PublicFinanceJuly/August2014

PublicFinance

The business monthly of the public sector

publicfinance.co.uk

Issue 07/08 July/August 2014

JULY/AUGUST 2014

SITTING IN JUDGEMENT How PAC chair Margaret Hodge holds the public sector to account

Can’t pay, won’t pay Chris Giles on Osborne’s £30bn tax black hole

Mike Owen CIPFA’s new president talks to PF about driving change

Doing the maths Kenneth Cukier examines big data in the Big Apple

CIPFA conference special p001_PFIjuly14_cover.indd 1

19/06/2014 10:28

Transformative back office solutions for the public sector

Find out more at the CIPFA Annual Conference: Visit Stand 34 and attend Workshop 1D at 1.30pm on Wednesday, 2nd July ‘How to achieve transformation from the way you manage your budgets’

Contact us: Call 0845 1606162: Visit www.advancedcomputersoftware.com/abs Follow us @advbusiness Advanced Business Solutions is a division of Advanced Computer Software Group

p02_PFIJul14.indd 14

16/06/2014 10:20

PublicFinance

CONTENTS

July/August 2014

Features

‘IF PEOPLE ARE STRAIGHT AND OPEN IN THEIR ANSWERS TO US, THEY WILL GET A GOOD HEARING’

20 COVER STORY The armchair auditor Public Accounts Committee chair Margaret Hodge speaks to Judy Hirst about tax avoiders, transparency and tracking the public pound

26 Driving force CIPFA president Mike Owen talks to Mike Thatcher about his goals for the year ahead and the challenges facing both the institute and public services

30 If truth be told CIPFA’s healthcare roundtable discussed whether finance managers should be open about the effects of cuts on services. Richard Vize reports

20

36 Analyse this Kenneth Cukier and Victor Mayer-Schönberger explain how big data’s progress in New York City is a template for the coming information revolution

26

Regulars 4

Leader Telling it like it is on the difficult issues

5

Second thoughts Chris Giles on the £30bn tax black hole in the public finances

6 News NAO to probe local government financial sustainability; call for long-term spending deals to aid service integration; Birmingham criticises PWLB loan rates

30

8 News Analysis Darra Singh, chair of the local government finance commission, speaks exclusively to PF

Need to Know

10 Opinion Rob Whiteman on civil service reform; Fayezul Choudhury on good global governance

40

On Account John Maddocks reviews the merits of outcomes-based approaches

43 Smart Thinking?

How big a security threat is the increase in hacking and cyber-attacks?

14 16

Voice of the Nations CIPFA prepares a ‘balance sheet’ for the Scottish independence debate

44

Professional Development How to deliver the perfect presentation

46 48

Numbers Game Cipfa Events

PublicFinance p003_PFIjul14_contents.indd 3

Watchdog Watch

43 Subscribe today for the latest expert comment on public policy and finance

18

Restless Nation ‘Cybernats’ and ‘unitrolls’ drag down both sides of the independence debate

Scan here to subscribe to the leading magazine in public finance...

19/06/2014 10:29

CONTACTS

Leader Speaking truth to power

D

arra Singh is the latest in a long line of the great and the good given the unenviable task of chairing a commission into the future of local government finance.

Sir Frank Layfield, Nick Raynsford and Sir Michael Lyons have all walked this path before, and none achieved notable success. The problems are clear – sometimes even the solutions – but the necessary reforms are viewed as impossible for politicians to endorse.

It would be easy therefore to dismiss council finance as ‘too difficult to change’, and assume we just stick with the status quo. But that would be an abdication of responsibility, and would ignore the fact that the current system is unsustainable.

Ahead of his speech to CIPFA’s annual conference, Singh tells PF ‘it’s all about context’ (pages 8–9). Lyons reported at a time of plenty. In contrast, the 2014 commission has to deal with a frighteningly bleak financial environment.

With two-thirds of town hall leaders saying they expect some councils to get into a ‘serious financial crisis’ this year, there’s no time to waste.

Singh’s commission, established by CIPFA and the Local Government Association, needs to speak truth to power. Ministers should be in no doubt of what will happen if reform is postponed again.

