructure and enterprise. This future however is dependent on getting some very basic challenges identified and resolved immediately.
Developing a quality of provision of education and technical training (5-25) which will bear international comparison.
In attempting to bridge the productivity gap, the North East is starting from a very low base: its current skill mix is more suited to a low value-added economy than a high value-added one. Skills in the work place are partly a result of the employment mix in the North East (many sectors requiring low level skills) and also reflect the poor performance at school level. There have been improvements in recent years but the proportion of 16 year-olds securing 5As or better at GCSE level is still only 14% compared with 20% in Greater London. Fewer people study for A levels in the North East and grades are worse than anywhere else in the country. In 2015 just one A level student in the Tyne and Wear area achieved an ‘A’ grade in computer science. In the critical 18/19 years old group there are twice as many NEETS (young people not in education, employment or training) as there are apprentices and for every seven 18/19 year olds who go on to higher education nationally only six do so in the North East. In the workplace, only 30% of employees have high level skills (Level 4+) compared with the national average of 36%.
There needs to be a significant shift in performance at school level but, perhaps more importantly, a shift in attitudes in our local communities is badly needed. In too many places there is a chronic lack of aspiration. Not only local communities but businesses do need to understand how the existing educational and skills deficiencies are holding back regional growth and productivity gains. As one indicator, in 2015 GVA per hour in the North East was 88 against a national average index of 100 and the South East recorded 109: every hour of work in the North East produces 12% less output than the national average. There is quite a lot of catching up to do. This will not happen overnight, but the commitment needs to be made now.
The majority of employees in the North East work in the low value-added economy; these are frequently individuals with a low level of skills, often tied to a particular community, generally not mobile and with few opportunities for advancement. This profile typically will have persisted for two or possibly three generations. The challenge is to break out of this mould; for individuals to seek higher level skills (and raising aspirations) to extend their personal horizons in terms of seeking new employment (becoming mobile) and being willing to take risks in the form of personal enterprise. It will be this new workforce that will attract new investment into the Region and support the ambitious and necessary enterprise agenda.
Spending on education and equity in funding are matters that need to be developed through a concerted voice (politicians and business leaders) to Whitehall; however there is much that can be done outside this sphere. The North East would do well to look at best practice elsewhere. In London many new initiatives that have made a significant impact on attainment have been delivered through social enterprises, charities and public/private sector collaboration. Corporate school engagement initiatives for example are widespread in London with employees encouraged to spend time in schools delivering literacy support and personal mentoring. Primary Reading Partners in Hackney harnesses over 1500 employees from large local employers to deliver lunchtime reading sessions in 68 Borough schools. These and other examples of best practice need to be taken on board in the Region.
Getting the most out of pupils at school, creating a seamless transfer to higher and further education opportunities and developing in individuals the competencies (rather than skills) they will need to move through an economic environment over the next two decades that will be very challenging but will certainly favour those individuals and regions which recognize and exploit their competitive advantages is a very big challenge. The challenge is also to develop a quality technical training (16-25) which will bear international comparison. The existing skills deficiencies are holding back regional growth and productivity gains. The creation of a North East Institute for Technology is a start.
Ensuring that regional Universities and Further Educational Colleges are enabled to make a greater contribution to developing local enterprise.
The North East’s ambition to outperform the UK economy by 2040 can only be realized if universities and colleges are fully engaged with businesses in the Region. Universities are well positioned to ‘anchor’ place-based industrial strategies. The two Russell Universities (Durham and Newcastle) already have links through N8 to other leading universities in the Northern Powerhouse area. Collaboration like this must be encouraged but there also needs to be a clearer emphasis on the links between higher and further education and the Region’s business base. The mechanisms to transfer technology into the market place need to be more sophisticated and better resourced, as does the delivery of the appropriate infrastructure to support high tech business growth (here infrastructure covers finance, IT connectivity and business premises).
The Region’s Universities already make a huge contribution to the North East through their core activities in education and research – bringing high value jobs, money and energy to the towns and cities that host them. Also the results of pure research – the transfer of technology into the market place – may well have the effect of securing business growth nationally and internationally – which will be good for the internationalization of the regional economy and will also strengthen the science base locally: a win/win situation.
Recent research has demonstrated that the relationship between universities and commerce runs both ways. On a national basis the recent report from the National Centre for Universities and Business (NCUB) notes that, ‘the UKs business-university partnership is robust, healthy and growing. But as we enter more complex global competitive conditions… the state of the relationship between businesses and universities has never been more important’. The report goes on to say that, ‘more action is needed to tackle the challenges in the 21st century knowledge-based economy’. The North East has a proud history in the exploitation of science in the pursuit of manufacturing excellence. However, a step change is now needed which will allow the Region to compete successfully in the knowledge-based economy which will be central to economic success in the future. Universities also contribute through civic, commercial and cultural partnerships, encouraging graduate entrepreneurship and working with SMEs through Knowledge Transfer Partnerships and initiative such as the new business clinic at Northumbria University. Similarly, Sunderland University’s Enterprise and Innovation Initiative and Teesside University’s entrepreneurs@tees supports small company start-ups and encourages links into the Universities technical and research capacity.
