Report Title: Local Enterprise Growth Initiative (Legi)

REPORT TITLE: LOCAL ENTERPRISE GROWTH INITIATIVE (LEGI)

EXECUTIVE MEMBER FOR REGENERATION:DAVID BUDD

DIRECTOR OF REGENERATION: TIM WHITE

DATE: 23RD DECEMBER 2005

PURPOSE OF REPORT

1.The purpose of the report is to provide an outline of the Local Enterprise Growth Initiative (LEGI) and inform on the proposals for the bid, which was submitted on the 9th December 2005. The LEGI proposal will be a collaborative bid and will bring a new dimension and opportunity to the Stockton – Middlesbrough Initiative (SMI).

2.The report sets out a summary of the research undertaken and provides a summary of the themes and priorities that have been identified.

BACKGROUND AND EXTERNAL CONSULTATION

3.The challenge facing Stockton and Middlesbrough is to reverse long-standing, entrenched economic under-performance that has so far only partially responded to the considerable efforts of public sector investment and support.

4.The SMI area has a limited tradition of entrepreneurship, and this is reflected in one of the lowest business densities per capita in the North East region, (itself performing poorly on this criterion by national standards).

5.Research undertaken to support the development of a LEGI bid has identified that to attain parity with the national position, SMI needs to raise its VAT stock from just under 5,000 to 9,700, an increase of 4,740 VAT registered businesses – almost a doubling in stock. The SMI gap represents 50% of the Tees Valley’s total VAT stock enterprise gap.

6.VAT registration levels have shown some improvement in recent years, (though disappointingly not in 2004/05) but this improvement has made no impression on the gap, as the stock of registered businesses (53 VAT registered businesses per 10,000 working age population) remains well below national levels (104 per 10,000 working age population) and de-registrations have exceeded the national average, so that the overall stock has declined by 3.4% since 2001, against a national increase of 3.7%.

7.Latest figures available show 2 and 3 year survival rates (VAT stock) for the Tees Valley (SMI not available) were below regional and national levels, at 62.5% and 76.2% respectively (national figures 66.5% and 78.9%).

8.The VAT gap is challenging, but could begin to be closed by more businesses starting, more businesses growing more quickly to higher turnover levels, and more businesses surviving.

ENTREPRENEURSHIP LEVELS

9.Self-employment rates in the Stockton - Middlesbrough area are currently only 59% of national rates, while within the NRF wards rates are only 44% of national levels.

10.The self-employment gap can only be closed by more people taking this route and reducing the failure rate of businesses. At this level, the challenge of closing the gap is large – to reach parity with the nation, Stockton – Middlesbrough would need over 7,150 further individuals to become (and remain) self-employed, while for the NRF wards alone, the gap is 3,780 individuals. If normal rates of business attrition are assumed, it would require 1,100 new starts per annum over the coming decade, (in addition to the current level of starts) to achieve a level of self-employment comparable with the current national rate.

SUMMARY OF KEY ISSUES

11.The Stockton Middlesbrough area remains in significant need of assistance to turn round an economy which is still struggling to recover from the many years of decline in its major industries. Within the SMI and specifically within the deprived NRF areas, which contain a declining but still substantial 140,400 residents:

• deprivation levels remain high, with local indicators all exceeding regional and national benchmarks, with low economic activity, low employment rates and unemployment remaining obstinately high;

• for those fortunate enough to be in work, the jobs held are mainly at the lower end of the occupations scale, with earnings levels around a third below national benchmarks, and household incomes insufficient to support reasonable levels of home ownership and vehicle ownership. Skill levels are low, with almost half possessing no qualifications, and the ‘usual’ occupations of those out of work are heavily concentrated (57%) in the four lowest status occupational groups. Local people find it difficult to compete with better qualified residents of the rural hinterland of the city region, and a third of NRF area jobs are held by people commuting in from outside Stockton and Middlesbrough;

• the local economy is underperforming against regional and national trends, in output terms, although jobs growth has improved since 1998;

• the business base (VAT registered) is failing to thrive, having declined since 1996, with registration rates well below national levels, and fluctuating de-registration rates. The business base needs to double to gain parity with national levels;

• the entrepreneurship culture is poorly developed, with little local tradition and few role models amongst the older generation. Self-employment rates, with and without employees, are less than half the national benchmarks. Female rates are even further below the national level. BME self-employment rates are above the national figure, but a little below the regional rate, however certain minority groups are still failing to enter self-employment, particularly mixed and black groups. Taking into account normal survival rates, 1,100 additional new businesses would need to be started every year for the next ten years, to catch up with the national self-employment rates;

• local residents are faced with many barriers to starting up in business – they include:

• lack of markets, due to the low incomes in the area, and poorly developed business base;
• lack of access to personal finance sources, due to low employment rates, low incomes, and therefore savings, low home ownership levels, and frequently, a poor credit record;
• lack of an established entrepreneurial culture, with few role models and low rates of self-employment amongst older people and women;
• lack of personal transport, with less than half of households owning a car or van;
• poorly developed skills, limited experience of higher level jobs, and low aspirations;
• higher levels of limiting long-term illness, and evidence of benefit dependency.

