Commercialisation

AI

What does AI mean for rural communities? 

Artificial Intelligence (AI) is a relatively new but rapidly growing technological field, and it is increasingly shaping the way we interact with the world. How is AI benefitting rural communities, and what more could it do? Jessica Sellick investigates. ………………………………………………………………………………………………..

AI technologies can be found in a wide range of everyday applications – from virtual assistants and navigation software, through to online banking and facial recognition. Artificial Intelligence (AI) is being deployed across many sectors to assist in tasks such as decision making and improving productivity. What is AI, and how can it be deployed to benefit rural communities? 

What is Artificial Intelligence? There is no universally agreed upon definition of artificial intelligence (AI) or AI technologies. Academics Haroon Sheikh, Corien Prins and Erik Schrijvers describe how it can be defined according to algorithms; by the imitation by computers of the intelligence inherent in humans; as a technology that enables machines to imitate various ‘complex human skills’; or an imitation or stimulation of something we do not yet fully understand ourselves: human intelligence! In seeking to define AI, research by psychologists, behavioural scientists and neurologists amongst others have opened up discussions around autonomy, human intelligence and innovation. All of this has led Haroon Sheikh and colleagues to adopt an open definition of AI where it applies to ‘systems that display intelligent behaviour by analysing their environment and taking actions – with some degree of autonomy – to achieve specific goals’.  The Alan Turing Institute defines AI as ‘intelligence, such as reasoning, making decisions, learning from mistakes, communicating, solving problems, and moving around the physical world’. 

Back in March 2023 the Government published the UK Science and Technology Framework. This set out the Government’s strategic vision for AI as one of 5 critical technologies. The Framework described AI as ‘machines that perform tasks normally performed by human intelligence, especially when machines learn from data how to do those tasks’. The Framework reinforced the Government’s commitment to delivering the National AI Strategy published back in September 2021, which was focused around the UK being an AI superpower, supporting the transition to an AI-enabled economy, and ensuring the governance of AI technologies is right.   

The Office for Artificial Intelligence (Office for AI), part of the Department for Science, Innovation & Technology (DSIT), defines AI as ‘the use of digital technology to create systems capable of performing tasks commonly thought to require intelligence’. As a research field it spans philosophy, logic, statistics, computer science, mathematics, neuroscience, linguistics, cognitive psychology and economics. While the field is constantly evolving, it has two distinct characteristics: (i) it involves machines using statistics to find patterns in large amounts of data; and (ii) it involves the ability to perform repetitive tasks with data without the need for constant human guidance.   

In August 2023, the Office for AI published a policy paper on AI regulation. This further described AI systems, or AI technologies, as ‘products and services that are adaptable and autonomous’. The paper sets out how the Government intends to support innovation while providing a framework to ensure risks are identified and addressed. In October 2023 the House of Commons Science, Innovation and Technology committee opened an inquiry into the governance of AI. 

More recently, in November 2023, the Prime Minister hosted a global summit on AI safety. This resulted in 28 countries agreeing to the Bletchley Declaration on AI safety. The UK and United States Governments also announced new National AI Safety Institutes. 

Why is AI capable of, and what is driving its use? AI is being used for linguistic tasks, computer tasks, and to improve the performance of robots. Some examples include:

  • Natural language processing (NLP): AI is being used for speech-to-text converters, online tools that summarise text, for chatbots, and for speech recognition and translation. 
  • Programming computer systems: AI is being used on computer systems to assist in the interpretation of images and videos (e.g. facial recognition, medical imaging, video surveillance) and to develop driverless vehicles. 
  • Robotics: AI is being used on machines to carry out actions (e.g. medical robots performing surgery, self-navigating drones).  

These AI developments are possible because of advances in data, computing power and investment. Machine learning (ML) systems are training on larger data sets. For example, ChatGPT 3.5 was trained using 300 billion words obtained from internet text. The amount of computing power used to train ML models has increased – a Foundation Model released in 2020 used 600,000 times more computing power than a comparable Model in 2012. In March 2023 the Government announced a £900 million investment towards a new supercomputer, known as Isambard-AI, and hosted at the University of Bristol. UK Research and Innovation (UKRI) also announced a £10 million investment to a group of universities (including Bristol) and Hewlett Packard Enterprise, and a £30 million award to the Science and Technology Facilities Council’s laboratory in Cheshire. 

While these advances already are (and will be) impressive, of greater significance is their uptake by society. Discussion has moved on from digital transformation to generative AI whereby our everyday lives are increasingly being shaped algorithmically.  And while some citizens are excited by the possibility of AI saving time and handling mundane or difficult tasks, others worry about the loss of human jobs and fear AI will become so powerful it will outsmart people. 

There are also concerns around the concentration of Large Language Models in the hands of a few technology companies; privacy and data protection around the use of data to train AI models (data mining or harvesting at a mass scale); the ability of AI models to generate false information; and a lack of skills in the current UK workforce to develop AI.    

How are rural communities using AI – and what do they have to gain? 

McKinsey has estimated that generative AI technologies have the potential to add between $2.6 trillion and $4.4 trillion annually to the global economy. AI is already found across a wide range of sectors and services. Some examples of how AI is being developed or deployed in a rural context include: 

  • Agriculture: choosing optimum crops for weather conditions, monitoring crops, improving resource efficiency, monitoring livestock and detecting the early signs of disease, employing automated workers or tasks (e.g. robotic fertilisers). 
  • Transport: monitoring deliveries or traffic status, self-driving or autonomous vehicles, or ‘pay with your face’ to use public transport. 
  • Education: for adaptive tutoring or instructional assistants that explain difficult concepts to students; to undertake automated routine tasks around lesson planning; and drafting communications with parents/carers and the local community.  
  • Healthcare: medical imaging, patient monitoring, or identifying patients at higher risk of developing certain conditions. 
  • Policing: gathering intelligence, predicting crime and facial recognition tools.
  • Weather: to generate scenarios or develop algorithms that mine social media posts to learn from the language used and the pictures shared to deduce whether a weather event is happening and to what extent. 

While many of the issues rural communities face may be shared by their urban counterparts (e.g. access to services, economic development, climate change), how they are experienced and the solutions that are needed are different in a rural context. While much of the focus to date has been on the deployment of AI in agriculture, there are opportunities for rural communities to engage AI in other new and novel ways – with examples ranging from building weather/climate resilience through to reducing the impact of social isolation.  

Is there an (emerging) urban-rural AI gap? Some researchers suggest data is more likely to be harvested from rural residents than their urban counterparts. For example, a study by Douglas Leith on data being harvested by smart phones revealed Android phones give Google 20 times more data that iPhones send to Apple. On the one hand, this suggests that where android phones are more dominant in rural areas the user’s data is more likely to be harvested. But on the other hand, this potentially exposes rural users to some technological downsides regarding data privacy, protection and ownership. 

Similarly, once gathered, some evidence suggests data is more likely to be used to develop initiatives that benefit urban areas. For example, a scoping review by Jose Guerra and colleagues found that public health AI projects primarily used community based surveillance data collected from rural areas, with the harvested data often used to design public health initiatives of benefit to urban areas. 

Closing this rural AI gap is part of a much broader discussion around digital infrastructure and connectivity, rural proofing within policy-making and investment decision-making, and skills and expertise.  

Data analysis by Ofcom shows that while there has been an increase in gigabit-capable coverage in both urban and rural areas across the UK, there has been a greater increase in urban areas. This is because some providers tend to focus their roll-out on urban areas. Similarly, while the majority of homes and businesses have access to at least decent broadband on a fixed line connection, around half a million premises, mainly in rural areas, currently do not. While Ofcom is seeing small improvements in 4G coverage (partly as a result of initiatives such as the Shared Rural Network), the lack of reliable digital infrastructure and connectivity in some rural areas continues to hamper the ability of communities and businesses to benefit from AI.

Back in October 2022 the White House published a blueprint for an AI Bill of Rights to make automated systems work for the American people. This recommended that systems be made and audited with ‘consultation from diverse communities’, including communities in rural areas which have traditionally been underserved. The blueprint therefore gives rural communities are opportunities to shape the trajectory of these technologies. Back in the UK, while the Government and devolved administrations have published a range of documents and announced investments in AI, alongside a much wider range of parliamentary interest and activity, to what extent is rural proofing taking place? Defra, for example, has developed an AI Community of Interest for colleagues in Defra who are interested in building and sharing knowledge about AI.

There appears to be little consistency in the terminology used to describe the knowledge, skills and roles of AI. While research from Accenture found that 34% of UK organisations had scaled up AI technologies in response to COVID-19, only 27% of UK business leaders described their non-technical workforce as being well-prepared to leverage new technology. The Alan Turing Institute has highlighted the AI skills gap – running from early years through to senior positions in academia and industry. Without consistency in terminology or data collection, it is currently difficult to understand the skills gaps being experienced across the UK. It would be good to recruit and retain AI workers in rural areas – having more AI expertise in rural communities could help to both increase its benefits and take-up but also lead to greater understanding of its challenges.    