CIPFA’s new president, Mike Owen, will inevitably be part of the communication process when the commission reports. Owen says in his PF interview that he is prepared to air strong views to politicians of all parties (pages 26–29). He might have to.

Power ultimately lies with the people, of course, and it’s important that the public understand the seriousness of the situation.

As a recent CIPFA health roundtable debate (pages 30–34) concluded, finance managers should be more open with the public about the effects of service cuts. Speakers compared the requirement for financial honesty with the duty of candour expected of doctors.

A lack of candour is not something that Margaret Hodge can be accused of (pages 20–24). The chair of the Public Accounts Committee, also a speaker at the conference, is famous for her no-nonsense approach when it comes to interrogating civil servants, tax-avoiding companies and BBC bigwigs.

She rightly defends her forthright questioning, telling PF: ‘I think the public demand much more transparent accountability right across the piece.’

It’s a message that all those in charge of stewarding public services need to take on board.

The next issue of PF will be published at the end of August. Keep up to date with daily news and comment from publicfinance.co.uk and publicfinanceinternational.org

■ Mike Thatcher EDITOR letterstoeditor@publicfinance.co.uk

4

REDACTIVE PUBLISHING LTD 17-18 Britton Street London EC1M 5TP 020 7880 6200 www.publicfinance.co.uk Editor Mike Thatcher 020 7324 2768 mike.thatcher@publicfinance.co.uk Deputy editor Judy Hirst 020 7324 2769 judy.hirst@publicfinance.co.uk News editor Vivienne Russell 020 7324 2788 vivienne.russell@publicfinance.co.uk Senior reporter Richard Johnstone 020 7324 2796 richard.johnstone@publicfinance.co.uk Reporter Judith Ugwumadu 020 7324 2794 judith@publicfinance.co.uk Contributors Jane Cahane, Keith Aitken Senior designer Gene Cornelius 020 7880 6227 gene.cornelius@redactive.co.uk Editorial assistant Tania Forrester 020 7324 2793 tania.forrester@publicfinance.co.uk Digital content manager Harriet Patience 020 7324 2733 harriet.patience@redactive.co.uk Business development manager Chris Dooley 020 7880 8545 chris.dooley@redactive.co.uk Sales manager Katy Eggleton 020 7324 2762 katy.eggleton@redactive.co.uk Sponsorship sales manager James Brunt 020 7880 6230 james.brunt@redactive.co.uk Recruitment sales executive Emmanuel Nettey 020 7324 6234 emmanuel.nettey@redactive.co.uk Advertising production Aysha Miah 020 7880 6241 aysha.miah@redactive.co.uk Printing Polestar Stones, Banbury, Oxon To subscribe to Public Finance at the annual cost of £100, call 020 8950 9117 or email publicfinance@alliance-media.co.uk.

Public Finance is editorially autonomous and the opinions expressed are not those of CIPFA or of contributors’ employing organisations, unless expressly stated. Public Finance reserves the copyright in all published articles, which may not be reproduced in whole or in part without permission. Public Finance is published for CIPFA by Redactive Publishing Ltd. Public Finance 17–18 Britton Street, London EC1M 5TP Tel 020 7880 6200 Fax 020 7324 2790

ISSN 1352-9250

Average circulation 16,127 (Jul 12–Jun 13)

Tel 020 7543 5600 Fax 020 7543 5700 Email corporate@cipfa.org Address CIPFA, 3 Robert Street London, WC2N 6RL

PublicFinance JULY/AUGUST SEPTEMBER 2011 2014

p004_PFIjuly14_leader.indd 4

19/06/2014 10:29

Second thoughts pfOpinion

Chris Giles

Mind the tax gap Tax revenues are below forecast despite the strong recovery in the economy. The result is a £30bn black hole in the finances and the need for yet more austerity The strength of Britain’s economic recovery has surprised everyone. So rapid has been the upswing that Bank of England governor Mark Carney is now telling households to prepare for an early rise in interest rates.

For all the good news, though, there are concerns we are not experiencing the ‘right’ sort of growth. Chancellor George Osborne has warned that Britain’s housing market poses an ‘old and familiar’ risk. Carney has added that the trade position is another fundamental vulnerability. ‘Borrowing from abroad to consume at home is hardly a recipe for a balanced and sustainable expansion,’ he said in his recent Mansion House speech.

