Enterprise zones do they create or transfer value

Wainwright:JSC page.qxd 10/01/2012 14:49 Page 124

Enterprise Zones: Do they create
or transfer value?
Received: 17th October, 2011

Simon Wainwright
is a graduate of the University of Reading and a Fellow of the Royal Institution of Chartered Surveyors; he has more than 30
years’ experience in private practice in the UK and specialises in property investment, development and appraisal. His practice,
J Peiser Wainwright has advised Canary Wharf Group and Land Securities on major regeneration projects with a combined value
in excess of £2bn; he has also undertaken investment transactions in Enterprise Zones throughout the UK.

Abstract This paper considers whether any lessons have been learnt from the
Enterprise Zones (EZs) of the 1980s and whether providing economic stimuli creates,
distorts or simply transfers value. Key issues include:

— How do the 2011 EZs differ from their 1980s predecessors?
— Land value as a residual, determined by the economic activity that can take place on a
plot of land; therefore bestowing economic advantages selectively will distort land
values.
— Enterprise Zones will undoubtedly cause the displacement of existing jobs to more
economically marginal areas.
— Previous attempts at creating areas which enjoy economic advantages include Regional
Development Agencies and Freeports; this paper examines what lessons, if any, can be
learned from these that could be applied to EZs.
— Could EZ benefits be applied across the entire UK?
— The benefits of the 1980s EZs were largely captured by property and land owners
rather than local businesses; who will receive the benefits from the current generation
of EZs?
— Jobs are as likely to be generated in the retail sector as the manufacturing sector; does
this matter?
— The success of the London Docklands Enterprise Zone can largely be attributed to
improved transport infrastructure; such transport proposals are missing from the current
proposals.

Keywords: Enterprise Zones, value, advantages, Canary Wharf, Merry Hill, Freeport,
Docklands, business rates, investment, jobs, infrastructure

Enterprise Zones (EZs) were first economically successful British Crown
Simon Wainwright introduced into the UK in the 1980s with Colony of Hong Kong. Some 30 years
J. Peiser Wainwright,
20 King Street, the objective of creating designated later, the British Government has
London EC2V 8EG, UK economic areas which were free of tax, reintroduced the same concept, but what
Tel: +44 (0)20 7776 2930 regulation and constraints, where dynamic lessons have been learned from the earlier
Fax: +44 (0)20 7776 2931
e-mail: info@jpeiser businesses could grow and flourish; the experiences, and what can be done to
wainwright.com concept was modelled on the ensure that new jobs are created rather

124 Journal of Urban Regeneration and Renewal Vol. 5, 2, 124–131 ᭧ Henry Stewart Publications 1752-9638 (2012)


Enterprise Zones

than simply transferred from neighbouring inferred that both rent and land values are
areas? a residual sum, determined by the value
The original 1980s EZs bestowed a that can be generated from one plot of
wide range of economic and political land in comparison with the value that
advantages on the businesses that located can be generated from another plot of
in these designated areas; these included: land, taking into account the relative costs
of production and transport between two
— exemption from business rates (local locations, all other factors being equal.
taxation) for commercial and industrial A practical example of this can be seen
property in retail rents, where high street shops in
— 100 per cent allowance for corporation the prime pitch command a higher rent
and income tax purposes for capital than identically sized shops in a more
expenditure on industrial and secondary location, as a result of the
commercial construction additional revenue that can be generated
— exemption from Development Land Tax from the relative differences in footfall and
(since abolished) turnover. Today, many other factors also
— a simplified planning regime where influence the differential in land values,
planning permission was not required including differences in the specification
for developments conforming with the of buildings erected on the land, user
EZ published plan constraints (either legal or planning),
— assisted HM Customs’ procedures technological advances, infrastructure,
— a reduction in government requests for energy costs and business rates (local tax).
statistical information It follows that if one takes two identical
— Industrial Training Board levies did not and adjacent plots of land and bestows
apply economic advantages on one but not the
— prioritised telecommunication facilities. other, a difference will arise in both the
rental and capital value of the two land
The benefits were limited to a period of plots as a direct consequence. Occupiers
only ten years, and they were designed to will be prepared to pay a higher rent on the
stimulate economic growth and create parcel of land enjoying the economic
new jobs: some worked spectacularly, benefits than for the same land without the
while others did not. In March 2011, the benefits, on the basis that it is capable of
British Government announced that a generating additional profits. The question
further 21 new EZs would be created, but then arises as to whom this economic
is it wishful thinking to assume that they advantage should accrue: the landowner in
will emulate the success seen in the the form of additional rent, the occupier in
London Docklands? The current debate is the form of additional profit or the
whether EZs create economic growth or government in the form of additional
distort the market by simply transferring taxation. In EZs, the objective has been for
value from neighbouring areas. the advantage to accrue initially to the
Ricardo formulated his ‘Law of rent’1 in occupier in the form of additional profit, in
1809; this states that the rent of a plot of order to stimulate economic development,
land is equal to the economic advantage growth and the creation of new jobs; in
obtained by using the land in its most practice, this has not always been the case,
productive way, relative to the advantage as was seen with the dramatic rise in rents
obtained by using marginal land for the and land values in the London Docklands
same purpose, given the same inputs of in the 1980s, benefiting the landowner
labour and capital. From this it can be rather than the occupier.

