The Apprenticeship Levy is a welcome attempt to boost employer investment in training in the UK, but it has had a difficult first year, with the number of apprenticeship starts having fallen substantially. A significant factor in accounting for the teething problems is the excessive centralisation of the apprenticeship system. It is increasingly clear that if the apprenticeship system is to be fixed, it must be fixed locally.

The UK is one of the most centralised states in Europe, with comparatively weak powers for local and regional government. In recent years, as part of the Northern Powerhouse agenda, there have been some welcome steps towards a more devolved skills system. The Adult Education Budget (AEB) is set to be devolved from next year to a number of combined authorities, giving them greater flexibility to meet local needs. We saw some tentative steps towards greater local flexibility in early City Deals, with the devolution of the Apprenticeship Grant for Employers giving local areas the ability to focus funding on priority areas.

With the advent of the Apprenticeship Levy, however, this progress has been reversed. Under the new system, the Department for Education sets the rules, employers make decisions on recruitment, and the Institute for Apprenticeships oversees quality. Local authorities and combined authorities have virtually no levers to influence employers in their region.

There are potential benefits to this centralised and employer-led system. By stimulating demand and putting decisions in the hands of employers, Government hopes they will invest in apprentices that meet their skills needs and boost productivity. For employers operating nationally, centralisation means less complexity, as they do not have to engage with a system that has regional variations.

But there are significant challenges with this system too. First, the Levy will do little to boost investment in training in many areas of the economy, including areas which might be strategic priorities for local areas. Take construction; as the levy affects only large employers, it will do little to boost investment in construction which is dominated by self-employment and by SMEs. Therefore, while boosting construction apprenticeships in the capital is a priority for the Mayor of London, he has no ability to make construction a strategic priority for investment.

Second, employers may make decisions that don’t necessarily accord with the priorities of policymakers. The Government has highlighted the need for additional higher and degree level apprenticeships, and for ‘3 million apprenticeships for young people’. Yet the vast majority of the growth we saw ahead of the introduction of the levy was for lower level apprenticeships and among older apprentices. So, while the Metro Mayor of Liverpool wants to create more ‘gold standard’ higher and degree level apprenticeships for young people, he has little ability to do so beyond exhorting local employers.

Third, the levy may exacerbate rather than address the deep regional inequalities that scar our country. As it is essentially a payroll tax on large employers, the levy will raise far more in London where there are higher levels of pay and a greater proportion of employment in large firms. Conversely, the levy will raise far less – and potentially stimulate training less – in the regions that need investment in skills the most.

Finally, under the current system, unspent levy funds revert to the Treasury after 24 months and are lost to local economies. While the Mayor of the West Midlands wants to invest unspent funds from the region in high quality vocational provision, he currently has no ability to do so.

With growing concern about the impact of the levy, it is time that the Government to recognise that the system can only be made to work locally. We need to recognise that it is locally accountable leaders who best understand the needs of local employers and local communities. We need to build strong regional institutions which can both tailor the system to local needs and stimulate a collective commitment to skills and productivity.

As a starter, Government could devolve top-up funding. Currently, employers who choose to invest their levy funds get a 10% co-investment from government. This goes to all employers, irrespective of the apprenticeship they are investing in. If this fundinjg was devolved to local areas, they could vary the subsidy by industry, by level or by age, in order to stimulate employer investment where it is needed most.

Second, Government should also devolve unspent levy funds. We always knew some levy funds to go unspent, but the slow rate of starts suggests a substantial proportion of the £3bn that will be raised annually will go unspent. This is money that should be invested in boosting training, skills and productivity, rather than disappearing into Government coffers. If a proportion of this funding was devolved to local areas, it could be used to subsidise apprenticeships in priority areas, to provide business support to encourage apprenticeship recruitment or to fund high quality careers information advice and guidance.

In the medium term, IPPR has called for the Apprenticeship Levy to be reformed into a productivity and skills levy to boost investment in training. Set at 0.5 per cent of payroll for mid-sized firms and 1.0 per firms with 250 or more, the levy would affect more employers and raise twice as much as the Apprenticeship Levy. A quarter of the contributions of the largest firms would be top-sliced and devolved, providing a Regional Skills Fund worth £1b for local areas to invest in high-quality vocational education and training. This would turbo-charge skills devolution, and help narrow deep regional.

The Apprenticeship Levy is a much-needed but poorly functioning policy. There is a strong case for a levy, but its success is being jeopardised by a reliance on an overly-centralised and employer-led system, which affords virtually no role for local flexibility. Instead of looking for levers to pull from Whitehall, government should recognise that the levy can only be fixed locally. We will only be able to build a modern vocational system, which meets the needs of local employers and local communities, if we recognise the role of local and regional government and empower those closest to these communities to make the system work.

Joe Dromey is a Senior Research Fellow at IPPR. He tweets @Joe_Dromey. A full version of this blog was originally published in the Learning and Work Institute edited publication All Change: Where next for apprenticeships?