NECESSITY IS THE MOTHER OF INTERVENTION

The recent criticism of commercial property acquisition by the National Assembly for Wales appears to have revived a very old issue or, more correctly, issues. The first is that it is difficult, if not impossible, to defend such action as strategic intervention in the absence of any apparent strategy. Were this an official and widely applied strategy then it would signal a significant reversal of Assembly policy to that which has prevailed. That was, of course, informed by a view that questioned the efficacy of public sector intervention in property markets. It favoured ‘investment in people not places’ and abandoned what Reinhold Niebuhr dismissed as ‘salvation by bricks’. In short, the prevailing wisdom which saw the abolition of the Welsh Development Agency, the Land Authority for Wales, the winding-up of the Cardiff Bay Development Corporation and other agencies of intervention in regional property markets.

There is, in my view, a case to be made for some clear policy on public sector intervention and that issue is considered further below. I will first briefly address any defence of opportunistic or reactive property acquisition as may be offered. Under certain circumstances public sector intervention may be essential to prevent the wider economic impact of catastrophic failure in the commercial property sector. Such measures were deployed following the Secondary Banking Crisis of 1973 and were central to Government and Bank of England intervention which ensured the controlled disposal of property to arrest the rapid deflation of property values. In subsequent recessions fiscal and other measures have been deployed to mitigate market failure. Such action may be inevitable periodically as, in the view of some, too great a proportion of the UK economy is vested in landed property which is, by its nature, a notoriously imperfect market. An aspect of that imperfection may be illustrated in the simplest of terms by reference to the fundamental economic principles of supply and demand. Overall demand for property can change very quickly, supply cannot. Coupled with this are further factors such as transactional speed and cost and other considerations. Stated simply, property is a long-term business and those that participate in it with a short term view are inevitably at greater risk.

I have no knowledge of any recent cataclysmic failure in the local property market which might have precipitated public sector investment with the attendant risk concomitant upon the Welsh Assembly acquisitions at issue. Given the historic and persistent antipathy to financial support for projects in the capital from elsewhere in Wales it is perhaps unsurprising that the opponents of the current administration would take the opportunity to denounce such initiatives. Perceptions that central Cardiff enjoys relative prosperity compared to less advantaged parts of the region have been, and evidently remain, a persistent factor in the standing debate on the allocation of financial resources. This would inevitably call to question a speculative property investment by the Assembly in Cardiff Bay, where £2.4 billion was invested and, even more specifically, at Callaghan Square which was created as part of a PFI project which will cost the public sector circa £190m. In the latter case the State sponsored project was undermined by competing speculative development which syphoned off occupational demand for commercial development. In that instance it may be claimed that the private sector were very much smarter and lighter on their feet than those in the public sector. The converse argument is that those entrepreneurs produced low quality buildings and, consequently, low value jobs and, if Cardiff is to be the locomotive of regional economic growth, intervention remains necessary to achieve better quality commercial accommodation and higher value employment opportunities.

If the market will not then provide buildings of suitable quality on a speculative basis, as the costs of doing so exceed a guaranteed return, there is a form of market failure. We could address, in passing, the cherished myth that the private sector is significantly less risk averse than the public sector here. The underlying rationale of intervention is that there must necessarily be some sort of support, usually in the form of direct or indirect financial subsidy, provided by the public sector to underwrite such risk. Alternatively there are the variants of public/private partnerships, wherein the risk is shared and/ or borne largely by the former, or the public sector must make ensure the provision directly through its agencies with the concomitant risks.

This then leads back to the issue of who makes such provision in Wales where, in the past, so-called ‘regeneration’ was predicated on financial intervention in such markets and implemented by bodies like the Welsh Development Agency. Many in regional government remain adamant that the dissolution of that agency was necessary but, in this context, that question may be revisited. One can argue, with the benefit of hindsight, that the participation of the WDA in property markets evolved over time and had moved to that question of quality. Originally it had been largely reactive and a response to the rapid decline in extractive and heavy industry. That was referred to colloquially as the ‘Red Shed Program’ and, in crude terms, meant the bulldozing flat of redundant collieries or other plant and the creation of ubiquitous cul-de-sacs of light industrial units. One problem with these was that such provision proved a deterrent to private sector investment as commercial developers saw the public sector as providing such accommodation at subsidised rental levels. The disposal of those estates to the private sector was in many respects then beneficial in establishing a ‘true’ market, although that was probably not an intentional objective of the then Secretary of State who ordered that sale.

