6. OECD case study: Considerations for economic regions in Mid Wales and South West Wales

Regional economic divergence may threaten well-being, economic development, social cohesion and political stability. On the other hand, a concentration of people and business can facilitate faster economic growth. Policymakers all over the world grapple with the trade-offs between the benefits from agglomeration economies and territorial equity aspects. How can the question of lagging regions – often rural – be tackled without compromising the drive of the most dynamic areas?

Regional development aims to reduce regional disparities by supporting economic activities at a regional level. The Welsh Government intends to strengthen regional development in Wales by reforming the economic regions for economic growth. This is driven by a number of considerations: to support a stronger place-based approach to regional development, to devolve regional development planning to the subnational level and to build the capacity of local authorities in regional economic development planning and the implementation of such plans. There are different ways to accomplish this, for example through stronger decentralisation, or by promoting inter-municipal co-operative arrangements, or both. In Wales, it has been proposed to set up co-operative units, the corporate joint committees (CJCs),1 formed by representatives of the local authorities in the economic region.

Wales, like the United Kingdom in general, is characterised by a high degree of institutional and fiscal centralisation by international standards. Welsh local authorities are responsible for delivering a considerable share of public services but, at the same time, nearly 70% of their revenues2 consist of central government transfers. The low degree of fiscal autonomy among Welsh local authorities underlines the Welsh Government’s responsibility for public service delivery in general and has implications for the reform proposals concerning the economic regions. Since the national level is responsible for financing the bulk of the activities and thereby is also responsible for the outcomes of the reform, an active role is needed not just in setting the rules but also in supporting implementation. Therefore, the role of the Welsh Government is important to ensure that the reform meets the goals set for the reform. For successful implementation of the economic regions, the co-operation between the CJCs and Welsh government authorities, notably the recently established Chief Regional Officers (CROs), should be seamless.

Furthermore, in order for Wales to reap the benefits it seeks from economic regions, the economic, administrative and institutional capacities of local authorities should be considerably strengthened. Establishing co-operative bodies can help solve problems of economies of scale and benefit spill-overs, which can lead to more effective regional development policies. One key to success, however, will be to ensure that the implementing bodies – i.e. local authorities – are in good fiscal condition.

The purpose of this case study is to discuss the benefits and challenges of establishing economic regions in Mid and South West Wales. Currently, the Economic Action Plan has established three regions but also the alternative to establish a separate region for Mid Wales is being considered. This case study explores the conditions under which such economic regions, whether one or two, could deliver more economic efficiency and regional equity. The study is based on economic research on the effects and conditions of decentralisation, and good policy practices from OECD member countries.

This case study starts with a short analysis and discussion of the Welsh local authorities in light of economic research on the opportunities and risks of decentralisation. The next section goes deeper in the case of Mid and South West Wales by comparing the situation of Mid Wales and South West Wales from aspects that are relevant for regional development. The third section focuses on the potential effects of establishing one or two economic regions in Mid and South West Wales. The final section concludes and presents the recommendations.

This section analyses the current situation of Welsh multi-level governance with respect to the local authorities, which represent the main implementing bodies for public services in Wales. The Welsh case, in particular the situation in Mid and South West Wales, is discussed using the key aspects of economics research on decentralisation and by presenting examples of policy practices from OECD member countries. The main aim of this section is to build an empirical and theoretical base for the comments presented at the end of the report on establishing the economic region(s) for Mid and South West Wales. The analysis presented here focuses on the governance aspect and discusses the structures within which policy is made. While the role of the private sector is key for economic growth and development, this aspect is beyond the scope of this paper.

Welsh local authorities deliver over 700 services rendering them very important public service providers in Wales (Welsh Local Government Association, 2020[1]). According to Welsh Government accounts, the largest single function of Welsh local authorities is education, which accounts for 33% of the total gross local government spending (Welsh Government, 2020[2]).3 Other core local government services are social services, which account for 23% of total expenditures, housing (13%) and security (10%) (Figure 6.1). The difference between the lowest and highest per capita expenditure is GBP 641. The lowest per capita spending is found in Monmouthshire (15.5% below average per capita expenditure) and highest spending is found in Rhondda Cynon Taf (12.6% above the average) (Figure 6.2). For most local authorities of Mid and South West Wales, the per capita spending does not differ markedly from the other Welsh local authorities. The highest spending per capita in this area is in Neath Port Talbot (above the country average) and the lowest is in Pembrokeshire (clearly below country average).

In light of the available information, Welsh spending decentralisation is not in conflict with what is usually recommended for decentralised service provision, especially at the local government level (Box 6.1). Moreover, even though many service responsibilities appear to be shared, Welsh local authorities play an important role because they are the main spending agents (Annex 4.A., Chapter 4).

Local taxes in Wales are comprised of the Council Tax and Non-Domestic Rates. In 2017-18, the Welsh local authorities received approximately 9.3% of the total tax revenue collected in Wales (Ifan, Siôn and Poole, 2019[6]). The Council Tax is collected by local authorities. In 2017-18, the revenue generated from the Council Tax was worth approximately GBP 1.6 billion, funding about 18% to 19% of local authority spending. The Council Tax base is regulated by the Welsh Government by classifying homes into “bands” by value and fixing how the tax varies across the bands. Local authorities set the rate for the central band, so the local governments define the overall tax rate (Holtham, 2019[7]). The austerity measures which have reduced the amount of Welsh Government transfers to local governments have resulted in local authorities gradually raising the Council Tax.

