Section 8

Adapting to austerity

8.1 The impact of the 2008 financial crisis

Following the financial crisis of 2008, tax revenues in most western economies fell dramatically and budget deficits increased accordingly. The downgrading of central government credit ratings in France, the UK and the USA, coupled with the near bankruptcy of various governments in southern Europe, provided a salutary lesson that projected levels of public debt were not sustainable.

There has been a tacit consensus among the main political parties in the UK and elsewhere that the deficit must be reduced and that the main brunt should be borne by cuts in spending rather than increases in levels of taxation. Ongoing pressures of health and welfare spending, as well as the burden of debt repayments, have, however, meant that the axe has fallen disproportionately in other areas, such as defence, local government and infrastructure.

Total public spending in the UK is forecast to decrease by 4.4% between 2010-11 and
2018-19, but increases in welfare spending, the cost of public service pensions and the cost of other ‘non-departmental’ spending mean that there will be cuts of 19.9% in spending by government departments on public services. However, some services, notably the National Health Service, have been protected, which means that cuts to other services are even greater. Spending on local government, for example, is being reduced by 28.4% between 2010-11 and 2015-16.1.

Most public sector organisations therefore face severely constrained revenue budgets in the medium term and an uncertain prospect that this will change even in the longer term. At the same time, many of them face overwhelming pressure to maintain or increase spending on education, welfare, healthcare and social care as demand for these services increases. There seems to be no prospect in the foreseeable future that levels of spending will return to their pre-2008 levels; the public sector has entered a new era of austerity.

In this context it is more important than ever that public sector organisations use their resources efficiently. This requires coherent strategies to reshape the way in which assets are used to provide public services. This is not simply a matter of doing what was done in the past in a more efficient way; it requires a wholesale rethink of why assets are held, how they are deployed and how capital investment should be targeted.

Many organisations are already embracing new ways of working. This section outlines a number of options. Most of them have already been successfully implemented in the public sector; others are untested in the UK and are more risky. The latter are included in order to stimulate thought about how things might be done differently rather than as examples of established good practice.

8.2 Re-prioritising capital investment

8.2.1 Introduction

Section 4 explained the importance of a proper process for prioritising capital investment proposals, including the need for clear evaluation criteria linked to the organisation’s corporate objectives. It should be part of normal good practice to revisit the process and review the criteria from time to time, but the unprecedented constraints on funding that many public sector organisations now face call for a more wide-ranging rethink about what the priorities for capital investment should be.

8.2.2 Encouraging economic growth

Some public sector organisations in the UK have redirected their capital investment priorities to support economic growth. Central government, for example, has prioritised infrastructure, such as roads and rail. Many local authorities have followed a similar approach to support the growth of their local economies.

The rationale for this in an era of austerity is that a growing economy will improve the public finances in the long run. UK local authorities benefit directly from economic growth in their areas, because they keep half the additional business rate income that is generated. They can benefit further from the recent introduction of tax increment financing. This allows local authorities to borrow for infrastructure projects against the anticipated growth in business rate receipts that will result from the projects. The idea originated in the USA, where it has been successfully implemented in a number of cities. Transport for London is now using tax increment financing to fund the extension the Northern Line of the London Underground to Battersea as part of the Nine Elms Regeneration Project.

If economic development is made a higher priority for capital investment, this needs to go hand in hand with a proactive approach to infrastructure planning, strong partnership working and a willingness to take calculated risks, as discussed in sections 3.4.2 and 3.4.3.

8.2.3 Prioritising revenue savings

Section 5 explained how the cost of most capital funding falls on revenue budgets sooner or later. Where the funding is used to invest in or replace existing assets, this is often mitigated by decreases in running costs, eg due to increased energy efficiency. However, achieving revenue savings is rarely the primary reason for undertaking a capital project.

Austerity warrants giving a higher priority to projects that yield revenue savings. These can either be used to mitigate revenue budget pressures or reinvested in the capital programme.

Thorough analysis is needed to ensure that estimates of savings are robust; claims that are not backed up by evidence should always be treated with caution. However, excessive caution can result in paralysis.

