PublicFinance
The business monthly of the public sector
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Issue 3 March 2015
MARCH 2015
Broadcast news
AN APPLE A DAY...
The BBC’s finance chief on her efficiency vision
PF Perspectives Sir Derek Myers outlines a new look for public audit
The big issue Latest developments at the municipal bond agency
Public health’s mission to keep illness at bay
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PublicFinance
CONTENTS
March 2015
24
Features
‘We’ve all been conflating good health with the NHS. Everybody is making the argument about how they’re going to put more money into the NHS and yet we know that won’t of itself improve health’
24 COVER STORY Healthy options A new national agency – Public Heath England – is distributing the £2.8bn grant to councils as they take on the task of commissioning services and improving the health of the people. Vivienne Russell reports
30 Programme of change at the BBC Anne Bulford has the job of knocking the BBC’s finances into shape. So why is she so bullish?
36 No more back-seat driving Sir Derek Myers argues that public audit needs to become more interventionist in an essay from PF Perspectives, introduced on page 39
19 Top 50 Trailblazers Applauding innovation in public finance
40 Meet Mansell Street CIPFA moves into its new home
30
Regulars 4
Leader The health dividend
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Second thoughts David Lipsey says the chancellor is trying to have his cake and eat it
6 News Independent Commission on Local Government Finance calls for decade of devolution; LGPS partnership formed to boost infrastructure investment
44 Need to Know
8 News Analysis Councils embrace the first ever issue of a UK municipal bond, due in April
42
On Account CIPFA on the perils of neglecting risk and assurance in the public sector
10 Opinion Jonathan Carr-West on Rotherham; John Perry on council housebuilding; and Ian Ball on the Greek election
43 Smart Thinking? Smart cities are not enough. Tomorrow’s world needs smart communities
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Voice of the Nations Scotland’s benefits split is a ‘political fix’, says SCVO’s Martin Sime
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Professional Development Hire an apprentice. It all adds up
46 48
Numbers Game Cipfa Events
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Watchdog Watch
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18
Restless Nation
22
Letters
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CONTACTS
Leader The health dividend
I
t’s election time. So naturally the NHS – its current troubles and future fate – is high up the political agenda. Polls indicate that it still tops voters’ concerns. There’s no shortage of ammunition to fuel the debate. A rash of ‘major incidents’ point to a mounting A&E crisis, with four out of five acute trusts reporting a deficit. Meanwhile a row has erupted over next year’s hospital funding tariff. The King’s Fund think-tank has concluded that Andrew Lansley’s NHS reforms were ‘damaging’ and a ‘strategic error’. Former health committee chair Stephen Dorrell calls them ’the biggest mistake of this parliament’. None of which is the kind of news the government wants in the run-up to election day. Even so, the Opposition’s attempts to make capital out of the coalition’s difficulties have been undermined by political infighting. At root, the rows are about financial credibility. All the main parties have pledged extra NHS funding (who would dare not?). But none have coherent answers to the really tough questions about sustainability. Step forward public health and its close cousin, prevention. Both get a starring role in the NHS Five Year Forward View, which sees big savings from tackling the drivers of ill-health. In fact, quietly, without fanfare, local authorities have been doing just that. Public Health England has been overseeing the transfer of public health responsibilities from the NHS to local government (pages 24-29). And local councils are enthusiastically using their new powers to – in the words of one chief executive – ‘throw the kitchen sink’ at health inequalities. All of which makes good economic sense. The problem is, there’s not that much to throw. The £2.8bn public health grant has been frozen for next year, and there are unresolved issues about its distribution. Nor is it clear whether the funding will be ringfenced in future. Many of the things councils want to do are in precisely the areas suffering cutbacks. Expanding recreational facilities, or curbing fast food outlets, for example, are not priorities for authorities struggling to meet even their statutory requirements. And if preventative remedies (remember Wanless?) were hard to implement in the years of plenty, that’s even truer now. All the more reason then to take seriously the recommendations from the Independent Commission on Local Government Finance about promoting local fiscal self-sufficiency (pages 6-7). Councils are good at being resilient and self-reliant. And long-term, locally-delivered health initiatives could certainly come to the aid of a beleagured NHS. But without the financial clout to make well-intentioned resolutions a reality, they remain just that – good intentions.
■ Judy Hirst ASSOCIATE EDITOR letterstoeditor@publicfinance.co.uk
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PublicFinance MARCH SEPTEMBER 20152011
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Second thoughts pfOpinion
■ David Lipsey y
Enjoying your cake, chancellor? There’s no logical connection between £10m to pay for more doctors and the £1bn in fines levied on banks for Libor rigging So £10m in ‘golden hellos’ for extra GPs in deprived areas is to be funded from £1bn in fines levied on banks for the Libor scandal; what’s not to like? Well, for this commentator, quite a lot actually. First, it is clearly a lie. The £10m will come from the Exchequer. It is true that £1bn will also come to the Exchequer in fines – but there is no logical connection between these facts. Or rather there is, but it is a sordid one: namely that the politicians are again at the business of having their cake and eating it. The cake is the spending on GPs, which they reckon will be popular. However, if it had to be paid for by the taxpayer, it would be less popular. So summon up the villainous banks, say you are making them pay for the virtuous doctors, and the best of both worlds is yours. The willingness of George Osborne to peddle this stuff is a measure of the man. Previous chancellors have understood
the value of austere Treasury doctrines for the long-term control of the public finances. Hypothecation, for example, using one source of revenue to pay for a bit of spending, is terribly dangerous. If the money is used for purpose A, it is not available for purpose B – and before long you end up without the general taxes to pay for wider public spending. Another heinous example of poor government behaviour is the coalition’s decision, backed by every national political party except Ukip, to lay down by law that 0.7% of national income is to be spent on aid. This means that at the end of each year there will be an unholy rush to push aid spending out the door to meet the target: as the independent National Audit Office has pointed out, that means the best money may be poorly used. Nasty dictators who hope to purloin it for their own pockets will be purring with pleasure at this misguided measure. Every time you say how much must be spent on one bit of public spending, you lose budgetary flexibility. So now aid spending is fixed. That comes on top of health service and education spending, which is ringfenced against cuts. So
THE CHANCELLOR WAS ONCE A POLITICIAN WITH AN EYE ON THE NATIONAL INTEREST AS WELL AS THE NEXT ELECTION. CAN ANYONE IMAGINE ROY JENKINS BEHAVING LIKE OSBORNE?