The other tax collected locally is a tax on non-domestic properties, the Non-Domestic Rates (NDR). This tax rate is set by the Welsh Government but the majority of revenue is collected by local authorities and paid into an equalisation fund. From the fund, the money is distributed to local authorities using needs-based formulas (population measures, dependency ratios, measures of poverty or deprivation and sparsity of population). The NDR yields over GPB 1 billion per year. The tax provides a stable revenue to local authorities irrespective of the economic cycle (Holtham, 2019[7]).5

Welsh Government grants are the main revenue source for the local authorities. Despite austerity measures, which have decreased the amount of transfers both in real and in nominal terms, transfers still form almost 70% of the revenues of local authorities (Figure 6.3). There are currently two main types of transfers, the Revenue Support Grant (RSG) and the specific Welsh Government grants. The RSG is non-earmarked, i.e. the local authorities have full discretion on its use. More specifically, the RSG is a formula-based “block grant” in the sense that while the grant is defined by taking into account the needs of different service categories, there is no obligation that local authorities spend the transfer in line with these allocations (Wales Audit Office, 2018[8]). The RSG is determined by the Standard Spending Assessment. The assessment estimates the differing costs of delivering services in each area based on their different demographic, physical, economic and social characteristics.

The small share of own revenues available to Welsh local authorities (basically just Council Tax since the NDR are regulated by the Welsh Government) inevitably raises the question of the adequate degree of revenue autonomy in Wales. Without a larger share of local government spending financed from local authority own-revenue sources, some of the benefits of decentralisation are lost6 (Box 6.2). This does not mean, however, that transfers and the equalisation system should not play a role in financing local authorities.

Another potential financing issue is the role of specific transfers in Welsh local authority financing. Since 2010, specific (earmarked) transfers have represented around 36%-38% of the total amount of transfers received by all Welsh local authorities and 25%-28% of their total revenues, thereby forming a considerable share of local authority financing. At the local authority level, the share of specific transfers varies between 31% (Powys) and 45% (Cardiff). In terms of total revenue from transfers, this varies between 19% (Powys) and 30% (Cardiff) (Figure 6.4). In general, extensive use of earmarked grants is not recommendable, because earmarking may draw subnational government attention too far away from local needs and preferences. This may distort local decision-making and eventually weaken the allocative efficiency. For example in Norway, the use of earmarked grants aiming to boost elderly care services was successful in increasing the elderly care service but the side effects included reduced spending on education, reduced childcare coverage and an increased budget deficit (Borge, 2016[11]). Earmarking may also weaken the transparency and accountability of local decision-making compared to a situation where the local governments are steered with legal obligations and funded by general grants. It is usually recommended that transfers to subnational governments should be mostly non-earmarked, and the use of earmarked transfers should be limited to special cases (OECD, 2019[12]). In sum, there appears to be room to reform the transfer system in the direction of using more general transfers for Welsh local authorities in order to increase local fiscal autonomy.

It is interesting to note that while transfers to Welsh local authorities have been cut, there has been no accompanying reform of the overall local government financing system. Although the local authorities have reacted to grant cuts by increasing Council Tax, it is not realistic to expect that local authorities can close the gap only with Council Tax revenue. If this situation continues, negative effects on local service quality and availability are likely, despite efforts to improve the efficiency of local public service delivery. Taking into account the wide-ranging services assigned to Welsh local authorities, the cuts in local authority revenues form a serious threat to the public service system in the medium and long run.

As for the NDR, it seems that the current system of using revenue for redistributing funds between local authorities does not encourage the local authorities to develop their business property tax bases. One alternative could be to concentrate the equalisation mechanism on the transfer system and let the local authorities keep their business property tax revenues.8 Equalisation within the transfer system should be relatively easy to carry out, taking into account the size of the transfer system. There are several examples among the OECD countries of how to build such a transfer system (Box 6.3).

With respect to tax assignment (Table 6.3), the usual recommendation in the economics literature is that subnational government tax revenues be mainly based on land or property taxes and user fees (Boadway and Tremblay, 2012[14]; Bahl and Bird, 2018[5]). But, if the service menu consists of services with high spending needs and if subnational governments are expected to finance a considerable share of their spending from their own-revenue sources, property tax bases and other user-charge types of revenue are likely to be insufficient to generate adequate levels of own-revenue. In such cases, subnational governments could be given some broad residence-based tax bases such as income tax, payroll tax or sales tax. If attributed to subnational governments with some power to decide tax rates, each of these taxes can influence the mobility of households, business location and shopping. To avoid unwanted effects of these taxes, it is usually recommended that subnational governments are given powers to choose tax rates but not the power to affect the regulation on tax bases. If subnational governments were able to affect the rules on tax bases and set the tax rates, the national redistributive objectives and equity of taxpayers in different subnational governments could be compromised. There could also be problems with vertical tax externalities (Boadway and Tremblay, 2012[14]). Other taxes suitable for subnational governments include resource royalties, conservation charges, excise (sin) taxes, motor vehicle registration taxes, frontage charges and poll taxes. In addition, subnational governments may be allowed to piggyback on national taxes on personal income (residence-based), wealth and carbon taxes (OECD, 2019[12]).

