Policy paper

Investment Zones place selection in Wales

Published 8 April 2024

This was published under the 2022 to 2024 Sunak Conservative government

Applies to Wales

Introduction

The approach to identifying Investment Zone (IZ) areas in Wales has been co-developed by the UK government (UKG) and the Welsh Government (WG) to reflect the specific policy context, governance, and economic landscape in Wales and the UK.

The WG and UKG are committed to a partnership approach to developing a policy offer for IZs in Wales, tailored to Wales’s needs and opportunities. The IZ Policy Prospectus published on 15 March 2023 sets out three principles for engagement between the WG and UKG, which have been established through previous joint working on programmes, such as Welsh Freeports:

• Partnership: WG and UKG will play an equal role in co-design, decision-making and overseeing the delivery of IZs.
• Parity: the overall offer in Wales will be of equivalent value to the overall offer per IZ in England.
• Strategic Fit:IZs will align with the WG and UKG’s policy frameworks, including the WG’s Innovation Strategy for Wales. They should also have a good fit with the regional economic and governance landscape and reflect the devolution settlement.

Through this engagement, the Welsh and UK governments reached agreement and jointly announced that subject to proposals meeting specific requirements and being agreed across all parties, there will be two IZs in Wales. The places offering the most potential to host these are:

• The Cardiff and Newport TTWAs ^{[footnote 1]} (delivered by the South-East Wales Corporate Joint Committee), and;
• The Wrexham and Flintshire TTWA ^{[footnote 2]} (delivered by the North Wales Corporate Joint Committee)

The WG and UKG intend to work collaboratively with Corporate Joint Committees (CJCs) to co-develop IZ proposals, offering support and advice throughout the process. IZs must be founded on long-term partnership and collaboration – between regional actors in a place, and between all levels of government – to maximise the effectiveness of coordinated investment and intervention. Through this shared commitment and partnership, IZs will support the long-term growth of high-potential clusters on the journey to becoming nationally significant and, in time, globally leading.

It is expected that IZs will be able to make the most of both reserved and devolved levers offered by UKG and WG.

This document provides further information on the policy model in Wales and how places were selected. Further detail on the parameters of the co-development process and guidance for these places to develop their proposals will be published in due course.

Objectives and policy model

Priority sectors

In keeping with the approach already set out by UKG in England, and jointly with the Scottish Government in Scotland, Welsh IZs will focus on five wide-ranging priority sectors in which the UK is well-positioned to play a leading role globally – digital and technology; green industries; life sciences; advanced manufacturing; and creative industries. These sectors closely align to five of the six innovation priorities set out in the WG’s Innovation Strategy – digital transformation; Net-Zero and decarbonisation; population health and biotech; materials and manufacturing; and creative industries and media. IZs will need to focus on growing clusters aligned with one or more of these sectors, to boost Welsh and UK competitiveness in these high-potential industries.

The barriers to the growth of emerging clusters of activity will look different between sectors and across different parts of Wales and the UK. This means there is no one size fits all model, as each region will require different interventions depending on what is already in place and the drivers of growth for specific clusters.

Funding envelope

Subject to proposals meeting specific requirements and being agreed across all parties, each IZ in Wales may receive a total funding envelope of up to £160 million for up to 10 years, which can be used flexibly between spending and a single ten-year tax offer, scalable based on the number and size of sites. This would consist of:

• Flexible spend, split 40:60 between resource spending (RDEL) and capital spending (CDEL), to use across a portfolio of interventions based on the opportunities of each cluster; and
• Tax incentives, available for ten years, offered over a maximum 600 hectares across up to three sites, ideally of no more than 200 hectares each. If a place chooses not to take up tax reliefs to the full extent available, they will have a larger spending envelope available to them. The principle of flexibility is woven throughout the policy offer and will respond to evidenced regional priorities, reflecting that regional partners know their economy best.