GOVERNMENT POLICY

12.The Government proposes three ‘pillars’ of support for enterprise in deprived areas.

1. National: tackling certain key enterprise development issues at the national level through an ongoing commitment to build onthe Enterprise Areas package, where either economies of scale are required, or where issues are common across many areas.

b.Regional: devolving to the regional level new responsibilities for the delivery of Business Link and the Phoenix Fund, to enable an integrated approach to business support.

c.Local: building-on support through the Neighbourhood Renewal Strategy, providing significant commitment to support locally appropriate plans for enterprise development through the Local Enterprise Growth Initiative worth £50 million in 2006-2007, rising to £150 million per year by 2008-2009, subject to confirmation in the 2006 Spending Review.

OUTLINE TO THE LEGI

13.The LEGI will provide flexible, devolved investment in the most deprived areas - determined by the Neighbourhood Renewal Fund areas (see Appendix one) – to support locally developed and owned proposals that pursue new or proven ways of stimulating economic activity and productivity through enterprise development. The national level aim of the LEGI is:

“to release the productivity and economic potential of our most deprived local areas and their inhabitants through enterprise and investment

thereby boosting local incomes and employment opportunities.”

14.This aim is supported by three outcomes:

1. to increase total entrepreneurial activity among the population in deprived local areas;

1. to support the sustainable growth – and reduce the failure rate – of locally owned business in deprived areas;

1. to attract appropriate inward investing and franchising into deprived areas, making use of local labour resources.

15.These three outcomes reflect the contribution that business start-up, growth businesses, and inward investors make to both national level productivity growth and local economic development in deprived areas. To ensure sustainability over the long-term, the LEGI will be focused on the fundamental issues and barriers that hold back enterprise and growth.

16.The LEGI will follow closely the principles of devolution, providing local institutions

and communities with the authority and freedom to best determine local needs,

options and solutions for enterprise development in deprived areas. Within the three broad outcomes set out above, there will be significant discretion to determine what the local priorities should be and how to tackle them; what indicators to aim for, what actions to pursue, and what local targets are needed.

17.The aim of the LEGI is to make a long-term change, transforming local deprived areas by addressing the market failures that inhibit growth, and ensuring the change is sustainable beyond the life of the policy.

DEVELOPMENT TO DATE

18.Middlesbrough and Stockton-on-Tees Councils are working with a range of partners such as Business Link on the joint development and submission of an application to Government Office North East for funding through the Local Enterprise Growth Initiative (LEGI). Funding for the development and submission of the LEGI bid came from the Pump Priming monies, allocated through Government Offices that were awarded to eligible authorities wishing to apply for LEGI funding.

19.The LEGI application process has been taken forward via the economic subgroups of each LSP, and has included consultation with a range of stakeholders and agencies. A business consultation event was held to gain a greater understanding of what concerns and issues existing businesses have. The event was well attended by around 25 businesses, all sharing their experiences and hopes for change. A key stakeholder event was also held to engage with the existing organisations working on both enterprise support and development.

20.Separate meetings have also been held with key businesses and individuals to gain a greater understanding of their services and also which direction they feel the LEGI proposal should take to support their business. This will be a continuous process until the LEGI bid has been formulated and agreed.

LEGI PROPOSALS / VISION

21.The vision for ‘SMI Enterprise’ is to develop an enterprising urban core at the heart of the Tees Valley that will increase wealth, income and employment opportunities for Stockton and Middlesbrough residents by:

• generating a culture of entrepreneurship;
• capitalising on the opportunities for business growth;
• alleviating barriers to business growth and competitiveness;
• connecting people, particularly hard-to-reach groups, to economic opportunities.

22.To do this, SMI Enterprise will transform the Stockton Middlesbrough urban core through an innovative and co-ordinated programme of activities that will help build competitive businesses, develop competitive residents and create a competitive city region:

THEME A – SMI ENTREPRENEURSHIP PROGRAMME

23.This programme will focus on improving the start-up rate of new businesses by raising awareness and developing the culture of entrepreneurship.

