Enterprise Zones: Do They Create Or Transfer Value? Received: 17Th October, 2011
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Wainwright:JSC page.qxd 10/01/2012 14:49 Page 124 Enterprise Zones: Do they create or transfer value? Received: 17th October, 2011 Simon Wainwright is a graduate of the University of Reading and a Fellow of the Royal Institution of Chartered Surveyors; he has more than 30 years’ experience in private practice in the UK and specialises in property investment, development and appraisal. His practice, J Peiser Wainwright has advised Canary Wharf Group and Land Securities on major regeneration projects with a combined value in excess of £2bn; he has also undertaken investment transactions in Enterprise Zones throughout the UK. Abstract This paper considers whether any lessons have been learnt from the Enterprise Zones (EZs) of the 1980s and whether providing economic stimuli creates, distorts or simply transfers value. Key issues include: — How do the 2011 EZs differ from their 1980s predecessors? — Land value as a residual, determined by the economic activity that can take place on a plot of land; therefore bestowing economic advantages selectively will distort land values. — Enterprise Zones will undoubtedly cause the displacement of existing jobs to more economically marginal areas. — Previous attempts at creating areas which enjoy economic advantages include Regional Development Agencies and Freeports; this paper examines what lessons, if any, can be learned from these that could be applied to EZs. — Could EZ benefits be applied across the entire UK? — The benefits of the 1980s EZs were largely captured by property and land owners rather than local businesses; who will receive the benefits from the current generation of EZs? — Jobs are as likely to be generated in the retail sector as the manufacturing sector; does this matter? — The success of the London Docklands Enterprise Zone can largely be attributed to improved transport infrastructure; such transport proposals are missing from the current proposals. Keywords: Enterprise Zones, value, advantages, Canary Wharf, Merry Hill, Freeport, Docklands, business rates, investment, jobs, infrastructure Enterprise Zones (EZs) were first economically successful British Crown Simon Wainwright introduced into the UK in the 1980s with Colony of Hong Kong. Some 30 years J. Peiser Wainwright, 20 King Street, the objective of creating designated later, the British Government has London EC2V 8EG, UK economic areas which were free of tax, reintroduced the same concept, but what Tel: +44 (0)20 7776 2930 regulation and constraints, where dynamic lessons have been learned from the earlier Fax: +44 (0)20 7776 2931 e-mail: info@jpeiser businesses could grow and flourish; the experiences, and what can be done to wainwright.com concept was modelled on the ensure that new jobs are created rather 124 Journal of Urban Regeneration and Renewal Vol. 5, 2, 124–131 ᭧ Henry Stewart Publications 1752-9638 (2012) Wainwright:JSC page.qxd 10/01/2012 14:49 Page 125 Enterprise Zones than simply transferred from neighbouring inferred that both rent and land values are areas? a residual sum, determined by the value The original 1980s EZs bestowed a that can be generated from one plot of wide range of economic and political land in comparison with the value that advantages on the businesses that located can be generated from another plot of in these designated areas; these included: land, taking into account the relative costs of production and transport between two —exemption from business rates (local locations, all other factors being equal. taxation) for commercial and industrial A practical example of this can be seen property in retail rents, where high street shops in —100 per cent allowance for corporation the prime pitch command a higher rent and income tax purposes for capital than identically sized shops in a more expenditure on industrial and secondary location, as a result of the commercial construction additional revenue that can be generated —exemption from Development Land Tax from the relative differences in footfall and (since abolished) turnover. Today, many other factors also —a simplified planning regime where influence the differential in land values, planning permission was not required including differences in the specification for developments conforming with the of buildings erected on the land, user EZ published plan constraints (either legal or planning), —assisted HM Customs’ procedures technological advances, infrastructure, —a reduction in government requests for energy costs and business rates (local tax). statistical information It follows that if one takes two identical —Industrial Training Board levies did not and adjacent plots of land and bestows apply economic advantages on one but not the —prioritised telecommunication facilities. other, a difference will arise in both the rental and capital value of the two land The benefits were limited to a period of plots as a direct consequence. Occupiers only ten years, and they were designed to will be prepared to