Benefit spill-overs exist in all decentralised systems because it is often difficult to ensure that jurisdiction’s administrative boundaries coincide with the service benefit areas. Benefit spill-overs mean that residents in neighbouring jurisdiction benefit from services paid for by taxpayers in other jurisdictions (e.g. roads/streets, parks, sports facilities, theatres). This can be a problem if it leads to an under-provision of public services, notably if subnational governments do not take into account the benefits received from the service consumed by residents of other jurisdictions. While “internalising” such externalities is not easy, mainly because information on the size of externalities is usually scant, the potential solutions are relatively straightforward. The national government may intervene using earmarked transfers to subnational governments in order to encourage extended service delivery that also considers non-resident users. Yet, as discussed in the previous section, widespread use of specific transfers is not generally advisable. Another potential solution is co-operation among subnational governments (Box 6.4). Joint service delivery enlarges the service area and helps divide the cost among the services users. Co-operation also has its risks, however, especially from an accountability and transparency standpoint. A third potential solution is to move service responsibility from a lower to a higher level of government.

In Wales, the possibility of large benefit spill-overs is limited by the fact that the local authorities are far larger by population than their counterparts in a variety of EU or OECD countries (Figure 6.5). Moreover, the services relating to natural resources, police, national parks, and fire and rescue have been assigned to co-operative bodies, which already supports utilising economies of scale and helps internalise spill-overs. The current proposal by the Welsh Government to establish the CJCs is a further step towards building additional scale in local service provision. The benefits received from co-operation are case-specific however and depend largely on implementation (i.e. how the co-operative units are financed and governed). For the moment, the details of the co-operative arrangements and the content of the services covered by the CJCs are still to be defined.9

This section goes deeper in comparing Mid Wales and South West Wales. It focuses on aspects that are particularly relevant for regional development and for forming functional regions: the population base, demographic development, labour market, commuting, GVA, deprivation, Internet connectivity and local government spending. The observations of the comparison are used as arguments in the SWOT analysis in the next section and for presenting the recommendations in the final section.

The Welsh Government has established three economic regions for the Economic Action Plan:10 North Wales, South East Wales, and Mid and South West Wales. Mid and South West Wales may be later split into Mid Wales and South West Wales, but at the time of writing, no decision has been made. The current Mid and South West Wales economic region is comprised of six local authorities: Carmarthenshire, Ceredigion, Neath Port Talbot, Pembrokeshire, Powys and Swansea (Figure 6.6). A four-region model would place Ceredigion and Powys together in Mid Wales, and Carmarthenshire, Neath Port Talbot, Pembrokeshire and Swansea in South West Wales.

In 2018, the area covered by the Mid and South West Wales was home to about 907 000 inhabitants, approximately 29% of the total population in Wales. The land area represents 57% of the total area of Wales, making the region the least densely populated of the three regions. The four local authorities in South West Wales make up 77% of the total population of the proposed Mid and South West Wales economic region. This share has been stable over time, suggesting similar population growth rates for these two areas (Figure 6.7). The Mid Wales population is only about 7% of the total Welsh population.

The Mid and South West Wales region has the lowest projected population growth in Wales over the next 10 and 20 years (Welsh Government, 2019[23]). The natural change (i.e. excluding immigration) of the population in Mid and South West Wales has been negative11 since the beginning of the 1990s and, overall, the future projected natural population change is negative for the full region (Figure 6.8). It is also interesting to note that in case of Powys, both natural population growth and migration projections predict negative population change, whereas, in the case of Ceredigion, the population is expected to grow by both measures. The overall population growth of Mid and South West Wales relies solely on positive net migration.

In 2018, the total number of working residents in Mid and South West Wales was about 402 500 persons. At the same time, the total number of people working in the area was 393 400 persons. Hence, the net commuting across the region was about -9 000 persons: more people commuted out of the region than into the region (Welsh Government, 2019[23]).

At the local authority level, commuting generally occurs within the region. There are exceptions, however. For example, in Powys, people commute more to England than to South West Wales or Swansea (Table 6.4). This works both ways, as there is a considerable amount of commuting from England to Powys. For Ceredigion, commuting is mainly to Carmarthenshire, followed by England and then Pembrokeshire. It is interesting to note that commuting between Powys and Ceredigion does not seem to be very common. This indicates that the labour market links between these two local authorities are not very strong. Instead, in the case of Ceredigion, commuting from Carmarthenshire to Ceredigion is important. As for the local authorities in South West Wales, Carmarthenshire and Swansea seem to be the most important receivers of commuters. Overall, commuting seems to be quite active between the local authorities, also from Swansea to neighbouring local authorities and England.

Based on the Welsh Local Labour Force Survey,12 the employment rate in Mid and South West Wales (72%) is lower than the Welsh average (73.5%). In Mid Wales, the employment rate (72.3%) is slightly higher than in South West Wales (71.9%). The unemployment rates differ much less, however: 4.2% in Wales and 4.1% for Mid and South West Wales.13 For South West Wales, the unemployment rate is 4.4%. For Mid Wales, however, the unemployment rate seems to be particularly low (2.7%),14 although the survey for Mid Wales may not be fully comparable due to the low number of responses.

The public sector is the most important employer in both Mid Wales (26% of all jobs) and South West Wales (32%) (Figure 6.9). The wholesale, retail, transport, hotels and food sector are the second largest in terms of the number of jobs in Mid Wales (24%) and South West Wales (26%). Agriculture, forestry and fishing is the third most important sector in Mid Wales (14.4%), whereas for South West Wales, this is not among the most important sectors (3%). This demonstrates the rural nature of the Mid Wales region compared to South West Wales. Overall, the jobs in production or construction and especially in the finance and insurance sectors form a much smaller share of total jobs in Mid Wales than in South West Wales.