health spending is protected. But spending on social care is being squeezed so only those with the most substantial needs receive help. Result: hospitals stuffed with patients who could be cared for in the community if help was available. Accident and emergency departments this winter have been bursting with elderly people who could have been cared for better and more cheaply at home – had the budget been available. Paul Johnson of the Institute for Fiscal Studies points out that if some bits of spending are guaranteed while the total is being cut, other bits of the budget end up being slashed. By the end of the next parliament, spending on unprotected budgets will be down 41% over the period from 2010. You may look in vain for a copper on your street. Of course, this is not the first government to try to find ever more ingenious ways of bribing voters with their own money. However, a measure of continence used to apply. Yes, Cabinet ministers would seek to bend the rules to buy popularity, however, the official Treasury remained an austere bastion of righteousness. Invariably it had in this the support of the chancellor – a politician, but a responsible politician, with an eye on the long-term national interest as well as the next election. Can anyone imagine Roy Jenkins or Nigel Lawson, let alone Stafford Cripps, behaving like Osborne? Politicians bend the rules of sensible governance more and more to try to grab votes by illegitimate means. Yet – here’s the strange thing – the more they do it, the less they succeed. The public may not be expert in the rules for sensible management of the public finances, but can spot a fiddling chancellor when they see one. David Lipsey is a Labour peer MARCH 2015
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News Local Goverment Finance
Give councils tax control in ‘decade of devolution’ national settlement from a new Groups of local authorities should be independent body. given complete control over council tax, ‘The core of the commission’s including the value of bands and the proposition is devolution of powers, timing of revaluations, the Independent funding and ultimately taxes to subCommission on Local Government national entities that are ready for that Finance has recommended. step,’ the report stated. ‘As individual The high-level commission, which areas succeed to take charge of their own was formed by CIPFA and the Local destiny others will grow in confidence to Government Association, said there follow and self-sufficiency in our sense should be a decade of devolution to can be achieved over a 10-year period of equip councils with the funding and reforms.’ fiscal powers needed for an era of lower Tony Travers, a member of the resourcing and rising demand. commission and professor in the Under the proposals, all councils Department of Government at the would be given full London School of control of council tax Economics, told Public Pioneer areas discount schemes, Finance that without currently set nationally, reform, local government and would retain all faced resources ‘simply The commission calls for business rates. draining away’ in the devolution to sub-national entities such as combined Further powers would next parliament. authorities of councils that be given initially to what He added: ‘The idea of meet governance criteria the report calls ‘pioneer becoming self sufficient and accept a long-term areas’, most likely would in the short term settlement that includes taking responsibility for managing combined authorities, create a far more stable grant distribution. These areas which would be environment. Even if the would need to prove they have: responsible for the government did a deal ■ A well-articulated business number and value of with local government case setting out how better council tax bands. This that accepted that local outcomes will be achieved. would include control resources would decline ■ An effective economic over when properties are more than they have up footprint. revalued, which has not to now, a settlement in ■ Robust and visible happened since the which local authorities leadership. current system was knew they would be able ■ Mature governance introduced in 1993. to rely on their own arrangements. These pioneers would resources would allow ■ Sound risk management. also take responsibility them to plan.’ ■ Strong relationships across for distribution of Approval of pioneer the full range of local public government funding areas would be, he said, services. within their area, after a the realistic way through BY RICHARD JOHNSTONE
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which Whitehall might agree to a large increase in local powers. ‘They need to be able to convince national government that they are capable and that the arrangements would be accountable,’ he said. Fellow commissioner and National Institute of Economic and Social Research director Jonathan Portes said the need for reform is urgent due to the ‘obvious tension’ of increasing powers for the Scottish Parliament recommended by the Smith Commission, as well as the pressures on public spending. The current funding system means councils are restricted in how they can spend money or deliver services, Portes added. ‘That is even worse in a time of declining public expenditure because of the strong incentives on central government to cut local government but not to take responsibility. This is obviously what has happened in this parliament but might happen in the next parliament under any government.’ Portes said that ‘radical change’ on council tax is vital as it represents the
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publicfinance.co.uk/news Metropolis now: The commission says powers should be rapidly devolved to combined authorities such as Manchester
KeyRecommendations ■ Independent review of the functions and sustainability of local government to be undertaken ahead of the next spending review to assess whether councils are appropriately funded to meet statutory duties, particularly for social care. ■ Independent body formed to advise Whitehall on local government funding needs and allocations to local authorities and sub-national areas.
only way to have a sustainable tax base for local government. The powers being initially offered to all authorities represent a bare minimum of what is needed, he told PF. ‘The degree of autonomy that we propose in the very short term for all areas is a sufficient start, but I want to see us quite quickly moving to what we’re proposing for pioneer areas, which is giving them control over rates and bands. ‘My view is that should be quite light touch and the presumption should be, if you have sensible governance arrangements that should be enough. Central government should not insist that every ‘i’ is dotted and ‘t’ is crossed before doing anything.’ Travers added that once some pioneer areas had extra powers, it would become more difficult to resist them applying to all places. ‘If Greater Manchester [which has agreed two devolution pacts with government since 2010] keeps saying that it will have more power and resources – and as long as they’re given them – I think others would take the risk. Photo: Alamy
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For all authorities
For pioneer areas
■ Abolition of the referendum cap on council tax increases. ■ Full control of council tax discounts. ■ 100% retention of business rates and consultation on localisation of business rate relief. ■ Adoption of multi-year budgets to enable effective financial planning for local authorities and other public sector services.