Improving all forms of infrastructure
Current plans for the North East understandably place considerable emphasis on improvements in the transport infrastructure (road, rail, air and sea); indeed improving internal connectivity and securing better external links are essential prerequisites for the planned growth in output and trade envisaged for the Region.
Whilst these improvements are vital, if the North East is to change gear and develop the international competitiveness which is vital for long-term sustainable growth, there is a need to develop an infrastructure that is fit for purpose. The North East, like many regions in the UK, has an infrastructure which has been built up over decades if not centuries, around the economic needs of a different age. Given the very significant changes in economic activity (the decline of basic industries such as coal, steel, shipbuilding and chemicals) the whole of this infrastructure needs to be re-assessed – not just in terms of upgrading and developing new infrastructure but more fundamentally in starting with a clean sheet and beginning to describe the types of infrastructure needed for the future. In other words we need an aspirational infrastructure ‘road map’ for the post Brexit landscape.
Infrastructure can be a complicated issue for a regional economy moving from low value to high value output. Hard infrastructure (road, rail, sea and air) is still important but it must reflect the new requirements in the region to improve internal connectivity and external linkages to support wider economic contacts and national and international trade. But equally important is soft infrastructure as evidenced by the need for universal high speed broadband and improved mobile networks in the North East (critical in rural areas) and social infrastructure – the development of networks to facilitate the exchange of knowledge and improve labour market mobility. An analysis of the infrastructure that underpins all the key sectors in the regional economy needs to be part of future plans and housing provision must be a critical component of this work.
For instance, in terms of the rural infrastructure is it adequate to sustain growth in market towns and allow for home working in rural areas, as well as supporting agriculture and industries such as forestry? As regards tourism infrastructure are the facilities in place to ensure the Region secures the maximum value out of the tourist economy? In terms of expenditure, the new infrastructure needs of the North East will be a major draw on existing resources. To secure maximum advantage there will be a need to set priorities, establishing which sectors and areas are the most important in helping to secure international competitive advantage and explore new ways of funding infrastructure (specialist infrastructure funds and pension funds for instance). There will be difficult decisions to take to ensure that the new infrastructure that is developed for the Region maximizes regional advantage: that must be the guiding principle.
Creating a competitive inward investment marketing capability
For much of the past thirty years the North East has been a major beneficiary of foreign direct investment (FDI). From 1988 to 1997 the North East attracted over 600 projects, which created over 75000 jobs and involved capital expenditure of almost £9bn. These investments also led to profound changes in the regional supply chains, the benefits of which are still being felt today. This level of performance was achieved by a high level of co-ordination between regional and national agencies and quality execution at a local level. Since 2005, however, there has been a steady decline in the number of projects secured and the jobs created as a result.
At the same time a more fragmented marketing and project management approach has emerged. This, of course, is equally true of domestic investment, be it from the private or public sectors. Today, there are in the North East 2 LEPs and 12 local authorities who are all involved to differing degrees in attracting FDI to the Region: key sectors are being targeted independently by several local authorities and there is very little recognition of the bigger picture. Major international investors are not interested in sub-scale partners. They wish to engage with organizations that have the scale, expertise and resources to deal with every aspect of their needs. This is equally true of domestic investment, be it from the private or public sectors. This is an institutional failure, which urgently needs correcting. An agreement has to be reached which allows the North East to compete effectively in the global market for FDI (a market which is still very important to the UK, data for 2016 showing an inflow of £197bn making the UK the largest recipient of FDI in the EU and second only to the USA globally). Competition is intense – between regions and countries in the UK and internationally – and is likely to become more so as the UK seeks to take advantage of the potential opportunities opened up by departure from the EU; however, with its North Sea coast, eastward facing ports and long history of trade with northern Europe and the Baltic States, the North East also needs to develop a distinctive strategy for re-engagement with European trading partners.
The goal is to focus on high value-added inward investment that can also work with and strengthen the regional supplier base: the Region has to recognize that this type of investment has to be secured in competition not only with regions and cities internationally but also with London, the South East and the Cambridge/Oxford corridor. Sights need to be set high to create the desired high value-added economy by 2040, but to compete the institutional capacity has to be improved markedly.