And when the International Monetary Fund gave its annual assessment of Britain’s economy, its staff said ‘growth will eventually stall’ if the terrible productivity performance of the past six years fails to improve.

None of these assessments mentioned another serious threat to household

prosperity and happiness: that the tax system is not collecting enough revenues.

Tax revenues have consistently fallen short of expectations in this recovery – unlike public spending, which has been close to the chancellor’s targets set in the June 2010 ‘emergency’ Budget. For the 2013/14 financial year, this year’s Budget estimated public sector net revenues of £607.7bn, more than 8% (or £54bn) lower than the £661.9bn expected back in 2010.

Of course, most of this shortfall was caused by the economic weakness of 2011/12. Economic stagnation is a necessary, but not sufficient, explanation.

In 2010, the Office for Budget Responsibility expected the tax system to be able to collect 38.7% of national income in tax revenues. In fact, this year’s Budget documents show revenues accounting for only 37%. It means that 1.7% of gross domestic product – almost £30bn a year – has gone missing. That is a lot of money.

The trends are no better, even in the most recent year of rapid economic recovery. Taking real growth and inflation into account, the size of the economy grew 4.7% in 2013/14, but revenues rose only 3.5%. Normally, revenues grow faster than nominal GDP.

‘BORROWING FROM ABROAD TO CONSUME AT HOME IS HARDLY A RECIPE FOR A BALANCED AND SUSTAINABLE EXPANSION’

Weakness in revenue growth matters because if it continues, the shortfall will eventually be recovered through painful tax rate increases or further public spending cuts, meaning the grind of everharsher austerity will continue for longer.

A disappointing tax-to-national income ratio is a problem for the acceptability of taxation, since it suggests Britain’s tax system is more leaky – either domestically or internationally – than we thought. If the trend continues, those paying taxes will face a greater burden in years ahead.

If you talk to Treasury officials about the missing tax revenues, you get one of two responses. In public, there are many explanations for weak revenue: more low-paid jobs have been created that are not so tax-rich because the government has increased the income tax personal allowance; housing transactions remain weak, leading to shortfalls in stamp duties; oil revenues have taken a hammering from the slump in North Sea production; and financial companies are still offsetting past losses against current profits, hampering the growth of corporate tax revenues.

In private, there is greater concern that the structure of the economy and the UK tax system no longer easily generate tax revenues. There must also be a concern that tax avoidance is beginning to make a serious dent in the nation’s resources.

We have been here before. In 1995, the Treasury was concerned about a value-added tax hole and set up an investigation into lost revenues in the 1990s recovery. Just as it reported – with rather inconclusive results – the revenues came flooding back. There is no guarantee of another happy ending 20 years later.

Mark Carney Chris Giles is the economics editor of the Financial Times. He will be speaking at the CIPFA annual conference in London, 1–3 July 2014 Photo: Bloomberg

p005_PFIjul14_2nd_thoughts.indd 5

JULY/AUGUST 2014

PublicFinance 5

19/06/2014 10:30

News Coming home to roost West Somerset District Council’s financial problems made it ‘not viable’ for the long term

National Audit Office

Whitehall’s local cash checks under review

BY RICHARD JOHNSTONE

The National Audit Office’s latest probe into local government will look at how well Whitehall departments can spot councils at risk of financial failure, according to the senior auditor in charge.

Aileen Murphie, the NAO’s director of local government value for money studies, told Public Finance that the watchdog’s review of council sustainability would also include an assessment of the cumulative impact of spending cuts on authorities.

The review, which forms part of the NAO’s local government work following Communities Secretary Eric Pickles’ decision to abolish the Audit Commission, is expected to be published in the autumn and will update 6

a report published in January 2013.

Auditors warned then that funding cuts posed ‘increasing difficulties’ for town halls, and urged Whitehall to better understand the impact of reductions. This came after West Somerset District Council had been judged by the Local Government Association to be not viable in the long term, with a programme subsequently agreed with neighbouring authorities to share services and management.

Murphie told PF the new examination would look at how government’s plans to identify financial failure had developed over time.