■ Phased introduction of place-based budgets for areas ‘willing and able’ to take on this reform. ■ Power to determine the number and value of council tax bands and when properties are revalued. ■ Creation of local public accounts committees to scrutinise value for money in all public services.
‘The logic for equalisation in subnational areas is that in most areas you have got better off and less-well off places. Why couldn’t the wider area have its own redistribution mechanism rather than having it imposed from the centre?’ CIPFA chief executive Rob Whiteman welcomed the report, saying it ‘establishes a clear direction of travel that the government has the capacity to implement’. He added: ‘CIPFA asked the commission to recommend pragmatic solutions, which wouldn’t increase government spending, but would allow financial sustainability for public services. ‘Although the commission has done a good job in outlining realistic recommendations there is room to go even further. The debate around devolution has provided local authorities with a unique opportunity to create a new financial model that allows those delivering local public services to respond creatively, even when facing long-term financial constraints.’
He said the scheme, announced in January, was also intended to show that LGPS members could undertake reforms at a time when ministers have called for change. The Department for Communities and Local Government has consulted on greater use of common investment vehicles, while the government has also backed the creation of a capital investment platform to get pension funds to invest. Quinn said the government and local authorities rarely look to pension funds for investment. ‘We are not the first port of call for government – be it local or national – looking for significant investment,’ he said. ‘We hope that this is going to start that process where in the future, UK pension funds are the first port of call for UK infrastructure activity.’ Quinn, who is also chair of the Local Authority Pension Fund Forum, called on other funds to consider joining the platform. ‘There’s a lot we can do and we can grow that pot by encouraging others to join us. I want to get to the point in time where we in the UK, through our collection and collaboration of pension funds, have a multi-billion pound pot. We have to start somewhere and this is our start.’ CIPFA’s pension technical manager Nigel Keogh said joint working and collaboration is ‘very much the direction of travel’ across the LGPS. ‘One of the issues that a lot of smaller funds find, particularly when it comes to infrastructure, is that it’s expensive to access,’ he said. ‘A fund that is comprised of lots of local authorities could access that market a lot cheaper. ‘So it may prove quite attractive to other funds to join with the GMPF/ LPFA fund so they can access that investment market.’
Infrastructure
£500m fund ‘is just the start’ BY RICHARD JOHNSTONE
A £500m infrastructure fund being created by two local government pension schemes could expand to form a multibillion pound investment vehicle across the sector, a key figure in its formation has told Public Finance. Kieran Quinn, chair of the Greater Manchester Pension Fund, said the partnership with the London Pensions Fund Authority was a first step towards making the Local Government Pension Scheme ‘the first port of call’ for UK infrastructure investment.
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News
Analysis Local government finance
Bond agency set to break new ground Councils are embracing a fundraising scheme that could save them nearly £1.5bn over 30 years even if they only refinance half their debt. Richard Johnstone on the first ever municipal bond issue With days to go until the new financial year, local authorities across the country are putting the finishing touches to their budgets. Spending plans for 2015/16 will deal with the impact of funding reductions for an unprecedented fifth successive year. April could also prove a historic month for UK local government finance for another reason, with the first ever issue of a UK municipal bond set to take place. The scheme, which has been in development by the Local Government Association for more than three years, was initially devised after Chancellor George Osborne increased the interest charged by the Public Works Loan Board to 100 basis points above the rates on government gilts in 2010. Now, following a cut to +80bps in 2012 for authorities that produced information on their requirements in advance, the bonds project is also intended to increase the sector’s financial independence from the Treasury. Under the plan, an LGA-backed firm called the Local Capital Finance Company has been formed to issue bonds. The money raised from investors will then be lent onwards to councils to either invest in capital projects – bonds have already been used by Transport for London as part of the funding package for Crossrail – or to refinance existing loans. 8
An analysis by the LGA found that councils could save nearly £1.5bn over 30 years if just half of council debt was refinanced through bonds. Speaking to Public Finance, Aidan Brady, who led development of the agency’s business case for the LGA and is now interim managing director of the company, says councils have embraced the scheme. Nearly 50 authorities are already either signed up to be LCFC shareholders or expressing an interest, with more expected in the weeks ahead. ‘We’re building our shareholder base and we’re getting expressions of interest from councils on a regular basis,’ he says. ‘I think we’re getting a lot of positivity from the sector and a lot of people want it to succeed. The numbers of people who are naysayers are reducing, I’m certainly seeing a lot of positive feedback.’ For councils, there are clear potential benefits. ‘It’s the opportunity to drive greater value for money and lower borrowing costs for councils,’ says Gill Kilpatrick, treasurer at Lancashire County Council. ‘There are associated benefits of more control and selfdetermination for local government, but ultimately the absolute driver is to reduce costs for council taxpayers and to deliver better value for money for councils.’ In preparation for LCFC’s launch, Kilpatrick says her authority’s treasury
management strategy for 2015/16 would authorise it to participate. Lancashire is also already one of the committed shareholders of the new firm. ‘Quite some time ago we put the appropriate governance in place when we put a proposal to our cabinet in preparation,’ Kilpatrick adds. ‘Lancashire has always said the municipal bonds agency is one tool in our treasury management toolkit. Because our ultimate responsibly is to provide value for money for taxpayers, we will be looking at what the most cost-effective way of borrowing is, at the point that we need to move into the market.’
