‘National economic growth will only come from increasing the productivity of places across the UK, many of which underperform relative to their international comparators. The IS-8 are active in every nation and region of the UK, but we cannot be place blind: we must identify and accelerate the highest-potential opportunities in each, while tackling their specific investment barriers.’
Modern Industrial Strategy,
Executive Summary (our emphasis)
In Part One we have seen how the UK’s regional economic disparity has taken hold and worsened over time, as a result of over-centralisation, the hollowing out of local institutions and a chaotic, piecemeal approach which mean that even when the right diagnosis was in place, government was unable to act on it.
The tangible experience resulting from this for people across the country is one of decline: of weak wage growth, the closure of local facilities and over-stretched services. This is personally shattering for those communities affected, and it is economically and politically lethal for the party in government that does not take action.
We have also seen how the Labour government elected last year seems determined to succeed where its predecessors have failed, and has set itself an overarching national mission of improving living standards in every part of the country. The ability to put down firm roots and feel confident in planning for the future is an expression of whether people feel that overall national economic renewal (when it comes) is serving them and their family. The extent to which more people in more places feel that that is the case come the next election will be a core element of answering the present day equivalent of the ‘Reagan question’ for this government.
It is in the spirit of helping progressive governments to answer that question in the affirmative that we set out below a toolkit with five recommendations rooted in the principles that we believe the state should adopt to increase regional prosperity and reduce economic disparity in the UK. Taken together, these tools are designed to encourage a state that is more reliable, capable and purposeful in the pursuit of growth that reaches all parts of the country.
If the UK Government is to make its Modern Industrial Strategy stick – and apply the lessons of the past – it must become more reliable, both as an investor and a rule maker. That means ensuring that a greater share of public investment in the essential building blocks of local economic resilience reaches much more of the country – and being clear about how and why the investment decisions that support this spread have been reached. Given the significant planned growth in capital spend (£113bn more over the next five years) this is not a zero sum exercise – all nations and regions of the UK will see increased investment – but it should mean a rigorous and transparent process of spending allocations, including more searching tests for decisions that do not direct growth investment towards underserved places.
The current picture is not good. In the Labour Together report ‘Nation Rebalanced’, JP Spencer helpfully identifies the types of public expenditure that form the ‘essential mix’ for growth. Using HM Treasury figures, he broadly delineates this as the spread of spend that captures transport, infrastructure, housing, education and skills, and R&D. While still broad in scope, this focused analysis is more useful than looking at wider spend-per-head statistics which include health and welfare expenditure.
Spencer’s analysis finds that when you compare the Greater South East with the rest of England, the average per head gap in ‘growth spend’ in real terms stands at 14.5% over the 16-year period in which this data has been collected to date (2008-2024). This gap stood at 19% during the 2019-24 parliament, demonstrating the extent to which the Levelling Up project fell short of its stated aims.
Paradoxically, there is evidence of private sector investment being better dispersed across the regions and nations when compared with similar public spend. R&D spending is a particularly acute case in point with a long term trend that actively undermines the Modern Industrial Strategy.
In a 2023 Harvard study into UK disparities, Anna Stansbury, Dan Turner and Ed Balls found that business R&D spend in the UK is more geographically balanced than comparative public expenditure. This stark research suggests that ‘the UK may be making regional inequalities in R&D worse by prioritising regions with academic expertise over those with existing private sector R&D strengths.’1
If business R&D spend is more geographically spread than its public sector equivalent, and UK universities beyond the so-called ‘Golden Triangle’ of London, Oxford and Cambridge boast globally recognised strengths of their own, it is hard to see how to justify the over-concentration of public investment in the South East.
This important detail is less well understood than the picture presented by looking purely at overall public spend per head. Taking a more nuanced view reveals how the status quo is allowing public funding to compound, rather than break down, barriers to more equitable growth.
At best, this analysis suggests that our public research institutions are risk-averse and failing to read, and move with, local economic specialisation and the relationship with shifting global demand. At worst, it points to a culture of decision-making that is out of touch with businesses that are capable of innovation-backed growth outside of the Greater South East.
One interviewee for this report, with experience in the cyber and AI sectors in both Oxfordshire and Cardiff, explained that while working in Oxford ‘you just feel the sense that government, industry and education is backing you all the way’. The scale of funding generated by the spending patterns described understandably makes the contrast with Cardiff a stark one.
Professor Richard Jones has highlighted this issue as it relates to the North West, arguing that relatively high levels of business R&D spend are not being supported by the basic and translational public R&D or skills investment that can support stronger business outcomes and jobs in the region.2
The UK also compares unfavourably to its OECD peers in this regard, such as Germany, where public R&D investment actively seeks to address regional imbalances. Yet the potential here is much higher: the UK Higher Education sector boasts more institutions that feature in global rankings for academic excellence than Germany, including many beyond the Golden Triangle.3 Yet despite this, we are in the bizarre position of directing public funding away from the activity that could support growth in other regions and ultimately lift the strain on wider public budgets.
The perverse outcomes of this current model were well summarised by an interviewee for a previous FGF report, Spurring Innovation, who observed that: ‘the UK government’s R&D policies have effectively been acting as an anti-regional policy for some decades’.4
Without appreciating that situation, it can be tempting for the government to defend the status quo rather than disrupting inherited assumptions and judgements on the path of growth-enhancing spend. More work is required to understand the nature of this problem, but government should consider the factors that have constrained R&D investment and be prepared to be bolder in addressing them.
The scale of the R&D commitments in this Spending Review period makes the need to address this long term trend more urgent, but also presents a greater opportunity.
| Recommendation 1 | Description |
|---|---|
| Create a Renewal Investment Tracker | Focus on reducing the growth investment gap between London and the South East and the rest of the UK. Work with devolved and regional government to identify and develop the data, collaborations and opportunities needed to reinforce new regional growth policies. |
The government should gather and share the data beneath this counterproductive situation, as a first step towards moving the dial on it. If the UK government is determined to stay the course on driving up regional growth, it should create a ‘Renewal Investment Tracker’ to bring focus to the path of growth-enhancing spend in concert with devolved nations and mayoralties.