Invest-to-save schemes

Invest-to-save (or spend-to-save) schemes are capital projects that are expected to achieve an overall net saving in the long term. The investment improves or replaces existing facilities resulting in reduced maintenance and other operating costs, with the long-term savings exceeding the upfront capital expenditure and any related financing costs. A good example is the Glasgow street lighting scheme (see the box below), which demonstrates how a project aligned to corporate objectives can be self-financing over its lifecycle.

Invest-to-save schemes are not a new idea, but have tended to be considered as a marginal addition to the overall capital programme, perhaps providing a rationale for a slight increase in borrowing. In the new era of austerity they deserve to be given more prominence in public sector capital strategies, with project evaluation criteria weighted accordingly.

Generating income

Another way to achieve an overall improvement in the organisation’s long-term financial position is to invest in schemes that generate new income streams or that protect or enhance existing income. Where, for example, an organisation owns commercial properties that generate a rental income, it might choose to invest in these properties to make them more attractive to potential tenants and thereby increase the income it receives.

8.3 Innovative delivery models

Innovative delivery models, such as LABVs, can sometimes offer the prospect of ‘more for less’: either more investment in assets for a given level of capital funding or more efficient use of assets, reducing the need for capital investment.

While the majority of innovative schemes are successful, they are, almost by definition, risky. There are numerous examples that have looked good on paper, but have failed to achieve the expected results. A recent example is Surrey Police’s abortive ICT project, SIREN, which was the subject of a public interest report published in June 2014 by the auditors, Grant Thornton.

Where these schemes are used primarily to secure investment in assets, as in a PFI contract, the private sector supplier incurs significant financing costs, which the public sector organisation pays for sooner or later through the contract charges. Since public sector entities can usually borrow more cheaply than the private sector, it is important to ensure in these cases that the value for money benefits clearly outweigh any additional costs of borrowing.

That is not to say that innovative schemes should be avoided, but that a prudent approach needs to be taken to considering the risks and the long-term implications for the revenue budget. Proper professional advice should be obtained where the appropriate expertise is not available within the organisation, but advice offered by consultants who may have a vested interest in promoting a product that enables them to earn substantial fees should be treated with caution.

Robust procedures and governance arrangements need to be in place so that innovative proposals can be fully considered, properly compared with other options and agreed in a transparent way.

8.4 Using assets more efficiently

8.4.1 Introduction

There are many ways in which public sector organisations can reduce their use of assets relative to the value of the services they provide. These usually involve increasing the use of individual assets, particularly buildings, so that either:

• ■the overall portfolio can be reduced, or
• ■increasing demands on services can be met without the need for a corresponding increase in the volume of assets required to provide those services.

It is beyond the scope of this guide to provide comprehensive advice on this subject, but the examples in the following sections illustrate the point and may stimulate thinking among those organisations that have not yet considered these kinds of options.

8.4.2 Rationalising office space and hot-desking

With the squeeze on revenue and capital budgets, but continuing pressure to maintain frontline services, rationalising office space may be an attractive solution. It enables revenue budget savings to be achieved through a reduction in the overall floor area that must be heated, lighted and maintained and through reductions in other property-related costs, such as rents. Capital receipts may be achieved from the disposal of surplus buildings and, in the long run, following the initial outlay to adapt the retained buildings, the need for capital investment will be reduced as a result of a reduction in floor area.

Savings can be achieved simply by reducing office space pro rata to any reduction in headcount, but further savings can be made by reducing space per employee. Many public sector organisations in the UK have achieved this through the introduction of hot-desking. This involves reducing the number of desks to less than one per employee, based on the rationale that at any one time a significant proportion of employees are on leave or out of the office for other reasons such as a site visit or working at home.

The savings achieved by a move to hot-desking can be very significant. A 25% reduction in space per employee is not unusual. There may be scope for organisations that have already adopted hot-desking to reduce their use of office space even further by encouraging employees to work at home more. Some local authorities in the UK have reduced office space to as low as 6m2 per employee.

Coventry City Council (see the box below) is one example of an organisation that is rationalising its office accommodation. This is an invest-to-save scheme and is linked to development of the new Friargate business district and the council’s wider city centre regeneration plans.