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QuoteUnquote There are associated benefits of more control and selfdetermination for local government, but ultimately the absolute driver is to reduce costs for council taxpayers and to deliver better value for money. Gill Kilpatrick, treasurer, Lancashire County Council
We’re getting a lot of positivity from the sector and a lot of people want it to succeed. The numbers of people who are naysayers are reducing. I’m seeing a lot of positive feedback. Aidan Brady, interim managing director, Local Capital Finance Company
Tunnel vision: Bonds have been used by Transport for London as part of the funding mechanism for Crossrail
The plan is gathering momentum across local government, she adds. The appointment of former LGA leader Sir Merrick Cockell as the LCFC chair in January to lead the first issue has helped further. ‘As the first issuance and the second issuance is successful, that is what will galvanise most local authorities [to join],’ she says. ‘I don’t think it will take long. If you think about how local government tends to work, you have a significant number of authorities that are moving the agency forward, and then
success convinces others.’ Brady agrees that once the bonds company is established and demonstrates it can provide cheaper borrowing than the PWLB, more councils will want to borrow from it. Eventually, the aim is for the majority, if not all, councils to become shareholders of the firm, he reveals. When it is able to demonstrate savings versus the PWLB, it could become the first point of call for a local authority wanting to borrow. ‘For the agency, we are already in a strong position with nearly 50, and building, councils either shareholders or committing to become shareholders,’ he adds. ‘The broadest sector involvement further strengthens the agency and makes us a more attractive counterparty for funding providers.’ As well as getting formal commitments from councils to sign up to agency processes – which include a proposed guarantee where councils provide collective backing of their fellow borrowers’ obligations – a key final step before any issue is for LCFC to receive a credit rating. Brady was anticipating that work to get a rating will begin in ‘short order’ as PF went to press. Matt Thomas, a director in debt capital markets at Barclays Corporate, is following the agency’s development. He says that achieving a good rating is critical to providing the cheaper borrowing sought by town halls. ‘The key objective here is trying to achieve pricing that is as favourable as possible versus the PWLB,’ Thomas tells PF. ‘To do that they will need at least a single credit rating, and in an ideal world multiple agencies – the stronger the credit rating backdrop, the better in terms of the ultimate spread outcome.’ An issue in April would coincide with
the peak borrowing month for the PWLB, but it is vital to get the credit rating firms comfortable with the structure of the agency, he adds, including the crossguarantee. The business case for the agency stated this level of security for investors could reduce interest rates charged by as much as one-third compared to the PWLB certainty rate, or about 25 basis points. With this structure in place, Thomas says the initiative will come into its own once a large number of councils are involved, as the scale of local government can drive down borrowing costs. ‘We’re hoping that the credit agencies will take significant comfort from the diverse borrower base within the agency and recognise the strong internal credit processes being put in place. It’s also important to remember that the UK Government sits behind the whole sector via the PWLB. ‘Once it gets to the critical mass of borrowers within the agency, each individual name within the agency is less important. Strength is very much in the diversity of numbers – as it grows, bond investors will become less focused on the individual constituents of the agency and more comfortable with the guarantees in place between its members.’ As well as being the start of the financial year, April will also be the peak of the general election campaign, which Brady acknowledges as a potential factor in any issue as the market quietens towards the vote. However, he concludes: ‘I’d certainly like to get something done in that timeframe. We still have some work to do, but equally we want to get going, we don’t want this to be an academic exercise. We want to start delivering cheaper finance to councils.’ MARCH 2015
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A test of localism by Jonathan Carr-West Safe as houses? by John Perry Greek election turned on a doubtful view of debt, by Ian Ball
Opinion Jonathan Carr-West
A test of localism The commissioners sent in by Eric Pickles to run Rotherham council must make themselves primarily accountable to local people, not to Whitehall The serial failings in Rotherham Metropolitan Borough Council, set out in such painful detail by Louise Casey’s report and the tragic impact of those failings on so many vulnerable people, have appalled people across the country. There will be a lot of sympathy, therefore, with Communities Secretary Eric Pickles' view that: ‘These are exceptional circumstances that justify Whitehall’s intervention so we can make the council address its failings and prevent this ever happening again.’ His intention is to appoint five commissioners to take over the functions of the council’s cabinet ahead of all-out elections in 2016. But while these circumstances are undoubtedly exceptional, Pickles’ intervention is not. In November, the secretary of state appointed three commissioners to oversee grant giving, appointments, property deals and the administration of elections in the London borough of Tower Hamlets. And following a damning report by Sir Bob Kerslake into performance at Birmingham City Council, he made it clear that he would also look to intervene there if there was no improvement within the year. In Tower Hamlets and in Rotherham, just as in Doncaster in 2010, there are clear and specific failures that need to be addressed. But it is worth asking what is the best way to address these failures? Is this type of intervention from the secretary 10
of state compatible with his commitment to localism? When is it acceptable for the government to step in and ‘rescue’ communities from their own councils? Why does Westminster’s democratic mandate trump that of a local authority? What is the relationship between performance management and local democracy? How do we know if central government’s interventions are successful? These questions are only likely to become more pressing as devolution becomes a more entrenched feature of the political landscape. The coalition government is committed to devolving powers to combined authorities and shadow chancellor Ed Balls, a man who once responded to service failure by sacking the responsible officer on live television, has pledged that a Labour government will devolve £30bn to city and county regions. These commitments are welcome,
The ballot box is the foundation of our democracy but not its entirety. From town hall meetings to participatory budgeting, commissioners can be primarily accountable to local people
