1. Assessment and recommendations
The Welsh Government has set an ambitious and innovative path for regional development and public investment. It focuses on generating growth and increasing productivity, as well as on reducing territorial disparities and ensuring the well-being of citizens, now and in the future. At the same time, the Welsh Government and local authorities are working in a context of uncertainty. Uncertainty arising from Brexit, which can affect multi-level governance systems and regional investment financing. Uncertainty arising from the COVID-19 crisis, which will further strain the Welsh economy, service delivery capacity and its fiscal health.
With uncertainty and crisis also comes opportunity. The Welsh Government has the chance to meet its regional development and investment needs in a manner that is fully reflective of its territorial reality, requirements and priorities. This is also a moment when the Welsh Government can – and is – reconsidering its relationship with regional development stakeholders, including local authorities, the private sector, the third sector, civil society and academia, and how to strengthen these interactions.
Successfully navigating this period of change in a highly complex socio-economic environment will draw on the capacity of all Welsh regional development actors to adjust. The role of government at all levels is changing, and especially in decentralised or devolved contexts. National governments are increasingly called on to take a stronger strategic and policy co-ordination role, creating space for subnational authorities to implement policy and deliver service in a manner most suited to their local specificities. This means building capacity at and by all levels of government. These new roles put a spotlight on the quality of inter-governmental relationships, which in Wales is also evolving. They have been characterised by mistrust in the past – between the United Kingdom (UK) and the Welsh Government levels as well as between the Welsh Government and the local authority levels. This may be changing, but all parties will need to actively move toward building mutual trust and credibility. The aim is to build a win-win collaboration, including with citizens.
The purpose of this OECD report is to accompany the Welsh Government in building its regional governance and investment capacity. The report starts with an introduction establishing the frameworks for analysis used. Chapter 3 provides an overview of the Welsh context in terms of its territorial and socio-economic conditions, challenges and opportunities in addressing regional disparities in productivity and growth, and its well-being profile. Chapter 4 takes a careful look at Welsh fiscal and financial frameworks, highlighting some critical challenges and identifying opportunities for ensuring continuity in investment effectiveness, post-Brexit. Chapter 5 examines the Welsh regional development strategic and policy frameworks, and mechanisms to boost policy and investment implementation capacity. Finally, Chapter 6 is a case study focused on establishing economic regions in Mid and South West Wales. It brings together concepts explored in the report, including subnational spending and service delivery capacity as well as governance structures, and compares the opportunities and challenges that would confront a combined region versus two separate ones. Chapters 4, 5 and 6 conclude with recommendations for action. This report was researched and prepared prior to the European Union (EU) Withdrawal Agreement Act 2020 receiving Royal Assent on 23 January 2020, and before the COVID-19 crisis.
Throughout the OECD, countries and regions are faced with managing global megatrends in demographics, technology and environmental change. Addressing this requires new, place-based regional development policy approaches and effective public investment, supported by institutional capacity at all levels of government. This is particularly important given the risk of megatrends exacerbating territorial inequalities. Furthermore, persistent regional inequalities can increase mistrust in institutions, and generate discontent with the economic, social and political status quo, particularly in lagging regions. In 2018, regional disparities in gross domestic product (GDP) per capita in the UK were among the largest among OECD countries – with the wealthiest top 10% of UK regions exhibiting a GDP per capita close to 5 times higher than the bottom 10% of UK regions. Of this latter group, 4 out of the 12 are in Wales. Wales is committed to ensuring the well-being of today and tomorrow’s generations. This is evident in its adoption of the Well-being of Future Generations Act (WFGA) in 2015, which serves as a compass for Welsh policymakers when considering the economic, social and broader well-being implications of their decisions.
A territorial and socio-economic conditions snapshot of Wales
Wales is facing difficulty catching up with UK average levels of economic prosperity. For example, in 2000-18, Wales’ GDP per capita remained the lowest among the 4 UK nations, representing 72% of the UK average. While there was some positive shift after 2009, GDP per capita remains sluggish, in Wales and the UK. Wales’ economic activity is strongly concentrated in two urban clusters – one in the southeast and the other in the northeast. These two clusters produce 75% of Wales’ GDP and are home to approximately 70% of its population – concentrated in 22% of the territory. This can result in unbalanced spatial development. In Wales, certain economic sectors and activities are highly spatially concentrated, partially explaining regional differences in GDP per capita. The sectoral composition of Welsh local economies reflects these differences as some economic sectors (e.g. high-tech) are associated with higher levels of value-added per input.
Managing a regional divide in labour productivity
Labour productivity levels in Wales remain among the lowest in the UK and are also below the average level among Northern and Western European-OECD regions. While overall labour productivity seems to be increasing, it is unequal across Welsh small regions. Its growth has been higher than 1% in the regions of Cardiff and Vale of Glamorgan, Swansea, Bridgend and Neath Port Talbot, Central and Gwent Valleys. In other regions, however, it has been decreasing over the past 16 years.
