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The Taxpayers' Alliance would like the regional development agencies abolished. Jyoti Banerjee studies their report - he likes their data but disagrees with their recommendation.

This month a report from the TaxPayers’ Alliance claims that the £15 billion spent on the Regional Development Agencies since their creation in 1999 has been a total waste as the RDAs have contributed absolutely nothing to the economic performance of the regions in the UK.

The TPA report has three main planks of evidence:
1) The RDAs were created to improve the performance of the regions, particularly those outside London and the south-east. In 1992, London and the south-east contributed 36% of the UK economy, a figure that has grown (in the wrong direction) to 48% in 2006.
2) Employment across the country grew by 9.5% between 1995 and 2000, while it only grew by 3% between 2000 and 2005.
3) Regional inequality worsened: apart from London and the south-east, England’s regions grew faster before the RDAs were around, compared to the seven years after.

To add to this lack of performance is a long account of RDA waste. For example, 39 RDA bureaucrats earn over £100,000 a year, one part-time RDA chairman had a travel expense bill of over £50,000 in a single year, and one RDA managed to spend £20,000 sending some of their team to a film festival in Dubai.

RDAs: yes or no?
The TPA’s recommendation is a simple, if predictable, one for a tax lobby: abolish the RDAs and use the freed budget to cut the tax rate for small business. The 2009-10 budget allows for £2.19 billion to fund the RDAs. This scale of tax cut would generate a 4% rate cut for small businesses, from 22% to 18%. According to the TPA, the tax cut would “create new jobs, boost existing businesses, make life easier for people starting business and give the regions an economic leg-up: exactly what the RDAs were meant to do and have failed to achieve.”

Does it make sense?

Before discussing the implications of the TPA report, it should be pointed out economics is a tough school for data analysis. Just because London grew faster, than the regions, for example, does not mean that the RDAs failed in their task. It could be that the inequality between London and the south-east versus the rest of Britain could have been even worse than it is, were it not for the RDAs. Okay, I don’t quite believe that – but we have no way of knowing. The economy is not a lab experiment, and we cannot reverse the creation of the RDAs to see if anything would have been different without the RDAs.

The data from TPA is really useful to see, and should be used as a weapon against waste in government, but it does not prove the case for the abandonment of the RDAs. Here’s why.

Economic growth for a nation is all about growth in the regions. The countries that seem to be glowing green with growth, such as China, India, and Brazil, are doing so because they have regions that are growing out of their skins. It isn’t China that is growing, it is the regions of Dalian, Beijiing, Shanghai, Zhejiang and Guangzhou that are growing. In India, the growth is driven from the metros of Mumbai, Bangalore and Hyderabad. In much of the rest of India and China, poverty is still a huge problem.

But these fast-growing regions, and those in the west, share a common theme: they have figured out their performance edge and use it to drive inward investment. By the way, all the top growing regions have great inward investment.

A potential investor may look at many sites around the world for their next investment. But the top decision-makers just look at a short-list of three to five names. So if the investment is in software, then Bangalore will be on the short-list. When I talk to Silicon Valley VCs, they tell me that if a software company wants their money, they have to base their operations in Hyderabad or Bangalore, but not the US. So the question the investor asks is not “Why Bangalore?” but “Why not Bangalore?”

The story is similar when it comes to CRM (Ireland), BPO (Holland in Europe, otherwise India) and electronics (Shanghai / Guangzhou). If a British region wants to compete with these growth powerhouses, it cannot do so without overt strategies. This is not going to happen by chance, nor by the workings of an invisible hand driven by a tax cut. But we need regional authorities that supply the basics that growing companies need: excellent infrastructure, strong and credible branding for the region on a global basis, and the removal of the growth hurdles that companies face.

Of course, the RDAs have created their regional economic strategies to deliver regional growth. But it is a sign of their weakness that, according to the Institute of Chartered Accountants in England and Wales, over 85% of British companies are unfamiliar with their own RDA, let alone their regional economic strategy. Britain’s best growth performers are its medium enterprises – but RDAs don’t engage with these companies.

So the Taxpayers’ Alliance is welcome to push its agenda of lower taxes. But let’s not do it by chucking away the RDAs. Sure, we don’t want their waste. But Britain’s regions need them to perform properly, with a particular focus on growth performers in their region. It will be no surprise to me if those growth performers turn out to be medium enterprises.

Want to read more about how regional growth performance should work? Check out an earlier post from this bog, Growth in the regions.