The objective here is to intervene where the path of public investment is actively making matters worse and to turn a broad consensus on regional growth into a shared sense of mission. A tracker could help achieve this by revealing the scale of the regional investment gap, and spurring all levels of government to ensure that new strategies and investments narrow, rather than widen, this divide.
Devolved as well as UK politicians would need to prioritise this work in order to shift the current barriers to the investment that is best placed to support local growth. While respecting democratic mandates, this should involve a shared project to address a collective challenge.
As we will see, making this gap more visible – and agreeing on the need to address it – should lead to a project that is more searching about the contribution that can and should be made by government at all levels.
Our proposed Renewal Investment Tracker – which could be commissioned by the government’s newly created Council of Nations and Regions (CNR) – would collate and publicise the volume of growth-enhancing expenditure made across the regions and nations of the UK. The definition of ‘growth-enhancing expenditure’ for this purpose could draw on the figures set out in Labour Together’s ‘Nation Rebalanced’ report, providing a basket of budget lines that can be tracked over time. This would likely require the collection and publication of more local data than is currently the case, in order to capture a more granular assessment of the existing landscape. Any tracker should be based on outturn expenditure – i.e. spend that actually got out of the door in the previous year – rather than being skewed by pledges that do not materialise.
The creation of such a tracker would require joint working across administrations and governments within the UK, given that control over the various budgets in question falls across different layers of government.
Negotiation would be required across governments and mayors based on the division of devolved responsibility and respect for the mandates each partner represents. The tool could be developed by the Office for National Statistics (ONS), which is already creating new methodological approaches to publish more data at the city region level. The Tracker would serve all levels of government and could be published by the CNR with input from Chief Statisticians, Chief Economists and respective Treasuries of the four nations.
Tailored work would be required with devolved nations to better understand where systemic disparities are evident. The Fiscal Frameworks that apply to each nation make this task more complex and care would be needed to agree upon the right model.
The CNR should publish Renewal Investment Tracker figures annually, with the first release capturing 2025/26.
This new tool could help government demonstrate that it is determined to act at scale while promoting major related interventions. For instance, the UK Government has rightly held up the example of a South Wales coal-fired power station that has recently been turned into a clean energy facility, supplying energy for the grid.5 The project has supported 300 new jobs with investment flowing from the private sector and local government pension funds.6 This is the kind of project that will deliver the local reward the Industrial Strategy is seeking, and the creation of new pension mega funds could unlock many more examples. Against this wider backdrop, a Renewal Investment Tracker would show investors and communities that the state is investing alongside them by funding the fundamentals for growth.
In time, the Renewal Investment Tracker should become a kitemark for an accurate picture of regional investment in the UK, a visible sign of the government’s commitment to tackling disparities, and a long term signal for investors that the UK is serious about driving up growth everywhere.
It should prompt the changes in investment spending profile that will deliver on that ambition. The prize of this broader project is enormous – as is the corresponding risk of not acting. Based on the analysis of spend in England only, ‘Nation Rebalanced’ found that if the spending pattern ‘as of 2023-24 persists for another ten years, the rest of the country will miss out on almost £100 billion of growth spending compared to an equal per capita allocation.’
This tool could also make it more difficult for future governments to reserve largesse for the Greater South East at the expense of the rest of the UK. If investors observe that a political cost is associated with pulling back from regional investment, they may also regard central government as having more skin in the game in the locations they are considering for new investment. We do not recommend a specific target or any ‘lock’ on decisions. Instead, the tracker should hold up a mirror to the path of public investment so that it can be tested against new reforming policy.
‘Our goal is to prove to investors that the United Kingdom is not just one of many countries seeking investment, but a country that you can believe in.’7
UK Infrastructure: A 10 Year Strategy
A Renewal Investment Tracker could hardwire the government’s wider objectives into decisions so that they are less likely to dissipate than previous commitments aimed at rebalancing productive investment. This tool could also help provide the proof point to reinforce the government’s claims in the Infrastructure Strategy that for investors the UK can once more be ‘a country that you can believe in’, and so help unlock more investable projects at the scale required to attract major inward investment. At a practical level, the Tracker would help draw a clear link between the pledged investment in the new Infrastructure Pipeline and the actual spend seen at the other end.
It would be important that this tool does not involve a reduction in the rigour attached to value for money assessments. Instead, it should lead to greater focus, and collaboration, on the development of investable opportunities. Being more interventionist and ‘more muscular’, as the Industrial Strategy suggests, ought to mean that the state will now play a more significant role in developing such opportunities. In short, the UK Government should feel in an active way that it has skin in the game and that it has a role to play in finding solutions.
New proposed changes to the Treasury’s ‘Green Book’ (see Box 1) would also be relevant, including the development of ‘place-based business cases’, which should take on an important status given the role they could play in turning policy into action. The Tracker would also align with the recommendations of a recent PolicyWISE report into the role the CNR could play in improving collaboration across the UK.8
The government is bringing forward fresh reforms to the Green Book – the guidance the UK Treasury uses to appraise spending decisions and assess a project’s value for money – which include a welcome role for ‘place-based business cases’.9 It is right that the review which the Chancellor initiated earlier this year was seen as an opportunity to make sure HM Treasury and guidance better serve the new direction set by Ministers. That said, – as FGF has argued elsewhere – it is overly simplistic to regard the Green Book as being responsible for underinvestment outside London and the South East.
Instead, it is broader risk aversion and the failure to attach regional investment to a plan for national economic renewal that have been the major barriers to decisions that unlock regional investment at greater scale. In fact, if the Green Book appraisal model was crudely or unthinkingly dismantled, devolved leaders could see local projects become less, rather than more, viable. For instance, the role of land value uplift is often cited as an example of inbuilt bias for projects in the South East because this is where existing land values are highest. However, Professor Henry Overman – who advised on the government’s review – has cautioned that dismissing land value growth in appraisals for integrated settlements would make it harder for devolved leaders to pursue significant local growth opportunities.10
There are examples of instances where Ministers have been able to take decisions that support regional growth and meet the needs of the Green Book. Any reforms to the letter of the Green Book therefore need to be tied to an accompanying shift in UK Treasury mindset, in the culture and behaviours across other departments and public bodies, and – most critically – in political will among Ministers, devolved, regional and local leaders. Responsibility for these judgements ultimately lies with them.