In 2018, the GVA per head in Mid and South West Wales was GBP 18 958 on average. Specifically, it was GBP 17 509 in Mid Wales and GBP 19 382 in South West Wales (Figure 6.10). The GVA in Mid Wales is clearly lower than that of South West Wales. Both figures, however, are well below the Welsh average of GBP 20 738 and are the lowest of the three economic regions. At the local authority level, Carmarthen has the lowest GVA per capita (GBP 16 751). Only Swansea had a higher per capita GVA (GBP 21 910) than the Welsh average. All other local authorities in Mid Wales and South West Wales had a lower GVA per head than the Welsh average (GPB 20 738) and the UK GVA per head value (GPB 28 489). The trends in the GVA growth rate differ markedly between Mid Wales and South West Wales, as in Mid Wales GVA growth has slowed since 2016 and decreased from 2017 to 2018 (Figure 6.10).

The Welsh Index of Multiple Deprivation (WIMD)15 was developed as a means to identify and understand local area deprivation in Wales. It is used to support policy development and target resources and services. It shows better rankings for Mid Wales in particular but partially also for South West Wales compared with Wales in general. The Mid Wales region stands out as an area with a comparatively low level of deprivation, with Powys being the second least deprived local authority area in Wales (Figure 6.11).16

In September 2018, 35% of homes and businesses in Mid and South West Wales had access to an ultrafast fixed broadband speed (300Mbit/s or higher). This was 14 percentage points lower than the UK rate of 49% in September 2018. Access ranged from 5% in Pembrokeshire to 75% in Swansea (Welsh Government, 2019[23]). Mid Wales has the smallest share of homes and businesses in Mid and South West Wales with superfast or ultrafast broadband availability. Similarly, Mid Wales (Powys and Ceredigion) had the highest share of homes and businesses in Mid and South West Wales not meeting the Universal Service Obligation of the Welsh Government17 (Welsh Government, 2019[23]). Furthermore, the percentage of homes and businesses in Mid Wales with indoor 4G coverage was the lowest in Mid and South West Wales.

Local government expenditure can reveal information on differences in local spending needs. The expenditure structure differs surprisingly little between the six local authorities in Mid and South West Wales, despite some interesting variations. Powys spends proportionately more on social services than the other local authorities, and Swansea spends a larger share on housing than other local authorities (Figures 6.12 and 6.13). Overall, however, these differences seem quite small. More detailed analysis is needed for conclusive comments but the spending structure comparison does not strongly contribute to arguments for establishing one versus two economic regions.

This section begins by discussing some general aspects behind establishing economic regions. Thereafter, a more detailed discussion on the pros and cons of a one- versus two-region models are discussed using a SWOT analysis of the alternatives.

The Welsh Government is proposing to support planning and service delivery at the regional level through corporate joint committees (CJCs). These would be co-operative units, formed and financed by local authorities in the area. Forming the CJCs could be either voluntary, or the co-operation could also be initiated by Welsh ministers in cases where the benefits of an enlarged scale can be clearly identified. For this, the proposal is that CJCs be responsible for any combination of the following four tasks: i) transport; ii) economic development; iii) strategic planning for the development and use of land; and iv) improving education. While the exact content of these tasks still remains to be defined, in general, they represent typical examples of public services that are associated with benefit spill-overs and economies of scale. For example, based on the general principles of public spending assignments, in the case of public transport, major externalities across local government boundaries should be contained within a larger regional area. In the same vein, economic development is best suited for a larger (regional) area because local measures for economic development are often deemed inefficient. Similar arguments apply to land use and development. It is generally recommended that land use planning not be strictly a municipal responsibility, because it needs to take into account wider needs and effects. For this purpose, a regional-level body could help co-ordinate the local government plans. Finally, while education is mostly a locally provided service, especially at the primary education level, a larger scale could be useful, for example to provide services to pupils with special education needs.

There is no blueprint or universal best practice for the “right” number of planning regions and it is seldom the case that regional structures can be designed “from scratch” without any pre-existing regional or local organisation. Regional reforms, therefore, are often path-dependent processes, affected by the existing administrative borders of subnational governments and the prevailing governance models. On the other hand, historical, cultural and ethnic circumstances may affect the formation of regions in an important way. There can be a strong sense of “common past and destiny” behind regional identity even without existing administrative borders.

Some interesting approaches have been developed to help plan and implement regional reforms in OECD countries. One is the concept of functional regions, which are geographic areas defined by their economic and social integration. A functional region is a self-contained economic unit according to the functional criteria chosen (for example, commuting and/or other daily or weekly movements, like shopping) (OECD, 2019[26]). The time available for daily travelling limits the movement of everyday life, which is why functional areas are often regional in size. The specialisation of labour markets, the development of transport systems and the concentration of services have increased daily journeys. Moreover, the increased attractiveness of the urban centres and improved accessibility have a greater impact than before, leading to an expansion of commuting areas. As a result, over time, the importance of functional areas has increased, especially in regional planning.

