Regional solutions

Regional solutions

The cost of doing business in London is rising. But can regional alternatives deliver business opportunities as well as cost savings?

London Gherkin Swiss Re Tower

London: towering costs

In 2006 England’s eight Regional Development Agencies will spend £2.3bn. The
Welsh development Agency spent £295m in the financial year 2004/2005, and 163
offers of selective assistance were accepted by clients of RSA Scotland,
totalling more than £69m. Regional development is, and at least until new EU
guidelines come into force at the end of 2006, continues to be big business for
companies who want to invest in the more deprived areas of the UK.

Although the London Development Agency, charged with revitalising the poorest
areas of the capital, is the second largest of England’s RDAs with an allocation
£373m for 2005/2006, the vast majority of the UK’s regional assistance goes to
business projects outside the prosperous South East of the country.

And London’s businesses would seem to be the perfect target for that
assistance. The December 2005 KPMG/CBI London Business Survey found that 81% of
businesses considered the cost of operating in London was higher or much higher
than in other capital cities. Also 37% said the cost of living was much higher
in London, with an impact on the salaries on offer for skilled jobs. Two thirds
expect upwards wage pressures and 53% expect skills shortages in the immediate
London is clearly a victim of its own booming economy: 48% of businesses
consulted say that the cost of housing leads to increased business costs, 30%
had to alter working hours to accommodate staff who could not live close to the

‘Overall the cost of doing business in London is considerably higher than
other major capital cities: businesses may be prepared to pay a premium for now
in order to avail of the opportunities it presents – but for how long? Unless
the barriers of doing business in the capital are addressed, London’s
competitiveness will be eroded,’ the report concludes.

So London’s businesses should be ripe for relocation, a fact that David
Parker, project manager for business services at the Wales Development Agency,
confirms. He spends on average four days a week in the Agency’s London office.
‘We have a big push on in London,’ he says, ‘It goes without saying that any UK
region is more cost-effective than London.’

Yet this ‘big push’ has to be conducted with the utmost care – because the
rules under which UK regional development functions specifically prohibits
offering incentives to displace jobs from one region of the UK to another. In
practice, trends like outsourcing make a nonsense of this rule, as Parker
admits. ‘What we’re not allowed to do is encourage any organisation based in the
UK to shut down and move out of the capital. But in the real world, if it’s a
question of either moving to a region or going overseas altogether, the
government allows us some flexibility.’

That flexibility, for example, allowed the WDA to offer grant aid to
LogicaCMG to open its Waterton offices in Bridgend in March 2005, creating 750
jobs in the area by 2007 for its outsourcing hub. No one would disagree that
there was sound financial sense in relocating that part of its business outside
the South East for LogicaCMG, but because the company was considering moving
offshore, it also qualified for development funding administered through the
Welsh Assembly – cited by the company as a ‘key factor’ in the decision.

While there is no suspicion that LogicaCMG’s plan to possibly move offshore
was not genuine, Nigel Wilcock, regional development director at Ernst &
Young, admits the rules around relocation are a ‘grey area’ which might be
exploited by companies to earn grant aid for relocation form the South East.
It’s a test of the mettle of an RDA: to refuse to grant aid based on a suspicion
that plans to relocate outside the UK might only serve to ruin its chances of
getting the business if another competing RDA steps in.

‘Overall the development agencies do sign up to the idea that it’s not wise
to steal from one region and give to another,’ Wilcock says, ‘If companies are
going to try that game these days, development agencies are wise to it and they
are sharper. But it’s the challenge they face: what credibility do they give to
the alternative path that they hear about.’

Wilcock believes these suspicions are well founded. ‘Your client is never
absolutely going to come out and say, “We would have done that investment anyway
“, but I think we have seen instances when that has happened.’

Ultimately, regional relocation grants can have the useful effect of
accelerating the creation of alternative hubs of expertise in the UK. Wilcock
points out that while some would consider grant aid for a relocation project
that already offers a return on investment for the companies involved is open to
criticism, the net effect for the regions are strong alternative centres of

‘RDAs should not be providing grants unless the company needs the grant,’ he
says, ‘and they realise that most of the job creation would have happened
anyway, but that doesn’t mean it [offering financial assistance] is necessarily
a bad thing.’
An example of a strong regional hub is the Glasgow International Financial
Services District, home to recently established offices outside London for
Morgan Stanley, JP Morgan, and Deutsche Bank among others. Since 2001, it has
created 9,000 jobs, and built 960,000 sq feet of office space.

Today, one in 13 people in Glasgow work in financial services. Part of the
incentive is the assistance given in grant aid, but ultimately the local economy
makes Glasgow attractive to companies headquartered in London when they decide
to recruit: according to the Office for National Statistics, the average wage in
Glasgow is £438 per week compared to £637 in London, £467 Edinburgh and £472 in

In targeting companies already headquartered in the UK, RDAs are only doing
their job: it’s a brave government official that will label a successful job of
attracting investment from London-based companies as displacement activity.
Parker points out that the political and economic penalty of letting jobs leave
the UK, whether the threat is real or not, affects how government treats this
‘grey area’.

‘The only way we could answer the question [of whether threats to leave the
UK are genuine] is to shut the RDAs and see if the same investment happened in
the regions,’ Parker says. ‘I wouldn’t want to be the minister that takes that

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