Recent financial reforms to local government, such as the part-localisation of business rate growth, meant a new investigation was needed, she added.

‘Because the whole shift in local government finance has been moving from grant funding towards localised incentives, you can’t have a look at the same situation over time,’ she said.

‘We are going to look at the strategies [for dealing with financial failure] and what a government’s warning canary is – what will tell them if something bad is about to happen.

‘I think that’s a very interesting question. There are probably eight central government departments that have got a really big impact in local government finance, and they’ll all have a different type of songbird.’

Although the NAO’s examination of the adult social care system in March highlighted that the Department of Health and Department for Communities and Local Government were working together, Murphie said there was still ‘a gap’ across other ministries that could make it difficult to follow the cross-cutting impact of spending reductions.

‘It’s always difficult to try and assess how joined-up Whitehall is, but we’re certainly looking at it,’ she said.

‘I know we always go and think about the DCLG because it is Whitehall’s prefect in the local government world, but there is an impact from other departments – I’m thinking mainly here about the Department for Work and Pensions and the coming impact of the Universal Credit.

‘What those departments should be thinking about, and looking for and telling DCLG, is really important as well.’

Responding to the comments, Jonathan Carr-West, chief executive of the Local Government Information Unit, said the NAO was right to be looking into the possible signals of failure.

‘The canary-in-the-mine aspect is really important, because it’s such a difficult time for local government financially that the last thing they need is unintended consequences from spending cuts elsewhere that then rebound on local government,’ he told PF. ‘Things are tight enough. I don’t

PublicFinance JULY/AUGUST 2014

p006_007_PFIjuly14_news.indd 6

19/06/2014 10:33

publicfinance.co.uk/news

PooledSpending Richard Johnstone

Long-term budget deals could ‘de-risk’ public service reforms think many councils have a margin for error, but to get a sense of that requires more of a helicopter view than any one council can do for itself.’

Cuts across the public sector can have a knock-on impact on councils, leaving them open to ‘a double whammy’, he added. ‘They’re taking the biggest cuts in any part of the public sector, but they’re also in many ways the service of last resort – they’re the ones that are there to pick up the pieces when other parts of the public sector withdraw services.

‘The council is the backstop, because it has that broad responsibility for the wellbeing of its citizens.’

The implementation of Universal Credit was a particular example, he said, where if people face trouble paying their rent – since under the reforms, some recipients will have to budget for these payments for the first time – town halls would have to assist.

‘The relationship between DWP and DCLG is patchy – it is anything but systemic,’ he added. ‘But who has to make sure that person is still housed in the end? It’s the local authority. It is a great example of where problems elsewhere could come home to roost.’

Long-term public spending plans are needed to help integrate local service provision, a senior figure involved in implementing the coalition’s flagship Community Budgets programme has said.

Robert Pollock, director of the Public Service Transformation Network, which works to design services around the needs of local people, said multi-year spending deals could ‘de-risk’ the implementation of plans to cut costs and improve provision.

Last year’s Autumn Statement included a Treasury pledge to work with departments ‘to give local public services the same long-term indicative budgets as departments from the next Spending Review’.

Speaking to Public Finance, Pollock said implementation of this was one of the ways government could incentivise different local services to collaborate on reforms.

‘Some of the places we’ve worked have said it’s a bit of a barrier that we don’t have a long-term funding arrangement,’ he said.

The network has worked with the four original ‘whole place’ Community Budget pilots – Essex, Greater Manchester, Cheshire West and Chester, and the London tri-borough of Hammersmith & Fulham, Kensington & Chelsea and Westminster – as well as nine additional areas that joined the network last July.

‘If the Treasury could work up indicative longer-term budgets, I think what it does is de-risk some of the partnership working,’ Pollock said.

‘Finance directors locally will have a clearer sense of what their future allocation is going to be, and can then start to think about how they’re using their mainline budgets for this kind of partnership working.

Aileen Murphie is speaking at the CIPFA annual conference in London, 1–3 July 2014 Bonds

PWLB changes hit investment, says Birmingham

Bond backer: Birmingham Council deputy leader Ian Ward

BY RICHARD JOHNSTONE

Government changes to the interest rate local authorities pay to borrow from the Public Works Loan Board have become a barrier to councils making decisions to invest in economic infrastructure, the UK’s biggest council has warned.

