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The devil is in the (£1.5bn plus) detail, Mr Pickles

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They will go the way of Anne Boleyn communities secretary Eric Pickles was fond of saying of England’s regional development agencies, when in opposition. It was no surprise then that in taking the helm at the Department for Communities & Local Government he pushed hard for the abolition of the economic development quangos, which he said were wasteful, costly, top-down impositions on local areas.

RDAs would be replaced, Mr Pickles said, by new Local Enterprise Partnerships - council and business-led bodies that would drive economic development over smaller sub-regional areas. It would be a new dawn for local areas, Mr Pickles claimed, with councils finally given the reins to drive growth in their local economies.

So far so good: but as the cliché notes, the devil, Mr Pickles, is in the detail. LGC has been told that the question of how RDAs would be abolished - beyond a triumphant flourish of the secretary of state’s pen - little occupied Mr Pickles. Details of the transition were for officials to work through - what was important was that the loathed regional structures were gone.

Hence when business secretary Vince Cable and business minister Mark Prisk made the case to Mr Pickles that the transition would not be all that easy to manage and that perhaps the government might be wise to either keep some RDAs in place - particularly those in the north - or at least slow the down their abolition, Mr Pickles was unimpressed. Go they must and so the Department for Communities & Local Government (DCLG) won a rare victory over the Department for Business, Innovation & Skills (DBIS) over the future of the agencies, which now sit on death row.

Footing the bill

But as LGC reveals today Mr Pickles’ haste to rid England of its RDAs has now come back to bite him, leaving his department with a whopping great bill to pick up the rising cost of abolishing the agencies. As LGC reveals, that bill - largely comprising the RDA networks liabilities, which must sit on the government’s books - has reached £1.5bn and could yet rise higher, as auditors go through the agencies accounts and the full cost of closing the quangos is taken into account. Indeed, it could yet rise to £2.5bn, LGC has been told.

Now officials in BIS and DCLG are scrambling to find money in their already greatly strained budgets to meet this escalating cost. LGC understands that DCLG is expected to pick up the greater share of the tab, as it is the RDAs’ main funding department. This will have serious implications not only for the funding of the bodies Mr Pickles wants to replace the RDAs with, but other funding streams within the department focused on vulnerable people and deprived communities.

To put the £1.5bn into context, DCLG’s entire spend over 2010/11 on “creating economically strong communities which enhance national prosperity and provide opportunities for everyone” amounted to £1.48bn - the RDAs’ liabilities soaks up that work stream - surely a key coalition priority - in its entirety.

Hobson’s choice

Worse still, as a Whitehall source told LGC, Mr Pickles has gone into bat for the chancellor in the Comprehensive Spending Review, wanting to make DCLG an exemplar of the coalition’s new lean Whitehall. LGC understands that the department has made an offer of an across the board cut of around 33-35%, but this may yet be reduced, possibly down to 30% due in part to the soaring cost of the RDAs liabilities.

When one puts a 30-35% cut alongside a budget black hole of £1.5bn (or more) plus a commitment to find part of the £1bn for the Regional Growth Fund, it is easy to see that Mr Pickles now faces some very grim choices about how his department might fund Local Enterprise Partnerships, let alone other programmes focused on vulnerable and deprived communities. Indeed, as one Whitehall wag said, on regeneration, economic development and community renewal, Mr Pickles faces a Hobson’s choice.

For instance, as LGC revealed this month, if Mr Pickles is hit with a cut across the board of 35%, that could lead to a reduction of around 80% for specific grants within the local government settlement. That would include the area-based grant, which largely consists of funding targeted at deprived communities and vulnerable people, such as the Supporting People programme. In August, the National Housing Federation warned that a cut of 40% to Supporting People would leave 438,000 vulnerable people without support, with hostels and women’s refuges closed and counselling services shut down. What would an 80% cut do?

Where might the axe fall?

To soften the cuts Mr Pickles will of course take an axe to the department itself. LGC understands around a third of DCLG’s work programmes and staff are to go: these will include New Deal for Communities; the Place Survey team; the Performance Management team; as well as other teams focused on ring-fencing and data analysis. Will that be enough? Hardly. DCLG’s central administration costs were £180m over 2010/11 - a fraction of the savings needed to be found. The regional Government Offices, which Mr Pickles bravely scrapped, cost £103m this year.

So Mr Pickles will also have to look to the communities side of DCLG’s budget. He could take huge chunks out of the housing budget (2010-11 £5.1bn), which has already suffered £450m in cuts this year or slash back funding for fire departments (2010-11 £544m) - both politically unpalatable choices. He will also look to the department’s funding for charities - £45.7m in 2009/10. Could that all go? Where ever one looks Mr Pickles has tough choices to make - or no choice at all - as there simply isn’t the money.

But there is a further sting in the detail for regeneration and economic development, as the cost of abolishing the RDAs will also have a big impact on the European Regional Development Fund programme. As revealed in LGC in July, £1.9bn of England’s ERDF pot is still to be spent but, in order to be drawn down, ERDF cash must be matched by other public or private sector funding, which in the most part is sourced through the RDAs’ budgets.