᭧ Henry Stewart Publications 1752-9638 (2012) Vol. 5, 2, 124–131 Journal of Urban Regeneration and Renewal 125


Wainwright

The concept of creating economic The Queenborough property included a
zones enjoying financial advantages and substantial area of open land used for
subsidies is not new in the UK, and many storage which was directly comparable
other policies have been used to try to with the open land used for storage in
stimulate the creation of new jobs and Sheerness Docks; this is a good example
growth: examples include Regional Aid of the differential in rent and land values
such as that provided by the Welsh that can occur between two adjacent land
Development Agency which, for a 30-year plots where one enjoys financial
period from 1976 until 2006, tried to advantages. The rental differential between
stimulate business development and these two comparable properties was
inward investment into Wales. The success significant, with the rent on the property
of the agency in attracting inward in Queenborough being sufficiently
investment was recently the subject of a discounted to persuade Mazda to remain
Commons Select Committee Inquiry,2 outside the Freeport area, despite the
where the experience with LG Electronics financial advantages enjoyed by occupiers
was re-examined. The Committee report within the Freeport area of Sheerness
details the development of a new factory Docks.
for the Korean company LG Electronics The new 2011 EZs will offer occupiers
in Newport, Wales, which should have the following economic advantages:
created 6,000 jobs when it was announced
in 1996, being hailed the largest single — business rate discount worth up to
inward investment in Europe. In reality it £275,000 per business over a five-year
created fewer than 3,000 jobs at a cost of period
£131m to Welsh public bodies, although — all business rates growth within the
some £71m was subsequently clawed zone to be retained in the local area to
back when it closed in 2003, leaving the support local reinvestment, for a period
taxpayer with a net cost of £60m. LG of at least 25 years
Electronics then moved production to a — government assistance to develop
plant in Poland, which subsequently simplified planning approaches for the
closed; production has now been moved EZ
to China. — government support to ensure that
Freeports are another example of areas superfast broadband is rolled out
enjoying special economic advantages, throughout the zone, by use of public
including deferment of HM Customs’ funding if necessary
duties, EU levies and VAT on imported — enhanced capital allowances for plant
goods. In the late 1990s, J Peiser and machinery investment to a limited
Wainwright sold an industrial property number of EZs in Assisted Areas.
investment in Queenborough, Sheerness,
Kent; the property was leased to Mazda In announcing the new EZs (see Tables 1
and consisted of land and buildings used and 2), Prime Minister David Cameron
to receive and store imported cars from said: ‘We are determined to do everything
Japan, to de-wax, repair and prepare the we can to make Britain the best place in
vehicles before onward shipment to the world to start and grow a business.’3
dealers. The rental value of the Mazda By confining these economic advantages
property at Queenborough stood at a to a limited number of EZs though, they
substantial disadvantage to adjacent are bound to divert business from the
properties within the adjacent Sheerness surrounding areas to these more
Docks which enjoyed ‘Freeport’ status. economically marginal areas. It is clear



Enterprise Zones

Table 1: New Enterprise Zones (England)