The subsequent campaign of attracting inward investment was also be seen as having been facilitated in part by low unit costs of land and buildings provided by such agencies. That proved to be a relatively short term advantage as lower labour and other costs elsewhere in the world significantly undercut any benefit afforded by cheap accommodation provided in Wales. As major investment declined critics of the WDA questioned the wisdom of ‘renting jobs from the Japanese’ and advocated support for indigenous SME’s and investment in The Knowledge Economy. The response to the latter was the building of ‘Technium’ buildings in proximity to Universities or areas where growth might be encouraged in specialised fields. Initially hailed as a visionary initiative this proved to be unsuccessful commercially and, for some observers, the final nail in coffin that had been constructed for the WDA by its critics in the Assembly. For those, all of the foregoing programs had been predicated on the philosophy of ‘build it and they’ll come’. Those who held the view that the job of government is to increase demand and not tinker with supply were in the ascendant.

A more enlightened view may be that it is not one or the other and that you have to do both to increase the chances of success. Moreover you have to take a much longer term view than may be taken by either commercial developers or elected politicians. In the case of the first, the property development industry in Britain has been dominated by the ‘hit and run’ style of operation since the 1960’s. The prevailing modus operandi in the commercial sector is to build, let and sell as quickly as possible. In the residential house building sector it is simply to build and sell quickly. Both sectors are conscious of the need for speed to avoid the recessionary cycles which have marked property markets, particularly since 1973. In the public sector the short-term view may be attributed to the electoral cycle, which seldom matches the aforementioned recessionary cycle in property markets,and the demand for politicians to produce ‘outputs’ which can be whipped out and waggled in the face of the electorate come polling day. That might be dismissed as a crude and cynical assessment but a cursory analysis of the rhetoric, which is further simplified and amplified by regional media, will evidence the pre-eminence of quantitative claims – numbers of jobs particularly – which are the currency of political claims.

There therefore needs to be a counterpoint to this where the argument for a long term strategy is formulated and properly explained to the electorate as has been the case in Scotland and elsewhere. If intervention is necessary in land and property markets then this should be supported by detailed research and a consensus secured across all parties to ensure that such policy as is necessary can be implemented across much longer property development cycles, let alone the political election cycle. If such policy were to be implemented by the civil service of the Assembly then that section of it responsible needs to be clearly identifiable and fully accountable. At risk of again returning to old issues, the abolition of Quango’s on the grounds that they represented a ‘democratic deficit’ can be questioned in the light of recent property market intervention where no-one can be clear who did what and why.

Some greater maturity would also be desirable in the debate that might inform such policy. All too often in Wales we subside into the sophistry of what may be termed ‘emotional economics’ for want of a better expression. That is the expression by the opponents of investment in contentious development in terms of schools, hospitals, or other essential public services which require accommodation of improved quality. All are necessary and finite economic resources need to be allocated rationally. The priorities need to be clearly established through intellectual analysis and reasoned argument and not the weary and tiresome rhetoric that passes for such in political exchanges.

As mentioned above Scotland has a clearly expressed the economic rationale for government intervention and we need to raise the level of debate and clearly address the issues which are not dissimilar here. Such policy then addresses the disparities that arise from market failure and what may be an essential role for government intervention to deal with related problems. This informs and underpins regeneration strategies which in turn have a strong equity rationale.

“Therefore, both efficiency and equity considerations can justify regeneration projects involving components such as land renewal, commercial, industrial, retail and housing development, improvements in transport and accessibility, environmental improvement,support for business, training and community development. If regeneration policy is effective in identifying relevant market failures, and is well-targeted at addressing equity issues, then it will maximise the possibility of convergence between wealthier and poorer regions, resulting in significant improvements in social cohesion, and potentially boosting long-run economic growth as well.”

(COMMUNITIES ANALYTICAL SERVICES, SCOTTISH GOVERNMENT)

A key phrase in that quotation is, again, ‘long-run’ and the longer term view that is critical in dealing with the property market. In that respect the Welsh Assembly might also revisit the principles of stewardship and better understand how those might have better informed their policy objectives on sustainability. Were they so minded they would also note that housing is included in the Scottish strategy and consider what is, perhaps,an even stronger case for intervention in residential land markets. This would address both the provision of affordable housing and the development of better quality planned settlements across Wales. They need, of course, look no further than the principles upon which the Land Authority for Wales was founded, which was to harvest the uplift in value which inevitably follows planning consent for more valuable use and re-invest that in public projects for wider social benefit. Ultimately that objective was perverted and LAW was denigrated as ‘the Quango that made money’. There is an opportunity to learn from and not repeat the mistakes of the past. In some instances land acquired by that public body was sold at enhanced values and funded major public infrastructure but the related private sector development was of questionable quality. There are numerous exemplars of radical intervention in Europe and elsewhere which would inform and extend such analysis of the benefits that can flow from such policy.

This might be a more enlightened and forward thinking approach than the seemingly spontaneous acquisition of second-hand airports in the wrong location. Such actions merely confirm the view of critics that market intervention is, at best, a very blunt instrument. My conclusion would be that such intervention is but one of the tools in the box and, given the innate imperfections in the property market, may not be refined and deployed as a precision instrument. It can, however, be used with greater skill and, handled with care, intelligence and skill, support and advance wider policy objectives.