Where next? The big shift taking place here is not only around data, models, and tools or their capabilities; but their uptake and the profound ways in which they are impacting society. While many of us are starting to think about AI and its implications, if we don’t keep pace with developments, and indeed shape the agenda, AI is going to create its own vision of rural communities.  …………………………………………………………………………………………………

Jessica is a project manager at Rose Regeneration and a senior research fellow at The National Centre for Rural Health and Care (NCRHC). She is currently evaluating a service that supports older people to maintain their independence; and reviewing neighbourhood based initiatives (NBI). Jessica also sits on the board of a charity supporting  rural communities across Cambridgeshire. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk. 

Website: http://roseregeneration.co.uk/https://www.ncrhc.org/ 

Blog: http://ruralwords.co.uk/ 

Twitter: @RoseRegen 

aeroplane

Ready for take-off? How significant are regional airports for rural communities?

Since the Wright Brothers (Orville and Wilbur) invented, built and flew the world’s first successful motor-operated airplane in 1903, aviation has played a defining role in connecting people and global trade. And while PPE,  pharmaceuticals and vaccines have all long been carried by air, COVID-19 has seen unprecedented demand for transporting these critical goods. At the same time the pandemic has led to travel restrictions and a sharp fall in passenger numbers – affecting airports and the entire air transport system. As part of its Levelling Up agenda the Government wants to improve connectivity between all corners of the UK, making it easier for more people to get to more places more quickly. What role can regional airports play, not only in bringing us closer together, but in boosting jobs, prosperity and growth? Jessica Sellick investigates. 

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What is a regional airport? 

While there is no statutory or legislative definition the term has been commonly applied to UK airports.  The label ‘regional airport’ can be traced back to a White Paper on Airports Policy published in 1978. This distinguished between four categories of airports: gateway international airports (Category A); regional airports (Category B); local airports (Category C); and general aviation airports (Category D).  Section 5 of the Airports Policy described regional airports as those airports not in or near London. The Environment, Transport and Regional Affairs Select Committee carried out an Inquiry into regional air services back in 1997. Again, the Committee defined regional airports as those UK airports other than the five London airports (Heathrow, Gatwick, Stanstead, Luton and London City); as well as the airports on Guernsey, Jersey and the Isle of Man. The Airport Commission’s work in 2013 categorised the following airports as ‘regional’: Southampton, Norwich, Southend, Bristol, Cardiff, Bournemouth, Birmingham, East Midlands, Coventry, Manchester, Newcastle, Liverpool, Leeds Bradford, Durham Tees Valley, Doncaster-Sheffield, Humberside, Blackpool, Glasgow, Edinburgh, Aberdeen, Prestwick, Inverness, Belfast International and Belfast City. The Civil Aviation Authority publishes data on 42 regional airports – this omits 6 London airports (Heathrow, Stanstead, Gatwick, Luton, London City and Southend), and 4 non-UK reporting airports (Alderney, Guernsey, Isle of Man and Jersey). In summary, the term ‘regional airport’ has been commonly applied in policy and practice to a range of UK airports not in or surrounding London. 

Who owns regional airports? 

The British Airports Authority (BAA) was established by the Airport Authority Act 1965 to take responsibility for four state owned airports from the Ministry of Aviation: Heathrow, Gatwick, Prestwick and Stanstead. In proceeding years, BAA acquired Edinburgh, Glasgow and Aberdeen. The Airports Act 1986 mandated the creation of BAA Plc which sought funds from the stock market and led to the sale of Prestwick. In 2006 BAA Plc was purchased by a consortium led by Ferrovial. Since then, the consortium has expanded into international operations – including signing contracts with Boston Logan, Baltimore-Washington and Indianapolis. Following an Inquiry by the Competition Commission in 2008-2009, BAA Plc was required to sell three of the seven UK airports it owned at the time within 2-years. Subsequently, Gatwick, Edinburgh and Stanstead were sold. 

In June 1985 the Government published a White Paper which, as per BAA Plc, proposed moving Local Authority airports onto a private footing. The Airports Act 1986 enabled airports to access private capital by becoming arms-length companies. This resulted in airports with a turnover of more than £1 million that were owned by Local Authorities to be privatised, including: Birmingham, Blackpool, Bournemouth, Bristol, Cardiff, East Midlands, Exeter, Humberside, Leeds Bradford, Luton, Manchester, Newcastle, Norwich and Teesside. However, some Local Authorities retained a ‘public interest stake’ in the sales. For example: 7 West Midlands district councils retained a 49% stake in Birmingham airport; Durham, Darlington, Stockton-on-Tees, Middlesbrough, Hartlepool and Redcar and Cleveland Councils retained a 25% stake in Durham Tees Valley airport; and Durham, Gateshead, Newcastle, North Tyneside, Northumberland, South Tyneside and Sunderland Councils retained a 51% stake in Newcastle airport. Cornwall Newquay Airport is a former RAF based which began operations as a fully civilian airfield in 2009. It is wholly owned by Cornwall Council and operated by Cornwall Airport Ltd. More recently, in 2019 Durham Tees Valley was brought back into public ownership to save it from closure and renamed Teesside International Airport. 

Since the 1990s it has been possible to ring-fence a regional air service to a national hub through a Public Service Obligation (PSO). A PSO is a form of ‘state aid’ and allows for socially and economically necessary air services to be subsidised by national Government or Local Authorities to protect lifeline routes to peripheral or development regions. PSOs are currently used on routes in Northern Scotland, and routes from Cornwall to London. While PSOs date back to our membership of the European Union, the Government has indicated that these regulations will be retained. 

Why are regional airports important?  

While there are no official figures for the overall economic contribution of regional airports, some airports have commissioned studies to estimate their economic impact including the number of direct and indirect jobs they support and/or their contributions through the supply chain. Other commissions have sought to draw together data on the importance of regional airports to other sectors and their wider impacts on GVA. 

From a public policy perspective, the contribution of airports (and the aviation sector more widely) to pandemic recovery, levelling up, net zero, and global Britain have taken on increased importance in recent times.   

Levelling Up: in January 2020 the Government announced that the Department for Transport (DfT) would be carrying out a review of regional air connectivity. The aim of the Review was ‘to ensure that all nations and regions of the UK have the domestic transport connections local communities rely on – including regional services from local airports’. The Review was suspended during COVID-19 and is now being taken up as part of the Aviation Recovery Plan (ARP).  Also in 2020, the Government commissioned Sir Peter Hendy CBE to work on a Union Connectivity Review. His final report, published in November 2021, recommended the creation of UKNET – a strategic transport network for the whole UK. To support UKNET, the Review identified a series of transport infrastructure enhancements to improve the capacity, reliability, journey times and sustainability on key strategic links across the UK. This included improving connectivity to and from Northern Ireland via the three airports and seaports. Where journeys are too long to be reasonably taken by road or rail, the Review recommended the Government assess existing subsidy rules for domestic aviation to allow support for routes between different regions of the UK rather than just to and from London; reduce the rate of domestic aviation tax; and intervene in the assignment of slots at London airports to provide more slots for domestic routes. 

Air Passenger Duty (APD) is a duty chargeable per passenger flying from UK airports to domestic and international destinations. APD follows a band structure, with the rate varying according to destination and class of travel. Receipts are collected by the operator of the aircraft and payable to HMRC within one calendar month. Airlines, airports and industry bodies have consistently campaigned for a reduction in APD.  In 2021, the Government consulted on reducing APD. The consultation sought views on reducing the rate of APD on domestic flights to support the Union and domestic connectivity whilst increasing the international rates to reflect the Government’s environmental objectives. At the Autumn Budget and Spending Review 2021, under the subheading ‘a better-connected UK’, the chancellor announced a package of APD reforms including a 50% cut in domestic APD and the addition of a new ultra-long-haul distance band. The new domestic band for APD has been set at £6.50 and will apply to all flights between airports in England, Scotland, Wales and Northern Ireland (excluding private jets). As a result, the Treasury estimates around 9 million passengers will pay less APD in 2023-2024, benefitting connectivity between Great Britain and Northern Ireland. 

In Spring 2021, the DfT published a General Aviation Roadmap which described the network of national airfields as a national asset, providing crucial connectivity for business, emergency services leisure and sporting flying. In recognising their local and regional impacts, airports are viewed as vital to levelling up. The Levelling Up White Paper published in February 2022 contained several references to airports – including plans to connect Birmingham Airport, Solihull and Walsall to Birmingham city centre via a light rail system; and the establishment of a freeport at East Midlands Airport. 

Achieving net zero: The Hendy final report recommended that the UK Government should drive the uptake of sustainable fuels and zero emission technologies on domestic aviation; and support the development of sustainable aviation fuel plants in part of the UK that are particularly reliant on aviation for domestic connectivity. 