It should also be noted that functional regions often differ from existing administrative boundaries. Functional areas evolve over time and such changes usually become arguments for reforming the established administrative structures or governance models. Demand for reforms in metropolitan governance and the financing systems of metropolitan areas are examples of such changes (Slack and Côté, 2005[27]; Bird and Slack, 2007[28]). It is widely accepted that urban areas are “engines of growth” in an economy, notably because the agglomeration economies may boost productivity by generating more innovations. Not only do major urban areas benefit from such development, but other areas do also as well since innovations eventually spill over, leading to higher productivity growth throughout the country (OECD, 2019[26]). Solving the problems of major urban areas is of vital importance because the agglomeration economies created by cities can have advantages for the entire country. Well-functioning metropolitan governance is one important factor for urban success but the existing administrative borders in metropolitan areas may no longer reflect the current activities in these regions. Moreover, if the land use policies are not intensified in metropolitan areas, the promise from agglomeration economies and human capital spill-overs may be missed (Glaeser and Gottlieb, 2008[29]).

In sparsely populated rural areas, the stimulus for reform is different. The demand for reform is often based on a diminishing population base, an ageing population, eroding tax bases and upward pressure on spending. Regional policies targeted to rural regions that are lagging behind aim to strengthen the capacity of these regions, and also to improve the urban-rural links and policies. The governance solutions vary by country and are highly case-specific but mergers of local authorities, intensified inter-jurisdictional co-operation and regionalisation have often been used (OECD, 2019[12]). In addition, reforms to the financing system, notably the transfer systems, have been carried out to support the financial capacity of lagging regions and local governments. In many countries, equalisation systems take into account the special circumstances such as remoteness and rurality of regions and local authorities.

The question of optimal regional unit size can be approached from the economies of scale and benefit spill-overs aspects. In such considerations, the existing spending assignments and available resources matter a great deal because they largely define the policy implementation and the service delivery capacity.

In Wales, the ability of the local authorities to jointly carry out their tasks through the CJCs will depend on their fiscal, administrative and institutional capacities. It is well known that the financial resources of the local authorities in Wales are scarce, not least because of the cuts made to transfers from the Welsh Government during the past decade or so. Moreover, as discussed earlier (Figures 6.12 and 6.13), the statistics on local authority spending show that local authorities in Mid and South West Wales allocate very few resources (1% of total spending) to the “planning and economic development” category. Since it is unlikely that all local authority resources for planning would be transferred to the CJCs, the budget resources available for CJCs risks being limited unless extra funding is made available.18

While it can be argued that combining the resources of two or more poor local authorities may not bring much value-added, it can be equally difficult to operate in a situation where the members of CJCs have very different capacities to finance the co-operation. Although the capacity aspect seems to lend support to the proposal for arranging the economic regions based on one region for the whole Mid and South West Wales area, the details of the tasks assigned to the CJCs, the administrative model, the implementation and the financing available will eventually define the outcome.

The optimal structure of the Welsh economic regions (i.e. the number of economic regions) does not only depend on economic efficiency arguments. Cultural, historical and local identity aspects are also important. From the cultural and regional identity and perspective, Ceredigion and Powys together could form a rural region with a unique natural environment and cultural heritage. Moreover, these two local authorities have themselves proposed forming a CJC to cover their territory, showing strong motivation and desire for own service provision in their area. It is also noteworthy that the local authorities of South West Wales do not resist the idea for a separate Mid Wales economic region. There is apparently also an administrative tradition in Wales for a separate Mid Wales, as from 1976 to 2006 Mid Wales was treated as a separate region within the context of the Welsh Development Agency – the WDA. From 1976-88 more or less, Mid Wales had its own entity – the Development Board for Rural Wales. After 1988, this was folded into the WDA and Mid Wales was considered its own WDA region. Taking into account the background, it is not surprising that the local authorities in Mid Wales prefer forming their own economic region.

A Mid Wales economic region would likely result in a relatively homogeneous entity in terms of service demands and needs, which would be beneficial for organising local public services and maintaining better allocative efficiency. This is a strong argument from the economic perspective. On the other hand, taking into account the tasks planned for the CJCs (transport, economic development, strategic planning for the development and use of land, and improving education), the economic and administrative efficiency arguments such as economies of scale and capacity to provide services do not seem to strongly support the idea of a separate Mid Wales economic region.

Wales is by no means alone in its efforts to design and implement economic regions. Similar preparatory work is currently ongoing in many countries considering a change in their regional structures. From this standpoint, the experiences of small unitary counties may be particularly interesting for Wales, including Finland (Box 6.5).

A separate economic region for Mid Wales would come with benefits and challenges. The main opportunities of a separate Mid Wales economic region are associated with the closeness of administration to the people, which could bring both efficiency and information benefits, potentially resulting in better quality services and ones that respond more directly to local needs (Table 6.5). It is also possible that co-operation between Ceredigion and Powys would be relatively easy to organise and lead to low administrative costs. These two local authorities have a strong common interest and motivation to establish a separate economic region and to develop their area further. Without creating a separate Mid Wales region, there is a real danger that the problems and potentials of Mid Wales get overlooked, especially if there is a focus on urban and large-scale developments.

The main challenges of Mid Wales economic region include the weaker financial, administrative and institutional capacities of Ceredigion and Powys to plan and implement effective policies, compared with a larger unit comprised by all six of the local authorities in Mid and South West Wales. It should also be recalled that the population base of Mid Wales is only 7% of Wales, with low population density. Such characteristics would make the Mid Wales economic region rather a special case in the Welsh economic region context.