Climate change, whether you believe in it or not, is going to change every business on the planet, either by force of regulation, or by a competitive drive towards low-carbon business models. Medium enterprises have a great opportunity to be the next generation of big winners in a future low-carbon economy. Or big losers. Jyoti Banerjee investigates the balance of probability.

Last week BBC Radio 4 featured an interview with a Canadian academic who has developed a prosthetic knee that generates electricity every time the knee flexes. It’s a great idea for helping provide power to disabled people but it turns out that there are other applications as well. The military could generate electricity for their communications devices while walking. And the rest of us could walk around to power up our iPods, mobiles and GPS units.

Walking to generate electricity is not going to turn back the tide on climate change but it is just one more example of the way clean-technology approaches are gaining traction in the market.

Medium enterprises are probably as concerned as everybody else about climate change but many executives of such organisations that I have met wonder what they can do to really make a difference. After all, the industries that have to make the biggest changes to their carbon productivity, such as energy, transport and heavy industry, are usually not populated with medium enterprises. Executives in medium enterprises agonise over installing efficient heating, or motion sensors to switch lighting in less-used locations like toilets because they know that these things make good business sense anyway, but surely none of these are going to tackle the problem of climate change.

In order to get a sense of what medium enterprises can do in this era of extraordinary change, let’s take a step back and get a feel for the scope of the climate change problem in the context of its impact on business.
If current climate science holds true ( and there is considerable uncertainty with some of the estimates), global greenhouse gas emissions need to decrease from today’s levels by 90% as of 2050 in order to keep global warming to within two degrees centigrade. Or to put it another way, our emissions need to be back at the level they were in 1950. Currently economic growth is tied very closely to emission growth. In 1950, every kg of CO2 produced $0.60 of global GDP. By 2000, this figure was around $1, showing a growth in carbon productivity of around 1% per year. In order to meet the 90% reduction target, we need every kg of CO2 emissions to produce at least $15, maybe even as high as $30 of global GDP.

This translates to a ratcheting up of our carbon productivity from 1% per year to around 5-7% per year, according to estimates from the World Resources Institute and McKinsey Consulting.

Bottom line: we need to break the umbilical cord that joins carbon emissions to economic growth.

How can medium enterprises participate in, and help catalyse, a low-carbon economy? They can do three things.

Carbon efficiency
Every business already has existing assets and products that are part of our current carbon-based economy. Each business needs to optimise the carbon efficiency of its infrastructure (such as buildings, data centres, and factories), its supply chains, and its finished products. This makes good business sense anyway, and the rising energy prices provide immediate rewards for carrying out such optimisation. Of course, those in energy, automotive and heavy industries have the most to gain from this. But it is also hardest for them to change their basic practices. Medium enterprises can focus on the changes they can make, and rest assured that it is easier for them to drive such changes through than it will be for larger companies.

New low-carbon solutions
We are not going to quadruple (and more) our carbon productivity growth without coming up with whole new business models that are entirely based on low-carbon technologies and value chains. Masdar City, currently being constructed in the United Arab Emirates, features an ultralow-carbon, car-free urban area, with magnetic trains, zero-carbon electricity and strict norms for water usage and waste disposal. Such developments need smart technologies but they also need smart ways in which businesses can create value systems out of low-carbon products and services. Innovation rates in medium enterprises are high, and they offer great potential to be the big winners in coming up with new low-carbon business models.

Regulation
There are not enough planetary resources available for everybody in the world to live in the same energy-consumptive, space-consumptive, resource-intensive, and waste-generative way that we live in the west. Right now India and China are driving growth in the traditional high-carbon way. Nothing will stop them doing that without regulation.

But we need regulation in the west as well. In fact, it is quite possible that without regulation, no individual or business will take the necessary steps to act in a way that will counter climate change. Adam Smith’s “invisible hand” will certainly not do it – it is simply generating the wrong result.

But if regulators are going to play a key role in changing business behaviour in the sort of fundamental ways described above, we need medium enterprises to stop avoiding government and start engaging with them to jointly figure out the best way forward. For example, one unintended consequence of regulation would be to be shift manufacturing away from relatively carbon-efficient plants in regions with high carbon costs (most of western Europe) to higher-emitting plants in countries that have little or no regulation (such as India and China). Many medium enterprises are ill-prepared to engage with government, but learning to do this is going to be a necessary skill if you want to succeed in a low-carbon economy.

The fastest movers in the move to a low-carbon economy will be those companies that are built on low-carbon business models, with no legacy assets needing to be protected. Medium enterprises are well-positioned to be a low-carbon attacker rather than a high-carbon defender.