The DfT published its plan to decarbonise the entire transport system in the UK in July 2021. This highlights the lead role the UK plays in the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and the role of the UK Emissions Trading Scheme. Alongside the plan the DfT published Jet Zero, a consultation on how to reach net zero aviation by 2050. The plan references ZeroAvia, the world’s first hydrogen fuel cell powered flight and contained commitments to consult on a target for UK domestic aviation to reach net zero by 2040, and to consult on a target for decarbonising emissions from airport operations in England by 2040. The plan sets out how the Government will fund a zero emission flight infrastructure R&D at UK airports; and kick-start commercialisation of UK sustainable aviation fuels (SAF).  

Manchester and Gatwick airports have already achieved carbon neutrality and Bristol airport is aiming for net zero emissions by 2030. Many regional airports have joined an Airport Carbon Accreditation programme (ACAP). Whilst these developments are welcome, it is worth noting that Airport ground-based activities account for approximately 2% of the aviation sector’s total carbon emissions. Indeed, the Association of Directors of Environment, Economy, Planning & Transport (ADEPT) queries the extent to which passenger growth is compatible with net zero, and what this might mean for airport expansions. North Somerset Council, for example, rejected a planning application to expand Bristol Airport which is owned by the Ontario Teachers’ Pension Plan. This decision was overturned by The Planning Inspectorate on the grounds that the benefits would outweigh the harm to greenbelt land.  

Global Britain: for Government, our departure from the European Union has been viewed as an opportunity to reach out to the rest of the world to forge new trade links, to connect and compete. CEBR research to quantify the economic impact associated with Heathrow Airport, for example, considers which countries will potentially provide the greatest opportunity for the UK economy through free trade agreements and their reliance on routes through Heathrow. As part of the UK Research and Innovation (UKRI) Future Flight Challenge, the results sets out a vision for the aviation system in 2030. This references ‘regional air mobility’ with electric, hydrogen or hybrid aircraft providing short-medium range hops between fixed locations; calling for demonstration pilot projects across selected airfields by 2024 with passenger carrying regional flights by 2030.    

More recently, policy attention has focused on domestic flights and regional connectivity – which can be seen as a move towards reducing spatial inequalities, and boosting productivity, jobs and growth. At the same time, this has also opened debates around spatial inequalities (London/South East airports versus other airfields), sustainability and the environment (airport capacity for growth versus climate change).  

What support have they received during COVID-19? 

The Government estimates it has spent some £12 billion supporting the aviation industry through the pandemic. Some of these measures have been economy-wide such as the Covid Job Retention Scheme [furlough] and Covid Corporate Finance Facility (CCFF); while others have been sector specific including the Airport and Ground Operators Support Scheme (AGOSS) and temporary waiver of the ‘80:20’ rule requiring 80% of flights have to be made from/to UK airports for airlines to maintain their slots. The Government also provided business rates relief, capped at £8 million per airport which was taken up by 22 of 25 eligible airports. The AGOSS is available until the end of March 2022. 

According to research by the Local Government Chronicle, many Local Authority owned airports – intended to boost economic growth and generate a commercial income – have become a drain on resources during the pandemic. Manchester Airports Group, for example, had provided an annual dividend of approximately £65 million a year to Manchester City Council – which has a 35.5% stake in the airport. Any future dividend income unlikely to be received until at least 2023-2024.   

Since March 2020, the EU has ensured Member States can implement State Aid schemes from which regional airports can benefit. During the pandemic, the EU has supported airports through its Recovery and Resilience Facility which aims to make Europe better prepared for green and digital transitions. At the same time a greater focus on tackling climate change is driving various projects to make airports more sustainable. In addition, some Member States have provided greater financial support to their aviation industry and/or taken equity stakes in their national carriers, often with environmental conditions attached (e.g. ending domestic flights where there are viable train options). 

On the one hand, the dramatic drop in passenger numbers due to COVID-19 triggered a range of financial support – loans, loan guarantees, wage subsidies, equity injections etc. On the other hand, many airports have faced increased operating costs to meet additional health and safety requirements. For me the pandemic has highlighted the importance of regional airports and the connectivity role that they play [particularly for islands]. Some Local Authorities are content to continue subsidising airports because of the boost they have – and will – provide to their local economies and communities.     

How important are regional airports for rural communities? 

In Europe, 50% of people live within a 30-minute drive of a regional airport, compared with only 41% for commercial airports. In February 2021, the European Parliament published a briefing on the future of regional airports. This highlighted their role in improving accessibility in remote locations or those not well served by other forms of transportation; stimulating employment and tourism and facilitating access to essential services. 

A report for the Australian Airports Association describes how regional airports bridge the gap between cities and rural communities, supporting the economic and social vibrancy of rural communities, enhancing their liveability, social connectedness and prosperity. Here regional airports deliver essential and emergency services to rural areas (e.g. protecting people and property from bushfires and/or The Royal Flying Doctor Service which brings medical services to rural and remote Australia). 

In the United States, ‘general aviation airports’ or ‘public airports’ located in suburban and rural areas are seen as a leveraging tool for recruiting and retaining businesses. For example, there are 72 public airports in North Carolina, only 10 of which are commercial airports (that offer regularly scheduled commercial flights). More than 90% of North Carolinians live within a 30-minute drive of a public airport. North Carolina’s general aviation airports provide some 25,000 jobs and produce nearly $5 billion in economic output. They also provide a salary that is approximately $20,000 higher than the median annual per capita income. 

In 2021, the International Transport Forum (ITF) published a roundtable report on connecting remote communities. Drawing together examples from Australia, Canada, Chile, Greece, Finland, Japan, Norway and the United States; the report highlights how many smaller airports struggle with both higher costs per passenger and lower commercial revenues compared to bigger airport sites. This is often due to the seasonality of traffic, smaller catchment areas, and a less well-off customer base. According to the Airports Council International (ACI), 71% of airports handling less than 1 million passengers make loses annually in Europe. Indeed, regional airports have been impacted by COVID-19 as passenger traffic dropped. For example, more than 6,000 routes served from Europe’s airports in 2019 were not fully restored 9 months into the pandemic. Regional airports recording the highest declines in direct connectivity include: -96% Linz (Austria), -95% in Treviso (Italy), -93% in Groningen Eelde (the Netherlands) and -91% in Vaasa (Finland). 

In considering airport and air travel, it is worth noting how some countries have an index to distinguish between accessible and less accessible rural areas (e.g. Australia, Chile, Greece, Scotland). Some of this work considers connectivity (access to services digitally and physically rather than drive time to an urban centre) and mobility (physical movements between locations) – and some account for whether rural areas are well served by other forms of transportation in addition to air travel.   

In England, in evidence to the Transport Select Committee’s review of the impact of the coronavirus pandemic on the aviation sector, witnesses highlighted how some form of Government incentives would continue to be necessary to encourage airlines to invest in regional routes which often have tight margins. Yet we have very little data on the influence and impacts of regional airports (individually and collectively) on rural communities. What are their usage levels, what economic and social contribution do they make, what are their environmental impacts, and importantly what are the emerging and future issues that they face? How do they link to other modes of transportation and digital connectivity?  

The Government is due to publish its Strategic Framework for Aviation – what will this say about regional airports and rural communities? Watch this space…

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Jessica is a researcher/project manager at Rose Regeneration and a senior research fellow at The National Centre for Rural Health and Care (NCRHC). Her current work includes supporting health commissioners and providers to measure their response to COVID-19 and with future planning; and evaluating two employability programmes helping people furthest from the labour market. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk. 

Website: http://roseregeneration.co.uk/ https://www.ncrhc.org/ 

Blog: http://ruralwords.co.uk/ 

Twitter: @RoseRegen 

Commercial Property

Local Authority investments in commercial property – are they cash generators or debt burdens?

Since the mid-2010s some Local Authorities have been building up portfolios of commercial property – from hotels and farms to shopping malls and leisure complexes – putting the profits that are generated into their revenue budgets. With Government now consulting on the lending terms of the Public Works Loan Board – a lending facility used by many Local Authorities to build up their portfolios – and the coronavirus pandemic leading many tenants to close and forgo rent payments; will Local Authority property portfolios go from cash generators to cash draggers and what impact might this have on public services? Jessica Sellick investigates.

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Local Authorities have long owned buildings that could serve a commercial purpose. Indeed they often use commercial structures to advance their core activities of delivering public services, housing and regeneration for the benefit of their citizens. However, recent reports suggest some Local Authorities have started to use low-cost loans from the Public Works Loan Board (PWLB) to buy investment property for rental income. The Government is now consulting on ‘debt-for-yield’ activity – recommending that Local Authorities wishing to buy investments primarily for yield should remain free to do so but not be able to take out new loans from the PWLB to do it. What decisions over capital projects are some Local Authorities pursuing – and how are they financing them? 

How much can a Local Authority borrow? Local Authorities are required to distinguish between capital and revenue funding in their accounting. Borrowing and investment are matters of Local Government Capital Finance, with practice in this area governed by The Chartered Institute of Public Finance & Accounting’s (CIFPA) Prudential Code for Local Authority Finance. In addition, Local Authorities must take account of CIFPA’s Treasury Management Guidance for Local Authority funds and the Ministry of Housing, Communities & Local Government (MHCLG) guidance on Local Authority investments and on Minimum Revenue Provision (MRP). 

