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Cost of abolishing RDAs rises to £1.5bn

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Ministers are scrambling to find around £1.5bn in already-constrained budgets to meet the escalating cost of abolishing the regional development agencies with the funding black hole likely to curtail any prospect of there being dedicated funding for new economic development bodies.

The Department for Business, Innovation and Skills (BIS) has asked the RDA network to go through its contracts line by line to determine the exact size of the agencies’ liabilities and told LGC that it expects an initial estimate this month.

But a senior RDA source involved in auditing the process told LGC the figure was around £1.5bn, marginally more than the entire £1.4bn RDA budget for 2010-11. This figure was independently confirmed by a Whitehall insider who said it could yet rise higher.

The RDA source said the liabilities ranged from land, such as former coalfields sites needing remediation, to involvement in ongoing public private partnerships, through to contractual commitments that could extend up to 20 years ahead.

“Unlike other public sector bodies that have been wound up, RDAs work over the long term - and that doesn’t mean three years but 15 to 20 years. It is very hard to just stop that kind of business,” the source said.

This £1.5bn figure includes both current liabilities, set out in the RDAs’ annual accounts, as well as historic liabilities, in the form of past obligations, such as loans or grants that may need to be recovered. But the bulk was future contractual commitments, the source added.

“Ministers are leaning on officials, saying do they really need to pay these [contractual obligations]. But they do, otherwise they will default on hundreds and hundreds of contracts. Whether the department takes them on or a residuary body they have to sit on someone’s books.”

The RDA Act 1998 states that the agencies’ assets and liabilities must return to Whitehall, with new legislation required to pass them on to other bodies.

But as revealed in LGC in June, BIS did not undertake a cost-benefit analysis on the plan to scrap the RDAs and had made no “meaningful estimate” of the costs likely to be incurred, prompting claims that ministers were acted hastily.

“[Eric] Pickles wanted to abolish the agencies because he hated regions. Period. He didn’t think it though. But it’s horrendously complex. Only [business minister Mark] Prisk grasps that,” said an RDA chief executive.

The £1.5bn figure is likely to rise further after the costs of closing the agencies - such as redundancy payments and closing leases - are taken into account. With around 3,000 staff across the network, redundancy payments could run into the tens of millions of pounds, the RDA source said.

Judith Barnes, a partner at law firm Eversheds, said the redundancy payouts would be inflated because few, if any, staff, would be able to transfer to new roles under TUPE rules. She said that because there would not be a direct match, in terms of functions, of the councils or Local Enterprise Partnerships that take on some of the RDAs powers, TUPE rules were unlikely to apply. “Without TUPE it will be very difficult to maximise the value to the public purse,” she said.

Ms Barnes said government may try to package liabilities up with the agencies’ assets, which BIS estimates at around £500m, and pass them onto LEPs, but with uncertainty around the long term funding for LEPs as well as their formal status, this could be difficult.

“Obviously everyone wants the assets, but no one wants the liabilities. If LEPs don’t have any funding its uncertain how they would be able to take on these obligations anyway,” she said.

The £1.5bn black hole has exacerbated the strain within the departments as ministers finalise their comprehensive spending review settlements and may wipe out the already limited resources that could have been available for economic development, community renewal and regeneration.

This year DCLG contributed £1.1bn to the RDAs’ budget, with BIS contributing £517m - prior to in-year cuts - with a range of other departments contributing small amounts. LGC understands that the liabilities will be roughly divided in proportion to the contribution, leaving DLCG with a tab of close to £1bn and BIS around £500m.

The £1.5bn tab comes on top of a commitment to find £1bn over 2011-12 to 2012-13 to fund the Regional Growth Fund - though Treasury has yet to determine the exact departmental contributions.

But with the departments facing across the boards cuts of up to 35%, the RDA source said ministers and officials were faced with “very difficult” decisions about how they might fund economic development, regeneration and community programmes, if at all, with the prospect of any funding for LEPs increasingly slim.

“Treasury has asked departments to start [the CSR process] with zero-budget - but [DCLG & BIS] are actually starting it in a deep hole,” the RDA source added.

A DBIS spokeswoman said: “As part of the Spending Review there is on-going dialogue between HMT, DBIS and DCLG on a variety of issues concerning the financial position of the RDAs. Audited figures for the RDAs’ liabilities are available in their published annual accounts. The issue of where liabilities will fall will be determined in due course.”

For analysis of the implications of the funding blackhole see Allister Hayman’s blog.

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