Enterprise Zone Location Hectares

1 Boots Campus Nottingham 40
2 Liverpool Waters Liverpool 60
3 Royal Docks London 122
4 Leeds City Region Leeds 142
5 Greater Manchester Manchester 150
6 Sheffield City Region Sheffield 168
7 Birmingham and Solihull Birmingham 68
8 Temple Quarter Bristol 70
9 Rotherwas Hereford 61
10 Northampton Waterside South East Midlands 120
11 Newquay Aerohub Cornwall & Isles of Scilly 55
12 Alconbury Airfield Huntingdon 150
13 Great Yarmouth & Lowestoft East Anglia 121
14 Daresbury Warrington & Runcorn 28
15 Humber Waterside Kingston-upon-Hull 375
16 Sandwich & West Essex Harlow 99
17 Science Vale Oxfordshire 92
18 MIRA Technology Park Hinckley, Leicestershire 87
19 Solent Daedalus Airfield, Gosport 82
20 North Eastern Newcastle 117
21 Black Country Black Country/Stoke-on-Trent 120
22 Tees Valley Tees Valley 170
Total 2,497

that there are no guarantees that the jobs commenced on the site of the former
created in EZs will be new jobs rather Round Oak Steelworks (the reason for the
than jobs which are merely transferred for original EZ designation) with an office
economic advantage; there can also be no and business park known as the Waterfront
guarantees in what sectors of the economy development, which created 3,000 jobs.
these jobs will be. By 2008, many companies had vacated the
An example of this point can be seen Waterfront business park leaving high
today at Merry Hill Shopping Centre, vacancy levels and, by June 2011, the area
Dudley West Midlands, which is the fourth was again applying for EZ status.
largest shopping centre in the UK. The When Merry Hill Shopping Centre
site on which Merry Hill is constructed opened, a number of national multiple
comprised the former Round Oak retailers, including Marks & Spencer, C&A
Steelworks, which closed after 125 years, and Littlewoods, closed shops in the
and the adjacent land at Merry Hill farm. surrounding towns and opened in the new
It was thought that the designation of the shopping centre. Surrounding towns such
entire site as an EZ in the 1980s would as Dudley were turned into ghost towns as
stimulate manufacturers to move into the a consequence, with dramatic falls in both
area and construct new industrial units rental and capital values of commercial
and stimulate growth. Richardson property.
Developments acquired the site and, Another example as to how the original
against local opposition, started the EZs did not quite evolve as they were
construction of retail units on the Merry originally anticipated is Canary Wharf
Hill farm site in 1984. The project where the industrial units at Heron Quays
commenced trading in 1985 and was West (constructed in 1984) sit in sharp
subsequently expanded, with further contrast to the adjacent 60-storey office
phases being added on the site of the old tower at 1 Canada Square (constructed in
farm. In 1989, construction finally 1987). For the last decade J Peiser



Wainwright

Table 2: New Enterprise Zones (Wales)
Docklands Enterprise Zone enjoyed in
Enterprise Zone Industry terms of occupier costs. Today, in contrast,
1 Anglesey Energy
Docklands office rents are at only a
2 Cardiff Central Financial services modest discount to City of London office
3 Deeside Advanced manufacturing rents.
4 Ebbw Vale Automotive
5 St Athan Aerospace Against this background, the new EZs
of 2011 have been fashioned in order to
try to avoid some of the distortions seen
in the 1980s EZs. The stated purpose of
Wainwright has acted on behalf of Canary the new EZs is to create new businesses
Wharf Group in reassembling the Heron and jobs. Just like the original Docklands
Quays West site through the acquisition of Enterprise Zone, the aim is to stimulate
the industrial units, which now benefits the development of smaller industrial
from a planning consent for a 195,000 units, but as both Docklands and Merry
square metre (2,100,000 square foot) Hill demonstrate, ‘the law of unexpected
office skyscraper. consequences’ sometimes takes
In the case of Canary Wharf offices, it precedence.
has been assumed that the jobs created If the benefits bestowed by EZs
were being diverted from the City of stimulate new business activity and are
London, but were they? In 1984, the beneficial for the economy, it could be
planning authority in the City of London asked why are the economic advantages
was not focused on growth; projects such confined exclusively to EZs, and why are
as Lord Palumbo’s plan to build a Mies they not made available to all businesses
van der Rohe tower on the site of the across the UK? The idea of a National
former Mappin & Webb store at No. 1 Enterprise Zone was proposed by the
Poultry were the subject of lengthy legal British Chamber of Commerce in a
and planning challenges. Against such a recent article in the Sunday Times.4 It is
background, it was not possible for the ironic that the announcement of the new
City of London to accommodate an EZs in March 2011 comes at exactly the
occupier seeking a 93,000 square metre time when Industrial Building Allowances,
(1,000,000 square foot) plus headquarters another form of economic stimulus
at that time, and it is arguable that, available nationally throughout the UK,
without the office developments of this were finally withdrawn in April 2011. The
size at Canary Wharf, such investment conclusion can therefore be reached that
could well have been attracted to world the true objective of the new EZs is to act
class cities outside the UK. Those who as a catalyst for change, to stimulate
invested in the original Canary Wharf sites development in economically marginalised
have seen exponential growth in the value areas, even if it is at the expense of
of their property as a result of the success employment in surrounding areas.
of the EZ; in many cases, such gains were This point has now been openly
multiplied again by the planning admitted: in October 2011 at the
relaxation in permitted changes of use Conservative Party conference, when
from Class B1 (industrial) to Class B1 Business and Enterprise Minister Mark
(office) use and by the installation of Prisk confirmed that it was ‘inevitable’ that
mezzanine floors within the original the new EZs will cause the displacement
industrial units, which did not require of some businesses. The minister said that
planning consent. Table 3 highlights the he hoped the impact could be minimised
relative advantage that the London by allowing Local Enterprise Partnerships