Across education, health, housing, land use, economic development, innovation, skills, higher education, procurement, local government and more, Ministers in Holyrood, Cardiff and Belfast exercise primary law-making powers and direct budgets worth billions of pounds each year.
In fact, over the course of this UK parliamentary term, the devolved nations will collectively spend in excess of £500bn across all devolved policy areas. This is an enormous figure, yet it is not well understood and nor is it reflected in the work of many Whitehall departments and industry bodies who should by now be better at engaging with governments that have existed for over a quarter of a century. The pandemic demonstrated the risks that come with failing to act on the reality of devolution, rather than (mis)perceptions of it.
The rapidly changing nature of defence policy offers an opportunity to address those problems.
The Strategic Defence Review (SDR) commits to a ‘whole of society approach’ which cannot be achieved without better cooperation across the nations of the UK. The CNR could therefore use the new Investment Tracker to think in particular about the defence sector, and how collaboration and investment here can unlock local growth and jobs.
While the CNR of course does not have the remit to drive defence policy, it could play a useful role in connecting the various levels of UK government, acting as an impactful forum to resolve longstanding historic blocks on cooperation. Geopolitics does not just affect the UK government; it also impacts on the decisions regional and devolved governments take and given current trends looks set to do so increasingly. In order to ensure the task becomes more actively shared across governments, CNR members should be regularly briefed on defence matters – the majority of which will not be sensitive.
An assessment of SDR priorities and mutually beneficial commitments would be a positive place to begin – for instance on skills. Firms within the defence sector – but also across the energy and technology sectors – will increasingly compete for similar skills as the Modern Industrial Strategy is implemented, and demand for workers with Science, Technology, Engineering and Mathematics (STEM) qualifications will remain high. Joint work at the CNR level could explore opportunities to resolve this shared challenge that cuts across devolved and non devolved areas.
The UK could look to one of its nearest neighbours in doing so. Ireland is recognised as a global leader on STEM skills and has regularly led EU league tables on STEM qualifications.11 This progress includes trebling the number of girls and women choosing to pursue STEM qualifications at Higher Education level. The Harvard Study on UK disparity referenced above observes that the wage premium for STEM graduates has remained higher than the premium for graduates more broadly, reinforcing the case for intervening in this area.
The combination of i) a reliable demand for skills, ii) the security need to spread defence activity across the country and; iii) the economic evidence on stronger earnings outcomes, should keep this issue on the agenda for all decision-makers.
Making progress on this challenge, and anchoring more quality jobs in places that have less access to them, is one way the state can demonstrate that it is determined to create opportunities in all parts of the country.
If it has not already happened, officials should be working across governments with support from Ministers to engage on the content of the Defence Industrial Strategy. The establishment of UK Defence Innovation is also an opportunity for another relevant institution to follow the NWF’s lead in making regional economic growth a strategic objective.
Even where there is broad consensus around the barriers created by an overly centralised system, actual decisions can still get stuck or blocked by circular arguments about accountability and incentives. Some argue, for instance, that as things stand Mayors are not encouraged to prioritise growth in their local tax base because they would see too little of a direct revenue reward from doing so. Others argue that extending Mayoral powers further still would lead to poor accountability.
But these arguments suppose that the alternative to devolving power is retaining it within a well-performing centre that acts on the lessons that strong accountability offers. The Levelling Up example does not bear this out, nor does performance across projects and programmes as high profile and varied as High Speed 2, Test and Trace, Kick Start and the outsourcing of probation services. And as set out above, the sheer scale of disparity in the UK suggests the status quo is failing to prioritise the growth of regional economies.
The UK Government’s distance from a local tax base means that the discipline of leveraging assets in a way that compounds benefits and crowds in investment is impossible to deliver in a top down way. What is more, institutions that do not allow for, or organise around, local leadership and vision stand little chance of mediating the trade-offs demanded in the transition to a UK that reaches net zero strengthens national security and deploys technology for the benefit of all.
It is encouraging that UK Ministers have sought to overcome the incentives versus accountability argument by asserting that Ministers, Mayors and local leaders share accountability in practice.
‘We must end the top-down micromanaging of individual decisions and approaches by local leaders and replace it with a principle of constitutional autonomy and partnership. Everyone – from frontline councillors convening their communities, to regional Mayors leading strategic economy policy – needs the tools and trust to deliver change. There must be a genuine relationship of equals, mutual respect, and collective purpose built around the missions to transform the UK, with clear outcomes local people will see and feel.’12
English Devolution White Paper
In that regard, the English Devolution White Paper marks a return to the principles of the the ‘Total Place’ model introduced by the previous Labour government, a return to which FGF advocated in the first report in this Impactful Devolution series, in partnership with Metro Dynamics.
‘To enable economic growth, national growth and industrial strategy need to be connected to the same elements at local, regional and pan-regional level. This will ensure consistency and build national project investment pipelines from the many blooms of local endeavour.’13
Impactful Devolution 01: A new framework
for inclusive local growth and national renewal
This reflects a welcome shift towards embracing complexity rather than using it as an excuse to hoard power. Where there is a good faith case for enhancing the arrangements for Mayoral accountability, particularly in the interests of supporting more effective councils, these should be considered as part of the development of the office. However, a perfectly neat model is unlikely to emerge and the question is second order to the case for providing the best possible combination of powers to support economic growth in poorer parts of the UK.
The creation of integrated funding settlements is also a positive step because it will allow local leaders to set public priorities that have greater consequences. Saying no to important, worthy and noisy funding bids will allow Mayors to explain why their option is the better course for their place. This likely to lead to greater pressure on the decisions made by Mayors who will still be working with pressured budgets. The justification for cutting a budget line in support of a strategic priority or pledge will likely be based on a shared sense of the circumstances that the region is dealing with. Current pledges made by Mayors range from new childcare grants and homelessness to airport support and free school meals, and each will require a different approach to achieve different impacts across England.