Expand financial institutions based on local capacity building
Recent reports on regional strategies have all emphasized access to finance as a key weakness in the regional economy. There are two aspects to this issue; on the supply side there are concerns about a shortfall in proof of concept funding and access to debt, mezzanine and venture capital finance and on the demand side there are low levels of new firm formation and business growth. As one indicator, patents granted in the North East are currently 26.5 per million of population compared with a national average of 56.4. Equally, the proportion of GVA spent on R&D in the Region is 1.2% against a national average of 1.9% and finally of the approximately 50,000 SMEs in the Region 87% employ fewer than 10 people.
Overall the North East is less innovative than virtually every other region in the UK. The North East has fewer small companies with the capacity to scale up and a lack of those high level skills necessary to drive high rapid growth: as one indicator the North East has 38 business per 1000 working age residents compared with 60 nationally. To progress the ambitious agenda of economic and social change in the North East the Region needs a Regional Development Bank, locked in by local stakeholders, through a mutual model, but operating as a centre of funding expertise and an agent for securing finance from multiple sources.
The Bank would be headquartered in the North East and would seek to recruit high caliber individuals, able to deal with investors, commercial partners and public sector stakeholders alike, allowing it to react more nimbly to the specific needs and opportunities of the Region – not only in terms of SME finance but more broadly through ‘coralling’ funding for infrastructure and inward investment projects. The Bank would be funded by institutional sources, potentially with public sector seed funding and could be a resource for the public and private sectors alike. It would earn money commercially through the delivery of progammes and fees on the execution of projects. It would be pro-active – identifying and driving new opportunities as well as reacting to the needs of partners and stakeholders.
Some of the components of such an institution are already in place in the Region (for example North East Finance which runs the highly successful regional JEREMIE programme). The multiplier benefits too – in terms of generating activity within the local professional services sector, graduate retention and developing confident multi-skilled and multi-competent business leaders – should not be underestimated. The creation of Atom Bank in Durham (the UK’s leading on-line fintech bank) for example and the collateral benefits this start-up has generated, have demonstrated the powerful impact of locally-based, high quality financial institutions.
Whilst the British Business Bank has an important role to play, specifically in the area of SME finance, by definition any national institution will find it more difficult to respond to the specific needs of a ‘place-based’ economic strategy. Importantly, the BBB would be well placed to act as a national co-ordinator or partner to a network of such place-based institutions across the UK.
Creating a climate of encouragement for enterprise
By 2040, the North East economy will have reinvented itself: it will have become a ‘beacon region’ – highly regarded nationally and internationally. Certainly, there are physical things that need to change – getting the right infrastructure in place, creating a highly mobile, highly skilled workforce, cities, towns and rural communities which are all contributing to regional success and, finally, a North East which contributes more in tax revenues than it draws down in social support.
To achieve these ambitious goals, there needs to be above all a clear focus on promoting a culture of entrepreneurship, providing in-depth support for start-up businesses on a consistent basis, ensuring appropriate access to finance is available along with high level advice, mentoring and high quality business services. This must be allied to developing an enterprise culture in schools, colleges and universities, to ensure there is a constant pipeline of opportunities for individuals to exploit and commercialize. Enterprising people working in an enterprising economy will ensure that success is sustainable over time, providing a successful environment for long-term growth in the North East. These mantras do not apply solely to the private sector; the public and voluntary sectors can equally be guided by these standards.
Already, many private sector initiatives have emerged: the PIE programme in Newcastle; the IGNITE tech accelerator (developed in the North East and now rolled out nationally); the InCredAbles initiative and the hugely influential Entrepreneurs Forum. Many more innovative programmes are emerging spontaneously in London as well as in Berlin, Tel Aviv and elsewhere. The Region needs more of this. There is an urgent need to work with local authorities, social enterprises and businesses (through their CSR programmes) to take these inspiring examples and positive messages to schools and communities across the Region.
Creating a cadre of individuals able to straddle the public and private sectors who can offer the Region leadership
This is probably the biggest challenge, but one which underpins all that could happen for the better in the North East over the next twenty years. The loss of so many iconic businesses (headquartered here) over the past 40-50 years has clearly impacted the quality and depth of leadership resources. We lack the individuals that can hold their own with Government Ministers or overseas trade delegations, as well as leading successful commercial, public sector and third sector organizations.
There is currently fragmentation of regional leadership in the public sphere – two LEPs, no strong single local government body covering the region, and two elected Metro Mayors, one in the North of Tyne and the other in Teesside – leading to severe weakness in our ability to offer a united representation nationally.
The huge transformational change needed over the next two decades requires dynamic leadership. The challenge is how to bring together the brightest young politicians, public servants, business people and social entrepreneurs with a common interest in seeing the North East succeed.
[*] This note was prepared following collaboration with John Bridge (ex chair of the regional RDA) and Andrew Mitchell (head of NE finance)