Creating specialized development zones as a way to encourage economic, environmental and social benefits is a smart idea. But it will take more than well-meaning announcements to achieve lasting impact.
As the shape of the global economy shifts, it is our cities that are at the end of their whip and suffer the greatest gyrations. Some cities – those in traditional steel belts or decaying industrial areas, for example – have suffered massive outflows of jobs, capital and people as entire industry sectors crumble or leave. Others are facing a slower, yet equally obvious, decline as digitization changes the way people think about and use city services.
Not surprisingly, many governments around the world are now looking for more innovative ways to encourage private capital to flow into the hardest hit areas. But it’s not just hard cash they hope to secure – they also want to find ways to work with the private sector to further the government’s longer-term economic, environmental and social objectives for these areas.
One of the more popular models in play today is embodied by the UK’s Enterprise Zones and the US’s Opportunity Zones. As our sidebar illustrates, both aim to achieve broadly the same goals – job growth, economic development and improved quality of life. And both offer significant tax benefits as a way to attract businesses and investors.
More than just a real estate deal
We see the creation of these ‘Zones’ as a positive development. In part, this is because – simply by designating an area for enhanced financial and government support – the government is creating some certainty and confidence around investing into what may currently be a declining area.
Yet it’s not just about demonstrating that government is willing to take a ‘stake in the game’. Many of these Zones also help reduce government red tape. They can help improve coordination in the planning processes, break down barriers to delivery between government departments and help drive simplified local authority planning.
Indeed, when supported by smart tax incentives, access to capabilities and joined up policy, these Zones can go a long way towards unlocking key development sites, kick starting infrastructure and attracting new businesses and residents.
London’s Canary Warf project serves as an excellent example of how private public partnerships within designated zones can super-charge regeneration and development. Focused on what was then a massive area of industrial decline in East London, the London Docklands Development Corporation served not just as landlord and owner, but also as a facilitator of planning, coordination and financial incentives. Over the next 17 years more than 8 square miles of urban land were regenerated, which helped create more than 120,000 new jobs as well as housing stock and transport infrastructure.
From big ideas to big results
While nobody expects the new UK Enterprise Zones to start spawning developments the likes of Canary Warf across the country, there is certainly a strong desire to see these Zones catalyze measurable economic, environmental and social benefits for their communities.
Yet, even while development Zone policy initiatives and financial incentives can serve as strong catalysts to long-term infrastructure investment, our view suggests that driving private investment into these areas of decline will require more than just tax incentives and policy wish-lists.
For one, policy makers will need to find ways to make sure their policy objectives are properly translated into measurable results on the ground. All too often, infrastructure projects are launched under laudable banners only to have their social and environmental benefits ‘engineered out’ as the project moves from idea to reality. Rethinking the value proposition of projects (for example, through a social lens) and then incentivizing the project team to deliver those outcomes will be key.
Policy makers will also need to continue to address the risk-return expectations of investors if they hope to attract private capital and capabilities. This will require not only improved planning flexibility, skills and experience – it will also require a viable pipeline of project opportunities that matches investment appetite.
Keep calm and Zone on
To be clear, we believe that the development of these types of focused development Zones is a positive step towards channeling private sector investment and capabilities into areas of great need. In time – and with the right support – we believe these Zones could even evolve into ‘islands of good’ that radiate positive outcomes across their wider urban area. Key is the transition from public and private planning to development led by the communities themselves which signals the coming to life of the zone as a viable urban community.
It’s still too early to measure success in either the US or the UK. But those governments seeking to catalyze urban regeneration should be watching the evolution of these Zones with great interest. Important lessons will be learned.
US Opportunity Zone1
Opportunity Zones were created as part of the US Tax Cuts and Jobs Act in December 2017. They essentially allow investors to defer tax on any prior gains made from the sale or exchange of any asset, as long as they are invested into a Qualified Opportunity Zone (QOZ) though a special purpose vehicle known as a Qualified Opportunity Fund (QOF).
The first set of Opportunity Zones, covering parts of 18 states, were designated on April 9, 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
UK Enterprise Zone
Enterprise Zones are part of the UK Government’s wider Industrial Strategy. The program offers investors and businesses a number of benefits including tax relief on capital allowances or business rate discounts. It also includes simplified local authority planning options to help speed up development in specified areas.
The first 24 Zones were launched in 2012 and 24 new Zones were created in 2016 and 2017.
Nahid Majid (mailto:Nahid.Majid@kpmg.co.uk), Director, KPMG’s Cities and Urbanization Center of Excellence, KPMG in the UK
Yesenia Scheker-Izquierdo (mailto:firstname.lastname@example.org), Partner, Tax and Real Estate, KPMG in the US