The East Midlands Inclusive Growth Commission established by Mayor Claire Ward (and chaired by former Bank of England Deputy Governor Andy Haldane) points to the opportunity to connect UK policy with tailored approaches to regional growth. The Commission’s interim report sets out the case for a practical step-by-step approach to skills and career development under the banner of an ‘Opportunity Escalator’ that is shaped around the specific needs of the region. It will also explore the creation of a ‘Regional Investment Fund for the East Midlands’ using a blended finance model to bring together NWF capital, local government pension funds and private finance.14
The Modern Industrial Strategy specifically commits the UK Government to a more muscular, interventionist approach and to renewing partnerships with devolved governments in Scotland, Northern Ireland and Wales. To deliver on that commitment, the UK Government will need to address the flaws inherent in the inherited status quo.
In his 2024 book Fractured Union, Michael Kenny presents a comprehensive analysis of governance across the UK. This includes a concern about the limited efforts made within the UK Government to understand the role devolution plays across most areas of policy. Specifically, Kenny identifies an ‘unwillingness at the highest levels of British politics to engage and internalise the implications and logic of devolution.’15 He goes on to highlight that devolution has been missing from the training undertaken by officials progressing through the Civil Service and warns of the risk that low levels of awareness about this issue can cause.
A 2018 inquiry into devolution and Brexit by the House of Commons Public Administration and Constitutional Affairs Committee identified the same issues and recommended training:
‘We are concerned that so much work still needs to be done 20 years on from the establishment of devolution in 1998. It is clear from the evidence to this inquiry that Whitehall still operates extensively on the basis of a structure and culture which take little account of the realities of devolution in the UK.’16
In the years since that report, other developments – such as confusion over COVID-19 regulations and the threat to use legal force to impose a freeport model encompassing devolved taxes on the devolved nations – have only served to further demonstrate the scale of the issue.
The 2014 Scottish Referendum, Brexit and the pandemic have all generated preventable risks to good governance and delivery. Whitehall increasingly legislates in devolved areas, at times unintentionally, pulling Ministers and officials into preventable conflict and away from strategic priorities.
It would be a significantly positive step, and contribute to the government’s broader industrial policy aims, if more officials in more Whitehall departments were properly trained and empowered to engage confidently with matters of devolution, meaning in turn that fewer preventable conflicts reach Ministers in all four nations.
This is also not solely the responsibility of Whitehall. The devolved governments should also expand the training undertaken by officials in Scotland, Wales and Northern Ireland so that departments develop a stronger understanding of the risks posed to their work by intergovernmental arrangements.
Having established themselves as more reliable via the recommendations set out above, governments at the UK and devolved nations level can take steps to improve the system they oversee. This involves each of these governments asking itself if it has the capabilities needed to develop good collaboration, effective data collection and analysis and the ability to reflect and improve?
Our recommendations for a more capable state focus on allowing the UK government to step back from the operational and make better use of its strategic capabilities. It can do this by reducing the number of grant-based programmes related to the IS-8 sectors, replacing them where possible with innovative alternatives. It should also develop a new evidence and evaluation service for local growth. This would allow the UK government to step back from the operational and make better use of its strategic capabilities.
| Recommendation 2 | Description |
|---|---|
| Create an Evidence and Evaluation Service for local growth | Build the evidence base for and with nations and regions to support smart decision-making. Mandate and incentivise evaluation to support institutional learning. |
A more capable state that makes progress on regional growth will be one that builds up – and acts on – a better evidence base. In order to bring specific focus to the regional element of the government’s core economic growth mission, it should establish a new Evidence and Evaluation Service to help improve performance.
At present, central, devolved and local governments are not able to draw on enough quality data and evidence to aid the development of smart regional policy interventions. A 2023 Bennett Institute study by Diane Coyle and Adam Muhtar points to the absence of feedback channels to support learning on UK regional policy interventions.
‘In comparison with other countries the lessons drawn for local outcomes are not institutionally linked back to national policy decisions, nor to local policy implementation through the fragmented and overlapping national and sub-national authorities concerned.’
Diane Coyle and Adam Muhtar
The Modern Industrial Strategy does provide a new monitoring and evaluation role for the Industrial Strategy Advisory Council which will include place level economic indicators, but this is a limited, top-down contribution. It does not provide a feedback mechanism that helps the state develop a better understanding of what is working or why.
A new service, instigated by the government’s growth mission, could help all levels of government spend more time building up and interpreting evidence that supports more effective regional policy.
Understanding and resolving barriers to evaluation will be an important step towards improving institutional learning. Competitive bidding processes (see below) can also act as a barrier to the evaluation work that is needed to do this. Henry Overman has argued that this is because local and devolved leaders will be influenced by the impact findings may have on future bids.
‘Ensuring that, when appropriate, all funding streams from central government for local economic development include clear, accessible, and financially well-supported evaluation components would be one way of reducing disincentives.’17
Professor Henry Overman
The government should act on the argument made by the What Works Centre for Local Economic Growth and make evaluation mandatory where possible. This would ensure that a new Evidence and Evaluation Service for Local Growth is being provided with the information needed to aggregate knowledge and share learning.
There is precedent for this elsewhere. The European Commission mandates evaluation within its projects and programmes while the UK only encourages this work in guidance, such as the Green Book. The EU does face its own problems in this area because it has proven difficult to turn evaluation into practice and evaluation uptake challenges are stubborn. However, they are able to work with a stronger evidence base and objectively have a better starting position as a result. Compared with the EU, the UK has fewer excuses for failing to collaborate on implementation meaning that it should be easier to translate learning that is more focussed on the specific needs of the UK.
Rather than being owned by one level of government, a new service could take the form of a shared resource across the nations and regions with a mandate to support regional growth. Multi-year programmes of work could be developed by expert teams drawn from central, devolved and local teams which would be signed off by the CNR.