though many would argue they do not go far or fast enough. Britain remains one of the most centralised countries in the world – with 98% of taxation and 80% of public spending controlled by the centre. Current policies loosen the fiscal and statutory apron strings between central and local government but do not cut them. Yet there are compelling reasons to believe that the responsive, preventive, people-centred public realm we need to cope with the challenges of the 21st century requires a level of integration and adaptability that can only be delivered locally. Nonetheless, even the most ardent localist cannot pretend that there will be no failures within local government. Post-Audit Commission, there is work to be done about how we define failure locally and how we establish local frameworks that help identify and mitigate it. But failure in itself is not an argument against localism. Indeed the failures we have seen in Rotherham illustrate exactly why we need public services that are accountable to local people and responsive to their needs. Such failures are rarely failures of local government alone, but also involve failure by the police, the health service and a range of other agencies (most of them controlled by central government). Where those failures are complete and catastrophic, however, it is appropriate for local leadership to take full responsibility, as the leader and cabinet have done in Rotherham by resigning, and for central government to support swift democratic renewal. Addressing the Commons about his plans for Rotherham, Pickles carefully framed his intervention in these terms: ‘The action I am proposing … is to
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Discredited structures: Eric Pickles said he acted to restore good local governance and pride to the Riverside House headquarters of Rotherham council
restore good local governance to Rotherham, where all can have confidence again in their council and they can take great pride in their borough.’ The commissioners he appointed would be charged with progressively returning functions to council control as quickly as possible, he told MPs. It is vital that they do so, but the commissioners also need to make sure that in their day-to-day operations they are making themselves accountable to local people. Given the scale of the challenge facing them, it will be hard to find the time, energy and means to do so, but it will be crucial to the success of their intervention. Many of the local structures that might help hold the commissioners to account, Photo: Alamy
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such as overview and scrutiny committees, will be discredited by the failure of the previous regime. It is important that the commissioners engage with them anyway, so that they can begin to restore the trust of local people. The commissioners also need to engage directly with local people. The ballot box is the foundation of our democracy but not its entirety. There are a host of more direct forms of participative democracy, from town hall meetings to participatory budgeting and a range of new digital democracy tools. The commissioners must make full use of these to ensure that they are responding to the needs of the community, communicating clearly, giving clear criteria to judge the success of their intervention and clear channels
to feed back upon it. The commissioners may report to the secretary of state but they can still be primarily accountable to local people and not to Whitehall. This goes to the heart of the question. If we believe in local democracy – the right of local people to shape the places they live in, the services they use and the lives they lead – then we should always want local government to be in the driving seat. If this becomes impossible the question is not whether central government intervenes but how. Does it look to take control for itself or to restore control to local people? That is the true test of localism. Jonathan Carr-West is chief executive of the Local Government Information Unit MARCH 2015
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Opinion John Perry
Safe as houses? A Whitehall-backed housing review has suggested councils could borrow from general funds if they have reached their Housing Revenue Account borrowing cap. But would such an approach make sense?
New build: Social housing for young people under construction by Barking and Dagenham council, in east London
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When Natalie Elphicke and Keith House launched their new report on local authorities’ role in house building earlier this year, they called on councils that have reached the borrowing limits on their housing accounts to borrow from their general funds instead. But is this a good idea? The Elphicke-House Review was specifically restricted by its terms of reference from looking at options that would breach the government’s fiscal rules or require accounting changes. So although much of the evidence to the review stressed the need to reconsider
the borrowing caps that apply to councils’ Housing Revenue Accounts (HRAs), Elphicke and House weren’t able to do this. Instead they questioned why councils were so concerned with the restrictions when, outside their HRAs, they could borrow freely (only needing to stay within prudential rules). Some councils are already doing this and there are three main reasons why. First, some 159 local authorities no longer have council houses, so if they decide to build they are unlikely to want to recreate their cumbersome Housing Revenue Account. Second, houses built outside the HRA can be let at higher rents and are not subject to Right to Buy. And third, councils can borrow to reinvest the money in housing provided by an arm’s length management organisation, or indeed a housing association. So what’s the problem with doing this? Well, there is a reason for the caps on HRA borrowing – it’s a very effective basis on which to borrow, because it has a large, secure revenue stream and asset base. The Treasury knows this and has acted to ensure that borrowing is kept within tight limits. To borrow outside the HRA, councils need an income stream to support the borrowing costs. Obviously they could put in free land to reduce the cost of a scheme, but even so they are going to have to build for market or near-market rents, or a combination of sale and nearmarket rents, to pay the loan costs. Where there is a very good market for such properties these schemes may work – but they do little or nothing to produce housing at genuinely affordable rents. The Elphicke-House Review makes much of the idea of setting up local housing companies, owned or partowned by the council and financed by borrowing outside the HRA. There are already examples of these: Ashford council has its own company and both Sheffield and Gateshead councils have set up joint venture companies for house building. However, there are risks involved. Photos: Alamy/Shutterstock
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Ian Ball These bodies are not easy to create and manage effectively, and councils have to be sure they’ll deliver the product they want and are financially robust. If the council is going to give these companies land, this has an opportunity cost, as the land becomes no longer available for council housing. Elphicke-House makes little mention of affordability, yet this is bound to be a consideration for local authorities that want to build – if possible – at social rents. They can only do this within the HRA, using the revenue stream from existing properties to support the borrowing. If Elphicke-House had wanted a case study of councils doing this, they could have looked to Scotland, where councils are building proportionately 10 times as many council houses as are being built in England. They are doing it with little reliance on grant, using their HRAs. Why not repeat in England the same rules that apply in Scotland and get genuinely affordable new homes? The odd thing is that borrowing outside the HRA has exactly the same impact on government borrowing (under the UK’s present rules) as HRA borrowing does. The reason it isn’t restricted in the same way is obviously that the Treasury doesn’t expect it to be a very attractive option for councils. But if the government is less worried about borrowing levels than we suppose, and sincerely wants councils to build more homes, why require them to do it outside the HRA when it would be much more secure to rely on the HRA’s income from rents? Local housing companies and direct non-HRA borrowing can both play a role where there is such a housing shortage that the borrowing stacks up on the back of the scheme itself. But these circumstances are not widespread and new joint ventures can be risky. Councils are bound to question whether they represent good ways of using their land, against the alternative of trying to build within the HRA and deliver housing at social rents. Many are going to conclude that their best option is to do the latter, even with the continuing restrictions on HRA borrowing. John Perry is a part-time policy adviser to the Chartered Institute of Housing