Ultimately, Wales is confronted with a choice in terms of productivity growth. It could pursue a distributed model, wherein productivity growth comes from converging regions, and the frontier region is not the main contributor to labour productivity growth. This model is evident in Austria, Germany and Poland, for example. Or, it could adopt a concentrated model, seen in France, the Netherlands and the UK. Here, most of the contributions to productivity growth come from frontier and keeping-pace regions (i.e. Greater London and Scotland respectively in the UK) while other regions contribute relatively little or even negatively. When considering these models, there is a trade-off. While the distributed model can help achieve regional convergence, it tends to generate lower aggregate growth. Another way to consider this: while a concentrated model can yield higher productivity gains, it does so at the cost of exacerbating regional disparities as frontier regions grow equally, or more, than regions already lagging behind. The choice between models will depend on overall objectives.
Enhancing productivity across all territories
In addressing its productivity challenges, Wales will need to consider several factors. First, is a need to better seize the benefits of agglomeration economies. This can mean investing in transport performance. High-performing transport networks, including green transport networks, improve accessibility within functional urban areas (FUAs), which contributes to well-being and productivity. In Wales, the metropolitan area of Cardiff demonstrates very low performance in both public transport efficiency and labour productivity, relative to other European metropolitan areas. Conversely, metropolitan areas with high public transport performance (e.g. Helsinki, London and Oslo) display among the highest levels of labour productivity. Inter-regional transport networks can also boost productivity in some rural remote areas by increasing proximity to the benefits of metropolitan areas. Additionally, high-performing transport infrastructure can facilitate integrating rural areas into regional or global value chains, helping unlock the potential of rural remote areas (e.g. Carmarthenshire or Powys) and contribute to better regional economic and social cohesion in Wales.
Second, population decline and ageing as productivity factors should be considered. Population growth within Wales is uneven. While the population of Cardiff is growing, that of Ceredigion, for example, is not. Beyond its implications for labour productivity, population decline in Wales can also negatively affect public service provision by reducing tax revenue. The Welsh Government’s commitment to supporting its foundational economy may be difficult to accomplish in the context of a declining population and shrinking tax base.
Third, additional attention will need to be placed on increasing the skills of the Welsh workforce and to research and development (R&D) investment, in order to deliver a more productive, and greener, economy. Across the UK, regions with a high-skilled labour force exhibit higher levels of labour productivity. Only 38% of Wales’ labour force has tertiary education. This translates into labour productivity of around USD 65 000 in Wales, compared to USD 77 000 in Scotland and USD 110 000 in Greater London (all in 2015 purchasing power parity [PPP]). Stronger investment in skills and R&D could help boost innovation and intensify competition among firms, which in turn may lead to greater productivity and improve employment and labour utilisation.
Using place-based regional development policy to ensure well-being today and for future generations
The well-being of its citizens is at the heart of the Welsh political and policy agenda. In general, well-being in Wales is above or equal to the OECD median value in 12 out of 13 indicators. Yet, it is below the UK average in most of these same dimensions. Addressing territorial inequalities can help improve well-being, smoothing out material (e.g. income, jobs, housing) and non-material (e.g. health, sense of community, education) well-being disparities.
The aim of place-based regional development policy is to help all types of regions thrive and offer their residents a high quality of life. While this is laudable, it can be difficult to achieve. Increasingly countries are re-evaluating their toolkit, identifying mechanisms that will help them promote high-levels of well-being by building on local assets and knowledge, undertaking strategic public investment and including a diverse stakeholder base in the process. Wales is considering all of these possibilities as it refines its governance and investment approaches to regional development, including through a green growth restart and recovery following the COVID-19 pandemic.
The Welsh Government and local authorities operate in a fiscally and financially constrained environment. The fiscal framework is characterised by limited devolution, a low tax base and limited ability to generate own-source revenue, contributing to a large fiscal gap. This affects the Welsh Government and local authority ability to finance many place-specific spending needs and to bridge an investment gap arising from several years of austerity. A stronger fiscal framework can help build a more resilient foundation to leverage external financing and enhance Welsh national and subnational capacity to invest in regional development. The limited access to sources of investment financing is an additional challenge for regional development in Wales. This is compounded by the uncertainty surrounding investment financing post-Brexit, including in terms of the exact value, and the terms and conditions for the disbursement of the intended replacement for European Union funding, including whether multi-annual funding will be maintained. Effectively managing the uncertainty will require strengthening fiscal institutions and rules and improving the capacity of all levels of government to attract public and private investment and support inclusive growth.