Given the damage done to devolution in the name of Levelling Up, the devolved governments of Scotland, Wales and Northern Ireland will require formal protections to ensure that this process in no way undermines devolution. This would create a more stable framework for public servants to engage and cooperate on these complex issues without running into the preventable conflict described in Box 2. If used well, the structures that support Intergovernmental Relations could help overcome these barriers to cooperation. The project proposed here should only require a small contribution from these structures but that level of oversight matters in allowing both politicians and public servants to use the sort of service proposed with confidence. Statements of good will not be sufficient and would stifle collaboration in practice. Civil servants and local authority officers within the devolved nations have some of the most extensive experience of managing EU programmes with a sustained place focus and within a system that placed a greater emphasis on evaluation. A greater level of shared learning could benefit interventions across the UK and support shared projects including city and growth deals, industrial strategy zones and new place based defence deals.
The service could be given a remit to help improve the evidence made available for the development of the new ‘place-based business cases’ that arose from the Green Book Review and inform the NWF’s strategic goal to support regional growth. This new function could also play a role in making more institutions accountable for the impact they have (and the data they hold) on local economic affairs.
While the current UK government’s overriding economic growth mission could act as the impetus for the establishment of this service, its focus on regional growth should help build in permanence for the function. Progress has been made in recent years which offers the opportunity to scale up the good work undertaken within various regions to date. This includes academic partnerships such as CityReady in Birmingham, Manchester’s Productivity Institute and Insights North East. These partnerships, along with the What Works Centre, can help form the building blocks of this service.
Almost all governments attempt to implement a vision for regional prosperity, but none has benefitted from the evidence base needed for effective implementation.
| Recommendation 3 | Description |
|---|---|
| Swap competitive funding pots for Open Innovation Challenges | Improve the quality of interventions with more open collaboration between government and industry on complex problems. Where possible, remove competitive processes that inhibit collaboration and innovation. Adopt innovation-led commissioning to enable joint working on a broader range of options. Follow defence reform lead on open innovation to solve problems and reduce the number of grant programmes. |
A persistent criticism from the energy, technology and defence sectors is that government asks industry to work towards predefined solutions developed at distance, rather than collaborating to identify joint outcomes and better approaches to achieving them. This creates shared frustrations across our three focus sectors. Breaking with the status quo could open up greater collaborations with businesses across the UK with investment that better matches industry potential.
The current broken process: Officials are tasked with engaging with stakeholders on strategy or grant programmes, before publishing bidding processes based on options already chosen within government. While this approach aims to protect procurement integrity, it systematically excludes innovation and genuine partnership with business ecosystems. More damaging still, it pushes government towards consensus rather than effectiveness, stifling creativity and ruling out the strongest options for progress.
Defence sector frustrations: In the realm of defence, Paul Mason and William Freer’s 2025 Council on Geostrategy report found that primes and mid-tier suppliers repeatedly called for government to ‘specify the problem, not the solution.’18 The Strategic Defence Review’s stark assessment of the status quo shows the consequences of not taking this approach as the Defence Equipment Plan ran over budget, left outdated products in service too long, and treated export opportunities as afterthoughts.19
Technology sector frustrations: Technology industry voices express almost identical concerns about being locked out of the policy design process, making the case for ‘Open Innovation’ reforms to accelerate deployment. Once more, the fundamental complaint is that government predetermines solutions and then limits engaging through the barriers needed to protect a competitive process. Within this process, businesses are also not incentivised to innovate at a level of intensity that can create new solutions as they prepare to compete.
Tramshed Tech CEO Louise Harris MBE told this report: ‘A more strategic, innovation-led commissioning model would reflect the reality of working within the current system and our judgement that sector leaders – if empowered with a clear mandate – can generate impactful, scalable outcomes.’
The experience of Sunderland Software City demonstrates how businesses are working with local innovators to solve problems with impact. The Gateshead AI company Wordnerds used an innovation challenge with Nissan to create valuable, real time customer insights software.
As well as creating a tool that was meaningful and useful for Nissan, Wordnerds were able to create a scalable product that can be adopted by any business and is now used by Marks & Spencer, Sainsbury’s and the Department for Work and Pensions (DWP).20
We recommend that government replace grant programmes wherever possible within the IS-8 with ‘Open Innovation Challenges’ – a model that directly responds to the frustrations voiced across the technology and defence sectors. This process will not be appropriate in all settings and government should be mindful of instances where this reform would lead to unintended consequences such as increased capital costs for suppliers in a less certain market. However, this should be balanced against the costs of the status quo which also inhibits learning and evaluation (see above).
Under our proposed model, instead of government defining solutions, teams would present industry with strategic challenges requiring innovation – such as scaling UK technology businesses to meet export demand or capturing dual-use technology potential for defence capabilities. This directly addresses both sectors’ core complaint about being excluded from solution design.
The process:
Challenge definition: Government articulates strategic problems rather than prescribed solutions
Collaborative innovation: Time-limited groups of proven sector leaders with strong start-up connections assess barriers and opportunities. Groups design projects to develop solutions through partnership rather than competitive bidding for predetermined outcomes
Implementation-ready outcomes: Within set deadlines, groups produce actionable playbooks enabling immediate government decisions
This model transforms the relationship between government and industry from transactional procurement to collaborative problem-solving. Rather than competing for small funding pots vulnerable to policy churn, businesses would work together on systemic challenges. As Harris explains: ‘This approach builds on existing strengths and allows solutions to emerge that are based on what’s actually needed on the ground, something a top-down model can’t deliver at scale.’
The approach directly tackles both sectors’ shared frustrations. It empowers rather than sidelines industry expertise, focuses on outcomes rather than process compliance, and creates space for genuine innovation rather than predetermined specifications.
The Strategic Defence Review is leading the way on embracing this sort of reform. The document includes a candid assessment of a procurement system that was ‘broken’ and unchanged ‘since the Cold War’ and criticises how ‘risk reduction and consensus decision-making are prioritised over productivity and innovation.’