Greek election turned on a doubtful view of debt Syriza’s election victory focused global attention on the country’s problematic public finances. But one of the myths about Greece is that is has a debt problem at all Ahead of the Greek election, media reports gave centre stage to the debt issue. Yet the election was, in one key respect, a travesty of democratic process. Electors were given a choice between political parties and policies that was based on a lie. The choice was which party would deal best with Greece’s huge and unsustainable debt. The lie was that Greece has huge and unsustainable debt. Had it been recognised that net debt is less than 20% of GDP, imagine how different the election would have been. The policies would have addressed how the economy could be made to function more effectively, and how the public finances should be managed. First, the facts: Greece’s gross debt is widely reported as being 175% of GDP. This is a number that Klaus Regling, managing director of the European Stability Mechanism, describes as ‘meaningless’, and it is. Accounting for Greek debt has been, well, Greek accounting. Measured according to International Public Sector Accounting Standards, Greece’s gross debt is 68% of GDP. The difference reflects, primarily, the unprecedented debt reduction brought about by restructurings in 2011 and 2012 that pushed debt maturities far out into the future and significantly
reduced interest rates. In reporting the lower number for gross debt, international accounting standards reflect economic reality and the time value of money, a principle recognised at least since the 13th century. But gross debt is not the best measure of debt burden or fiscal strength. Governments with strong fiscal management regard net debt as a better measure, and Greece’s net debt is 18%. The difference between 68% and 18% reflects the financial assets of the Greek government. And 18% means Greece’s debt burden is markedly lower than that of most European governments. So the election was a travesty – sound and fury about a problem that does not exist. Greece does not have a debt problem, but that does not mean it does not have a problem. The Syriza-led government must get a clear view of its real situation, and determine a path forward on that basis. That path should include negotiations with the troika – the European Union, European Central Bank and International Monetary Fund – based on the real numbers. It means reform of accounting, budgeting and financial management systems. It almost certainly implies a lesser need for austerity. Debt relief Greece has already received gives it breathing space to address the real problems of its economy. Key among those is building institutions that create confidence and trust in citizens and investors. Ian Ball is chair of CIPFA International
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Watchdog
Watch WHAT’S GOING ON IN THE WORLD OF REGULATION AND INSPECTION National Audit Office The Treasury needs to undertake a rigorous assessment of the £40bn UK Guarantees programme to determine whether government underwriting is necessary in all cases and work out if the projects will deliver public value, the National Audit Office has said. Under the scheme, the Treasury assumes the risk faced by lenders in return for a fee, promising to repay in full and on time, regardless of a project’s performance. Once guarantees are issued they cannot be withdrawn or the fee changed if risks or prices alter. The NAO said that, while the scheme can help to progress infrastructure projects, eligibility criteria have not been strictly applied, nor have tests determined if a guarantee is necessary. It was not confident that the benchmarks measuring risk to the taxpayer are sufficiently reliable. The Treasury responded that it has ‘full confidence’ in the scheme and all projects endure rigorous due diligence, comparable to the private sector. Separately, the NAO found that cancer treatment outcomes vary significantly across England despite improvements to NHS provision since 2010. Analysing quality of treatment, auditors found survival rates for people diagnosed since 2008 have improved. However, five-year survival rates for those diagnosed between 2000 and 2007 remained about 10% lower than the European average. Patients aged 55-64 are 20% more likely to survive for at least a year after diagnosis than those aged 75-99. There would be nearly 20,000 fewer deaths from cancer each year if mortality rates 14
Treatment outcomes: About half of NHS cancer patients have radiotherapy as part of their treatment
for all socioeconomic groups were the same as for the least deprived. The auditor general gave the Department for Education an adverse opinion after concluding it failed to meet Parliament’s accountability requirements on academy spending. Amyas Morse said the level of error and uncertainty in the statements was both material and pervasive. He also qualified his opinion because the department exceeded one of its expenditure limits. Morse said the DfE faces financial management challenges in accounting for the spending of academies, alongside its executive agencies and public bodies. For 2013/14, there are 2,591 bodies consolidated into the group financial statements, including 2,585
academy trusts operating 3,905 individual academies, with different reporting periods applied. CIPFA chief executive Rob Whiteman said the qualification demonstrates the difficulty in providing consistent, timely, consolidated reporting for relatively new organisations such as academies.
Charity Commission The Charity Commission is improving its regulatory regime after criticism of its effectiveness, the National Audit Office has found. After reporting in December 2013 that not enough was being done to identify and tackle abuses of charitable status, the NAO’s follow-up said a ‘credible’ change programme is now in place.
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COMINGUP… LAST WORD ON GAMES Audit Scotland is expected in March to issue its final report on last summer’s Commonwealth Games in Glasgow. It will determine whether the games were delivered within the £563m budget, what extra costs were incurred by public bodies and what progress has been made to secure the games’ legacy. It is intended to provide assurance to the Scottish Parliament, Glasgow City Council and other stakeholders that the games had good financial control and delivered early legacy benefits.
TRAVEL EXPENSES CHECK A National Audit Office team is examining government travel expenditure. Although only a small proportion of Whitehall spending, travel
The charity watchdog has developed a new business model that focuses more resources on high-risk cases and aims to automate low-risk transactions. Under new chief executive Paula Sussex, it has also put in place a plan to become more proactive, boosting investigations through £8m in one-off funding from the Treasury and making better use of enforcement powers. Commission chair William Shawcross said the NAO’s findings were a ‘vote of confidence’ in reform plans. ‘We have much hard work ahead of us and we are not complacent about the effort and the skills that are still needed to achieve our goals,’ he added.