pay a higher rent on the stimulate economic growth and create parcel of land enjoying the economic new jobs: some worked spectacularly, benefits than for the same land without the while others did not. In March 2011, the benefits, on the basis that it is capable of British Government announced that a generating additional profits. The question further 21 new EZs would be created, but then arises as to whom this economic is it wishful thinking to assume that they advantage should accrue: the landowner in will emulate the success seen in the the form of additional rent, the occupier in London Docklands? The current debate is the form of additional profit or the whether EZs create economic growth or government in the form of additional distort the market by simply transferring taxation. In EZs, the objective has been for value from neighbouring areas. the advantage to accrue initially to the Ricardo formulated his ‘Law of rent’1 in occupier in the form of additional profit, in 1809; this states that the rent of a plot of order to stimulate economic development, land is equal to the economic advantage growth and the creation of new jobs; in obtained by using the land in its most practice, this has not always been the case, productive way, relative to the advantage as was seen with the dramatic rise in rents obtained by using marginal land for the and land values in the London Docklands same purpose, given the same inputs of in the 1980s, benefiting the landowner labour and capital. From this it can be rather than the occupier. ᭧ Henry Stewart Publications 1752-9638 (2012) Vol. 5, 2, 124–131 Journal of Urban Regeneration and Renewal 125 Wainwright:JSC page.qxd 10/01/2012 14:49 Page 126 Wainwright The concept of creating economic The Queenborough property included a zones enjoying financial advantages and substantial area of open land used for subsidies is not new in the UK, and many storage which was directly comparable other policies have been used to try to with the open land used for storage in stimulate the creation of new jobs and Sheerness Docks; this is a good example growth: examples include Regional Aid of the differential in rent and land values such as that provided by the Welsh that can occur between two adjacent land Development Agency which, for a 30-year plots where one enjoys financial period from 1976 until 2006, tried to advantages. The rental differential between stimulate business development and these two comparable properties was inward investment into Wales. The success significant, with the rent on the property of the agency in attracting inward in Queenborough being sufficiently investment was recently the subject of a discounted to persuade Mazda to remain Commons Select Committee Inquiry,2 outside the Freeport area, despite the where the experience with LG Electronics financial advantages enjoyed by occupiers was re-examined. The Committee report within the Freeport area of Sheerness details the development of a new factory Docks. for the Korean company LG Electronics The new 2011 EZs will offer occupiers in Newport, Wales, which should have the following economic advantages: created 6,000 jobs when it was announced in 1996, being hailed the largest single —business rate discount worth up to inward investment in Europe. In reality it £275,000 per business over a five-year created fewer than 3,000 jobs at a cost of period £131m to Welsh public bodies, although —all business rates growth within the some £71m was subsequently clawed zone to be retained in the local area to back when it closed in 2003, leaving the support local reinvestment, for a period taxpayer with a net cost of £60m. LG of at least 25 years Electronics then moved production to a —government assistance to develop plant in Poland, which subsequently simplified planning approaches for the closed; production has now been moved EZ to China. —government support to ensure that Freeports are another example of areas superfast broadband is rolled out enjoying special economic advantages, throughout the zone, by use of public including deferment of HM Customs’ funding if necessary duties, EU levies and VAT on imported —enhanced capital allowances for plant goods. In the late 1990s, J Peiser and machinery investment to a limited Wainwright sold an industrial property number of EZs in Assisted Areas. investment in Queenborough, Sheerness, Kent; the property was leased to Mazda In announcing the new EZs (see Tables 1 and consisted of land and buildings used and 2), Prime Minister David Cameron to receive and store imported cars from said: ‘We are determined to do everything Japan, to de-wax, repair and prepare the we can to make Britain the best place in vehicles before onward shipment to the world to start and grow a business.’3 dealers. The rental value of the Mazda By confining these economic advantages property at Queenborough stood at a to a limited number of EZs though, they substantial disadvantage to adjacent are bound to divert business from the properties within the adjacent Sheerness surrounding areas to these more Docks which enjoyed ‘Freeport’ status.