Fiscal devolution is an ongoing process with mixed results
Devolution, particularly fiscal devolution, is an ongoing process in Wales, with mixed results, thus far. In general, fiscal decentralisation in the UK is low compared to other OECD countries, and this is true as well in Wales when compared to EU and OECD Regions, and measured as regional government spending contributions as a percentage of total public expenditure. Approximately 60% of total public spending on services is financed by the Welsh Government and local authorities. The rest is financed by the UK government. In addition, fiscal devolution in Wales is unbalanced between spending responsibilities and revenue-generating capacity, creating a fiscal gap, which will likely be exacerbated by COVID-19. In such cases, there is a risk of compounding territorial inequalities, including in the accessibility, type, diversity and quality of services that local authorities can provide, as well as in their investment capacity.
The fiscal gap affects the capacity of the Welsh Government and local authorities to better target their spending and forces them to make budgetary choices between essential sectors. In terms of budget allocation, economic affairs accounted for 15% of Welsh Government spending in 2017, compared to 21%, on average, among regions in EU and OECD countries. At the local authority level, it represented 6% of their spending, compared to 12% on average for local governments across the EU. While this difference in spending is to be expected, it can signal limited development capacity in areas that promote growth, such as economic development, transport, communications, and energy and construction.
The Welsh Government and local authorities also face a gap in terms of revenue-generating capacity. Contributing to this is low revenue diversity. Up to 80% of Welsh Government revenue comes from a block grant from the UK government. Among regional governments in the EU and OECD, grant revenues generally account for 50% of total revenue, on average. This relatively high rate of revenue centralisation can affect Welsh Government fiscal autonomy, which in turn affects its capacity to borrow. Opportunities to address this issue are limited. First because the centralisation of tax revenue by the UK government is a constraining fact. Second, the Welsh tax base is low. Finally, own-source taxes are limited and new, and user fees and charges are an infrequently used tool. This situation is mirrored at the subnational level in Wales, as 61% of total local authority revenue in 2017 came from current grants.
Building fiscal and financial capacity and boosting territorial equalisation
Effective equalisation policies can help address disparities in revenue-generating capacity and public service delivery. The current equalisation system in Wales does not provide sufficient incentive for business development in an individual local authority. Nor does it offer sufficient support for local authorities in rural or sparsely populated areas. Given the territorial disparities in Wales, additional consideration should be given to equalisation arrangements, as these can help ensure that territorial inequalities are not accentuated by further decentralisation.
The Welsh Government recognises a need to shift towards a system that emphasises own-source revenue over grant-dependency. Updating the subnational fiscal framework is one way to achieve this, and the Welsh Government has taken steps to do so by launching a Tax Policy Framework as well as a comprehensive programme to reform subnational finance. Addressing the design of the Council Tax and Non-Domestic Rates, and optimising local tax capacity could be part of this effort. By improving subnational fiscal health, the borrowing capacity of the Welsh Government and local authorities could be strengthened.
Encouraging local authorities to work together as fiscal and financial actors, rather than autonomously could help address fiscal imbalances while also helping build their administrative and financial management capacity. Pooling resources to deliver services, sharing costly administrative functions and sharing the cost of experts can all reinforce fiscal capacity by freeing revenue for other expenses. There are several positive experiences in this type of activity in Wales, and more should be encouraged.
Introducing a coherent investment framework for regional development in Wales
Investment financing contributing to regional development in Wales is divided among financing from government departments, financing from EU funds and funds channelled through the City and Growth Deals. The challenge is to ensure that investment occurs strategically and coherently in order to maximise and optimise resource effectiveness – particularly as EU funds phase out and are replaced by funds from the UK government. To meet this challenge, the Welsh Government is rethinking its investment framework, the structures of investment co-ordination, and the need to further reinforce investment capacity. To this end, the government is developing a Framework for Regional Investment, which, if successfully implemented could support investment at the Welsh national and subnational levels. Such a framework is a fundamental co-ordination tool as it can help ensure that objectives and priorities align in a complementary fashion.
Day-to-day investment co-ordination is also critical. The Welsh European Funding Office (WEFO) and Welsh government departments have significant experience in managing multi-stakeholder, high-volume, complex investment projects and funding. This experience and institutional knowledge should be maintained and used to ensure that investment decisions are aligned with regional development objectives across government sectors and among different levels of government. The Welsh Government also appears to be aiming for a more integrated and flexible approach to public investment, one that can evolve with the changing structures and needs post-Brexit. One essential condition for investment planning, however, is a multi-annual approach to regional development funding. This provides the necessary stability and reassures investors, and is just as important in investment frameworks emanating from the Welsh Government as it is from those emanating from the UK government.
Reinforcing and building on current existing investment financing practices
The current moment presents a tabula rasa to the Welsh Government in terms of its investment framework. It has a unique opportunity to adjust investment conditions that are considered weak while maintaining those that have worked successfully. It is also a moment to ensure that public investment financing for regional development more strongly aligns with territorial characteristics than it was able to do when relying on EU Cohesion Policy, for example. There is also the opportunity to design or encourage cross-border investment, certainly between Welsh jurisdictions, but also with UK regions or cities. City and Growth Deals are powerful investment levers, and a good opportunity to advance green growth and circular economy priorities. It would be important to further integrate City and Growth Deals into Wales’ broader regional development strategy and to make them more competitive with other UK City Deals. This may become particularly important if funds to replace EU financing are disbursed on a competitive basis and are channelled towards City and Growth Deals.