In general, Mid Wales would suffer from weaker critical mass in economic and administrative terms compared with all other economic regions. Moreover, the information on commuting patterns between local authorities indicates that the labour market connections between Ceredigion and Powys are not particularly strong. All this could at least partly compromise the benefits received from proximity and better information (the allocative efficiency). It is also possible that Ceredigion and Powys would not be sufficiently attractive for new businesses and that the region could fail to encourage graduates to stay (or move into) the region. While Mid Wales is still expected to attract new inhabitants during the coming decades, the natural rate of population growth is predicted to be negative.20

However, the recent decision to establish the Mid Wales Growth Deal for GBP 55 million will certainly help build capacity and indeed provides local decision-makers with momentum to tackle many development issues (Box 6.6). The Mid Wales Growth Deal, together with the allocative efficiency arguments, forms the main economic justifications for a separate Mid Wales economic region.

Going beyond the purely economic arguments, as was discussed above, it should be acknowledged that the local authorities in Mid Wales form a unique area both culturally and geographically. They build on strong joint local identity, especially on the rurality aspect. Moreover, the local authorities of Ceredigion and Powys have made it clear that they are motivated and committed to developing their area based on a separate Mid Wales economic region. Such dedication would undoubtedly form an important factor for building an economic region and for a potentially successful co-operative arrangement (CJC).

A single economic region for Mid and South West Wales would also have its benefits and challenges (Table 6.6). The main strengths and opportunities include the potential for utilising economies of scale and internalising externalities, thereby giving the opportunity to minimise the benefit spill-overs across regions and ensuring low administrative costs. Furthermore, the information on commuting suggests that Mid and South West Wales forms an economic area, which would give a good base for effective policies. Swansea, as the region’s main urban area, could be further strengthened as an engine of regional growth, innovation and productivity, benefitting the wider area. One economic region for the whole Mid and South West Wales, with 29% of the Welsh population, would enable the critical mass needed to generate on strong regional development. One region covering all six local authorities could also enable building on synergies between the two “Deals” in the region: the Swansea Bay City Deal and the Mid Wales Growth Deal. The relatively diversified economic structure of Mid and South West Wales could also ensure the potential for growth and innovation. Moreover, with one economic region model, there would likely be sufficient resources to develop the key business sectors and also to diversify the policies, to take into account the development needs in the northern part of the region formed by Ceredigion and Powys for example.

The challenges of a Mid and South West Wales economic region are linked with the potential problems caused by the heterogeneity of the local authorities. There are considerable differences between the six local authorities in terms of service needs, organisation and population size, financial and administrative capacities, industrial mix and operating circumstances. A single CJC for the whole region may be unable to take the specificities of the region into account to the same degree or level of detail as a two-region model. The risk is therefore that the rural Mid Wales area could suffer. The distances and travel times within the larger Mid and South West Wales economic region could prove to be problematic for equity of access and service delivery. All this could lead to lower allocative efficiency, i.e. reduced ability to meet service needs and demands. In a larger co-operative unit, there is also a risk that each member tries to maximise their own benefit at the cost of others. At worst, this could lead to excessive spending.

Since the current plan is to organise CJCs as co-operative units formed by local authorities, the structure of CJCs can be relatively easily modified later on, if needed. This is particularly true if the economic regions are first organised around four regions. For example, after five years, the situation could be re-evaluated. Decisions to carry on with the existing structure or with a reduced number of regions could be made based on the analysis. In order for such an ex post evaluation to be useful, the evaluation should be planned and carried out jointly with the academia and other independent policy evaluation experts.

Such piloting of a regional model is not exceptional in an international context. In Sweden, successive governments have used various approaches to pilot with different models to implement regional development (Box 6.7). In Finland, a regional self-governance model was piloted in the remote and rural Kainuu region, between 2005 and 2012. The Kainuu region pilot aimed to gain experience in regional development, health and education services, citizen activity and managing the relationship between the regional and the central government.

The Welsh Government has introduced CROs to support regional-level planning and implementation capacity, and ultimately to work together with local authorities as well as CJCs. With the CROs, the intention is to ensure a more integrated and place-based approach to economic development policy in Wales, in part through their role in supporting the design and implementation of Regional Economic Frameworks (Welsh Government, 2018[34]).

The CROs, as Welsh Government officials, together with CJCs, would play a key role in ensuring co-operation between the local authorities and the Welsh Government. Since the main task of CROs is to support the regional-level planning and implementation capacity (discussed in Chapter 5), there should be a strong partnership between CRO offices and CJCs. The experience and contacts of CROs in the Welsh Government could be valuable for CJCs, especially in the beginning. CROs can ease the burden of maintaining contact with the diverse parts of the Welsh Government and co-ordinating the measures with other CJCs as needed. Moreover, the CROs could help ensure equal treatment of the economic regions from the Welsh Government side. However, in order to reap the benefits from local decision-making and local information, the CROs should probably not be given decisive power over the CJCs, such as the power to accept or reject plans prepared by the CJCs. The dialogue between CROs and CJCs could be arranged mostly on an informal basis but the CJCs could, for example, invite the CROs to their meetings time to time, so that all participants get the relevant information. The CJCs could also ask the CROs their written opinion on specific matters, for example.

In their role as enabling Welsh Government representatives, the exact number of CROs and their offices may not be the most fundamental question, as long as CRO staff have strong local knowledge. The eventual number of regions and the number of CROs does not necessarily need to be the same. It is plausible therefore that one CRO could operate in both Mid Wales and South West Wales if the Welsh Government decides to establish four economic regions. Given that the CROs are still relatively new and the CJCs are yet to be introduced, there is room for clarification and reorganisation. In order to increase the effectiveness of the CROs, the role and status of CROs and their staff should be clarified and strengthened within the Welsh Government.