It will particularly focus on programmes working with hard to reach groups such as women, young people, BME communities and social enterprises.

THEME B – SMI NEIGHBOURHOOD ENTERPRISE GATEWAYS

24.This programme focuses on the visible enterprise hubs which help to engage, support and develop local enterprise activities. The existing and future enterprise centres will be closely networked to maximise opportunities for enterprise development. There will also be a dedicated neighbourhood enterprise team working proactively at the grass roots level to respond to local needs and opportunities.

THEME C – SMI ENTERPRISE GROWTH PROGRAMME

25.This programme will concentrate on developing key cluster groups such as digital media and will identify and support growing businesses via a High Impact Programme. This programme will also support and develop existing SMEs and provide on-going advice, training and financial support.

THEME D – SMI ENTERPRISE ENVIRONMENT / INFRASTRUCTURE INVESTMENT PROGRAMME

26.This programme will establish a network of incubation allowing developing companies to realise their potential. It will be supported by a team of business and technical support staff with specialist facilities with a co-ordinated delivery strategy.

27.Appendix two of this report provides a summary of the application which has been submitted to GONE, based on these themes. A full copy has been placed in the members’ library.

OPTION APPRAISAL/RISK ASSESSMENT

28.Option One-Middlesbrough not submitting a LEGI bid in the first round

There are potentially three rounds for applications to the LEGI fund. Government Office advised potential applicants not to submit applications in the first round if applicants would struggle to fully understand the enterprise gap in their respective areas within the tight timescale. This would result in two distinct advantages; more time to examine the gaps and needs to submit a more robust application and secondly, allowing others to submit in the first round and learning lessons from both winning and losing applications.

29.However, applying in the first round also provided the opportunity to learn from the experience and gain vital feedback from the appraisal process which would help focus future applications in a more targeted manner. Moreover, the potential to secure the benefits of LEGI as soon as possible was felt to be a compelling reason to bid in round one.

30.Option Two-Middlesbrough not submitting a joint bid with Stockton Council

Middlesbrough Council had the option of applying for LEGI funding unilaterally due to the high level of deprivation across its neighbourhood renewal areas. However this presented some dilemmas:

• the LEGI guidance stressed the desire for collaboration, particularly between authorities and their respective boundaries. A collaborative bid would therefore increase the chances of success;

• a joint application added significant value to the extensive work done in developing and progressing the SMI, as well as creating a distinctiveness for the bid by placing it squarely within strategies such as the Northern Way manifesto and the Tees Valley creation of city regions development plan.

31.Option Three-The SMI LEGI bid applying for a lower financial level

Stockton-Middlesbrough, like many other areas, has consistently invested in the process of enterprise creation. Over time there have been significant successes but the scale of the challenge is such that the gap with better performing regions has worsened. The reasons behind this are complex but full LEGI funding would make the kind of structural changes that are required and the LEGI commitment over a longer time frame will allow for more concerted activity.

32.Overall therefore achieving critical mass and the desired “step change” required, investing the level of resource outlined in this application was judged to be the best way in which to secure sustainable improvements

FINANCIAL, LEGAL AND WARD IMPLICATIONS

33.Financial Implications-The first round for LEGI will be very competitive with 9-10 proposals expected from the North East region, with the likelihood of only one being successful. There is potentially £2-10m per successful bid per year for the next 10 years but the Stockton – Middlesbrough LEGI proposal focuses on taking a tiered financial approach based on the needs identified by consultants. This tiered effect will focus on funding of around £3.8m in the first year, £7m in the second and around £8m for the third and continuous years, tapering off towards the end of the 10-year programme.

34.The SMI Enterprise LEGI bid can be viewed in the Members’ library and section five specifically examines financial issues, examining the possibilities and options available if only partial or no LEGI funding was secured.

35.Legal Implications-There are no legal implications at this stage.

36.Ward Implications-Appendix One highlights the NRF wards in both Middlesbrough and Stockton that are likely to be those which benefit from any LEGI funding awarded due to their high level of deprivation.

LEGI APPROVAL PROCESS

37.The submission date for the bid was the 9th December 2005 to Government Office for the North East. The proposals will be put forward to a regional panel of 7 members who will appraise the bids and rank them in order of those best meeting criteria and regional priorities. The bids will then be forwarded to a national panel in London where, after consultation with ministers, the final decision of winning LEGI proposals will be announced around February/March 2006. The unsuccessful bids will receive feedback on where submissions failed and will have the opportunity to develop a new application for the second round of LEGI funding beginning around April 2006.