Limited efficiency in investment management is considered a barrier to mobilising capital funding for local investment in Wales. Thus, building expertise for public investment in Wales will be important in moving forward. The Development Bank of Wales and WEFO, for example, would be mobilised to support the Welsh Government and local authorities build their knowledge and skills base. Peer-exchange and pooling expertise among local authorities in areas related to public investment could also be further supported, for example through the Welsh Local Government Association (WLGA). Building this capacity will be fundamental given the need to expand the tools used to finance investment. Public-private partnerships (PPPs), innovative sources of public investment financing, such as land-value capture, climate finance and green bonds, as well as participatory budgeting, are all mechanisms that could be highly valuable to support regional development investment in Wales but require additional capacity-building support at the national and subnational levels.
Developing a coherent investment framework can be highly valuable in terms of maintaining a sustainable investment strategy for regional development. As Wales transitions to post-Brexit investment structures, opportunities to build on what works, and adjust what could work better present themselves.
1. Optimise the Welsh Government’s capacity to reduce its fiscal gap and improve fiscal health
Expand spending devolution to the extent possible, making sure shared responsibilities for economic development are clear among levels of government.
Diversify Welsh own-revenue sources and make use of existing fiscal levers (e.g. tax rates, user fees, etc.) to fill the fiscal gap.
Strengthen the fiscal management capacity of the Welsh Government and local authorities, including by monitoring revenue-raising capacity in order to produce long-term fiscal forecasts.
Encourage local authorities to pool resources and work in partnership to build their administrative and financial capacity.
2. Further reform the subnational fiscal framework to increase own revenue
Optimise and diversify local taxes and tax bases to increase own revenue among local authorities (e.g. vacant land tax, Non-Domestic Rates retention and tourist taxes).
Review the fiscal equalisation system to reduce territorial disparities, support local authorities with a low tax base and encourage local economic development.
Ease borrowing restrictions for the Welsh Government and local authorities, and make them more flexible in order to help address fiscal challenges in the short and medium term.
3. Address investment strategy fragmentation for better-co-ordinated investment post Brexit
Adopt the proposed Framework for Regional Investment and use it to support investment initiatives across sectors and among levels of governments.
Transition WEFO into an investment administration and management body for regional development, maintaining its location in the Office of the First Minister.
Implement a multi-annual approach to financing investment projects for regional development, to the extent possible.
Encourage cross-sector or cross-jurisdiction projects, including cross-border co-operation, including with specific incentives for local authorities.
4. Ensure all levels of government have sufficient capacity to support place-based investment
Increase capacity and expertise of local authorities in the design, implementation and evaluation of investment projects through knowledge-transfer from WEFO and the Development Bank of Wales (among other agencies).
Create an appropriately resourced PPP unit with sufficient resources and continue strengthening the use of the Mutual Investment Model (MIM).
Ensure that ex ante analysis comes early in the investment cycle and that ex post evaluation includes outcomes.
5. Pursue additional sources of investment financing for regional development.
Make City and Growth Deals more competitive with other UK City Deals by reinforcing their ability to leverage additional revenue and by improving their transparency and accountability.
Promote the use of external financing mechanisms by local authorities (e.g. climate/green finance and land-value capture) on a case-by-case basis and subject to mutually agreed-upon pre-conditions.
Encourage participatory budgeting and crowdfunding as complements to local authority financing for small-scale investment projects with high local visibility (e.g. community infrastructure, green and public space improvement, etc.).
The factors supporting successful investment for regional development include using an integrated regional development strategy, engaging in place-based, cross-sector, regional development planning that is results-oriented and forward-looking, and ensuring that investment occurs at the proper territorial scale. Implicitly, this draws on the ability to bring together and guide diverse policy sectors and interests and take a learning-based approach to building national and subnational-level capacity. In its pursuit of balanced regional growth, inclusiveness and greater well-being, the Welsh Government may need to address fragmentation in its strategic and policy frameworks for regional development and investment, diversify the policy co-ordination mechanisms used and reinforce policy implementation mechanisms. Increasing policy effectiveness and generating trust-based partnerships will simultaneously depend on and nourish multi-level governance systems that support all levels of government in making successful investment decisions for regional development.
Creating an integrated strategic planning framework for regional development in Wales
Articulating a vision-based, long-range plan to achieve national, regional or local aims for growth and well-being is at the heart of a regional development strategy. It can anchor sector policy interventions for regional development and facilitate cross-government action to realise agreed-upon aims. It can also clarify what government means by and expects from regional development, its objectives and priorities. Some Welsh stakeholders have expressed frustration with the lack of strategic vision for regional development. A successful regional development strategy relies on societal agreement to promote policy coherence, optimise resources and realise desired outcomes.