Speaking to Public Finance after Birmingham City Council confirmed that it would invest £200,000 in the Photo: Alamy/PA

p006_007_PFIjuly14_news.indd 7

creation of a municipal bonds agency, deputy leader Ian Ward said it wanted to increase certainty over its borrowing costs.

The interest rate for the PWLB was increased to 1% over government gilts

by Chancellor George Osborne in the 2010 Spending Review, but was subsequently cut to 0.8% above gilts

‘Some of the feedback from whole place was that, while it wasn’t a limiting factor, the lack of long-term funding certainty and alignment between local government and health made it more difficult to do.’

Pollock told PF the network had a target to have made £250m worth of savings, either delivered or in future spending baselines, by the end of the current financial year.

By that time, the four whole-place areas will have had more than a year of implementing their plans, while the nine transformation areas will have begun to do so from the autumn.

‘That’s our ambition by the end of the current financial year,’ Pollock said. ‘We will assess all the evidence, quality assure it, and that’s our target, so that we can be held to account for the contribution we’re making.’

following the 2012 Budget if town halls provided details on their borrowing plans for the next three years.

Ward told PF that Birmingham had chosen to back the creation of the agency, which was approved on June 16, so it had another borrowing option.

‘Potentially, it could give us the ability to borrow money at a low rate of interest, given the recent increase in PWLB rates,’ he said. ‘We’re always looking to borrow money at the most competitive rate we can.

‘We’re estimating that borrowing from the new route of a bond from the LGA would be about 0.2 percentage points lower than the rate currently available through the PWLB, so the fact that this is more a competitive way for us to borrow money is obviously attractive.’

Asked if the PWLB rate changes in this parliament had formed a barrier to investment decisions, Ward said: ‘Yes, because any uncertainty is not helpful when you’re looking to borrow large sums of money.

‘In that sense, yes, that uncertainty can be an impediment to us borrowing money for major infrastructure.’

JULY/AUGUST 2014

PublicFinance 7

19/06/2014 10:34

News

Analysis Local government

Learning the lessons of Layfield and Lyons The latest in a series of reviews into council finance is being chaired by Darra Singh. But can he avoid the fate of his predecessors and persuade politicians to support change? Richard Johnstone reports With last month’s Queen’s Speech having set out the government’s final legislative plan before the general election, focus is fast moving to the next parliament, with political parties and policy groups devising plans for implementation from 2015.

One area being examined in depth is the future of local government.

With all three main parties likely to propose devolving more powers to town halls or increasing local control of public services, CIPFA and the Local Government Association have launched an independent commission on council finance to recommend reforms and better ways to fund services.

The make-up of the nine-strong commission was announced on June 2, with Darra Singh, partner in the government and public sector team at EY, confirmed as chair.

Singh told Public Finance that the key spending areas the commission would examine are: investment in infrastructure and housing; integration of health and social care; a welfare benefits system that promotes work and protects the vulnerable; and support for families and young people through early intervention.

‘Our terms of reference are really pretty clear,’ he says. ‘First of all, to have a look at the current local government finance system, and seek evidence of where 8

PublicFinance JULY/AUGUST 2014

p008_009_PFIjuly14_analysis.indd 8

the strengths and weaknesses are.

‘And then we have to look at what recommendations we could come up with to reform the finance system to make sure that we actually get better public service and encourage economic growth.’

Jonathan Portes, director of the National Institute of Economic and Social Research, is a fellow commission member. He says there are a number of ‘pretty obvious’ flaws in the current local government finance system for the commission to examine.

‘Councils have limited control over revenue, and what control they do have is constrained by council tax capping and various other mechanisms that central government uses,’ he tells PF. ‘Council tax itself is poorly designed in a number of respects, and it’s quite regressive. The business rates system also doesn’t appear to give the incentive you would want on councils to promote local economic development. So there’s all sorts of things wrong with the current system.’

A key conundrum the commission faces will be how to balance the need for financial freedom to stimulate growth with maintaining support for those areas at risk of being left behind, he adds.