Birmingham City Council Communities secretary Eric Pickles has appointed an expert panel to help Birmingham City Council implement a wide-ranging reform plan, following governance criticisms. This follows the review of the council’s governance by Sir Bob Kerslake, which found successive administrations had not addressed problems faced by the city, including failing children’s services and deteriorating finances. The panel is to be chaired by John Crabtree, a lawyer and former president of Birmingham Chamber of Commerce. Frances Done, former managing director for local government, housing and criminal justice at the Audit Commission, will be the vice chair. The other two members are Leeds City Council leader Keith Wakefield and Cheshire West and Chester chief executive Steve Robinson. Pickles gave Birmingham a 12-month Photos: Alamy
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expenses are of great interest to the public and vulnerable to risk, the NAO says. It will examine the effectiveness of measures introduced by the government in 2010/11 to control travel expenditure as well as the extent of central government spending on travel.
for initial teacher education at Ofsted, said: ‘Early years teachers have a very important role. They help to create a culture in which young children can learn through play, and begin to get used to a structured day. This means they will be more ready to learn when they begin primary school.’
UNDER-FIVES TRAINING REVIEW CQC CONSULTS ON RATINGS From April, Ofsted inspectors are to review the quality of training provided to teachers working with children up to the age of five. This will be the first time training for early years teachers has been inspected and is part of a drive to improve education standards in nurseries. Early years teacher status was created in September 2013 with the same entry requirements as primary school teaching. Jo Morgan, the national director
deadline to improve performance or face government intervention.
Monitor Proposed changes to the NHS tariff system have been vetoed by hospitals and other providers and will now be delayed, health service regulator Monitor announced. Commentators said the ‘unprecedented’ decision put financial planning in the NHS into disarray and cast doubt on efficiency savings. Providers accounting for a majority of NHS services objected to changes planned for 2015/16, which means the national tariff cannot be implemented. Just over a third (37%) of providers objected, but together they supply threequarters of services. Monitor had planned to reduce payments by NHS commissioners to providers by 3.8%. This standard ‘efficiency factor’ is intended to ensure that providers make savings. In a statement, the watchdog said it was considering whether to consult on
Second City blues: An expert panel has been called in to help implement reforms at Birmingham City Council
The Care Quality Commission has been seeking views on a plan to require service providers to display CQC ratings at their premises and online. Ratings tell the public if a service is outstanding, good, requires improvement or is inadequate. The proposal, which would come into force in April, would demand that providers display their ratings in public areas, such as waiting rooms. The consultation closed on February 25.
revised proposals, or to refer the payment arrangements to the Competition and Markets Authority. NHS England’s chief financial officer, Paul Baumann, said that, since overall NHS funding totals for 2015/16 are agreed, any changes to the tariff would ‘be robbing Peter to pay Paul’. This could mean less investment in other hospitals, mental health or GP and community services. Richard Murray, director of policy at the King’s Fund, said rejection of the tariff was unprecedented. ‘It signals that the policy of implementing yearon-year reductions in the prices paid to hospitals for their services has reached the end of the line. ‘It is not clear what the outcome will be but, with just three months to go before the start of the financial year, it will throw financial planning in the NHS into disarray.’
Ofsted Good schools are to be subject to frequent but shorter inspections, Ofsted announced. Setting out what it said are some of the most significant changes in its history, the education watchdog said a common framework would standardise the approach to inspections and help drive up standards. Schools and further education providers deemded to be ‘good’ will be inspected once every three years – with the focus on ensuring that standards are being maintained and leaders have identified areas of concern and are able to address them. The changes will also see all independent non-association schools inspected by Ofsted by July 2018. MARCH 2015
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Voice of the
Nations Scotland
Benefits split ‘a fix’, says Sime NEWS FROM THE DEVOLVED ADMINISTRATIONS BY KEITH AITKEN IN EDINBURGH
Plans by the London-based parties to give the Scottish Parliament limited new powers to shape and set benefits could make life worse for vulnerable people and their carers, the leader of Scotland’s charities sector has told Public Finance. In a forthright interview, Martin Sime, chief executive of the Scottish Council for Voluntary Organisations, dismissed the draft Bill based on the cross-party Smith Commission’s proposals for increased devolution as an unstable and unsustainable political fudge. ‘Smith was never a process that was going to deliver a good result for our people who use public services, or for the aspirations that people have for home rule,’ Sime said. ‘The process is not led by people and their experience and their
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engagement and their ambitions. It’s led by politicians and it’s a political fix of the old-fashioned sort.’ He voiced concern about proposals to split benefits between Westminster and Edinburgh, with the former retaining control over most benefits, including Universal Credit, while Holyrood gains some top-up powers plus responsibility for benefits to ill or disabled people and carers and Social Fund benefits such as cold weather and funeral payments. ‘What’s actually emerged on welfare is probably worse than what we had before, because it’s dragged goodness knows how many more people into having to deal with two different systems, which have different ambitions, which don’t talk to each other, and which are ideologically poles apart,’ Sime said. ‘If you’re an unemployed carer, Poles apart you’re going to have to Martin Sime says splitting welfare engage with the between Edinburgh Scottish Government and Westminster is about how it supports incoherent carers, but you’re also going to have to engage with JobcentrePlus for your Jobseekers Allowance, who will send you off on mandatory activities or you’ll lose your benefit.’ Sime predicted complications over the extent to which support for carers by the Scottish Government might weigh against their UK benefit entitlements, pointing to the
precedent of unemployed charity volunteers having free lunches or bus fares counted against them. ‘There will be more jarring in this new arrangement than there was in the past because, at the moment, carers don’t get anything from the Scottish Government,’ Sime said. ‘The split on welfare is a political split and a political fix, but on the ground it is incoherent.’ All three pro-union parties are committed to legislation soon after the general election and the Scottish National Party-led Scottish Government co-operated with the Smith process. But the fragile consensus has crumbled since publication in January of the draft Bill. First Minister Nicola Sturgeon claimed the Smith plan had been extensively watered down in translation to draft law, while her deputy, John Swinney, identified 12 new Westminster ‘vetos’, a claim disputed by the unionist parties. The Scottish TUC, which was neutral over independence, said the plans would force Holyrood to seek Westminster approval for any new benefit entitlements and shackle Scotland to London’s economic austerity strategy. Citizens Advice Scotland declared itself ‘disappointed and bewildered’ by the limits on benefit powers. Sime told PF the plans ignored the political divergence between Scotland and the rest of the UK. ‘Our politics are different, our health service is different, our public services are different, our expectations about how policy is made are different,’ he said. ‘We are on different trajectories as countries, and the idea that you throw a blanket of a devolution settlement over that relationship and say, “right that’s it, it’s fixed,” they’re kidding themselves.’