The current strategic framework supporting Welsh regional development is structured around the WFGA and diverse strategy and policy documents, both active and proposed. While comprehensive, the framework is fragmented across policy sectors and government departments, which can affect policy coherence and requires highly effective co-ordination mechanisms to ensure cohesive implementation. Funding streams are also fragmented. Such fragmentation is not unique to Wales. However, it represents a significant challenge and requires effective co-ordination. This is particularly important in light of the current uncertainty surrounding investment financing arising from Brexit, and the impact of COVID-19 on finances and investment needs.
As it advances with its regional development agenda, supporting a dedicated cross-sector policy for regional development and integrating the financing strands would be valuable. There are some distinct advantages to this approach: aligning priorities, building coherence and complementary across sectors, setting clear guidelines for decision-making and action, and building on cross-sector synergies. It can also serve as a roadmap for sector strategies and policies that contribute to the regional development agenda. Ensuring that diverse stakeholders are involved in its design can build a sense of ownership for the policy and its objectives, and can generate innovative solutions to specific challenges.
Strengthening regional development policy co-ordination in Wales
Responsibility and leadership for advancing the Welsh Government’s regional development aims are spread throughout the government. Given the policy fragmentation, and a tendency for the Welsh Government to work in silos, there is a need for stronger horizontal and vertical co-ordination of regional development activity among actors and for a high degree of incentive to work together. Currently, there is an emphasis on consultation bodies. These are valuable for offering expert insight and advice, but they do not serve a co-ordination function. Turning to a high-level, inter-ministerial co-ordination body could help to identify cross-sector complementarities, harmonise expectations and rules, support investment pools, and establish a clear and transparent priority setting process that considers the territorial impact of policy and investment initiatives. Additionally, centres of government are playing stronger co-ordination roles across the OECD, and their emerging strategic importance goes hand-in-hand with a shift in the role of national-level governments. Today, national governments are being called on to take a more strategic role, focused on setting objectives, co-ordinating policy and monitoring performance, while subnational authorities concentrate on meeting their service responsibilities.
Not only do regional development and investment need political-level co-ordination but it also requires practical co-ordination. A technical-level entity with full cabinet (political) support and a formally-recognised mandate to co-ordinate regional development and investment would be important in Wales. This could be a dedicated office for regional development and investment within the office of the First Minister. Given the Welsh governance context, it is fundamental that such an office remain sector “neutral” and not politically or sectorally aligned with any specific government department or policy sector. Such an office could unite the strategic planning and investment planning dimensions of regional development into one entity, consolidating responsibility for strategy, policy co-ordination and investment management.
National regional development policy is important. Just as important is to complement it with place-specific development plans, designed and implemented at the relevant territorial scale (e.g. regions, metropolitan areas, local governments). A large amount of regional- and local-scale planning and service delivery already occurs in Wales. Ensuring that these are co-ordinated would be important. In the short term, it would be valuable to articulate clearly how the various regional- and local-level plans work together – including Regional Economic Frameworks, and City and Growth Deals. In the medium term, rationalising many of the existing plans into comprehensive, cross-sector, regionally designed development plans that align with a national regional development policy would be helpful. Such streamlining could also address questions of planning fatigue and limited resources.
Boosting policy and investment implementation capacity
Successful policy implementation is as essential as effective policy design. Policy implementation in Wales is reported to be challenging at the national and subnational levels. This can be due to policy instability, a disjointed policy delivery process, and limited capacity. As the Welsh Government moves to devolve additional responsibilities to local authorities, building capacity and strengthening relationships in order to work in tandem will be fundamental. Success moving forward will depend on accepting new roles and building capacity to fill them, including a more strategic approach for the Welsh Government, and a more empowered implementation role for local authorities. The Welsh Government is taking steps in this direction, for example with the introduction of chief regional officers (CROs) and their teams, and the proposed introduction of corporate joint committees (CJCs). However, additional steps are likely necessary. The devolution of responsibilities frequently calls for a “learning-by-doing” approach, that can be realised through a combination of trust-building mechanisms, including formal partnership agreements (e.g. contracts), and piloting the attribution of responsibilities. The weight of capacity building rests not only on the Welsh Government. local authorities must also recognise their limitations and take the steps necessary to address these, including by working at a larger scale and being clear about what they can achieve in the short versus medium and long terms.
There is a rise in the use of regional development agencies among OECD countries. Reintroducing a regional development agency that is strategically oriented to support the implementation of regional development and investment policy could boost the potential of policy delivery and also build implementation capacity in the public and private sectors. It is critical that such a body be able to work across policy sectors and levels of government, have a national-level and subnational presence, be adequately resourced and have decision-making power within defined parameters. The Welsh Government’s experience with regional development agencies is mixed and it would be important to learn from the past while also capitalising on previous practical experience.