Acting National Armaments Director Andy Start has outlined a new approach that is faster, bottom-up and open to innovation. For the first time, service users will provide problem statements to strategic leaders responsible for equipment decisions. The Armaments Director Group will then work with industry to innovate around shared problems rather than procuring from predetermined shopping lists. Start illustrates the difference between ‘asking for a faster tank’ and creating something ‘far more innovative, far more capable… [and] much better value for money.’
By following the Ministry of Defence’s lead, government at all levels could save months of work for civil service and military teams. The central mandate for Open Innovation funding competitions should emphasise place-based approaches, ensuring high-quality innovation isn’t excluded by cultures that privilege too few locations.
This recommendation would complement Cabinet Office Minister Georgia Gould’s reforms enabling Whitehall to ‘get alongside the frontline’ to design better policy. As Gould notes: ‘They know the problems, they know what doesn’t work, and testing new approaches and then scaling them up… I think that is incredibly energising for civil servants to work in that way. They don’t always feel like they have permission, they don’t know how to start.’
For businesses in established and emerging clusters, an Open Innovation approach could enable unexpected solutions that are more efficient, less expensive and geographically distributed, whilst developing cross-government capability to collaborate effectively with partners and building on Strategic Defence Review reforms.
Birmingham, Alabama earned its nickname as the ‘Magic City’ when the explosion of its iron and steel industries led to the creation and rapid expansion of a prosperous new city. In the decades that followed the demise of heavy industry, the Magic City pivoted to become an automotive heartland, second only to Detroit. More recently, though, missed opportunities for wider investment saw the city population decline within one of the US’s poorest states – a story of decline that is familiar to many parts of the UK.
However, Birmingham has bucked the trend in developing significant technological success. Over the last decade or so, the technology ecosystem in the city has grown rapidly, with major companies like Shipt and Fleetio established and headquartered there.
The economic output of Alabama’s technology sector has increased by 50% since 2018 and is projected to reach 5.3% of the state’s total GDP by 2030. In 2023 alone, there was $321 million in IT-related venture capital deals in Alabama, up from $74 million in 2022.21
The Tech Unicorn Fleetio began as a start-up in Birmingham’s ‘Innovation Depot’ in 2012 and is now worth around $1.5bn. It recently acquired the Portsmouth (UK) business Auto Integrate for $450m22 and now occupies one of Birmingham’s large tower buildings and is committed to remaining headquartered in the city.
In 2023 Birmingham won Tech Hub status from the Biden Administration, building on these strengths as well as developments in biotech.
In an interview for this report Tech Birmingham CEO, Deontée Gordon, framed the city’s journey around a strong sense of history which informs a hard headed ‘gritty and scrappy’ discipline to working with the grain of existing strengths and assets. Specifically, he identified opportunities for technology businesses that target historic local economic and research strengths, such as automotive and health.
Growing demand for logistics technology that enables the mobility and auto industry could allow the city to build on the success of Fleetio, which centralises data on vehicle fleets to help businesses save money. In the biotech field, Acclinate is a homegrown start-up that has developed new software models to help overcome the lack of Black representation in clinical trials and improve the accuracy of results. This has led to deeper partnerships with health organisations and patient voice groups designed to help build trust with minority communities in what was once the most segregated city in the USA.
The University of Alabama is a major medical research centre, which allows businesses like Acclinate to innovate close to researchers. The business has also been supported by the City’s RISE initiative – Retention Incentives for Success and Expansion – introduced by Mayor Randall Woodfin. The priority attached to retaining local talent and value reflects the motivation to anchor success and growth in a local economy with poverty rates above the national average. The relationship with existing strengths and new businesses – that have expanded at scale – is also providing a discipline and focus that leaders such as Mayor Randall Woodfin are using to connect growth with inclusion.23 Crucially this means there is an authentic story that is deeply relevant to – and respectful of – the city’s formative history.
Deontée Gordon acknowledged the challenge in promoting the case for technology with audiences who have not seen the impact local action can achieve. Stakeholders – including politicians – without experience of the ecosystem are more likely to see the sector through the lens of Big Tech. These assumptions are not informed by the companies turning regional strengths into new opportunities or the risk of not supporting local start-ups such as Fleetio.
The emergence of new longer term policy is welcome but it should be buttressed by institutions and processes that are purposeful in the pursuit of regional growth. Until now, the regional dimenstion has too often been an afterthought and not a strategic priority for UK institutions which have been largely unaffected by regional development policy.
It is welcome that regional growth is a key objective in the NWF’s strategy, a change that should be reflected in the strategies of more public bodies.
In order to connect strategy and decisions with the sustained focus required for regional growth, we recommend the creation of new regional banks in England and a new criteria for IS-8 decisions, connecting investment with place.
| Recommendation 4 | Description |
|---|---|
| Create new regional business banks in England | New regional institutions can connect national policy SME development in line with Modern Industrial Strategy. Allow strategic focus on place and the ability to develop responsive products based on local evidence and intelligence. Prioritise energy, defence and tech needs in selecting first locations. Turn finance workforce strength into visible, proud local institutions serving communities. |
The UK boasts one of the strongest financial sectors in the world but it lacks regional investment infrastructure dedicated to serving local economies. Helping British SMEs to scale up and building more resilient supply chains are core objectives within the new Industrial Strategy. Institutions that connect this national objective with local circumstances could open up more opportunities for SMEs in underperforming regions.
‘The banking system has been professional and world class in this country for over one hundred years. There are people sat in cities across England who can become the Chief Risk Officer, the Finance Director and the CEO of new regional banks. Many of them would love it, it’s a fantastic pitch.’
Gareth Bullock OBE, former Chair,
Development Bank of Wales24
The RSA has argued that regional banks offer benefits that should be appealing in a more uncertain economy. These include the ability to offer: i) a ‘cushioning effect’ with tailored responses, ii) better quality decisions based on stronger intelligence and iii) a Head Office with the autonomy and range of functions needed to offer more career opportunities.25
These benefits reflect the experience in Wales in the decade that has followed the launch of the Development Bank of Wales (DBW). ‘The Banc’ has demonstrated the benefits of being close enough to read the local economy, large enough to act at scale and free enough to innovate.