Enterprise Zones

Table 3: Office occupancy cost comparison, March 1983

Rent (£/sq ft) Rates (£/sq ft) Total (£/sq ft)

City of London 26.00 15.30 41.30
Westminster 19.00 10.70 29.70
Reading 12.00 2.90 14.90
Croydon 11.00 3.85 14.85
Crawley 8.00 2.30 10.30
Milton Keynes 7.00 1.55 8.55
Docklands 6.36 0.00 6.39

Source: London Docklands Development Corporation.

(LEPs) to retain uplifts in business rates to of the country by providing a
be reinvested wherever they chose, which medium-term benefit to owners, occupiers
would amount to a form of ‘tax increment and investors. The discount offered on
financing’. business rates is now limited by European
In trying to attract inward investment Union state aid law to £55,000 a year per
into the UK, one of the relative firm, which equates to a maximum unit
disadvantages that this country suffers from size of approximately 1,000 square metres
is the high price of land suitable for (11,000 square feet), which should avoid
industrial and logistics use relative to other instances of large multinational
countries. This has arisen, in part, due to corporations such as LG Electronics taking
supply constraints imposed by the excessive advantage of the concessions for
planning system which EZs offer to short-term gain.
remove and simplify. High land prices But in terms of land use control, it is
combined with the higher cost of fuel for here that the usual controls imposed
transporting goods, higher minimum wage through the planning system are being
costs and higher taxation make the UK a relaxed. In many cases, the land contained
less competitive place to do business and in the new EZs is in single ownership,
serve to drive up the price of the goods such as LEPs, and it is thus possible for
manufactured, imported, bought and sold, some measure of land use control to take
relative to those from foreign markets. place through legal restrictions rather than
The UK is certainly not alone in the through a more relaxed planning system. A
global competition to attract inward public sector landlord is also more likely
investment and does not have a monopoly to set affordable rental levels in order to
on the economic benefits offered in EZs. attract the right type of occupiers rather
A visit to the MIPIM annual property than pursue an open market imperative to
conference and exhibition in France will achieve the highest level of rent at all
reveal the significant number of countries costs, which could limit the type of uses
seeking to attract inward investment by and could negate the advantage from the
offering packages of tax breaks and economic concessions.
benefits in designated ‘special economic If any lessons from the past are to be
zones’. learned, there are three studies of the
So what is different about the new EZs, success of the 1980s EZs that are worth
and why will they attract new businesses? reviewing. A 1995 study5 found that there
Well by placing a cap on the total amount were over 5,000 companies within the 22
of business rates discount, current policies EZs by 1990, employing 126,000 people;
do seem designed to stimulate smaller after allowing for deadweight and
businesses in economically deprived areas displacement, it was estimated that only