An axe for European cash?

The Treasury has placed a freeze on RDA spending beyond March 2011, which includes match funding for ERDF and with DBIS and DCLG scrambling to fill the £1.5bn (or more) black hole, it is unclear whether there will be any public spending left to match the remaining ERDF cash.

Indeed, a senior source at a council in the north of England said ministers are considering scrapping the ERDF programme altogether - quite simply, handing £1.9bn or so back to Brussels as there isn’t the match funding to draw it down. That would be hugely controversial, given that the ERDF is meant for England’s poorest areas and ought to be a key component in the government’s strategy to tackle the north south divide.

An alternative would be to bring the ERDF programme into Whitehall and roll it into the Regional Growth Fund, with match funding coming from the private sector or the RGF - if it all. But that still wouldn’t solve the problem of what money, if any, will go to LEPs. For as Sir Ian Wrigglesworth, deputy chair of the panel set up to approve bids to the RGF made clear this week, he does not expect much, if any, of the RGF to go to LEPs. For impact, he added it would be a “miracle” if the RGF alone rebalanced the economy.

So where does that leave Mr Pickles? With a very expensive bill to scrap the ‘costly and wasteful’ RDAs he so loathed and no money to fund the activities they undertook. LEPs may not be top down, but they may also not be much else. But that, it would seem, is what Mr Pickles means by localism.

  • Comments (8)

Readers' comments (8)

  • Don't you have to balance the considerable assets of RDAs against these liabilities to get the true "cost" of the scrapping of the bodies? Please explain further.

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  • Good point, the logical thing would be to wrap liabilities with assets and parcel them out to successor bodies.
    But, at least as it has been explained to me, the problem is that while the government may look to pass on RDA assets (BIS estimates them to be around £500m) to the agencies' successor bodies it will have difficulty passing on the liabilities.
    Not just because councils and Local Enterprise Partnerships will be reluctant to take them on, but because handing over the liabilties to LEPs would require dedicated year-on-year funding, which it seems ministers are either reluctant to give or don't have the money for - ie- how can a LEP take on an RDA contractual committment that may stretch over 20 years without some form of funding to meet that obligation?
    Therefore the cost of the liabilities may have to be met soley by DCLG and BIS, hence the headline figure. But yes, you are right, it would normally be (somewhat) balanced out by assets.
    There is, I understand, also a separate but related question of whether LEPs will become legal entities and therefore able to take on the RDAs assets/liabiltiies.

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  • Thanks Alister,

    One other question that I am not quite clear on. If many of these asset payments are spread over the long term, then presumably the effect on yearly budgets is not as dramatic as the headline total. ie if you divide 1.5 billion by 20 years, for argument's sake, it works out at about £750million per year. So isn't it a bit misleading to say that the RDA liabilities would soak up the annual budget for creating economically strong communities?

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  • Thanks Jim, again I can only refer to what I've been told is actually going on in the departments, which is that they are having to make provision within their CSR settlement to take on the whole tab for the RDAs.
    The £1.5bn plus will have to sit on their books, which is, I'm told, impacting on the kind of decisions they can make now about what to fund over the next spending period.
    The point of the saying the liabilities would soak up an entire workstream in DCLG was to try and give the figure some context. ie- in the grand scheme of things, it's not a huge amont, for DCLG, and for regeneration programmes, it is.

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  • I'm not sure about the idea of bringing the ERDF programme into Whitehall - I've heard a rumour its going to be scrapped.

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  • It looks like Mr Pickles has messed up big time. All the nonsense about supporting growth, enterprise and innovation - I would love to know who is advising these ivory tower people. The entrepreneur on the street needs business support - ERDF proves to be an important instrument for doing this. Abolishing the RDA without having a structure in place to pick them up is madness. Given that the most of the LEP bids feel short of the mark what next? Do Prisk, Cable and Pickles ever meet?

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  • It would be interesting to see how these costs break down into: 1) redundancy costs 2) costs which would have occured anyway in the short term and 3) costs which have been caused to crystalise by the abolition of the RDAs. I think there are good grounds to have concern about the behaviour of RDAs if they, as you suggest, entered into a significant number of 20 year contracts - perhaps you might give some examples where that has happened?

    There are good grounds to be concerned about bodies which have no independent funding of their own, such as precepting powers, entering into contracts which substantially exceed their committed funding. Even under the previous government RDA funding was not guaranteed at a specifc level and, if not abolished, they would have been a likely target for budget reductions had Labour remained in power. There is a significant democratic issue here - because taxpayer funding is committed to projects which have no democratic mandate...

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  • Thanks for your comments everyone.
    Richard, you raise interesting points, but I think the fact that RDAs may have entered into contracts over 20 years, in some cases, is simply the nature of the kind of activity they are involved in: regeneration/ economic development is not a short term activity and projects can take a long time from start to finish. Canary Wharf was not built in a day.
    On ERDF, yes, as I mention above, I've have heard there has been talk of ministers washing their hands of it and sending the money back to Brussels. But nothing is settled and it's still a very live issue. More news on that is it comes in.
    Thanks and keep the comments coming.

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