The Welsh multi-level governance model is characterised by extensive spending decentralisation and centralised financing. In this, Wales reflects the UK tradition, which is distinguished by a high degree of institutional and fiscal centralisation by international standards.

A decade of austerity measures has left its mark on Welsh local authorities. The cuts in transfers to local authorities have affected local services across the board, and local investments and non-statutory tasks have been hit particularly hard.

With nearly 70% of local authority revenues coming from transfers, the incentive for economic development among local decision-makers is restricted. Increasing the share of own revenue of local authorities’ incomes would increase local government accountability to own residents and help ensure that decisions to expand local public programmes are made keeping in mind the additional costs. Solving the lack of own-revenue bases is not easy, but the way forward should include reforming the financing system for local authorities. Such considerations should include diversifying tax bases for the local authorities, reducing the amount of specific transfers (with an increased share of general transfers) and gradually increasing the overall level of financing available for local authorities. This does not mean that a revenue and cost equalisation system would be unnecessary, however. Practically all countries with decentralised systems utilise equalisation. The best equalisation systems work to ensure that local governments operate at comparable tax rates, so that differences in tax rates reflect differences in efficiency and/or service demands, not their tax bases.

Co-operative arrangements help solve problems of decentralisation. This is particularly the case for services with benefits spill-overs and externalities, and for services where effective delivery requires a larger scale than a single local authority is able to provide. The proposed corporate joint committees (CJCs) can help solve such problems but the outcome depends largely on the services in question and how the co-operation is implemented. Furthermore, without adequate resources and financing from the local authorities, and in the case of decentralised services from the Welsh Government,21 the threat is that the effectiveness of the proposed CJCs could be limited.

There are benefits and risks associated with establishing a Mid Wales economic region. A Mid Wales economic region would likely result in a relatively homogeneous entity in terms of service demands and needs, which would be beneficial for organising local public services and maintaining better allocative efficiency. This is a strong argument from the economic perspective. The main risk is formed by the weak economic and administrative capacities of both Ceredigion and Powys to operate an economic region. The recent decision to introduce a Mid Wales Growth Deal may help secure adequate resources for regional development and build regional attractiveness, however. It should also be noted that cultural, traditional and political arguments are also important in establishing regional-level co-operation and in attempts to generate well-being in Mid Wales. From this aspect, Ceredigion and Powys could together form a rural region with a unique natural environment and cultural heritage. On the other hand, the tasks planned for the CJCs seem to emphasise the economic and administrative capacity arguments. Launching a pilot experiment with a Mid Wales economic region would enable evaluating the benefits and costs of establishing a fourth region. Such a pilot should be carefully planned with academia and independent research institutes.

The CROs can help local authorities operate in the complex structural framework that characterises Welsh multi-level governance. The experience and contacts of the CROs in the Welsh Government could provide valuable help to CJCs especially when they start their work. This enabling and consultative role of CROs is natural because the CROs are expected to work co-operatively with the local authorities in their respective regions. Establishing economic regions in Wales should be based on tight co-operation between the CJCs and Welsh Government officials, notably the CROs.

References

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[10] King, D. (1984), Fiscal Tiers: The Economics of Multi-level Government, Allen & Unwin.

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[3] Oates, W. (1972), Fiscal Federalism, Harcourt Brace Jovanovich, New York.

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Agglomeration economies – Occur, at a broad level, when individuals and firms benefit from being near to others. Agglomeration economies are usually discussed in connection with production. It is argued that the physical proximity of firms to other firms, workers and consumers may help firms in the day-to-day business of producing goods and services, leading to higher productivity.

Benefit spill-overs – Externalities that exist when the delivery of services leads to impacts on households that reside outside the administrative boundaries of the jurisdiction responsible for service delivery.

Calculatory tax revenue – A specific method often used in formula-based transfer systems, where each municipality is defined a hypothetical tax revenue using a mean tax rate (over all municipalities) and real tax base for the municipality.

Capacity, administrative – Can be summarised as the combination of capabilities used to achieve effective policies. The capabilities include human resources, organisational structure and governance for example.

Capacity, institutional – Implies empowerment, social capital and an enabling environment, as well as culture, values and power relations.

Centralisation, fiscal – Generally means low spending and revenue powers at subnational government levels.

Centralisation, institutional – Means centralised decision-making and low degree of autonomy at the local government level.

Economic and social integration of geographic areas – A broad description that refers to economic and social links between population and firms in the area, within or across administrative borders.

Equity of taxpayers in different subnational governments – Refers to tax policies that aim for “equal treatment of equals”, i.e. tax rules should treat taxpayers with similar qualities equally, irrespective of their home municipality.

Fiscal federalism – Lays out a general normative framework for assignment of functions to different levels of government and the financial relations among levels of government.

Gross expenditure – A total amount of money the government spends on a particular task, without deducting any revenue that the spending in question will generate for the government. In contrast, net expenditure means the total amount the government spends minus revenues (user fees or sales revenue for example).

Gross value added – The value of output minus the value of intermediate consumption. It can be used to measure the contribution to gross domestic product (GDP) made by an individual producer, industry or sector.

Homogeneous business structure – Refers to a business structure comprising mainly of small- and medium-sized enterprises (SMEs) and a low degree of variation in business sectors.

Inter-municipal unit – A co-operative association or organisation formed by municipalities.

