Blossoming investment

In the first wave, the Budget has confirmed that the first vanguard Enterprise Zones would be based within eleven local enterprise partnerships lead by Birmingham and Solihull, Sheffield, Leeds, Liverpool, London, Manchester, the Bristol area, the Black Country, Derby and Nottingham, Teesside and the north east.

The first four locations are the Boots campus in Nottingham; Liverpool Waters; Manchester Airport; and the Royal Docks in London. In order to identify the remaining 10 Enterprise Zones in England the Government is launching a competition over the next couple of months, inviting local enterprise partnerships to nominate sites that they feel should be considered for approval.

The basic premise for the new zones is simpler planning rules, access to super-fast broadband and more generous treatment in respect to business rates and capital allowances.  This, in turn, should help create more jobs and successful new enterprises.
For example, eligible businesses in the enterprise zones will receive a business rate discount worth up to £275,000 over a five-year period and, in addition, all business rates growth with the zone for a period of at least 25 years will be retained within the local area.  This will mean that any growth will be re-invested locally instead of being exported out of the area.

Examining reality
All the above sounds very laudable but will it really work, as the fundamental difference between what is proposed now and what went before is funding? And, as all readers know, the availability of investors is in somewhat short supply at the moment.

While the Chancellor has said that stimulating the provision of private investment into fast growth companies is on his agenda, it remains to be seen that in the current form there will be any real appetite from private investors, who historically make up circa 75 percent of non-bank funding. Equally, the public coffers are bare and the institutions are not touching anything that’s not prime and most of which is confined to central London.

Launched under Thatcher in the 1980s, Enterprise Zones (EZs) provided a way of sparking regeneration in deprived areas. Tax breaks and regulatory relief encouraged investors and entrepreneurs to launch new businesses in selected areas. These areas were typically economically deprived, often where heavy industry such as docks, coal mining and steel works were previously predominant. Undoubtedly the best-known example being the London Docklands, which was famously transformed from dereliction to a financial powerhouse.

Key to the success of Enterprise Zones was a unique financial initiative: Enterprise Zone Trusts (EZTs). Tax advantages existed for property trusts that invested in these designated areas. Investors received tax relief on their share of building costs, as well as receiving a share of the rents. Admittedly not without its share of risks, when it worked it was a seemingly win-win situation: Investors enjoyed good returns and the Government saw the positive benefits of the regeneration of a Brownfield site.

Ticking boxes
But, what were the benefits of investing in an Enterprise Zone Trust? Well, apart from giving the investor an initial 100 percent tax allowance on a commercial building’s construction costs, which could be deducted from taxable income for the first year that the expenses were incurred, being part of an enterprise zone trust was ideal for smaller investors. Essentially, it allowed them to own a unit of a large-scale development. The alternative would have been to be part of a syndicate but then the costs, and risks, rose dramatically.

Once construction had finished the investor received a share of the rents, meaning a typical investment ran for about 10 – 25 years. Investors could also take out a loan to cover the investment and then use their rental income to finance the loan repayments. And as income tax relief could be claimed at a client’s highest rate of tax, this was an attractive proposition for the long-term investor.

From the Government’s perspective, urban renewal led to growth and new businesses, which in turn led to a fall in unemployment and therefore more people were paying income tax and national insurance. Added to that the VAT and corporation taxes paid by new businesses and you see why the scheme was so attractive to all concerned – especially when it brought in an assortment of businesses from overseas.

From an investor’s point of view the main risk was that of occupancy. A building rented out to a strong, reliable company ensured a good and secure rental yield.  Where property managers failed to attract quality tenants, this not only affected rental incomes, but also the value of the property as a whole. It was in these situations that investors lost money. A regular complaint about the former enterprise zones was that these initiatives did little more than just move jobs from one part of the country to another.

Today’s Ministers state that they want to avoid the ‘mistakes’ of Margaret Thatcher’s 1980’s enterprise zones, which they say did little to create extra jobs, a point that I would personally disagree with having been involved with over 20 zones and circa £1.5bn worth of funding. They claim businesses apparently just uproot from neighbouring areas into enterprise zones to benefit from low tax rates and automatic planning permission. According to ICAS’s business policy unit, 63,000 jobs were created in enterprise zones between 1981 and 1986, of which 13,000 jobs (20 percent) were new and my personal experience would confirm these figures.

The point that often gets overlooked, however, is that during the Thatcher era, many businesses expanded and thrived in their new EZ environment and, while some of this was pure displacement, many of the ‘displaced’ businesses went on to create and retain jobs that would have often moved overseas.

State of play
Coming back to today, the Government wants to learn from its earlier experiences of setting up enterprise zones. At the heart of the new enterprise zones is a desire to remove barriers to private sector growth through reduced burdens for businesses, particularly in terms of lower tax levels, planning and other regulatory and administrative burdens.
The Government has taken a slightly different approach focusing on four main objectives. First, they aim to focus on areas of ‘genuine economic opportunity’ and achieve a balanced approach to growth. The long-term success of the areas involved is also critical – beyond the initial period of Government business rate subsidy.  Local enterprise partnerships will also have a key role to play in developing and implementing the enterprise zones, while competition will be encouraged to attract foreign inward investment, avoiding localized competition and minimizing displacement.

The core of the EZ initiatives can perhaps be best encapsulated by the criteria of the Government’s competition to identify the next 10 Zones. Essentially, the Government will be looking for those proposals which offer the best prospect of increased growth, with minimization of local displacement of businesses and business rates.

Only the local enterprise partnership, on behalf of all its partners, will be able to bid for an enterprise zone. This will help ensure that small areas aren’t competing against each other to attract other businesses within the same partnership.

While there still are critics of the enterprise zones, their success in the past and the Government’s determination to make them work means that fundamentally the concept should succeed. However, my biggest concern remains the lack of available funding, which is why I would still urge the Government to look at encouraging more private investors through the reintroduction of the Enterprise Zone Trust with their associated tax breaks or other similar financial arrangements.