Governance tools to support stronger regional development and investment outcomes
Outcome-oriented performance measurement and a strategic approach to stakeholder engagement are tools that can contribute to policy and investment success. While Wales pursues both, it could reinforce its practices. A more robust approach to performance measurement in regional development would help Welsh public authorities to better understand the impact of their policies and programmes. A targeted, concise indicator system designed around specific regional development aims can help accomplish this. It could be used to highlight the effectiveness of programmes and investments that support growth, inclusiveness, service delivery, the foundational economy and well-being. Additionally, it can serve as a citizen accountability mechanism – especially when shared in easy to understand language, highlighting matters of citizen and stakeholder interest, and be available in an accessible format. Opening itself and its performance to public scrutiny would also permit the Welsh Government to lead by example and support efforts to increase outcome-based performance measurement at the subnational level as well.
Stakeholder engagement can help ensure successful public policy and investment outcomes. The Welsh Government relies on a variety of consultation mechanisms, from consultation bodies and working groups to reflection exercises and public consultation to support its policy process. There are limitations to this approach, however. Many of the key players and experts that participate in these bodies are the same. The advantage is trust and deep knowledge of the matters at hand, e.g. regional development policy and investment. The risk is a narrow approach that incorporates broader stakeholder consultation too late in the policy design process. For example, there is reportedly room to improve engagement practices with non-government stakeholders including the private sector, academia and the third sector. Active engagement with local authorities and other subnational actors could be strengthened, as well. In this case, there appears to be a disconnect between national and subnational government actors with respect to engagement definitions and expectations. While the Welsh Government stresses consultation, local authorities expect more “active” or “hands-on” engagement in the design and delivery of policies and investments. This gap will need to be bridged. Establishing clear, agreed-upon definitions and aligning engagement expectations among all parties could improve engagement practices and contribute to building greater trust. Stakeholder engagement strategies are one mechanism to accomplish this.
1. Establish a vision-based, long-term regional development strategy for Wales
Undertake an active, cross-sector, multi-stakeholder consultation process.
Potentially use the WFGA as a basis for the strategy.
Set clear, societally agreed-upon long-term objectives for the territory.
2. Introduce a single, integrated national regional development policy to realise strategic aims
Take a cross-sector (whole-of-government), multi-stakeholder approach to policy design.
Establish clear, measurable objectives that support the long-term development strategy.
Ensure co-ordination between the regional development policy and sector policies with regional logic and goals.
Create an outcome-based performance measurement system to evaluate regional development policy and investment implementation and success; adjust when necessary.
3. Strengthen and diversify co-ordination mechanisms for more effective policy and investment integration
Reinforce the role of the centre of government as a guide and co-ordinator of regional development and investment policy.
Establish a high-level inter-ministerial co-ordinating body for regional development chaired by the First Minister; complement with a technical/implementation subcommittee.
Introduce/strengthen a multi-level, multi-stakeholder dialogue body and activate its innovation and knowledge-sharing potential via a strategic role in regional development and investment.
4. Establish an office for regional development and investment
Link strategic regional development planning with regional development investment planning and management activities (currently in WEFO), by uniting them into one office.
Ensure the office is “sector neutral” by placing it in the office of the First Minister.
Give this office a mandate (ideally statutory) for leading regional development strategy and co-ordination efforts across government.
Potentially move CRO teams into this office.
5. Reinforce subnational capacity to deliver on regional development planning and implementation responsibilities
Better articulate complementarities between Regional Economic Frameworks and other City and Growth Deals, as well as other existing planning requirements and plans.
In the medium term, introduce regional-level development plans, designed by subnational entities and aligned with a broader national regional development strategy, consolidating other relevant planning requirements into these.
Establish formal agreements/contracts as a capacity-building mechanism.
Adopt a learning-by-doing and asymmetric approach to devolving responsibilities.
6. Reintroduce a regional development agency to support regional development policy and investment implementation
Orient this body toward strategic support for realising national and subnational regional development and investment aims at the regional and local levels, working with the public, private and third sectors.
Ensure a sectorally independent head office, with accountability to the proposed office for regional development and investment.
Establish regional-level “branch” offices (one per region). CRO teams may be effective support agents.
Ensure adequate human and financial resources and decision-making power within its remit.
If placed in an office to regional development and investment CRO teams may also effectively support such an agency at the subnational level.
7. Reinforce governance tools that support regional development and investment outcomes
Strengthen an outcome-based dimension to performance measurement, using insights as a learning tool to evaluate and adjust regional development policy interventions and investment effectiveness and to build accountability to citizens.
Support CJCs and/or local authorities in the design, implementation and use of a monitoring and evaluation system for their regional development plans.
Ensure system measures are easy to capture and to understand, are relevant to policymakers and citizens, and can support accountability to citizens.