‘Capital expenditure’ is defined in the Local Government Act (2003) as “expenditure of the authority which falls to be capitalised in accordance with proper practices”. Government provides an annual allocation of capital funding to Local Authorities alongside the annual distribution of revenue funding set out in the Local Government Finance Settlement. While Local Authorities can access finance for infrastructure from a number of sources, the quantity of expenditure that is often required for capital projects means that most Local Authority capital finance is obtained through borrowing. 

Under part 1, chapter 1, of the Local Government Act (2003) a Local Authority may borrow for any purpose relevant to its functions or for “the prudent management of its financial affairs”. Every Local Authority must set a total borrowing limit for itself in accordance with the principles of the Prudential Code. This borrowing limit is related to the revenue streams available to a given Local Authority, and the extent to which it can repay debt. Local Authorities are prevented (by law) from using their property as collateral for loans. However, there is some flexibility in exactly how individual Local Authorities set their borrowing limits. The Prudential Code, for example, does not contain a formula for Councils to make an exact calculation of prudential limits; with Local Authorities relying instead on the judgement of their chief finance officers and on ‘generally accepted accounting practices’. 

The Prudential Code requires all Local Authorities to draw up rolling three-year plans for capital expenditure. These plans typically cover all capital spending apart from housing. While Local Authorities may borrow money from a number of different sources, they cannot breach the overall borrowing limit they have set. 

Under section 32 of the Local Government Finance Act (1992) Local Authorities are required to maintain an appropriate level of reserve funding. As per the Prudential Code, the judgement as to an appropriate level of reserve lies with individual Local Authorities – there is no standard formula for identifying the correct level.  

Guidance on Local Government investments issued by the MHCLG in 2018 requires Local Authorities to prepare an investment strategy annually (or include the required details in their treasury management strategy). Each strategy must explain how their investments (including commercial property portfolios) relate to their core purposes; and quantitative indicators to allow Elected Members and the public to assess a Local Authority’s risk exposure as a result of its investment decisions. Importantly, the guidance requires an explicit statement to be included in each strategy about the degree to which commercial income underpins the delivery of services – and that each Local Authority must set annual limits for the proportion of gross debt compared to net service expenditure as well as the percentage of net service expenditure that comes from commercial income. This follows up on the findings of a Public Accounts Committee (PAC) Inquiry in 2016 which found Local Authorities were investing less in physical assets such as libraries, museums and parks; and spending more on commercial investments such as property. The PAC called on the Department for Communities and Local Government [now MHCLG] to strengthen its understanding of the capital issues faced by Local Authorities, and to develop a cumulative picture of risks and pressures across the sector. This formed part of a call to change key aspects of the codes and governance in line with a view that Local Authorities should not borrow to invest solely for yield.  

Who can a Local Authority borrow from – and how much are they borrowing? Local Authorities seeking to develop property portfolios do so using Statutory Powers that relate to their wider purposes – such as regeneration or economic development. 

Section 4 of the Localism Act requires anything done for a purely commercial purpose must be carried out by a Limited Company. However, if a Local Authority is using powers related to regeneration or economic development to buy a local shopping centre, for example, it is not acting purely in a commercial purpose and can own it directly. 

The Local Government Act 2003 permits Local Authorities to pursue certain forms of commercial activity through a company structure. The General Power of Competence, introduced in the Localism Act, permits a Local Authority exercising it with the (a) power to do it anywhere in the United Kingdom or elsewhere; (b) power to do it for a commercial purpose or otherwise for a charge or without charge; and (c) power to do it for the benefit of the authority, its area or persons resident or present in its area. Again, as Local Authorities are looking to manage commercial property as an adjunct to other functions rather than purely for financial gain a company is not required.  

Local Authorities can fund commercial property acquisitions using money from capital receipts, by using revenue funding, or through borrowing and meet debt servicing costs from revenue funding. Local Authorities are able to choose between different sources of external borrowing.  

In recent years the majority of loans taken out by Local Authorities have been supplied by the Public Works Loan Board (PWLB). The PWLB is located within the Government’s Debt Management Office (DMO), part of HM Treasury, and its funds are available at lower rates than the market. The PWLB publishes data listing borrowers, with the amounts advanced, the rate of interest, the term of the loan and length of time before the loan will be fully expended. 

Alternative borrowing mechanisms include:  

  • Tax Increment Financing (TIF) which permits Local Authorities to borrow money for infrastructure projects against the anticipated increase in tax receipts resulting from the infrastructure – for example, Local Authorities might borrow against their income within the Business Rate Retention Scheme or against the rate within a specific geographical area such as an Enterprise Zone. 
  • New Development Deals (NDD) where a geographical area is not subject to future levies and resets thereby creating an area and stream of revenue outside of the Business Rate Retention Scheme. 
  • An ‘earn-back scheme’ which has been enacted in some City Deals whereby Local Authorities can make investment up-front if additional GVA is created relative to a baseline. 
  • Through bonds, which allow Local Authorities to raise substantial sums of capital immediately, and repay it at a specified point in the future. Some Local Authorities have obtained credit agency ratings, allowing them to borrow on the open market; and for smaller Local Authorities through the UK Municipal Bonds Agency which is owned by 56 shareholding Local Authorities and has offered to obtain a competitive price for bonds at a lower rate of interest than the Public Works Loan Board. 

The MHCLG publishes statistics annually on Local Authority capital expenditure and receipts. The latest statistical release covers the financial year April 2018 to March 2019. This shows capital expenditure by Local Authorities in England totalled £25.9 billion in 2018-2019; an increase of £202 million (or 1%) in real terms compared to 2017-2018. When this figure is broken down by economic sector, acquisition of land and existing buildings totalled £4.4 billion, up from £326 million (or 8%) in real terms when compared to 2017-2018. The data also reveals how Local Authorities are financing a greater proportion of their capital expenditure from prudential borrowing and capital receipts rather than from capital grants and revenue resources. For example, the proportion of capital expenditure financed by prudential borrowing has increased from 22% in 2014-2015 to 38% in 2018-2019. Over the same period, the proportion of capital expenditure financed by capital grants has fallen from 45% to 35%.  Actual debt held by local authorities was recorded at £104.46 billion at the end of June 2019. At the beginning of 2017-2018 Local Authority external debt stood at £110.1 billion – but at the end of 2017-2018 Local Authority external debt stood at £118.3 billion (an increase of 7.4%). 

The data does not provide a clear indication of the type of acquisition made. Similarly, the PLWB does not currently keep defined records of the purpose of each of the loans it makes to Local Authorities.  

In February 2020 the National Audit Office (NAO) published a report on ‘Local Authority Investment in Commercial Property’. This estimated that Local Authorities spent £6.6 billion on buying commercial property between 2016-2017 and 2018-2019 – this figure is 14 times more than in the preceding three years. 40%-90% of spending between 2016-2017 and 2018-2019 was financed by borrowing. Local Authorities spent an estimated £3.1 billion on offices, £2.3 billion on retail property [including £759 million on shopping centres or units within them], and £957 million on industrial property. 38% of all spending between 2016-2017 and 2018-2019 was outside of the local area. The NAO found the increase in commercial property investment to be concentrated in the South East, and also amongst District Councils (comprising 51% of commercial property spending between 2016-2017 and 2018-2019). For example, 49 out of 352 Local Authorities accounted for 80% of commercial property spending between 2016-2017 and 2018-2019. 17.5% of all commercial property acquisitions by value in the South East between 2016-2017 and 2018-2019 were made by Local Authorities. 

Why are some Local Authorities investing in commercial property? Since the mid-2010s some Local Authorities have sought to build up portfolios of commercial property. Various reasons may account for this, including (but not limited to): 

  • A reduction in Government funding provided to Local Authorities. The National Audit Office (NAO) estimates a real-terms reduction in Local Authorities’ spending power [from Government funding and Council Tax] of 28.7% between 2010-2011 and 2019-2020. Analysis from the Local Government Association (LGA) found in one year, between 2016-2017 and 2017-2018, Local Authorities had to absorb a funding shortfall of £2.4 billion – with further analysis showing a potential funding gap of £7.8 billion by 2025. Government provides a Revenue Support Grant (RSG) to Local Authorities to finance revenue expenditure on services. According to MHCLG, while the RSG has declined since 2015-2016 this should be viewed in the context of increased funding from business rates retention and other grants such as the Better Care Fund. 
  • Changing approaches to asset management whereby some Local Authorities have shifted away from disposing surplus land and buildings towards using them as assets and as ongoing sources of revenue – with this approach facilitated through the Government’s One Public Estate programme and in some devolution deals.  
  • As Local Authorities have been given more flexibility and freedoms (e.g. through the Localism Act) this has fostered a more commercial culture amongst officers and Elected Members, leading  some Councils to be innovative and entrepreneurial in obtaining more money from commercial activities rather than relying on ‘traditional’ sources such as council tax and business rates. Interestingly a report on insourcing by APSE in 2019 suggested that a rise in insourcing was being driven by a desire to improve service quality and flexibility amid the need for greater control over allocating resources, including commercialisation in order to raise revenue.  
  • Local Authorities have purchased commercial property to support local regeneration and economic growth – bringing unused or underused property back into use for the benefit of their citizens.  