Following the 2023 Autumn Statement, and the intention to extend the IZ programme from 5 years to 10 years and increase the funding for places from £80 million to £160 million, the WG will be exploring how it can offer devolved tax levers over a 10-year period. Further detail on this will be published in due course.

Flexible spend

Within the overall fiscal envelope, the spending envelope will be split 40:60 between resource and capital funding. Funding can be used for Research and Innovation, Skills, Infrastructure, Regional Enterprise and Business Support, and Planning and Development.

Fiscal incentives

Subject to proposals meeting specific requirements and being agreed across all parties, it is anticipated that WG and UKG will offer all or a combination of some of the following tax reliefs in designated tax sites within each IZ. Where applicable, it is anticipated that these will be available for up to 10 years and include:

• Land Transaction Tax relief
• Non-Domestic Rates (NDR) relief
• Enhanced Capital Allowance
• Enhanced Structures and Buildings Allowance
• Employer National Insurance Contributions relief

Any tax sites would need to be tightly defined and located on underdeveloped land.

Non-Domestic Rates retention

It is intended the authority or authorities in the IZs also benefit from retention of (NDR) growth within the tax sites area.

In drawing up proposals for IZs, CJCs will need to demonstrate how NDR retention would provide for inclusive economic growth within the region, support at least one of the priority sectors within the IZ and represent value for money for the Welsh and UK governments.

Government support

Alongside funding, WG and UKG anticipate providing support to CJCs in the development of their proposals to ensure they are robust, evidence-based and achieve the objectives of the programme. WG and UKG would welcome evidence that shows how CJCs intend to align their IZ proposals with existing and planned public and private investment in the area, including current and future infrastructure plans, so that regional and national strategic aims are met.

All proposals should include secured and anticipated match funding from the private sector and research institution partners.

Delivery geographies

CJCs are co-terminus with existing city and growth deals and represent a coherent economic and administrative geography. The CJCs provide a coherent, democratic and statutory governance structure to support local authorities to collaborate in delivering strategic economic interventions. Given the scale and scope of IZs, working in partnerships across administrative boundaries is essential, and regions have established collaborative structures to facilitate this model of working. This is consistent with the approach in England and Scotland, where English Mayoral Combined Authorities (MCAs) and Scottish Regional Economic Partnerships (REPs) were used as administrative authorities across functional economic geographies that national governments can work with to co-design and deliver IZs.

Place selection

UKG and WG co-developed a bespoke approach to identifying IZ areas in Wales to reflect Wales’s specific policy, governance and economic landscape.

Core principles

The IZ methodology is underpinned by a set of core principles that have been agreed between both governments. These have guided the development of the approach.  

a. Objectives: The methodology and criteria used to identify areas best suited to establish an IZ should flow directly from the policy objectives. IZs are designed to be a targeted intervention aimed at selecting areas capable of leveraging local research strengths to boost productivity and increase innovation. They will focus on growing knowledge-intensive clusters linked to research institutions and build on existing local strengths. IZs will also need to deliver benefits to communities beyond the direct partnership with institutions and clusters, recognising they have a wider role in supporting the prosperity of Wales and the UK.

b. Strategic Fit: IZs should align with respective policy frameworks of both governments. They should also fit the regional economic and governance landscape and reflect the devolution settlement.

c. Place-led: A place-led approach should be undertaken to identify and select areas with the potential to support IZ policy objectives, and which have the fundamental characteristics to create the environment in which the private sector can prosper and knowledge-intensive clusters can flourish.

d. Geography: Travel to Work Areas (TTWAs ^{[footnote 3]}) are used as the basis for informing the selection process, as economic activity operates across administrative boundaries. The TTWAs have been adapted to reflect data availability and cross-border considerations in recognition of the relationship with places in England ^{[footnote 4]}.

In addition to the above, further factors have also been considered which include having a balance of investments across Wales.

Subject to the data and information constraints which exist on Welsh and regional economies, the above principles were applied to objectively assess and identify the areas within Wales which may stand to benefit the most from hosting an IZ.