Adopt a stakeholder engagement strategy to establish clear engagement definitions and expectations for the Welsh Government and local authorities.
Reinforce engagement practices with external regional development stakeholders (e.g. private and third sectors, academia, etc.).
The Welsh Government is introducing economic regions as part of its approach to place-based regional development. Through these, it aims to build an adequate scale for devolving regional economic development planning and to build the capacity of local authorities in the planning and implementation process. For Wales to benefit from such regions, the economic, administrative and institutional capacities of local authorities will need to be strengthened. Establishing co-operative bodies among local authorities is one way to address problems of scale, and support more effective regional development policies. This, however, requires that the local authorities be in good fiscal health. Currently, Wales has introduced three economic regions: North Wales, South East Wales, and Mid and South West Wales. The question currently circulating among Welsh regional development actors is whether three economic regions should be maintained or if greater economic efficiency and regional equity could be gained by separating Mid and South West Wales into two distinct entities, creating four economic regions.
Welsh local authorities: The heart of proposed economic regions
Welsh local authorities are responsible for delivering over 700 services, making them important public service providers, particularly in education, social services, housing and security. Their per capita spending on services is relatively similar across the territory, including those of Mid and South West Wales. Revenue comes primarily from Welsh Government grants (almost 70%). The share of own-revenue available to local authorities is small, which raises the question of adequacy with respect to revenue autonomy in Wales. Without a larger share of local authority spending financed by their own-revenue sources, some of the benefits of decentralisation are lost, despite the equalisation system. Another issue with respect to local authority financing is the role of earmarked transfers, which form between 25%-28% of total local authority revenue. In general, the extensive use of earmarked revenues is not advisable. It can draw subnational government attention away from local needs and preferences (or limit their ability to meet these), and weaken the transparency and accountability of local decision-making. Thus, it is often more desirable to opt for non-earmarked or block grants and use earmarked transfers only temporarily for special cases.
While transfers to Welsh local authorities have been cut, it has not been matched by a reform of the local government financing system. This can widen a fiscal gap, particularly as Council Tax revenues alone cannot make up the shortfall. It is also not possible to rely on the Non-Domestic Rates system since it does not encourage local authorities to develop business property tax bases, which otherwise could contribute to trimming the fiscal gap. If this gap persists, there could be a negative effect on local service quality and availability, posing a serious threat to the public service system in the medium and long run. To improve the fiscal health of Welsh local authorities and support their ability to undertake regional development planning and implementation tasks, there will need to be an adjustment to the tax framework.
A comparative look at Mid Wales and South West Wales
When considering Mid and South West Wales as one or two economic regions, a number of factors need to be accounted for. Population density is critical. Mid and South West Wales is home to about 29% of the population and 57% of the total territory, resulting in low population density. Furthermore, it exhibits the lowest population growth projection in Wales for the next 10 and 20 years. There are labour market factors to consider as well: more people commute out of the region to work than into the region, and the labour market links between communities in Mid Wales and South West Wales are not very strong. Mid Wales has a more rural profile when compared to South West Wales, though in both areas the public sector is the largest employer. Also, in both, the gross value added (GVA) per head is below that of Wales overall. Trends indicate a markedly different growth rate between South West Wales and Mid Wales, where GVA growth has slowed.
Ensuring governance capacity for a Mid (Wales) and South West Wales economic region
There is no “optimal” number of regions for any particular country and it is seldom the case that regions can be designed “from scratch” – without any pre-existing regional or local organisation. Regional reform, therefore, is often a path-dependent process affected by a variety of factors, ranging from administrative borders, economic and labour market characteristics, to historical, cultural and ethnic identity. The Welsh Government is proposing to build territorial scale and support devolution of regional economic development planning and implementation, with the introduction of inter-municipal co-operative bodies, corporate joint committees (CJCs) as “regional-level” entities. While the exact tasks of CJCs remain to be defined, they could help all levels of government consider the wider effects of local-level development needs and priorities, and help co-ordinate diverse plans. The ability of Welsh local authorities to carry out the tasks assigned through CJCs will depend on their fiscal, administrative and institutional capacities. Financial resources are scarce among local authorities, which means that, unless extra funding is made available, budget resources for CJCs risk being limited as well. Effective governance in such an arrangement can depend on fostering local-level ownership, strong accountability and empowerment to act in their region. Ensuring that CJC decision-making bodies are populated by local politicians (council members) is one way to achieve this.
The opportunities, challenges and trade-offs associated with three versus four economic regions
A Mid Wales economic region would likely result in a relatively homogenous entity in terms of service demand and needs. This would support the organisation of public services and help maintain better allocative efficiency – strong arguments from an economic perspective. At the same time, economic and administrative efficiency arguments, such as economies of scale and the capacity to provide services, do not strongly support a separate Mid Wales economic region. When considering benefits versus challenges, there are some clear opportunities. These include proximity to residents, potentially better-quality services and services that respond more directly to local needs. Furthermore, the two local authorities that would co-operate – Ceredigion and Powys – are highly motivated to work together and develop their area in tandem. There is also a danger that in a unified Mid and South West Wales economic region, the problems and potentials of Mid Wales would be overlooked, particularly if development focuses on urban and large-scale investments. In terms of challenges, the weaker financial, administrative and institutional capacities of Ceredigion and Powys need to be considered, particularly when compared to a larger unit of the six local authorities which form a Mid and South West Wales economic region.