What are the benefits – and the risks? Some commentators highlight how Local Authorities have long held large property holdings which they have used for social, economic and commercial purposes; and that the annual return rates on commercial property, and the spread between the loan rate and the return rate on letting out the property, generates profit for Local Authorities to use for the benefit of their citizens. For example, a report by the Audit Commission back in 2000 described how “typical non-operational properties include high street retail outlets, markets, industrial estates and shops on housing estates, held primarily to generate income or to stimulate economic or social development” (page 7). Some Local Authorities have bought commercial property to use the returns to deliver new homes and infrastructure, to respond to private sector withdrawal or market failure (e.g. high streets), to support social enterprise and community business and/or for wider place-making. In many instances it is the spread between the loan rate and the return rate on letting out the property that enables the Local Authority to make a profit to reinvest in local services and activities.  

In 2017 the Local Government Association (LGA) published practical guidance on how Local Authorities could turn their commercial plans into reality. The guidance described trading and commercial property activity as “a particularly specialist activity where advice should be sought, if necessary, from a range of experts such as lawyers, property experts and accountants. Councils considering investment activity should be clear around long term risk and benefit modelling, governance and what specialist capabilities may be required to support the activity. They should be aware of the accumulated effect of every decision they take as well as the risks of each individual decision” (page 36).

More recently, the NAO in its report referred to ‘specific risks’ associated with each individual property [such as the length of the lease or the financial strength of the tenant] and ‘systematic risks’ [such as movements in markets e.g. people shopping online leading to growth in vacancy and void rates of retail units]. 

Some of the key risks for Local Authorities using commercial property to generate revenue are around: 

  • A downturn in the property market – leading to falling rents, higher vacancies, falling property values and causing financial pressures. 
  • Any Government intervention setting limits on the commercialisation strategies available to Local Authorities. 
  • A lack of skills and expertise (commercial awareness) within Local Authorities about the market and making investments leading to poor acquisition decisions. 
  • Liquidity – if a Local Authority needed to meet immediate cash requirements, property cannot be as quickly realised in the same way as other financial instruments.
  • Local Authorities are legally required to set a balanced budget – if commercial income is underpinning the delivery of services does not yield the required return, how will they overcome these broader losses of revenue? 

On 9 October 2019 the Government announced it would raise the interest rate on new loans from the PWLB by 1% over gilts over and above the existing interest rates. This decision was explicitly linked to substantial borrowing for commercial investments: “Some local authorities have substantially increased their use of the PWLB in recent months, as the cost of borrowing has fallen to record lows”. For some Local Authorities the rate rise was seen as making some large-scale regeneration schemes costlier, unviable, or requiring more time to obtain a return on investment – with some commentators suggesting it may lead Local Authorities to seek alternative sources of finance (e.g. private sector lenders, Municipal Bonds Agency).  At the same time of the announcement Government increased the cap on the total amount Local Authorities can borrow from the PWLB from £85 billion to £95 billion.

Are we reaching a tipping point?The NAO has highlighted how some Local Authorities would be badly exposed in the event of an economic recession or property crash, describing how “in the last recession UK commercial property values and market rental values both fell. More recently, systematic risk is perhaps apparent in the performance of the retail sector with the shift to online sales, among other factors, leading to growth in vacancy and void rates” (page 41).  

Analysts point to past examples of Local Authorities suffering financial difficulties – the interest rate swaps in the late 1980s/1990s, investments in Icelandic banks in the late 2000s, and LOBO loans in the mid-2010s. However, these episodes affected a small number of Local Authorities and none generated long-term financial strain or losses even though they led to serious concerns in the short term. Nor did they require Local Authorities to raise Council Tax substantially to offset a lack of funds. 

Yet all of these episodes are very different from the novel coronavirus (COVID-19).  Emerging evidence highlights the impact of the pandemic on bricks and mortar.  Coutts reveals how the retail sector was already heading into recession before the pandemic due to the rapid adoption of online shopping and the change in shopping habits. They predict this downward trend in retail property is likely to continue with only retail-to-residential conversions and specialist event venues surviving; warehouses and logistical centres will continue to expand; and the period of people working from home may lead companies to change working practices and reduce office space. The real estate developer Hammerson revealed that it had only received 35% of second quarter rent from its outlets – and it had also received requests from tenants for rent deferrals, monthly payments and waivers. Coronavirus is expected to create a hole in Local Authority income as a result of lost revenues from commercial property. This is further compounded by the loss of other revenue streams (e.g. planning fees, car parking). 

In March 2020 the Government announced £1.6 billion package for Local Authorities to respond to service pressures including increasing support for adult social care and services that support the most vulnerable; a £500 million Council Tax Hardship Fund of discretionary support to help economically vulnerable people and households; £3.2 million of initial emergency funding to reimburse Local Authorities for the cost of providing accommodation and services to rough sleepers; the deferral of £2.6 billion in Local Authority payments of the Central Share of retained business rates; and brought forward £850 million of social care grants. In April 2020 the Government announced a further £1.6 billion of additional (and un-ring fenced) funding to support Local Authorities to meet additional pressures arising from the pandemic and to help them to continue to deliver frontline services. 

While the impact of coronavirus on Local Authorities – including those with substantial commercial property portfolios – depends on how long the lockdown last for and the gradual steps to a ‘new normal’ that the Government will implement; scale really matters here. The bigger the spend, the bigger the borrowing, the greater the risk. And these risks become even greater where Local Authorities are dependent on income from commercial property portfolios to repay debt or fund services. They may also be tying up Local Authority money and resources that could be diverted elsewhere. 

Because we do not have a clear picture of the scale of investment of public funds in commercial property, where it is concentrated and how it is being financed, considering the implications for rural residents and businesses is difficult.  According to the Rural Services Network urban authorities in 2016-201717 received 40% more (£116) per head in the Government’s Settlement Funding Assessment compared to rural authorities. We also know that it costs more to deliver services in rural areas. What we do not know is whether this leads rural Local Authorities to borrow more than their urban counterparts, if and how much they are investing in commercial property,  what the income from this investment has been used for, and what impact COVID-19 will have on these portfolios and Local Authorities now and into the future. The longer the pandemic persists, the greater the chance of a more prolonged impact on the economy including commercial property markets. In the meantime, we need to improve the data and evidence base: what are the trends in capital strategies, buying out of area, the contribution of commercial income to service expenditure, the scale of contingency, and which Local Authorities are vulnerable and what can we do to manage the risks?  

When making any investment we are reminded that past performance should not be taken as a guide to future performance. The value of investments, and the income that we get from them, can go down as well as up and we may not recover the amount of our original investment. 

Affordability is a key duty underpinning the borrowing arrangements contained in the Prudential Framework. In practice, some Local Authorities have taken on general fund debt in high multiples of core spending power and viewed it as affordable because of the income their commercial property investments generate. The experiences of coronavirus, seen within the context of already sustained financial pressure, may mean that some Local Authorities (inadvertently) test the limits of compliance. 

As Local Authorities have built up their commercial property portfolios there has perhaps been a lag in governance and oversight from Government.  In March 2020 HM Treasury launched a consultation containing proposals to (a) require local Authorities that wish to access the PWLB to confirm that they do not plan to buy investment assets primarily for yield; (b) publish guidance defining activities that the PWLB will no longer support; and (c) standardise the information currently gathered through the application process for the PWLB Certainty Rate to confirm with Local Authorities that their plans conform with the guidance. The consultation runs until 4 June 2020 and you can submit responses here.  

As we have to get used to a ‘new normal’ Local Authority repayments to the PWLB and other borrowers may start to hurt. Will this lead some Local Authorities to increase taxes or reduce public services? Watch this space. 

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Jessica is a researcher/project manager at Rose Regeneration. Her current work includes helping public sector bodies to measure social value; evaluating an employability programme; and working with 8 farming organisations across England on a Defra funded project on farmer resilience. She is also a senior research fellow at The National Centre for Rural Health and Care (NCRHC) and sits on the board of a Housing Association that supports older and vulnerable people. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk. 

Website: http://roseregeneration.co.uk/https://www.ncrhc.org/ 

Blog: http://ruralwords.co.uk/ 

Twitter: @RoseRegen 

Outer space

What does the new ‘space age’ mean for rural communities?

On 4 October 1957 the Soviet Union launched the first artificial earth satellite (Sputnik 1) from a spaceport known today as Baikonur Cosmodrome. Since then launch vehicles have reached orbit from 27 spaceports around the world. With the rate of space launches expected to grow exponentially in the coming years, the Government here wants the UK to be a leading player in the global space industry, capturing 10% of the global market by 2030. But what does being at the forefront of a new commercial ‘space age’ mean for rural communities? Jessica Sellick investigates.  ………………………………………………………………………………………………..