Recent changes introduced by the coalition government, such as the part-localisation of business rate growth,

have been criticised by some councils for emphasising economic development over local need.

Although Portes says this tension is inevitable, he feels the current balance can be improved: ‘We have two things that everyone agrees that we want to do, but there are trade-offs. There’s no point pretending that you can have a perfect system that does each of these perfectly, but I think it is important to get evidence and good ideas as to how you address these trade-offs as best you can.’

The challenge is exacerbated by the fact councils face funding reductions, explains Portes, with the share of council funding spent on statutory services going up.

The commission’s focus will be on ‘real-life problems’ of providing services as budgets are being cut, Singh says.

Photo: Alamy

19/06/2014 10:34

publicfinance.co.uk/news

QuoteUnquote ‘We’re thinking about practical solutions in terms of reform, recommendations that will help local ocal areas respond to the real-life challenges that at they’re facing.’

Darra Singh, chair of the Independent Commission sion on Local Government Finance

‘The principle of pooling parts of funding, which is well established in parts of local government, is a good one to build on.’

Anita Charlesworth, Health Foundation chief economist and commission member

Walking a difficult line: One of the biggest challenges facing councils is how to provide and integrate health and social care services in the face of increasing demand

‘We’re thinking about practical solutions in terms of reform, recommendations that will help local areas respond to the real-life challenges that they’re facing.’

The practical tests the commission will judge its recommendations against include integration of services such as health and social care, where increasing demand represents one of the biggest service priorities for councils. LGA projections find that some authorities will spend as much as 40% of their budgets on care by 2020.

Anita Charlesworth, a member of the commission and chief economist at the Health Foundation think-tank, says it will

take the practical approach of identifying what local government needs to do to deliver on such integration.

There are already many people looking at how to implement specific integration initiatives, such as the government’s plan to pool £3.8bn of health and social care spending through the Better Care Fund.

Instead, the commission should focus on how finance can help incentivise reform across a range of services, she says.

‘Pretty much everybody in local government recognises that the current [finance] system is unsustainable, and that creates a real challenge in terms of getting people to think long term and to plan and take risks. However, the principle of pooling parts of funding – which is well established in parts of local government – is a good one to build on.’

Finance is one tool to effect that change, and it really needs to be aligned with other functions, she says. ‘That’s the benefit of having the LGA and CIPFA working together. It brings expertise on finance, but it starts with the purpose of what are we really trying to achieve here for local people.’

The commission intends to report early next year, and Singh says it will be aware of previous reports on local government reform that – from Layfield to Lyons, as examples – have often had problems with getting politicians to implement them.

Although he acknowledges this is ‘not a greenfield site’, with the commission able to draw upon previous examinations, a new review is needed to reflect the present funding environment.

‘It’s all about context,’ he tells PF. ‘There’s been really important and impressive work that’s been done by a load of different commissions, but the last commission that looked at local government finance on a national level

was the Lyons review [published in March 2007], and we’re in a very different context now.

‘So, this is actually of its time – and it’s a positive step setting up the commission because we’re looking at local government finance on a national level in that context of very constrained current and future public investment.’

George Jones, emeritus professor of government at the London School of Economics and a member of the Layfield commission that published its report in 1976, says his lesson from previous examinations is that the commission must be an ardent champion of its proposed reforms to get political support.

‘It’s no good the commission just producing its report and going away,’ he says. ‘It needs to remain active promoting it for some time to come. It will have to keep making its case, countering criticisms, correcting errors and misinformation, and ensuring its message is widely disseminated.’

For his part, Singh insists the commission will not produce recommendations that stand very little chance of being implemented.

‘Our terms of reference are very much geared to looking at the practical challenges faced by local areas and then looking at the practical solutions,’ he adds.

‘If we can demonstrate that the recommendations we make can help national government better deliver local priorities working with local government and local public service providers, then I think that will improve how receptive people are.’

