Do we need this lifeline?

Mar 13 2007 By Nigel Stirling, The Journal

Is the region too dependent on grants or are they a vital lifeline to help its economic regeneration? Nigel Stirling reports.

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Any threat to the pipeline of cash from taxpayers' pockets to the region's public sector bodies is enough to send a chill down the spines and into the wallets of North-East businesses and workers.

One such threat is the expansion of the European Union (EU) since May 2004 to embrace its developing - but still relatively poor - cousins in the eastern and central reaches of the continent.

Some £700m was spent by the EU in the North-East during the last spending round from 2000 to the end of last year - ranging from capital grants worth millions to help build The Sage Gateshead music centre - total cost £70m - to money for skills training and seed capital for business start-ups.

The grants have either directly or indirectly led to the creation of up to 4,000 jobs a year in the region, according to the TUC.

According to One NorthEast those grants will be cut by half during the course of the next six-year spending round, starting this year.

The regional development agency, which will be the principal conduit through which this money is allocated, will see its European funding fall from 20% of its current £300m annual budget to 10% during the period.

Iain Derrick, international policy manager at One NorthEast, was part of a delegation of development agency and business bosses that travelled to Brussels during the European Week of Cities and Regions last October to bid for extra funding for the region in the next spending round.

He said: "It was accepted that the focus should shift to the eastern parts of the EU, where there is insufficient infrastructure and a more acute need for investment in regional development. In 2005 European resources represented 25% of domestic expenditure on regional development.

"As those resources are cut back, domestic spending on regional economic development will be increased to compensate."

However, Mr Derrick admits these assurances from the Treasury of replacement funding must be seen "within the context of the Comprehensive Spending Review".

Chancellor Gordon Brown announced last year he would seek annual 5% cuts in spending from Whitehall departments between 2008 and 2011 to be outlined in next summer's CSR.

North East Chamber of Commerce chief executive James Ramsbotham says "tens if not hundreds of millions" of pounds could be lost to the region as part of the sinking lid being placed on public spending in the next few years.

He said: "The region has been reassessed because it has been deemed that the North-East in many cases does not justify the level of support it has been getting.

"It demonstrates that we are successful as a region because we have been performing strongly over the last few years."

Mr Ramsbotham said the "big prize" for the regional economy was public spending on infrastructure, such as on the road network, which would go to support further economic growth.

He said: "If the economy is to continue to grow at the rate it is growing it needs spending on infrastructure and it needs a greater share of the region's wealth to come from the private sector if that growth is to be sustainable.

"The businesses from this region that have been really successful, the (regional plcs) Vardy, the Graingers of this world, did not - as far as I am aware - receive a cent of public funding."

However, the pool of businesses from which that success stems could diminish if European funding is not replaced, warns a fund manager which invested in 60 small and start-up businesses in the North-East last year.

NEL last year operated three funds investing an average £175,000 debt and equity stakes in start-ups and "proof of concept" funding for research into new products being developed by small businesses.

About 45% of the £10m invested by NEL each year is from public sector funds - including European funding - with the balance coming from private sector investors, including banks and regional "institutions".

Chief executive Barrie Hensby said: "One of the consequences of cutting back European funding is that the ratio of private sector funding will have to be increased.

"These funds are for investment into prototypes and seed capital - areas which can be very, very difficult to get private funding for.

"They are also three years into a 10-year life and the businesses are at an early stage and not into profitability."

The fund manager's "mezzanine" investment fund - which raised an additional £12m from investors three years after its launch - has been set up to prioritise the payment of profits to private investors.

This type of structuring could reduce the risk for private investors and attract more investment to future funds, Mr Hensby says.

If new and existing businesses in the region survive, the accession of 12 new member states since May 2004 could represent richer pickings for the North-East compared to other regions in the UK. ONE's Iain Derrick says that as a result of the EU spending round starting this year some 80% of the EU's regional development funding will go to the new accession countries of eastern and central Europe.

He said: "A very significant amount of that will return to the UK in the form of consultancy contracts and the export of services.

"Two thirds of the UK's exports currently go to the European Union. The UK average for Gross Domestic Product from exports to the EU 27 is 11%.

"In the North-East it is 15%. Expertise in process industries, energy, and science and chemicals will be needed by the new EU countries and are areas that the North-East has been traditionally strong in.

"It is a very significant opportunity for the region's firms, which will see a level playing field in terms of non-tariff barriers such as hygiene standards, production and environmental standards that may have been used in the past to place firms in the North-East at a disadvantage in those markets."

Sarah Green, regional director at the Confederation of British Industry, said: "As a region we should move from a dependency culture to recognising the opportunities EU enlargement brings - primarily that UK business can now trade in a market of 500 million consumers.

"Instead of looking backwards to the times when our region needed handouts we should focus on improving procurement and tendering skills so that our businesses can continue to win projects across the EU market."