Implementing office rationalisation, even without hot-desking, can be difficult, especially where the organisation has a mixture of buildings that are unsuited to modern working arrangements. The introduction of hot-desking is even more challenging; it can adversely affect employee morale and productivity if it is implemented in the wrong way. Employees will not feel valued if they are squeezed into offices too tightly, have to fight for a desk and have insufficient meeting rooms, break-out areas, toilets and kitchens. Also, staff who work at home may not be as productive, especially if they require a lot of supervision.
Hot-desking requires a major change in the culture of the organisation, which cannot be achieved overnight. It may be better therefore to introduce it in stages rather than in a ‘big bang’.

Hot-desking is still a relatively new development in the UK public sector and will no doubt be refined in the next few years. Public sector organisations should therefore keep abreast of emerging best practice and research in this field so that they can make informed decisions about how far they should follow this route.

8.4.3 Dual use of assets

Organisations providing similar services in the same or adjacent localities may have scope for sharing assets that are currently underused, such as a mortuary or a waste disposal facility. Savings may also be achieved through dual use of assets, eg use of a sports hall by a school and the local community.

The principle of dual use of assets can also be applied to different departments within an organisation, eg different departments of a local authority might share vehicles that would otherwise be underutilised.

Dual use is not a new idea, but should be looked at afresh in light of the changed financial landscape.

8.4.4 Shared services and collaboration

A more recent development, which has the potential to deliver substantial savings, is shared services. This is principally a means of achieving savings in staffing costs and other running costs, but it can also bring significant savings in the use of office space and other assets.

Many local authorities in the UK are already sharing back-office functions with neighbouring authorities. This is relatively uncontroversial and relatively simple to achieve. A more radical step, which enables even greater savings to be achieved, is the sharing of frontline services. This is more difficult to achieve politically, particularly for an organisation that has a strong individual identity. The most well-known example of local authorities that are sharing frontline as well as back-office services is the ‘tri-borough’ initiative (see the box below).

The move towards an integrated approach to the provision of health and social care, which requires partnership working between local authorities, clinical commissioning groups and others, is one development that should encourage public sector organisations in the UK to share services and therefore assets.

The One Public Estate is another UK example of how assets can be used more efficiently through collaboration among public sector organisations. The initiative, led by the Cabinet Office and the Local Government Association, encourages organisations to share services and buildings with partners to help reduce running costs and generate capital receipts from the release of surplus property. It was launched in June 2013 in 12 pilot local authorities and extended to a further 20 authorities from August 2014.

One of the pilot projects is the Knowle Green Public Sector Hub, where Surrey County Council, Spelthorne Borough Council, the Ministry of Justice and the National Health Service are working in partnership to integrate public services. It is forecast that this will yield savings of up to 50% in operational costs and generate £15m to £20m in capital receipts.

More information about the One Public Estate can be found in One Public Estate Programme Prospectus (Local Government Association, 2014).

8.4.5 Double-shift schooling

Double-shift schooling is a radical idea that appears in this publication not because it is accepted good practice, but rather as an example of another way of getting more from less.

Under this model the school day is lengthened and divided into two shifts with half the pupils attending in the morning and the other half in the afternoon. This enables the number of pupils educated in a school building to be doubled.

The difference between double-shift schooling and other ways of intensifying the use of assets is that it involves a radical change from customary hours of service provision and working. The same principle could be applied to back-office functions to reduce office space even further than it can be through hot-desking.

This system has been used in developing countries, such as Indonesia and the Philippines, but has not yet been tried in the UK. Introducing it here would be fraught with difficulties, including:

• ■resistance from parents, especially those whose work–life patterns are fitted around the existing school day
• ■resistance from teachers to a radical change to their working hours
• ■effect on pupils of starting school early and/or finishing late and having fewer breaks
• ■difficulty in providing school meals
• ■squeezing out of breakfast clubs, after school clubs and other extra-curricular activities.

While it seems unlikely that this idea will catch on in the UK in the near future, it is being talked about, albeit tentatively, in areas where there is a severe shortage of space for school buildings. A report in the Times Educational Supplement in July 2014 highlighted an increasing problem of encroachment on outdoor play space due to the expansion of schools to meet a growing population. In areas where this problem is particularly acute, unless another solution is found, a move to double-shift schooling could eventually come to be seen as the lesser of two evils.