Stage 1: Identifying the places that have the potential to benefit from Investment Zones

TTWAs have formed the basis for identifying and ranking places. All TTWAs were assessed according to the following criteria to determine the potential for a place(s) to benefit from IZs:

1. Economic potential: this focuses on the ambition to boost productivity. A way to achieve this is to focus on high population areas with potential to improve productivity and ‘catch up’ with other parts of the economy. This criterion therefore targets IZs towards places that have the greatest scope for increased productivity and output.

2. Innovation potential: this focuses on levels of innovation adoption. It recognises that increasing innovation and the adoption of new ideas is one of the key drivers of higher long-term productivity and prosperity. This criterion therefore targets IZs towards places with strong business dynamism (i.e. innovation adoption) and a highly skilled workforce.

3. Deprivation: this focuses on existing levels of deprivation. A further outcome of IZ policy is to provide wider benefits to communities, including pockets of deprivation, beyond the direct partnership with research institutions and knowledge-intensive clusters. This criterion therefore targets places that also have high-deprivation areas within them.

Two further thresholds were also applied to the assessment of TTWAs to rule out less suitable areas including:

Minimum size: places within the smallest TTWAs in Wales are unlikely to have sufficient size or critical mass to support the development of knowledge-intensive clusters targeted by the IZ policy. Fewer people live in such areas, and so the benefits of IZs would also be felt less widely. Consequently, the smallest areas, i.e., those that fall in the bottom 30% of TTWAs by population for England and Wales, are excluded at this point.

Average Productivity: places with potential to improve productivity may already have relatively high productivity. Such places are not the target of the IZs policy, given the focus on addressing constraints on productivity and disparities between regions. All areas with productivity above the UK average productivity are therefore excluded. This results in a further refinement of the list of TTWAs.

Quantitative Metrics

Criteria or threshold	Metrics	Commentary
Economic potential	Below average GVA per worker x working population in TTWA (using data for the whole of the UK)	This metric captures the relative economic performance of a place, and hence, at a high level, the opportunity for improvement if constraints to productivity growth are alleviated.
Innovation Potential	Knowledge Intensive Business employees as a % of total employees. % of businesses that are high growth and have more than 10 employees.	These metrics provide a proxy for assessing business dynamism and labour market skills as key ingredients for innovation. An existing concentration of highly skilled workers is considered a good indicator for the potential supply of future skills for an IZ. Highly skilled labour is often attracted to places with high levels of innovation.
Deprivation	A combination of metrics covering: % of population who have attained NVQ3+  3-year average (2019-21) Healthy Life Expectancy 3-year average (2016/17- 2018/19) Total median weekly pay (gross) (£) 3-year average (2020-22) GVA per hour worked 3-year average (2018-20) Wales Index of Multiple Deprivation Score	These metrics assess how places fare according to high-level socio-economic factors such as education levels, life expectancy, earnings and productivity.
Minimum Size threshold	Places that fall within the bottom 30% of TTWAs by population for England and Wales	This metric identifies places which fall within the bottom 30% of TTWAs by population.  They are excluded to ensure only places with the required level of scalability are considered.
Maximum productivity threshold	Places with higher than the UK average productivity (GVA per Hour Worked).	Places with productivity above the UK average are excluded.

Stage 2: Identifying the necessary characteristics to support a successful IZ and make the most impact

Two further qualitative criteria are applied to assess which areas also have the necessary characteristics to support a successful IZ and make the most impact: 

Presence of a knowledge anchor: places with research-intensive institutions are important to cluster development and in leveraging local research strengths to spread the benefits of the innovation across the wider economy. This criterion therefore targets IZs towards places with strong research-intensive institutions, such as universities, catapults, and innovation accelerators, to boost innovation capacity and raise the productive potential of areas.

Sector Strength: a core programme objective is to support the growth of key sectors where they already exist. This criterion therefore acts as a threshold to ensure a place has evidence of an existing strength, including how such strengths align with respective priority sectors identified by both governments.