Wainwright

58,000 of those jobs (46 per cent) were investors simply attempt to take advantage
additional to those which would of the available tax allowances and reliefs.
otherwise have been created in the local As can be seen from the three studies
areas, and that 54 per cent of those jobs identified in this paper, many of the jobs
were displaced or ‘deadweight’. The created in the 1980s EZs were simply
additional jobs were highest among the being transferred from elsewhere; there is
manufacturing sector and lowest among no reason why this will not happen again
the retail and logistics sectors. with the latest generation of EZs.
The Work Foundation’s study6 shows With relaxations in planning controls,
that, between 1981 and 1986, some there also seems little to direct the sectors
63,300 jobs were created in the 1980s of the economy in which development
EZs, but of these only 13,000 were will take place, and occupiers are as likely
actually new jobs. The report concludes to be car showrooms and retail outlets as
that in the London Docklands Enterprise they are to be manufacturing businesses: if
Zone, the Docklands Light Railway was this stimulates employment and growth in
the main catalyst for the increase in these designated areas, it is a value
employment within the zone, from 7,000 judgment as to whether or not this is
people initially to 90,000 people today, significant.
with 80 per cent of the jobs created being If EZs are seen as a panacea for current
displaced from elsewhere. economic ills, the question remains, why
The study ‘What would Maggie do?’7 confine these financial advantages to EZs,
concludes that the 1980s EZs and why not make them available across
the UK, ie why not re-create the
— did regenerate some areas of dereliction conditions that caused Hong Kong to be
— did not deliver a high number of such a spectacular economic success on a
additional jobs national basis? The answer is that the
— cost the public sector £26,000 current economic environment is such
(inflation adjusted) for each job created that the country cannot afford the loss of
— moved jobs to areas of low productivity tax revenue that this would cause. Both
which was not beneficial to the labour wage rates and working conditions
national economy combined with current health and safety
— most importantly, captured most of the legislation already imposes a high cost
benefits for the property owners rather burden whereby the country simply
than local businesses. cannot compete on equal terms with
China in manufacturing industries. If the
The report concludes that government EZ advantages were available on a national
should introduce a new area-based basis, they would also fail to stimulate
strategy focusing on investment in people, development in the more economically
skills and business growth, termed ‘Local marginalised areas of the UK, with
Growth Zones’. investors preferring to consolidate
investment in the most prosperous
regions.
CONCLUSIONS Another benefit of the proposal to
Without full regard to the issues of land create the new EZs is that they constitute
ownership and control, the designation of a low-cost solution for the public sector.
EZ status will undoubtedly result in a The principal public sector cost is the
transfer of value from the surrounding reduction in tax revenue that will be
area as existing businesses, occupiers and experienced over a ten-year period, but



Enterprise Zones

this should be paid back from tax revenue the commitment to roll out superfast
after the business rates moratorium ends. It broadband in the new EZs, but other
is the promise to retain the business rates infrastructure investment will be required if
growth in the local area to support local any of these areas are to be a long-term
reinvestment for a period of at least 25 success.Yet, if nothing else, the new EZs
years that is causing the most interest: should help kick-start regeneration in
effectively this is a form of ‘Tax Increment some economical marginalised and
Finance’ that is being promoted by the disadvantaged areas of the UK.
government, and the proposals to promote
Tax Increment Finance schemes will not References and Notes
be confined to EZs. 1. Ricardo, D. (1996), ‘On the principles of political
economy and taxation’, Chap. 2, Prometheus
Looking back on the success of Canary Books, New York, NY.
Wharf, one should not forget the 2. Corrected transcript of oral evidence HC 854-V
roller-coaster ride of boom and bust to get taken before the Welsh Affairs Committee on
to where it is today. In reality and as Tuesday 14th June, 2011.
3. London Evening Standard (2011) ‘Government
correctly identified in the Work reveals new “enterprise zones”’, news report, 17th
Foundation report, it was the sizeable August, available at http://www.thisis
infrastructure investment made through the london.co.uk/standard-business/article-23978798-
government-reveals-new-enterprise-zones.do (last
Docklands Light Railway and later through accessed on 6th December, 2011).
the Jubilee line underground extension 4. Sunday Times (Business), (2011), p. 5, 25th
that really put the Docklands Enterprise September.
5. Department of the Environment and Cambridge
Zone on the map. It is therefore apparent Economic Consultants Richard Ellis and Gillespies
that capital expenditure in the form of (1995), ‘Final evaluation of enterprise zones’.
public sector infrastructure investment is 6. Sissons, A. and Brown, C. (2011), ‘Do Enterprise
what is really required to stimulate Zones work? An Ideopolis policy paper’, March,
The Work Foundation, London.
development activity in economically 7. Larkin, K. and Wilcox, Z. (2011), ‘What would
marginal areas. This is in part recognised by Maggie do?’, Centre for Cities, London.


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