Since its establishment, the size of funding overseen by DBW has increased from £440m to £2bn. Over £950m has been directly invested in Welsh businesses and £625m has been secured in private sector co-investment.
A mixture of loans and equity between £1,000 to £10m are offered across a range of funds. These include innovative funds that work alongside Welsh Government interventions such as:
Green Business Loans: discount interest rates and patient capital to support SMEs to fund energy efficiency and lower their bills
Stalled Sites Fund: problem site remediation to support housebuilding
Help to Stay: Shared equity loans to help financially distressed families remain in their homes
‘The Banc’ also acts as the public sector shareholder representative across infrastructure projects financed by the Mutual Investment Model (MIM), allowing the Welsh Government to take equity in those ventures
In 2024, FGF published the report Rebuilding the Nation 03: Infrastructure Investment Partnerships’ exploring the case for a new model of public-private partnership (PPP) to help tackle Britain’s enormous infrastructure backlog. That included a focus on the Welsh model which has allowed for a more ambitious schools and college building programme and the completion of one of the UK’s largest road projects.26
The 10 year UK Infrastructure Strategy27 cites the MIM example when confirming that the UK government will now consider the use of PPPs that learn the lessons of the Private Finance Initiative (PFI). New regional development banks in England could play a similar role to that of DBW, acting as a robust, expert public sector steward within the governance arrangements for overseeing any new PPPs models that are taken forward.
In 2023, the Green Business Loans offer allowed a wholesale gifts business based in Swansea to access £1.2m to install over 2,000 solar panels on its warehouse; reducing bills and allowing it sell energy back to the market28.
For the hugely successful AI start up, Amplyfi29, DBW and the wider ecosystem – including access to international offices promoting Wales – helped them choose Cardiff over Boston, USA as their base.
The existence of this new regional bank means an expert board and executive team have the space to focus on the context of the place within which it operates. They have the bandwidth to partner with government, the British Business Bank (BBB) and business to help generate tailored solutions to local challenges. The brand, autonomy and dedicated focus offered by a regional bank also creates exciting career paths for finance professionals looking to make a different impact.
Former DBW Chair Gareth Bullock – who has served on major boards in the UK and globally – told this report that the lack of political interference in the bank’s operation has been decisive to its development. In recommending the adoption of a similar model in England, Bullock makes clear that while the remit letter instructing a bank could be owned by a Mayor or a combination of Ministers and Mayors, the Boards should be drawn from finance and business with no role for political influence.
This observation is linked to the risks that come with establishing a new regional bank. Any new service that offers funding for business will cause frustration and disappointment. There will be businesses who should not receive funding and there will be limits to the size of funds available. Protecting regional banks from the local political pressure that arises from these realities is essential to their credibility and performance and a test of Mayoral leadership.
The What Works Centre for Local Growth advises caution on approaches to addressing the problem of access to finance for SMEs.30 Providing more finance without understanding whether the challenges are based on demand or supply problems could make matters worse. A regional bank with the right expertise is essential to the work of discerning between good and bad projects and business plans. They will also be well-placed to judge how those plans relate to local economic conditions where that is relevant to a decision. A new institution of this kind should not mean a looser grip on value for money and any regional bank should be incentivised by evergreen funding arrangements whereby revenue funds future funding decisions.
It is striking that the National Wealth Fund’s Chief Financial Officer, Annie Roper, has recently joined the DBW board, because it demonstrates national recognition of the important role a regional development bank can play. When taking on the position, Roper described DBW as ‘a catalyst for local innovation, job creation, and regional economic balance’, adding ‘I saw the impact of this approach in Canada, and it’s now core to what we do at the UK’s National Wealth Fund.’31
Regional banks for England could be shaped by the new Industrial Strategy and play a further role in consistently connecting venture capital with regional economies. Rather than competing with existing banks, these institutions would be ‘gap funders’, aimed at SMEs who cannot obtain debt or equity from banks or other conventional lenders.
The BBB has been tasked with extending substantially more lending to SMEs and will become more active in more complex clusters. The addition of regional banks could allow a smaller BBB to connect its expertise to a network of boards and executive teams with the ability to meet more demand and create more innovative funds that add value to regional spend and policy.
The creation of regional banks would also send a signal to the public: that the government believes in the growth of the local economies and is willing to back that belief with a new, locally-owned institution visibly dedicated to that task.
| Recommendation 5 | Description |
|---|---|
| Adopt investment criteria to make place factors systemic | Develop The London School of Economics’ (LSE’s) data-driven tool to connect the IS-8 sectors with regional economic impact. Steer defence imperative for dispersed capabilities and link clean energy with just transition. |
The Modern Industrial Strategy prioritises eight sectors and commits to an ‘unashamedly place based approach’. While campaigners, vested interests or commentators may dismiss either the emphasis on high growth sectors or place (depending on their perspective), any government has to find a way to do both in practice – and well-designed tools are essential to ensuring a consistent approach.’.
The Green Industrial Policy Matrix (The Matrix), developed at LSE, is a strong candidate for this task.32 It presents a data-driven approach to connecting clean energy investment with growth that is regionally balanced in a model that could be adapted across other sectors.
The model applies three considerations to put this into practice:
Opportunities for growth: comparative advantage in trade and/or innovation,
Strategic importance: Domestic demand under net zero targets, state of global supply chains and
Distributional aspects: job creation, regional spread of opportunities33
This analytical tool draws on data covering trade, supply chains, patent activity, firm specialisation and a range of employment statistics, including sector requirements and the spread of jobs in related markets. Specifically this analysis helps us interpret where the UK’s strongest clean energy opportunities exist at a national and subnational level as well as at a sub technology level.
In the cases of offshore wind and carbon capture the data confirms that the UK boasts a genuine comparative advantage in technologies that offer job creation opportunities on our coasts and in industrial communities.
The analysis of tidal stream technology states that the UK can be a leader in global terms with job opportunities that should align with the skills of oil and gas workers in the Highlands. However, this includes the caution that the scale of the opportunity is limited by the size of a relatively small market.