Qualitative Criteria

Criteria or threshold	Metrics	Commentary
Presence of Knowledge Anchor	2 – Transparent Approach to Costing (TRAC) Group A-C university / Top two universities in terms of Quality-Related (QR) funding AND Research Wales Innovation Fund / Innovate UK (IUK) Catapult within the TTWA boundary. 1 – TRAC A-C university / Top two universities in terms of QR funding OR Research Wales Innovation Fund / IUK Catapult within the TTWA boundary. 0 – Neither a TRAC A-C university, Top two universities in terms of QR funding or Research Wales Innovation Fund / IUK Catapult within the TTWA boundary.	TTWAs are required to have a research-intensive university and/or an IUK Catapult (a sectoral focused research and innovation hub that provides business support, spinout/scale up and adoption of innovation). Having both indicates enhanced opportunities for research and commercialisation of innovation so will score maximum points.
Sector Strengths	2 – High employment representation compared to the Wales average across multiple priority sectors, and/or offshore wind cluster. 1 – High employment representation compared to the Wales average across one sector or offshore wind cluster. 0 – No high employment representation compared to the Wales average across any sectors.	Strengths are assessed according to the concentration of a sector (Digital, Creative Industries, Life Sciences, Advanced Manufacturing) in each place. The methodology uses employment shares. In addition to this, due to the economic geography of Wales, location quotients have been considered to capture the degree to which areas have a relatively high representation compared to the Wales average. There is no change in the outcome of the results. The presence of an offshore wind cluster is used as a proxy for green industries in lieu of accurate green growth employment share data.

Stage 3: Shortlist of Places

The following were also considered to determine the strongest TTWAs to host an IZ:

Geographical Spread:

Ensuring a geographical spread of investments across Wales and recognising how an IZ relates to the regional structure of Wales, taking account of the differences between the North and South of the country.

Capacity and Capability:

Ensuring regional capacity and capability amongst local partners to deliver an IZ. Considering, in exceptional circumstances, where there are legitimate, evidenced, or self-identified concerns with the capacity or capability of local partners. CJCs have a broad power to promote the economic wellbeing of their area, alongside regional transport and land-use planning duties. They represent a coherent economic and administrative body, providing a democratically accountable governance structure with which to engage on strategic economic interventions.

Given the scale and scope of IZs, working in partnerships across administrative boundaries is essential, and regions have established collaborative structures to facilitate this model of working. This is consistent with the approach in England and Scotland, where MCAs and Scottish REPs were used as administrative authorities that can be worked with to co-design and deliver IZs. The leaders of each constituent council are members of the CJCs, making the decisions within the CJC on behalf of the councils they are elected to represent. CJCs can also engage and involve others in their work through co-option. CJCs are therefore invited to develop proposals for IZs in successful TTWAs.

Results

Based on the application of the criteria in stages 1, 2 and 3, the following areas have been determined as the strongest two areas to host an IZ in Wales:

• The Cardiff and Newport TTWA (delivered by the South East Wales CJC); and
• The Wrexham and Flintshire TTWA (delivered by the North Wales CJC)

Footnotes

1. Travel To Work Areas (TTWAs) have been determined through ONS Data and the Deaton Review ↩

2. As above. ↩

3. TTWAs are defined by the Office for National Statistics using census data for commuting between wards, based on the different locations of individuals’ home and work addresses. A TTWA is a collection of wards for which “of the resident economically active population, at least 75% actually work in the area, and also, that of everyone working in the area, at least 75% actually live in the area”. TTWAs have been determined through ONS Data and the Deaton Review (see footnotes 1 and 2). ↩

4. For example, the Chester TTWA straddles the Wales-England border, with the local authority of Flintshire (Wales) being part of the Chester TTWA. The Flintshire local authority has been reallocated to Wrexham TTWA (Wales). These factors have been considered as part of assessment undertaken. ↩