Data collected by satellites impacts upon our everyday lives – from navigation and weather reports to broadcast television, mobile communications and financial services. They are often described as an “invisible utility”. The decreasing cost of small satellites and launch services combined with the increased application and use of satellite data is creating more demand and requiring more capacity for satellite facilities. Further, with the development of re-usable spacecraft and horizontal launch capabilities, space travel and space tourism are now a reality. With the world becoming ever more dependent on satellites and the space industry, the Government’s ambition is for the UK to be a leading player in this global industry.  But what does this mean for rural communities? I offer four points. 

1. How big is the UK space industry?  

The UK Space Agency (UKSA), an executive agency of the Department for Business, Energy & Industrial Strategy (BEIS), is responsible for all strategic decisions on the UK civil space programme. Every 2 years the UKSA surveys organisations in the UK who supply and/or make use of space or satellite services – spanning commercial and non-commercial activities. The latest in a series of ‘size and health of the UK space industry’ studies was published in January 2019. Carried out by London Economics, the study covers the period 2015-2016 and 2016-2017 and is based upon an analysis of 948 space-related organisations (comprising 276 survey responses) and desk-based research of more than 600 organisations. The facts and figures presented reveal how: 

  • Total UK space industry income grew to £14.8 billion in 2016-2017, a growth rate of 3.3% per annum. This is equivalent to 5.1% of the global space economy (2016-2017). Income is forecasted to grow 4.8% to £15.5 billion in 2017-2018. 
  • The upstream grew strongly to £2.4 billion, though the downstream still dominates at £12.4 billion. Space Applications is the largest segment with 69% of income, of which 48% is Direct-to-Home (DTH) broadcasting. This is followed by Space Operations (15%), Space Manufacturing (13%) and Ancillary Services (3%). 
  • Across all activities, Broadcasting dominates (51% of total income) followed by Communications (19%), Position, Navigation and Timing (12%), Defence (which has grown to 8%), and Earth Observation (3%). 
  • The UK space industry now comprises 948 organisations, with 39 new entrants per year since 2012. Income growth from 2014-2015 to 2016-2017 (+£924 million) can be divided into: organic growth (+£794 million), new entrants (+£357 million), less attrition (-£226 million). 
  • Growth is concentrated amongst very large enterprises (56% of overall growth) and larger SMEs (28%), with the latter growing particularly fast (31% per annum, compared to very large enterprises at 2% per annum). 
  • The industry is commercially-focused, with 82% of income from sales to consumers and businesses. However, the public sector share of income has increased from 14% (2014-2015) to 18% (Space Agencies 4%, Government 14%), but remains marginally lower than the global average (20%). 
  • Exports grew to £5.5 billion in 2016-2017, or 37.4% of total income. This is up from 36.4% in 2014-2015 and this export intensity is one third higher than the UK economy. 
  • The industry directly contributed £5.7 billion of Gross Value-Added to UK economic output (0.29% of UK GDP, up from 0.27% in 2014-2015), and a total of £13.0 billion (including supply chain effects) in 2016-2017. 
  • Employment in the UK space industry increased at a rate of 4.3% per annum to 41,900 jobs in 2016-2017. This is equivalent to 0.13% of the UK workforce (up from 0.12%). 
  • The space industry workforce is exceptionally highly-skilled, with 3 in 4 employees holding at least a primary degree. This is higher than any sector covered by ONS Census data for England and Wales. 
  • It is estimated that wider UK industrial activities representing over £300 billion of UK non-financial business economy GDP (15.3%) are supported by satellite services as follows (not mutually exclusive): 

GNSS (positioning, navigation and timing) satellite services support £264 billion of GDP (13.4%). 

Meteorological satellite services support £159 billion of GDP (8.1%). 

Telecommunication satellite services support £117 billion of GDP (5.9%). 

Earth Observation satellite services support £92 billion of GDP (4.7%). 

As well as benefitting the space industry itself, these investments are seen to result in new knowledge, expertise and technologies that benefit wider economy. Termed ‘spillovers’, the lag between investments in space-related work and the benefits accruing to groups outside of these initial activities is 3-5 years. Spillovers are often focussed around technology transfers (e.g. products, processes and knowledge that can be copied and used in other settings). It is argued that without Government support, private companies would be likely to under-invest in activities with positive spillovers because they could not fully capture all the benefits of these activities. Conversely, in the absence of Government intervention, private companies are likely to over-invest in activities generating negative spillovers because they do not fully bear the costs. Both these cases of market failure are used to make the business case for Government intervention.

2. Why do we need spaceports? 

In July 2018 the Government published a brochure promoting the UK as an attractive destination to grow commercial markets for small satellite launch and sub-orbital flight services.

Small spacecraft (SmallSats) focus on spacecraft with a mass less than 180 kilograms – about the size of a large kitchen fridge. More than 1,300 smallsats were launched between 2012 and 2018 – with 2018 seeing six times as many launches compared to 2012. In 2018, 36% of smallsats were launched from the United States (US) – 80% of them manufactured by US companies. The US deployed the most Government smallsats between 2012 and 2018 (120) followed by China (44 smallsats) and Russia (43 smallsats). 

A paper from Frost & Sullivan commissioned by the UKSA assessed the potential UK market share for dedicated launch services.  With the number of small satellites launched in 2017 increasing by 157% compared to 2016 combined with modelling showing likely supply (launch capacity) and demand (satellite operator constellation plans) to 2030 – the paper highlights an opportunity to invest in a spaceport in the UK. 

As part of efforts to grow the UK’s spaceflight capabilities, Government has been funding a range of industry-led projects. This includes a £1.3 million investment in spaceport plans in England, Scotland and Wales. As part of the spaceflight programme, ‘Launch UK’, Government has contributed to a funding package to establish the UK’s first spaceport in Sutherland (Scotland). Called Space Hub Sutherland, the project is being led by Highlands and Islands Enterprise (HIE) and will see the development of a vertical launch site for a new generation of small rockets to launch micro communication and earth-observation satellites at The Moine, on the Melness Crofting Estate near Tongue. The launch site is expected to create around 40 highly skilled jobs. At a regional level, HIE estimates this figure will multiply to 400 jobs by 2023, with launch activities in Sutherland making the site the hub of a significant new space sector. The HIE project team has identified community benefits around tourism and local supply chain development and diversification. In October and November 2019 HIE organised a series of public events and community engagement activities. HIE then hopes to submit a formal application for planning consent to the Local Authority. 

The UKSA and Cornwall Council are working with Virgin Orbit to develop facilities and operational capabilities that would enable small satellite launches from Cornwall in the early 2020s. The funding package consists of approximately £12 million from Cornwall Council, £7.85 million from the UKSA and £0.5 million from the Cornwall and Isles of Scilly Local Enterprise Partnership (CIOS LEP). Spaceport Cornwall will use an existing airport, Cornwall Airport Newquay, and a modified Boeing 747 to offer launches. The spaceport also aims to act as a catalyst in attracting more high-value companies (from all sectors) into Cornwall. It is estimated that 150 direct and 282 indirect jobs will be created and £200 million of GVA generated over the next 5-years.   

Other Government investments include a new National Satellite Test Facility in Harwell, Oxfordshire and a new National Propulsion Facility in Buckinghamshire. Additional funding has been provided to support plans for small satellite launch and sub-orbital flight from aerodromes in the UK – including to Snowdonia Aerospace for the Snowdonia Spaceport Development Plan, which aims to create a centre for space R&D, training and satellite launch; and to Machrihanish Airbase Community Company (MACC) for a spaceport cluster plan in Argyle, Scotland. 

The RAF will be launching a satellite as part of the Ministry of Defence’s £30 million space programme. Eight military personnel will also be joining Operation Olympic Defender to work alongside allies at the Combined Space Operations Centre in California.

Back in May 2018 the Government published its ‘Prosperity from Space’ strategy – setting out its vision for enhanced growth in the UK space sector over the next decade. The strategy focuses on four areas: (i) earth navigation services; (ii) connectivity services; (iii) in-space robotics; and (iv) low-cost access to space. The strategy aims to double the value of space to wider industrial activities from £250 billion to £500 billion, generate an extra £5 billion in exports, attract £3 billion of inward investment and interact with 1 million young people a year to increase interest in STEM careers [science, technology, engineering and mathematics]. Developing space launch sites in the UK is one of the priorities to take forward the goals of the strategy. 

In August 2018 Government suggested the UK could compete to launch 2,000 satellites by 2030 – having a competitive advantage to compete for a more substantial share of the market owing to the UK’s location, regulatory framework, private sector strategy and space ecosystem. Existing ‘rideshare’ small satellite launches [where small satellites piggyback on larger missions] are capable of meeting less than 35% of the total demand thus revealing a significant gap in commercial small satellite launch provision for which future UK spaceports could deliver.

The UK’s geography is also well suited for launch sites. Our northern latitude provides access to specific types of orbits around the earth – such as polar orbits, which are useful for earth observation. Also, the neighbouring Atlantic means launches can take place over the ocean and sparsely populated areas. 