In tracking patenting data, the Matrix also indicates whether investment is likely to deliver returns within a region or whether it will spill over into other parts of the country.
If adopted formally, this tool could help government make smarter decisions that actively contribute to regional policy as a matter of course. More specifically, the methodology could help regions and nations develop a more rigorous analysis of their own strengths and intervene in fewer areas with greater impact. This would, in a tangible way, demonstrate that government is now dealing with the complexity that has previously been wished away or overlooked.
Government should develop similar assessments for each IS-8 sector as part of its commitment to overcome a ‘place blind’ approach.
No analytical tool can eliminate risk or supplant judgement. Those calls are for Ministers, devolved and local leaders. Rather than being prescriptive, the adoption of this tool is recommended as a practical way to connect decisions throughout the IS-8 to the job of reducing regional disparity. A rigorous focus on the evidence, with an inbuilt emphasis on place, could help overcome the institutional barriers that have allowed regional policy to become disconnected from core economic strategy.
Where gaps are identified in this approach, government should consider whether action could be taken to improve the availability of the data required. However, the perfect should not be the enemy of the good and government always has to work with less evidence than it would like; hence Recommendation 2 above.
The position of the steel industry provides a useful example of how the application of this matrix could support the decision-making process.
Steel is regarded as a foundational industry for the IS-8 and the new strategy commits the government to ‘identifying opportunities to stimulate domestic demand’. In April 2025, the government intervened in the face of a crisis to protect blast furnace steel production in Scunthorpe amid concerns that the business was being deliberately allowed to fail. In June, Network Rail signed a £500m contract that will see 80% of their steel products met by British Steel in a deal the government hopes will protect thousands of jobs.34
In the years ahead, the deployment of net zero products such as wind turbines and electric vehicle charging points will drive a significant increase in the demand for steel products.. At the same time, there is a stronger security case to protect and diversify domestic steel production as part of the UK’s focus on strengthening national security. Maximising the variety of products we are able to produce will add greater resilience in a market that has been aggressively undermined by China and Russia in recent years.
A 2023 analysis by Green Alliance predicted a 50% increase in the demand for steel products by 2050. The industry body UK Steel believes the scale of defence investment offers a huge opportunity for the industry as government ramps up spend on munitions factories, nuclear warheads, barracks and housing among other opportunities.35
As the steel workers’ union Community has stated, the government should update its own forecasts on steel demand to help the industry plan, especially in the context of additional infrastructure expenditure and the defence spend targets. The Department for Business and Trade has revived the Steel Council and a new Steel Strategy is due for publication this year which should set the direction for the role the sector will play in support of the Modern Industrial Strategy.
The Matrix shows where both broad and niche opportunities for steel exist across clean energy technology deployment, particularly in offshore wind, Carbon Capture, Usage and Storage (CCUS) and green hydrogen. With the NWF instructed to deliver on green steel and hydrogen projects in particular, the Matrix should help guide interventions that connect national policy with regional impact.
A more stable framework that supports these decisions could offer greater clarity to the industry and accelerate the adoption of the right technology to meet anticipated demand. Countries like the Netherlands have moved faster than the UK in embracing these opportunities which has helped to smooth their transition to a greener industry.
Case Study 2 details a further opportunity in the region that could unlock new jobs based on the application of the same tool and the new government’s objectives.
Before its unveiling in 2022, London’s Elizabeth Line had been sat largely completed since 2017. The cutting edge service relies on complex integration systems which needed to be ready before the line could go live, contributing to delays and greater costs.
Among the other challenges faced by this ambitious project was the inability to test the new systems away from the London underground system. An evaluation undertaken by the Department for Transport (DfT) and the Infrastructure Projects Authority found that too little focus was given to the ‘integration effort required to bring the railway into service.’36
The Global Centre of Rail Excellence (GCRE) is a railway innovation project established by DBT and the Welsh Government to meet the changing needs of the industry and the infrastructure that supports it. The project exists to reduce the sort of preventable cost and risk rail projects grapple with as well as enhancing the passenger experience.
The test and research facility, situated 15 miles from the Port Talbot steelworks, will be the UK’s first net zero railway with the potential to create around 1,100 jobs in its first decade and add £300m of Gross Value Added (GVA) to the regional economy. The site is turning a former opencast mine into a more valuable asset designed to meet the challenges of a global industry that has to embrace electrification and new technology.
The project has established partnerships with Network Rail, Hitachi, Transport for Wales and train manufacturer CAF while more than 200 companies have pledged to become GCRE customers. The centre would be the sole rail infrastructure test site in Europe meeting the needs of UK, European and Middle East markets in particular. Universities involved in the UK Rail Innovation Network network such as Birmingham and Swansea Universities have also highlighted the strategic value of the project.
GCRE could demonstrate the ‘step change’ the National Wealth Fund promises. Within the Strategic Priorities set by HM Treasury,37 the NWF is instructed to:
ensure the benefits of investment are felt in all four UK nations
support the deployment of low carbon technologies in the transport system and;
invest in nascent and earlier technologies that support growth and clean energy
The Treasury also wants the NWF to invest billions of pounds each year and ‘roughly double its investment activity relative to the 2024-25 financial year’.
With support from the NWF and/or via direct government funding, GCRE could be fully operational later this decade, reducing costs within the Infrastructure Strategy and creating well paid jobs in a local economy that is now home to a significantly smaller steelworks. The project has recently launched a rail engineering training programme for former steelworkers to help them access employment in the rail industry.
The overall project is regarded as ‘high’ value for money by PwC and would see the UK apply the lessons from recent projects – such as the Elizabeth Line – in a manner that de-risks future investments.
For UK Ministers, this project could also be supported by the application of the Green Industrial Policy Matrix by testing projects against the considerations on comparative / nascent technology and, crucially, their distributional impact.
If Ministers choose to develop this tool with criteria that match their objectives, they would be more able to directly link new projects to economic need; in this case linking the global demand for low carbon, hi tech rail to the loss of steel jobs in Port Talbot.