Conversely, a single economic region for Mid and South West Wales could better offer a good base for policy effectiveness and enjoy lower administrative costs. This arrangement could also permit Swansea to be further strengthened as a motor for regional growth, innovation and productivity, benefitting the whole economic region. Furthermore, the critical mass to generate strong regional development is already present and could be additionally supported by building on synergies from the Swansea Bay City Deal and the proposed Mid Wales Growth Deal. The challenges such a region would face are linked to the heterogeneity of the area’s local authorities. This means that a single CJC for the region may be unable to consider regional specificities to the same degree as in a two-region model and Mid Wales could suffer. Additionally, the distances and travel times within a larger region could be problematic for equity of access and service delivery, leading to less ability to meet service needs and demands. Finally, in a larger co-operative unit, there is a risk that each member aims to maximise their own benefit, which, in a worst-case scenario, would lead to excessive spending.
Adopting a pilot approach to support decision-making and supporting co-ordination
There are clear benefits and challenges in both a three- and four-region model, and trade-offs need to be considered. Given that CJCs, as co-operative units, can be easily modified if necessary, it would be possible to adopt a pilot approach. In other words, first organise the economic regions around a four-region model with clear objectives and a clear timeframe for meeting these (e.g. five years). Once that time period is met, the model could be independently evaluated, for example by policy evaluation and academic experts, to determine if it should be kept or if Wales should move to a reduced number of regions.
Chief regional officers (CROs) and teams were introduced by the then Cabinet Secretary for Economy and Transport (now the Minister for Economy, Transport and North Wales) to support regional-level economic planning and co-ordination. CROs, as Welsh Government officials, together with CJCs as regional-level entities, would play a key role in ensuring a strong partnership approach between levels of government. CROs could help maintain contact with diverse parts of the Welsh Government and support co-ordinating measures with other CJCs. They could also help ensure equal treatment of the economic regions by the Welsh Government. However, care should be taken to ensure that the relationship is dialogue and not power-based. In other words, CROs should not be given decisive power over CJCs, such as the power to accept or reject plans prepared by CJCs. Yet, CJCs could, and should, invite CROs to their meetings on an ad hoc basis to ensure relevant information is shared. As these regional structures take form, it will be important to ensure that the roles and responsibilities of all actors are clarified and strengthened.
1. Strengthen the administrative and service provision capacity of local authorities
Increase local authority fiscal autonomy by reducing the role of earmarked grants and increasing general grants.
Concentrate the equalisation mechanism in the transfer system rather than in the Non-Domestic Rates.
Increase the local authority own-source revenue (e.g. diversify local taxes; introduce a surcharge on personal income tax; reform the Council Tax; generate revenue from charges and fees).
Adjust the equalisation system to ensure all local authorities can provide a standard/minimum level of service.
Increase cross-jurisdiction co-operation (e.g. through CJCs) to minimise territorial inequalities and build scale for key services, ensuring strong governance mechanisms, adequate resources and clear lines of accountability.
2. Take a strong evidence-based approach to establishing economic regions in Mid Wales and South West Wales
Consider diverse territorial factors when establishing an economic region (e.g. population base, demographic trends, labour market conditions, commuting, deprivation, GVA, Internet connectivity, local government spending).
Take a functional area approach when considering a Mid and South West Wales economic region(s), balancing between economic, administrative, social, cultural and identity dimensions and the trade-off between risks/challenges that are economically, socially and politically acceptable.
3. Ensure clear roles for CROs, CJCs and local authorities in the economic region(s)
Establish a close working partnership between CROs and their team(s) and CJCs, where CROs play an enabling and consultative role but not a decision-making or authoritative role over CJCs.
Ensure a clear role and scope of authority for CJCs and local authorities in regional development and foster local-level ownership, accountability and empowerment to act in their region(s).
Secure strong CJC governance and accountability by ensuring that the decision-making bodies of CJCs consist of local politicians (council members).
Ensure that CROs and their offices have strong local-level knowledge.
4. Pilot a Mid Wales economic region to support a place-based approach to productivity, growth and regional well-being
Establish a clear timeframe for the pilot (e.g. five years) then carefully evaluate the impact.
Base the final decision of continuing with a four-region model or to merge Mid Wales with South West Wales on an independent evaluation of results achieved.
Use the pilot to determine whether three or four CROs and teams is optimal.
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https://doi.org/10.1787/e6f5201d-en
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