The Space for Smarter Government Programme (SSGP) is a strategic, national, programme established in 2014, led and funded by the UKSA. It is delivered in collaboration with the Satellite Applications Catapult to drive the uptake and use of space products, data and services across Government departments. The programme aims to increase the public sector’s use of space as an enabling technology to stimulate innovation and growth whilst at same time making Government more efficient and ‘smarter’. 

On the one hand, the development of spaceports is viewed seen as providing a means for the UK to build a global reputation for manufacturing and launching small satellites (drawing on skilled engineers in the aerospace, electronics and software industries); of attracting companies from across the globe to invest in the UK; fully integrating the sector supply chain; boosting local economies in the communities surrounding sites and more widely (e.g. well-paid careers, inspiring the next generation); and increasing links to academic institutions and the research community. On the other hand, concerns have been raised about the lack of public consultation and the potential environmental impact of spaceports. 

Alongside these developments Government is intending to establish a new National Space Council to inform UK space strategy and governance. Government is also focusing on international cooperation and has signed a Memorandum of Understanding (MoU) with Australia to exchange information, technology and personnel between the two countries. 

3. How are they being regulated? 

In the UK, the Space Industry Act 2018 provides the regulatory framework for the expansion of commercial space activities and the development of spaceports; covering orbital and sub-orbital activities and horizontal and vertical launches. In most cases, the Civil Aviation Authority (CAA) will regulate sub-orbital activities and the UKSA will regulate space activities. The exception is where the UKSA will regulate all spaceflight activities involving the use of rockets; regardless of whether they are involved in sub-orbital or space activities.

The licencing framework is not fully in place yet with details to be set by secondary legislation. The Government has issued guidance for prospective licences (for any launch, procurement of launch operation or return vehicles capable of operating above the stratosphere, some 50km) and anticipates publishing and consulting on detailed regulations in 2019. So far there has been one call for evidence on liability, insurance and charging.

Government has also been looking at health and safety legal requirements that may need to be implemented by a spaceport to minimise the risks to populations nearby from the storage and use of hazardous fuels.

The infrastructure spaceports need will require permission from the local planning authority.  

4. How will rural communities benefit from ‘lift off’? 

Launch UK is focusing its attention on Prestwick, Western Isle, Shetland, Sutherland, Campbeltown [Scotland]; Snowdonia [Wales]; and Newquay [England] – i.e., rural and remote areas. 

The initial selection to qualify as a location suitable for a spaceport was based on a CAA assessment of a wide range of criteria from meteorological to environmental and economic factors. Criteria also included having an existing runway that could be extended to over 3,000 metres in length; the ability to accommodate dedicated segregated airspace to manage flights safely; and a reasonable distance from densely populated areas in order to minimise impact on the uninvolved general public.

For some rural residents the development of commercial spaceports is viewed as an opportunity to create highly technical jobs, upskill local people and generate income for the local economy. Other rural dwellers are less supportive – with spaceports seen to threaten the solitude and tranquility of where people live and have adverse environmental impacts (on landscapes and wildlife). Moreover, there have been discussions around whether spaceports are being imposed upon some rural communities and do not represent the kind of infrastructure they actually need. With Local Authorities responsible for the provision of an extensive range of services (e.g. planning, housing, highways, environment, economic development) how is/will Government support them to increase spending on these core services in spaceport areas? 

If space matters – every time we go to work, turn on the television, make a phone call or do our banking; how can we ensure the benefits from our satellite and space programmes flow back to rural communities? For if the UK is to truly realise its potential of becoming a spacefaring nation it is dependent on rural places to do so.  

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Jessica is a researcher/project manager at Rose Regeneration. Her current work includes evaluating two veteran support projects (in Cornwall and North Yorkshire); supporting public sector bodies to measure social value; and evaluating a series of community safety and crime reduction projects. She is also a senior research fellow at The National Centre for Rural Health and Care (NCRHC). In her spare time Jessica sits on the board of a housing association. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk or telephone 01522 521211. Website: http://roseregeneration.co.uk/https://www.ncrhc.org/ Blog: http://ruralwords.co.uk/ Twitter: @RoseRegen 

Commercialisation of government services

The commercialisation of (rural) government services…?

The money that Government spends on public goods and services can be broken down and understood in different ways: from total managed expenditure (TME) to departmental expenditure limits (DEL); and from annually managed expenditure (AME) to resource spending and capital spending. Collectively, total spending, at all levels of Government in the UK is estimated to be £784 billion in 2017. Local Authorities are expected to spend about £173 billion– with the largest expenditure on welfare (£55 billion) followed by education (£47 billion), community protection (£15 billion) and transport (£9 billion). While this sounds a lot of money, the Local Government Association (LGA) estimates that by 2020 Local Authorities will have lost 75p out of every £1.00 of core central Government funding that they had to spend in 2015; leading to an overall funding gap of £5.8 billion. What lies within these figures, then, is the reduction of state funding for local and central Government services and changes to how we think about ‘investing’ in local communities (including calls for local areas to be given control over their own finances and growing their local economies). What does this changing state funding mean for rural communities? Jessica Sellick investigates.

Back in July 2011, Government published its Open Public Services White Paper. This was concerned with giving people more control over the public services they received and opening up the delivery of those services to new providers. The centralised model of public service delivery was seen as costly and no longer capable of meeting the challenge of delivering personalised, joined up services that the public expected and needed. Here Government was seeking to create “a more innovative, diverse and dynamic landscape of public services.” Competition was seen as a means of delivering higher quality services and improving efficiency while maintaining equity. Subsequently, private companies, charities and voluntary and community sector (VCS) organisations started managing huge swathes of public services – from schools and health centres, to train lines and prisons.

As part of attempts to respond to the pressures of funding reductions (doing more with less) and/or to radically transform service delivery (find alternative income streams); the concept of ‘commercialisation’ is re-emerging within public policy. What commercial models and practices are being taken up and what might they mean for rural service delivery?

As a concept for delivering public services, commercialisation within central and local Government is not new. It can be traced back to the privatisation of state entities such as British Aerospace in the 1970s, water and sewerage systems in the 1980s, the creation of private finance initiative (PFI) in 1992, the railways from the 1990s, parts of the probation service and all of Royal Mail in 2015. While successive Governments have remained committed to and reaffirmed principles such as privatisation and commerciality across public services; the emphasis now is on building commercial capability within the civil service (and this is accompanied by an array of terms such as resilience, entrepreneurship and risk appetite).

The Crown Commercial Service (CCS) is an executive agency of the Cabinet Office. Set up in April 2014, CCS has five strategic objectives: (1) to deliver savings for central Government departments, (2) to undertake services in an efficient manner which meet the needs of customers and lead to increased spend through central deals, (3) to deliver the Government’s objectives on procurement policy, (4) to continue to improve commercial capability and organisational efficiency, and (5) to strengthen operational controls and deliver the financial plan. CCS is responsible for buying around £2.5 billion of goods and services for central Government departments. The agency also manages buying frameworks that help the wider public sector purchase £12.8 billion of goods and services. In December 2016, the National Audit Office (NAO) reviewed the value that CCS has provided since it was established. While the Cabinet Office wanted to increase the CCS’s management of direct buying from £0.5 billion in 2013 to £13.4 billion in 2017-2018 (generating net savings of £3.3 billion), the NAO found there was no consistent information on what departments spend and no agreement about what should be centralised and what should be bought locally. Auditor general Amyas Morse described how “because of this, it is not possible to show that CCS has achieved more than departments would otherwise have achieved by buying common goods and services themselves.”

Alongside the CCS, in 2016 the Government Commercial Function (GCF) was established. Coordinated by Gareth Rhys Williams, then newly appointed as the Government’s Chief Commercial Officer, GCF is part of the Civil Service and Cabinet office. It offers support to Government departments in four main areas: (i) complex transactions, (ii) markets and suppliers intelligence, (iii) commercial assurance, and (iv) developing commercial capability. In his first public interview Rhys Williams said “the principle driver is value for money, of course, but we are also about performance, better results…what we’re less good at is the bit on either side, and unfortunately they’re important bits. So we are not very good in deciding what we want and involving potential vendors in discussing that, and we’re not very good at managing contracts once we’ve procured what we’ve bought…There’s a number of different versions of best and we need to build some dashboards and then see who is improving the fastest and what can everyone else learn from them to improve our rate of improvements. It is like the bicycle team – hundreds of small improvements and we’re going to keep on going. That is the mentality we have here: how many failed procurements do we ever have? How long does that take? How many contracts are delivering all of their key performance indicators? With these sorts of metrics we can start to collect and share good practice.”

In February 2017, the Institute for Government published its analysis of the Government’s commercial reforms. The reforms focus on recruiting commercial specialists, retaining and developing talented staff, sharing information on what works and which suppliers are performing, and deploying the best professionals to areas of high need within departments. The Institute for Government concludes Government is focussing on the right issues, with the potential to succeed, and that most Government commercial activity should be managed by departments to deliver their objectives rather than through a centralised system.

Whether commercialisation is a central function or sits within individual departments, these reforms (and the activities of the CCS and GCF) are intended to put the ‘commercial DNA’ into Government and the wider public sector.

