Regional Extraction and the Foundational Economy

The outsourced state has led to diverging economic fortunes for UK cities. A recent 800 page report highlighted just how unequal the UK regional economic landscape has become: in ratio terms, the UK’s largest 2nd tier city generates around 10% of the output of London – the second highest capital to 2nd tier city output inequality within the EU (Parkinson et al 2012, p. 27). In terms of the regional concentration of GDP creation, we have more in common with a Hungary, Bulgaria, Romania or Greece than a Germany, Netherlands or Sweden. And while there is evidence to show that the UK’s 2nd tier cities were growing faster than the capital pre-crisis (from a lower base), that trend is now being undone as austerity cuts bite into the non-metropolitan North and West.

To understand these processes, we must think laterally about flows in a national economy. Growth can be driven by regional productivity gains which have positive spin offs for the rest of the economy. Growth can also be driven by regionally specific competences which give rise to different regional return profiles and growth trajectories. But growth can also come from a less productive source: regional extraction - the absorption of revenues and taking of skills from one region to advantage another.

This paper argues that the UK’s regional inequality problem is partly a consequence of the increased financialization of the economy which, through PPPs, PFI etc, has allowed firms located in London to extract both revenues and surpluses from the nation's foundational activities. For example, a major infrastructure project outside London funded by a public-private partnership might have London-based shareholders, with the finance company, the building company and the service providing company headquartered in London. The law, accounting and architectural teams may also be provided by London-based firms. Hence, even when infrastructural investments are made outside of London, London businesses may benefit, concentrating multipliers in the capital; leaving the labour pool in non-metropolitan areas with little choice but to move down South.

To explore this hypothetical, the paper reviews data on 456 UK Domestic Ultimate Owners (‘DUOs’ – the highest national corporate entity in the nest of corporate entities) involved in Public Private Partnerships or Private Finance Initiatives between 2004-2012, looking at the returns made to shareholding firms and their regional headquarters. The key finding is that 75% of all PPP/PFI DUOs are HQ’ed in London and the South East. This is supplemented with a case study of the build and financing of Central Manchester & Manchester Children’s University Hospital NHS Trust, which shows a similar preference for London-based firms. It is argued that this process could be thought of as a quiet cross-subsidy running from North and West to South and East, entrenching national unevenness through the withering of broad competences in the regions.