Hidden capital

How do we unleash the potential of UK cities?

This question sits at the heart of the UK Urban Futures Commission, led in partnership with Core Cities UK and others by the RSA. Previous answers to this question have tended to focus narrowly on economic measures of success: How do we make our cities more productive? How do we raise skill levels in cities? How do we improve connectivity and infrastructure in our cities? While all these issues are important to success, we wanted to take a broader approach through the Commission, one that also recognises the critical and often overlooked importance of social, cultural and environmental value.

This approach more accurately reflects how people think about the place they live, and not just those that reside in cities. When people choose to move house, the motivations and factors they look for are often social, cultural and environmental. Is it near to friends and family? Are there social and community groups to get involved in? What are the cultural and social amenities like? Is it close to green space and good-quality air?

Yet, when it comes to measuring and valuing these factors across and within places, we find it hard. Data on the quality of community infrastructure and social networks, on the cultural offer, or on the environmental performance of places is piecemeal. We therefore set about, through the Commission, to establish a regenerative framework for assessing the natural, social and economic assets of our cities and practical recommendations for rewiring national and local systems to properly account for this collective value.

Nested systems approach

In order to understand how the systems of economic, social and natural capital interact, we need to be able to define what we mean by each of them. Economic capital is already well defined. We might usefully think of social capital as the stock of non-financial resources in society, among citizens and within communities. This includes endowments of trust, relationships, belonging and agency among people, together with the social infrastructure – including civic and community institutions – as well as cultural offerings that support these assets and collectively help to define a place. This stock of social assets generates a flow of improved wellbeing among citizens.

Natural capital captures the stock of natural assets on the planet, from lakes and oceans to forests and soils, to animals and the biosphere. These assets are not easily quantified or given a market value, but can be given accounting or user values for the essential services they provide to sustain people, biodiversity and places.

The case for properly valuing and nurturing social and natural capital does not end with the importance of these systems individually. Economic, social and natural systems reinforce one another. The Commission repeatedly found that concentrations of low income, health deprivation and poor air quality cluster in deprived neighbourhoods across the UK’s cities. Conversely, growth in one system is contingent on the health of the others, so these systems are best nurtured as a collective rather than in isolation.

Tackling underinvestment

In order to build a system that properly values social and environmental capital, we need to understand why there is currently underinvestment at a local level. The impact of austerity in the last decade on local authority budgets has significantly reduced investment in social, cultural and environmental assets, as limited funding has increasingly been consumed by statutory service provision in areas such as adult and children’s social care.

We also tend to see underinvestment in these assets from the private sector. This is due to it being difficult to capture revenue streams from these assets that make such investments profitable. Any monetary benefits that do exist tend to accrue indirectly, for example through increases in wages or savings in utility bills, which are difficult to capture at the project or local level. And many of the benefits cannot be monetised, accruing in the form of improved wellbeing or a better environment. This means it is not attractive for the private sector to invest beyond small-scale philanthropic projects aligned to their environmental, social and governance commitments.

These local issues are compounded at the national level by the UK’s macroeconomic and fiscal framework, which fails to take proper account of social and natural capital. Returns on money spent in each of these areas are structurally undervalued, resulting in less investment capital being made available to spend in cities to enhance communities or improve the natural environment.

So, what will it take to rewire the way the UK works to better account for social, cultural and environmental value?

Local prosperity plans

The Commission recommends we start at the local level with a plan. Currently, it is rare for local authorities to cover economic, social and natural systems in a single strategy. If future efforts are to be more successful, this needs to change. What is required is a single, long-term integrated strategic plan to deliver prosperity to city residents and beyond through the regeneration of its economy, society and environment. We might call this a ‘local prosperity plan’. This can ensure the benefits of replenishing non-financial and natural assets are not missed, even for those that are more comfortable with traditional economic measures of prosperity. Healthier and happy residents are likely to be more productive, while innovating to reach net zero provides opportunities to create secure, well-paid jobs as part of the transition.

Better management of non-financial and natural sources of value also necessitates better measurement, in particular those that aim to capture the happiness and wellbeing that people derive and the long-term, intergenerational benefits that accrue. This requires places to identify appropriate indicators of broad-based prosperity and understand their interdependencies. And this plan cannot be the preserve of a local politician or the local authority. In the case of cities at least, the most successful plans are designed and delivered collaboratively, drawing on a wide cross-section of partners with a stake in the place’s success, such as businesses, anchor institutions and, crucially, residents themselves.

Lessons from Wales

However, a local prosperity plan alone is not enough. Without systemic intervention, growing demands for statutory services combined with constrained budgets will continue to squeeze resources for investment in social and natural capital. Balancing against the gravitational pull of statutory services such as social care, waste and public safety means putting local authorities’ responsibilities to grow prosperity in their city on an equal legislative footing. This new statutory responsibility might be framed explicitly as an enabling purpose – akin to that in the Well-being of Future Generations Act in Wales – that stipulates the long-term duty of places to serve both current and future generations’ social, economic and ecological needs.

The complement to a new statutory purpose focused on prosperity is increasing the funds available to invest in non-financial and natural forms of capital. Part of the answer lies in granting local leaders greater discretion over how to spend their money, including building their own capability to develop projects and invest wisely. The current plethora of short-term competitive bidding pots that are narrow in scope are anathema to leaders investing in a strategic and balanced manner across the three systems. A healthier approach might look like the mirror image: long-term, flexible funding settlements granted on a multi-year basis.

Ideally, as well as greater flexibility, increasing the size of the pot available to invest in social and natural capital would be part of the solution. While public finances are likely to remain tight, fiscal devolution would help. Broadening the range of taxes that are collected subnationally would allow places to realise some of the indirect returns on investment that accrue from well-executed local prosperity plans, which, in turn, could be reinvested or used to attract match funding from the private sector, creating a virtuous cycle.

Finally, shifting the system means revisiting the UK’s macroeconomic and fiscal framework. Current rules promote short-term decisions to balance the books rather than the long-term investments needed in social, natural and even economic capital. Adapting the UK government’s fiscal rules from a focus on declining net debt over a five-year horizon to maximising net wealth – defined broadly across social, economic and natural capital – over a longer-term horizon would be transformational. And, as with local prosperity plans at the subnational level, placing this broad definition of wealth at the heart of a clear long-term and integrated national industrial strategy would bring considerable benefits across all three of the nested systems.

Taken together, we believe that the recommendations in the Commission could unleash the potential within our cities and not only create economic powerhouses but vibrant, more equitable and sustainable places that can bring joy and wellbeing to many, both within cities and beyond.