Within Local Authorities, much of the discussion around commercialisation has focused on the buying of offices/buildings for their income yielding capacity and/or making larger economic regeneration investments to grow the business rates base. Councils were given a ‘general power of competence’ (GPC) in the Localism Act 2011. This gives Local Authorities “the power to do anything that individuals generally may do” as long as they don’t break other laws. The Government intended the GPC to encourage Local Authorities to work with others in providing cost-effective services and facilities in innovative ways to meet the needs of local people. In practice, it means Councils can lend or invest money and/or trade.

In 2016, Civica considered how reductions in central Government funding had driven Local Authorities to adopt commercial strategies and alternative income streams as part of attempts to become financially self-sufficient and sustainable. According to the research, commercialisation now plays a significant part in 40% of Local Authorities current strategies. While generating income is not a new concept for Councils, the need to find new commercial avenues at the same time as closing the budget gap and redesigning services is challenging. Civica identified four critical factors for success: (1) having an appetite for risk and attitude to change, (2) having a clear vision and leadership to move towards a more commercialised model, (3) finding the resources and ability to finance and drive forward new initiatives, and (4) that location and customers affect a Council’s ability to generate income i.e., a view that in more remote parts of the country, where big businesses are less inclined to locate, it is harder to boost the local economy.

In June 2017, the New Local Government Network (NLGN) developed the term: “changemaking”. This describes how Councils have no choice but to find new ways to deliver services and impact rather than scaling back existing ways of working. “The reinvention required is not the redesign of rigid structures or institutional remodelling of organisations. Instead, it must be a change which considers function over form and focuses on raising social impact above all else… [this involves] nothing less than a major cultural shift towards three core values: creativity, collaboration and self-determination.” The report contains examples of ‘changemaking in practice’: from US special forces in Iraq to clearing rubbish in Lima; and from the growth of Dutch home nursing organisation ‘Buurtzorg’ to Etsy, an online marketplace for arts and crafts products. One of the elements of this new transformational agenda is commercialisation: how can Local Authorities generate new revenue streams to fund public services?

There are a plethora of examples of how Local Authorities have interpreted and adopted commercialisation. The LGA, for example, has a commercialisation best practice map which shows how and where Councils in England are engaged in commercial activities. The Association for Public Service Excellence (APSE) Municipal Entrepreneurship report includes a set of case studies which highlight how some Local Authorities have embedded commercial skills and business acumen in their delivery.

The Leadership Centre has examined a range of future scenarios for local government finance (from status quo through to financial collapse) as part of attempts to help Councils generate additional revenue to compensate for the shortfall in traditional funding streams. The Heritage Lottery Funds (HLF) State of UK Public Parks 2016 illuminates commercial activities already being undertaken by park services within Local Authorities (e.g. establishing trading companies, adding a retail outlet, business sponsorship, corporate volunteering). In 2016, Councils spent more than £1 billion on real estate in their hunt for income generating property assets: Spelthorne borough council in Surrey, for example, spent more than £350 million on the BP Business Park in Sunbury, and Guildford Borough Council purchased the Wey House office block in Guildford for £22.7 million. Local Authorities are now seeking to fund public services through their property investments, providing professional/technical consultancy and/or opening retail outlets.

For me, against this backdrop of commercialising central and local Government, there is renewed need for discussions around: (a) where commercialisation fits with the strategic aims of Local Authorities and their delivery of services, (b) whether the public/‘customers’ are willing for some or all public services to be commercialised, and (c) where rural fits in the commercial approaches that are emerging.

Firstly, the role of Local Authorities. The Local Government Act 1989 set out the functions of Councils around decision-making on matters affecting their local communities, delegating some decisions to committees of officers and monitoring how these are exercised, and overseeing the performance of the administration and delivery of services and programmes. Today there are some 375 Councils in England and Wales with almost 19,400 elected Councillors. Local Authorities determine local priorities and provide a wide range of services. Where does commercialisation fit between the strategic aims of Local Authorities and the delivery of services (i.e., in juggling income generation, savings, selling or acquiring assets etc.)? It is clear that there is no one model of how/where/when commercialisation fits– many Councils now have ‘commercialisation’ and/or ‘income generation’ strategies. For some authorities these strategies come from their vision for their local area, or to respond to a changing funding climate, and/or as part of attempts to seek more innovative approaches to service delivery. In November 2016 the House of Commons Committee of Public Accounts published its report on the financial sustainability of Local Authorities. This describes how Local Authorities have maintained capital spending while decreasing revenue spending. Many Local Authorities have done this by investing less in physical assets such as libraries and parks, and spending more on commercial investments often involving property. The report raised a number of concerns around Officers and Members having the necessary commercial skills and experience, as well as the need to anticipate risks to financial and service sustainability. If we want Local Authorities to become ‘entrepreneurial’ and ‘self-financing’, how can we ensure commercialisation doesn’t damage the very things Local Authorities have been set up to do (‘services’, ‘programmes’) and the public services communities want? How can we reconcile the social aims of Local Authorities alongside their commercial interests? And at what level should commercialisation happen – at organisational/whole Council level, in procurement and commissioning teams, in/across individual service areas and/or according to other factors (e.g. budget, place)?

Secondly, are the public (‘customers’) up for some or all public services being commercialised? The Local Government Service List is a collection of services that a council (or other public sector body) in the UK provides to or on behalf of those who live, work and pass through the area for which they are responsible. The Department for Environment, Food & Rural Affairs (Defra) publishes statistical indicators covering the accessibility of services in rural areas. Here, service availability is framed around distance to cashpoints, banks and building societies, supermarkets, NHS dentists, pubs, petrol stations, libraries, jobcentres, post offices, convenience stores and pharmacies. For me, this opens up a dialogue around finding out what ‘services’ are important to rural communities, which ones are deemed ‘public services’ and what role commercialisation might play in their delivery.

On the one hand, there is a view that the public aren’t too concerned with who is providing them with a service as long as that service is delivered to them. On the other hand, public services are very different to businesses – and it is not simply a case of turning one into the other. In December 2016, the Department for Education (DfE) published its report for developing the capacity and diversity of children’s social care services. While the report considered how to promote the marketisation and commercialisation of statutory children’s social services, [interestingly England was then the only country looking at contracting out assessments and decision-making to do with the safety and protection of children] Government subsequently sought to distance itself from the report. The Government response concluded: “we therefore reject those options which would either centralise the delivery of children’s social care services, such as the option to establish a National Children’s Social Care Commissioning Board, or allow profit-making organisations to deliver them.” This opens up discussion around what is meant by marketisation and commercialisation. Research for Defra on alterative service delivery models in 2013 identified 11 models of delivery (from Councils sharing services, through to co-production and private companies). This includes case studies which highlight the role of rural residents in taking on responsibility for the delivery of services ‘on their own account’ as well as the role of Local Authorities, Parish Councils and VCS organisations in supporting them. Is this commercialisation and/or are rural communities ‘filling the gap’ where public providers can no longer afford to deliver services and where commercial providers cannot generate a profit from them?

Thirdly, where does rural fit then in the commercial approaches that are emerging? Rural Services Network (RSN) members inherently understand and grapple with the ‘premium’ involved in delivering services in rural areas. Similarly, rural residents and businesses often have to travel some distance to access services. How are commercial approaches able to respond to the challenges of cost, speed and practicality in adoption in rural places? How is ‘geographical take up’ (reaching rural places) and ‘service take up’ being tackled? What data and evidence exists to tell us what works and why in a rural context? The risk here is that without care and attention the most ‘profitable’ bits of public services will be picked up leaving rural areas underserved. There are also examples of where ‘gap filling’ has been happening i.e., where community minded individuals spot the gaps (or potential gaps) and devise projects to fill them. What happens in rural places where communities do not have the capacity, interest and/or know-how to do this? If putting people first is to remain the mantra of public service delivery, now more than ever in with commercialisation, we need to focus on how services can be even better from the perspective of rural residents.

Finally, what outcomes are we looking to achieve and what difference do we want to see through commercialisation? Are commercial approaches leading to higher quality and more sustainable service provision (in rural areas)? Are they building resilience within Local Authorities and helping them to generate a surplus? Are they delivering value-for-money for taxpayers? Are they enabling central Government and Local Authorities to work together on a shared agenda of making public services (commercially) viable? Going forward, if we want ‘new commercial DNA in the public sector’, how are rural Local Authorities going to continue to play a meaningful role in local communities? Or will we see a return of approaches to public services inspired by budget airlines and national retailers? Watch this space…

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Jessica is a researcher/project manager at Rose Regeneration; an economic development business working with communities, Government and business to help them achieve their full potential. Her current work includes supporting a Lottery programme to help people into paid work; research for the NHS on rural workforce recruitment and retention issues and evaluating a financial capability project. Jessica can be contacted by email jessica.sellick@roseregeneration.co.uk or telephone 01522 521211. Website: http://www.roseregeneration.co.uk/ Twitter: @RoseRegen