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InBrief CASH INJECTION £40m boosts NHS in Wales The Welsh Government has allocated £40m from reserves to help the NHS meet winter pressures. This comes on top of £200m extra previously announced. GP out-of-hours services in Wales had their busiest ever Christmas and New Year, ambulance services dealt with more critically ill patients while accident and emergency saw more patients with acute conditions and complex needs.
POLL TAX ARREARS Liability to pay ends in Scotland Liability to pay historic poll tax debts
ended in Scotland on February 1, the Scottish Government has announced. Arrears collected by councils in Scotland fell from £1.3m in 2009/10 to below £350,000 in 2013/14 and some have stopped collecting the tax, which was abolished in Scotland in 1993.
GROWTH AGENDA NI ‘driving innovation’ in Europe Northern Ireland can help drive public sector innovation across the European Union, finance minister Simon Hamilton said after a visit to Brussels. Hamilton said the EU sees innovation as a priority for driving economic growth and the public
Councillors face 25-year term limit
Photos: SCVO/iStock
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HOME IMPROVEMENT £20m to raise housing quality A £20m home improvement loans scheme launched by the Welsh Government aims to improve poor-quality housing. It comprises £10m over two years to fund interest-free loans up to £25,000 per property. A further £10m for the Houses into Homes scheme offers interest-free loans to owners of run-down properties to bring them back into use for rent or sale.
the way for allowing Northern Ireland to set its own rate of corporation tax with sizeable investments in job creation and skills development,’ Hamilton said.
Wales
Welsh councillors will be able to serve for no more than 25 years and chief executives would also face term limits, under radical plans to reform local government in Wales and make it more open, transparent and representative. The Cardiff executive said the local government white paper would be a ‘new deal’ for Welsh councils, with a smaller number of authorities – down from 22 to 12 – working to fewer priorities. ‘This is about reform not reorganisation. It is about rebuilding councils from the inside out, rebuilding trust and confidence in local government and a new relationship between councils and the people they serve,’ said public services minister Leighton Andrews. ‘This is about profound change in the way councils work and deliver for their communities.’ The proposals include setting out in legislation the roles of council leaders, cabinet members, elected members and chief executives, a stronger role for local audit committees, self-assessments for councils every year and a commitment to review funding mechanisms. The Welsh Local Government Association said it supported many of the proposals but needed time to reflect on the more controversial measures, such as term limits. ‘The WLGA recognises and supports the need to tackle the widespread challenges around diversity and disengagement in democracy generally in Welsh society,’ said the association’s leader, Bob Wellington. Consultation runs until April 28.
sector as an important player within that. ‘This very much chimes with my department’s agenda and the executive’s own innovation strategy,’ he said.
Scotland
Revenue Scotland ‘ready for the job’
Merger candidate: Tenby in Pembrokeshire, one of the counties facing merger in Welsh plans for local government Northern Ireland
Budget deal ‘a sign of maturity’ The Northern Ireland Executive has finalised its budget, after the wrangles over welfare reform that threatened to derail it last year. Finance minister Simon Hamilton said: ‘No budget would have meant no Stormont. Agreeing it in the context of severe pressures on public spending represents a sign of growing maturity.’ Additional allocations of more than £150m provide health and education with signification spending increases. A £20m funding boost was also made to the Department of Justice to help manage police pressures. ‘This budget, and the agreement that has been reached on welfare reform, puts the executive’s finances back on a long-term and sustainable basis. It underpins economic growth and paves
Revenue Scotland, the new tax collection agency in Scotland, is fully ready to take over the job from April 1, Scottish Finance Secretary John Swinney has told the UK Treasury. His assurance follows a report from Audit Scotland in December that cast doubt on whether the new agency’s recruitment and IT were on track. Swinney’s announcement means Revenue & Customs can wind up stamp duty and landfill tax in Scotland from the end of March, ready for their replacement by devolved taxes introduced under the 2012 Scotland Act. The Act also empowers Revenue Scotland to collect a share of income tax from 2016. ‘A group of senior Scottish and UK government officials have agreed that all necessary preparations are now in place and arrangements can now be made to introduce the devolved taxes,’ Swinney said. ‘These two new taxes are the first national taxes for Scotland in 308 years and it is important that they are administered fairly and correctly.’ Scotland’s land and buildings transaction tax, which replaces stamp duty, remains controversial, despite revised rates. Scottish ministers wanted the tax to be more progressive than its UK predecessor, but were unprepared when George Osborne reformed stamp duty rates in the Autumn Statement. MARCH 2015 PublicFinance 17
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