Under the bonnet of the Green Book review: will this really “rip up the rules” on regional investment?

Simon Dancer is a Board Member of the Institute of Economic Development, and a Director at AMION Consulting.

 Green Book: if you’re a film buff, it represents the Oscar winning screenplay by Pete Farrelly.  For medical folk, it provides the latest information on vaccines. But for us economic development professionals, the Green Book often means only one thing…how do I get my project approved?
 
When I was a young cub starting my career in Whitehall back in the 1990s, and Joseph Lowe was still roaming the corridors of Treasury, I was given a forest of paper documents to devour. One of the tomes was a gleaming, bound(!) copy of the Green Book (to the unversed, yes, it’s actually green, dark green to be precise). Though the years have inevitably meant less paper copies are in circulation, and thankfully less woodland is destroyed, it’s importance in the public sphere has only soared. Since time immemorial, a project sponsor’s heart will skip a beat with those dreaded words “is this proposal Green Book-compliant?”
 
Back to the present day, and the Chancellor of the Exchequer has initiated a review of the Green Book. To use Rachel Reeves exact words “(we) will review the Green Book in order to support decisions on public investment across the country, including outside London and the Southeast.” Though the Chancellor hasn’t released formal terms of reference for the review, the statement “including outside London and the Southeast” is rather telling. Certainly, that’s the message being broadcast to the northern heartlands, with organs like the Yorkshire Post proclaiming that “(changing) Treasury rules around infrastructure project spending could unlock billions of pounds of investment for the North.”
 
Thumbing through my dusty files, I managed to locate the Treasury slides outlining the scope for the 2020 Green Book review. It was noted at the time that any re-assessment should, to quote directly "(address the alleged) systematic bias towards London and the Southeast” plus, and rather emotively, the “tyranny of BCRs” (Benefit Cost Ratios). Sound familiar?
 
So, what’s at the heart of the issue?
 
To answer this question, we need to ask another one, this time rhetorical. Surely one of the accepted roles of the state is redistribution and, by association, regeneration? As economic development specialists, we know the market alone will not bring forward some of the more challenging corners of the country. It would be naive to suggest a private sector developer looks at, say, Burnley in the same way as, perhaps, Sevenoaks. We know that depressed values and challenging viability mean developers often need the public sector to take a supporting role to break the stalemate.
 
The crux of the argument is, disappointingly, rather techy. So, grab a strong coffee and buckle-up. Over the years, an appraisal technique emanating from our transport cousins and their sacred TAG guidance has migrated across to economic development. What is this technique I hear you cry? Land value uplift, of course! The practice used by DfT analysts to capture the uptick in values due to road improvements, is now the principal economic benefit used to justify a property-based renewal project, be it in Burnley or anywhere else.
 
The gripe from Metro Mayors and others is that land values – especially housing ones – are significantly higher in the south of the country, than, say, in the north. This means a Green Book orthodoxy which relies exclusively on “LVU” will always have a natural bent towards Sevenoaks rather than Burnley. To give you a flavour of the difference in residential values, using MHCLG’s own ‘Land value estimates for policy appraisal’ it recommends for Burnley using £370,000 per hectare. Whilst for Sevenoaks, the same indicator stands at an eyewatering £8,300,000 per hectare. Those good at mental arithmetic will know that’s a factor of 22:1. This means by appraising exclusively LVU, any Green Book exercise looking to choose between funding the same housing scheme in these two areas, the Sevenoaks of the country will always ‘score’ higher as the land values are in a different stratosphere.
 
If this wasn’t enough, critics turn to the other side of the benefit cost equation, namely the public cost denominator. It’s not a great intellectual leap to suggest that areas with low values and tough viability will naturally need a bigger injection of grant to get them over the line. Add to this, the legacy of de-industrialisation that blights swaths of Northern England, it’s not hard to see why the likes of Steve Rotherham (Metro Mayor for Liverpool) have been pushing for a rethink in Whitehall.
 
Does this tell the whole story?
 
Your red-blooded economist will tell you that values/prices send out vital signals in an economy, and the land market is no different. The Southeast needs more housing because this is where the demand is, which is duly manifested in the higher prices. Why use scarce public resources building homes where people don’t want to live, as the mantra goes. Counter to this argument is, of course, one of renewal and equity, as played out a moment ago. In fact, there are already Green Book techniques that appraisers can use to capture and monetise “externalities”. Have another swig of coffee, we’re approaching the summit.
 
Treasury – and MHCLG – boffins would argue that a good Green Book business case would study the direct benefit of new development, as captured by the usual LVU calculus. But these same experts also recognise that regeneration can often lead to a broad range of further external impacts i.e. externalities. For example, new housing or employment floorspace, public realm improvements and facilities that benefit existing communities (as well as new residents).  These will not be fully captured through a simple LVU assessment.
 
The Green Book makes it clear that the appraisal of social value should consider not just economic market efficiency but overall social welfare efficiency (hang in there, one final push). This is echoed in MHCLG’s appraisal guidance (we’ll discuss that guide another day!) which highlights the need to capture all the benefits and costs of an intervention. This includes all externalities in the form of placemaking and regeneration, health, education, transport, environment, plus culture and amenity impacts.
 
The challenge facing appraisers, is that these externalities can often be difficult to quantify and monetise. Therefore, this can mean that metrics commonly used to assess a project’s value for money, such as (tyrannical?) BCRs do not reflect the real impact on society.
 
What does this all mean for the Green Book review?
 
Getting out my crystal ball, firstly, I think LVU is here to stay. Though much-maligned in some political quarters, I don’t suddenly expect Treasury to re-write economic theory. Whisper it quietly, but LVU logic is widely accepted by many government economists.
 
What I do expect is a renewed focus on the externalities I referenced above, tapering the blunt tool that LVU can be. The Homes England economics team is already leading this debate, with its series on Measuring Social Value. It would be remiss of me not to mention that AMION helped prepare the first paper in this series: Placemaking impacts of housing-led regeneration (though I’m informed alternative competitors are also available).
 
Finally, a dog that rarely barks is the explicit use of distribution coefficients within appraisals. Buried in Annex 3 of the Green Book is advice on the use of Distributional Appraisal. Though governments of all colours tend to dodge the language of (re-)distribution, I’m afraid it’s written on the tin. I wouldn’t be surprised if the review gave a further nod in this direction.
 
On release, Pete Farrelly’s Green Book movie was greeted by universal acclaim and ultimately received many awards and nominations. Will Rachel Reeves be accorded the same treatment?