Lack of critical mass (of a region) – Refers to inadequate size, measured by capacities or resources, which may prevent the organisation from operating effectively.

Municipality – An administrative unit with its own government in a local area. A municipality is a basic type of local government and it can be a city, town or rural community.

National redistributive objectives – Refer to government policies to income redistribution.

Nominal terms – Data which have not been adjusted to take inflation into account.

Per capita – Defined as data for each person. For example, per capita public expenditure is the government expenditure averaged across everyone who lives within the territory of the government. At a country level, the expenditure would then be divided by the country’s total population.

Real terms – Data that has been adjusted to take inflation into account.

Regional economic development planning – Means a broad spectrum of tasks that focus on planning the economic processes and the use of resources available from a regional perspective. Such tasks include strategic planning, impact analysis, research, co-ordinating, infrastructure and land use planning. In fact, spatial planning and regional economic development planning can be considered as closely linked activities.

Regional equity – See Territorial equity.

Service-tax mix – A combination of local public services offered and tax rates charged for providing the services.

Territorial equity – A general expression usually meaning specific policy goals such as equity in access to standard/minimum level of public services despite regional features. Such policy goals usually require spatial policies targeted at inequalities that are generated by specific regional features. For example, the policy goal for universal provision of public services may entail spending more per capita to maintain services in less populated areas. Territorial equity does not, in general, mean exactly the same level of services in all regions, however.

Vertical tax externalities – Refer to a situation where two or more different levels of government share the same tax base, which may lead to a situation where the different levels of government ignore the effects of their tax rate decision on the tax revenues of other levels of government.

Notes

← 1. Four service categories have been defined as potential tasks of CJCs: i) transport; ii) economic development; iii) strategic planning for the development and use of land; and iv) improving education. The exact combination of services for the planning regions will be decided later, however (https://gov.wales/sites/default/files/publications/2019-02/regional-economic-development.pdf).

← 2. Revenue expenditure data. While user fee revenue is not included in this data, adding them would not change the conclusion.

← 3. This section focuses on spending at the Welsh local authority level. Chapter 4 discusses spending by the UK government, Welsh Government and Welsh local authorities.

← 4. This theoretical discussion aims to show the usual fiscal federalism recommendation on spending assignments between levels of government. In the Welsh context, the levels of government considered are the UK government, Welsh Government and local authorities. For example, the responsibility of stabilisation and monetary policy is with the UK government but many tasks have also been devolved to the Welsh Government, which finances, regulates and monitors the local authorities.

← 5. During the COVID-19 crisis, however, the usually stable revenue from NDR has been weakened.

← 6. The economics literature on revenue assignment usually argues that when local residents self-finance local services through local taxes and charges, they have an incentive to evaluate the costs and benefits of local service provision, and benchmark local government performance against neighbouring jurisdictions. Such “yardstick competition” can encourage local politicians to maximise the welfare of local residents instead of promoting their own self-interested goals.

← 7. Exclusion principle means that a consumer can be excluded from using the service if they are not willing to pay for its use.

← 8. The central government could maintain control of the rate levied, with lower and upper bounds of rates for example, to prevent competition for business eroding the tax base.

← 9. As was mentioned in the beginning of the report, four service categories have been defined as potential tasks of CJCs: i) transport; ii) economic development; iii) strategic planning for the development and use of land; and iv) improving education.

← 10. In some Welsh Government documents, they are called “economic regions”.

← 11. The number of deaths has been higher than the number of births in the combined Mid and South West Wales area.

← 12. For more information, see https://statswales.gov.wales/Catalogue/Business-Economy-and-Labour-Market/People-and-Work/Employment/Persons-Employed/employmentrate-by-welshlocalarea-year-gender.

← 13. Employment rates are defined as a measure of the extent to which available labour resources (people available to work) are being used. They are calculated as the ratio of the employed to the working age population. The unemployment rate is the number of unemployed people as a percentage of the labour force, where the latter consists of the unemployed plus those in paid or self-employment.

← 14. The rate of self-employment is high in Mid and South West Wales compared with Wales in general, and it is particularly high in Powys (26%) and Ceredigion (28%). Entrepreneurship and self-employment may partly explain the comparatively low unemployment in Mid Wales.

← 15. This index is the Welsh Government’s official measure of relative deprivation for small areas in Wales. It uses the Office for National Statistics “Lower Super Output Area” (LSOA) geography as its reporting unit, which sub-divides Wales into 1 909 separate geographical areas with an average population of 1 600.

← 16. Powys has argued that the indicator does not sufficiently account for deprivation in sparsely populated rural areas.

← 17. The universal service obligation includes the following targets: a minimum download “sync” speed of at least 10Mbps (Megabits per second), a minimum upload “sync” speed of at least 1Mbps, a medium response time with end-to-end latency of no more than 200ms for speech applications, a maximum sharing between customers (contention ratio) of 50:1, a minimum data allowance of 100GB, a technology neutrality design (can be delivered via a mix of fibre based and/or wireless solutions).

← 18. It is possible that, in the future, CJCs may be eligible for investment funding through funds and processes similar to EU funds now, though this matter is still to be decided.

← 19. Provinces in Finland were administrative areas for central government deconcentrated functions. The provinces were abolished in 2010.

← 20. The biggest group of in-migration has consisted mainly of retired people or persons in their mid-life (50-64 years of age) from the urban areas of England (Stockdale, 2014[35]).

← 21. For example, in the case of economic development, if it is decentralised from the Welsh Government to CJCs.

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