A sweet spot for state entrepreneurship
Part One - The challenges facing councils who want to set up and run their own enterprises
Alan Sitkin, Senior Lecturer, Regents University London
The first blog series, about economic development from a local government perspective, spoke to the challenges and opportunities associated with labour issues like employability and in-work poverty. Drawing from my experience gained during a four-year stint as the London Borough of Enfield’s Cabinet Member for Economic Regeneration, the series covered the trade-offs faced between the quantity and quality of jobs, the barriers to providing high-quality training and how the public and private sector can have shared interests in regeneration.
The focus of this second series (five blogs in all) is on the financial and physical aspects of regeneration.
The best way to start this discussion is to highlight the economic conditions I discovered when assuming my functions in 2014. From the very outset, it was easy to see that the borough’s main economic challenge was the way in which Thatcherite de-industrialisation had weakened our productive apparatus. Hence the decision to do everything possible to address the root problem, a policy orientation that would end up with two threads: nurturing private sector (inward) investment; and direct investment by the Council. The latter strand is the topic of this new NPI blog series.
The idea that a public body can invest directly in economic production is nothing new in European social democracy, where states commonly own and operate countless ventures (starting with utilities and trains) that have often been privatised in the UK.
A few voices (mainly Conservative, but not only) disputed my declarations of intent in this area for reasons of pure laissez-faire ideology – or possibly (in the Council leader’s words), they lacked the “intellectual firepower” to conceptualise viable state-owned enterprise. But most councillors and officers quickly supported this approach, if only because there really was no other option.
Ongoing draconian cuts in local authority grants nationwide means that UK local authorities no longer have sufficient “revenue funding” to employ the regeneration officers they need – in the old way of doing business – to coordinate external actors’ economic interventions.
On the other hand, given the abundance of “helicopter money” that has been one fallout of the 2008 global financial crisis; capital funding has been plentiful and cheap, particularly for local authorities who are equivalent to AAA borrowers. Of course, to qualify for capital funding, councils must engage in capital projects. Later on, however, a number of other UK local politicians would follow suit, sometimes because they had the same politics as me, but more often than not because they realised that this re-definition of the role of the state was the only way to get things done in a world of austerity.
Once the principle of state-owned or at least state-driven enterprise is accepted, the next step is to identify the parameters conditioning this action. Our idea was that the activities must pertain to public goods providing both social and economic value to all constituents; not be currently run by private sector operators (to avoid creating “crowding out effects” and wasteful duplication); and feature relatively low risk, if only because our fiduciary responsibility to make best use of taxpayer monies precluded committing the Council to initiatives with any likelihood of heavy losses.
Of course, as all finance specialists know, this low-risk imperative meant that new state activities would necessarily offer low returns – too low (and probably with too long a payback period) to be of interest to dividend-hungry private investors.
This then became the sweet spot for state enterprise: low risk, low return, low volatility, long-term payback and socioeconomic utility. Once these principles had been determined, we could then start the work of identifying prime strategic activities fitting the profile.
The process was a bit “hit and miss” at first, as might be expected whenever a large organisation adopts a new paradigm. Indeed, the next blog in this series will detail some of the many entrepreneurship ideas that we entertained before ultimately committing. There are almost as many lessons to be derived from the initiatives we decide to forego as from the ones we ended up pursuing.
For the moment, readers may like a quick introduction to the two main areas of activity where Enfield Council did launch entrepreneurial ventures. Unsurprisingly, one involved housing, a paramount consideration in the UK today and a policy area run incredibly ably during my time in office by my friend and ex-Cabinet colleague Ahmet Oykener, about whose work much has already been written.
More specific to my own portfolio responsibilities was the green business that we founded known under its holding company’s name: Energetik. The work done founding this company – and the general lessons that readers might derive regarding the joys and perils of state-owned enterprise – is the case study that will underpin this second NPI blog series.
The next blog will go into detail on the process of launching a capital venture and Energetik, an example of successful state intervention and the benefits it can bring. The third and fourth will uncover the internal and external obstacles faced by local governments large capital projects and finally the fifth blog will conclude the takeaways from capital investment during my time in Enfield Borough Council.