Summary: The Cities and Local Government Devolution Act 2016 is the latest in a line of Government measures to implement an enhanced devolution agenda for UK local government. Whilst important constitutionally it must also be viewed as an important tool to stimulate investment in regeneration.

The Cities and Local Government Devolution Act 2016 is the latest in a line of Government measures to implement an enhanced devolution agenda for UK local government. The impact of the financial crisis on government finances, the abolition of the old Regional Development Agencies and a progressive shift in Government policies in favour localism has radically changed the approach of the UK government (both central and local) to economic development and regeneration funding. Whilst local authorities have always had some focus on stimulating the local economy the lack of general powers and funding often constrained activities to smaller scale projects and collaborating with RDAs. However, over recent years the seismic shift in decision making from the centre is something which investors ought to take into account in their pursuit of investment opportunities. Whilst central government direction may remain investors will find local financial levers are increasingly in the hands of local authorities.

As a start the Local Democracy Economic Development and Construction Act 2009 enabled Combined Authorities and Economic Prosperity Boards. Combined Authorities could be formed post the 2009 Act by groups of tightly defined local authorities to take on economic development, regeneration and integrated transport functions whilst Economic Prosperity Boards could only take on the narrower economic development function. Following on from this the Localism Act 2011 introduced a General Power of Competence for local authorities, enhanced community neighbourhood planning and housing functions. As a package the Localism Act powers gave local authorities and their communities a much greater identity and control of shaping of “places” within their areas.

In parallel, the Government has also supported the creation of Local Enterprise Partnerships. LEPs are non-statutory bodies which are partnerships between local authorities and local business reflecting distinct economic areas and who have discreet Government funding programmes allocated to them. The LEP provides strategic leadership for economic growth in their areas with some public funding support for economic objectives. Separately increased retention of business rates is also promised.

The latest addition to the devolution toolbox, the Cities and Local Government Devolution Act 2016, creates a much broader constitutional framework for local devolution which includes enabling elected major’s for a Combined Authority’s area exercising specific functions, removing the current statutory restriction on functions which can be conferred on a Combined Authority (currently economic development, regeneration and transport) and also geographical limitations and enabling public body functions (including those of Government Departments) to be devolved to local authorities and combined authorities.

The 2016 Act will underpin increased and enhanced Devolution Deals. Devolution Deals are agreements between central government and a city or county region that give that region control to (a) take charge of and responsibility for decisions that affect their area (b) do what they think is best to help businesses grow (c) create economic growth and (d) decide how public money should be spent. Examples of devolved powers and funding include transport, business support, land and housing, EU funding and more recently health and social care integration. Such deals also include inter city and county region powers and funding such as that made available to the “Northern Powerhouse” to increase physical and economic connectivity between the city regions of Liverpool, Manchester, Leeds, Sheffield, Hull and the North East.

Once again the importance to investors of this trend to devolution cannot be over emphasised with local authorities having increased autonomy over infrastructure funding. However, these devolved powers and funding invariably have strings requiring local authorities to deliver for the local economy and consequentially increasing the focus on delivery. In short local authorities having for years asked for increased powers and control over funding and now that it has become a reality they need to take advantage of them. One other by-product that investors should be aware of is that increased devolution has ratcheted up competition between major cities and has also introduced new elements of competition from second tier cities, other urban areas and indeed County areas who feel an element of exclusion.

The increase in local devolution has increased motivation for private investment alongside new public investment with the “holy grail” often perceived as attracting overseas investors. Whilst there are and will continue to be increased investment opportunities investors need to be diligent to ensure that the local authority has done its ground work. For example have the cash flows been structured to yield the desired returns to investors and have they been stress tested? Have the risks to those cash flows been identified and capable of management or otherwise retained by the public sector? Has sufficient thought been given to the nature and structure of the capital sought for example, distinguishing between equity and debt (or hybrid structured capital)? The potential demand for investor capital should not be underestimated and the increased autonomy which local authorities have over their projects is likely to stimulate this demand yet further.