Darra Singh will be speaking at CIPFA’s annual conference in London, 1–3 July 2014 JULY/AUGUST 2014

p008_009_PFIjuly14_analysis.indd 9

PublicFinance 9

19/06/2014 10:34

It’s all in the implementation by Rob Whiteman Getting to grips with good governance by Fayezul Choudhury

Opinion Rob Whiteman

It’s all in the implementation Civil servants are often blamed for problems that stem from unworkable policies. Perhaps it’s time to rethink relationships between politicians and officials Much work is taking place in Whitehall to improve implementation capabilities.

More is planned, with some debate in the run-up to next year’s election about whether faster and deeper civil service reform is needed.

But it’s also important to ask whether government policy decisions could be

better, with a greater eye on their ‘implementability’ – to avoid the risk that civil servants are asked to deliver the undeliverable.

The highest profile here over the years has been reserved for big information and communications technology projects from Universal Credit or e-borders at present to Connecting for Health in recent history.

By any standards, many projects are challenging because of six key factors: ● scale – some UK public service is large – for example, the NHS is one of the

Computer says no: government ICT projects, like Connecting for Health, have been beset by functional issues

10

PublicFinance JULY/AUGUST 2014

p010_011_PFIjuly14_opinion_whiteman.indd 10

biggest services in the world, and it is dependent on ICT for modernisation; ● user requirements are complex – these are not necessarily driven by operational considerations when the government makes frequent and complex policy changes that have considerable impact on systems; ● security considerations are material – national security and avoiding external fraudsters means that the supply and vetting of contractors requires a costly and time-consuming rigour; ● data quality is often appalling – because of the tempo of policy changes and consequent operational change over decades, the bread and butter is seldom good; contractors need time to understand the Heath Robinson design, which is costly to replicate by new contractors; ● ‘siloism’ is rife – the lack of a corporate culture means systems are designed that are not cognizant of other synergies or opportunities within the same department or across government departments, which leads to suboptimal value for money for government or public services as a whole; and ● lengthy delivery – given the above complexities and constraints, it can take so long to implement systems that the original business case and technology strategy may be outdated by the latter stages of implementation.

However, ‘pulling the plug’ and writing off costs is often politically sensitive.

But soldiering on can mean even greater resource growth and asset impairment.

The Major Projects Authority is adding value to many big programmes through its assurance, expertise and toolkits, and the Cabinet Office is capping government ICT contracts at £100m to avoid Photos: Getty/Sam Kesteven

19/06/2014 10:35

publicfinance.co.uk/opinion

A DIGEST FROM THE WEB

pfBlogs

‘Why is it that housing is the only purchase item where, if prices go down, people say “how terrible”, whereas if the price of food, energy, transport, wine, foreign holidays or consumer goods goes down, they usually say, “great”?’

Malcolm Prowle, professor, Nottingham Business School

‘NHS reform has relied too much on targets, inspections and competition, and too little on building improvement from within. The consequence is that England’s health care system is one of the most centralised in the world’

Travelling around the UK, I have observed a real difference, with Scotland, Wales and Northern Ireland seeming to value public sector competencies more genuinely

Chris Ham, chief executive, King’s Fund

‘The self-employed have accounted for the lion’s share of employment growth since the recession.

The fact that our measure of wages in the economy doesn’t capture their experience looks increasingly problematic’ Laura Gardiner, research and policy analyst, the Resolution Foundation

‘Local government stands at a crossroads. In one direction lies the spectre of reduced influence and public disengagement; in the other, the promise of reinvigorated civic economies, with services built around citizens’ needs’ Jonathan Carr-West, chief executive, Local Government Information Unit

monolithic deals wherever possible.

This announcement earlier in the year fits into the common narrative of an oligopolistic market for large government ICT contracts and clients’ lack of rigour in letting, managing and enforcing them.

As such, the announcement has been sensible. But we must also equip public services managers to act more assuredly with contractors. Public managers often let bigger contracts with more complex risk, reward and financing vehicles than they might in the private sector, so the job at hand is to show confidence in the competency of public management while importing some private sector expertise.

There are two points here: first, we need to move away from a simple ‘public sector bad/private sector good’ view and invest in public management capabilities, innovation and cultural transformation.

Travelling around the UK, I have observed a real difference with the governments of Scotland, Wales and Northern Ireland seeming to value public

sector competencies more genuinely.

Secondly, in my experience of the civil service, I came across many gifted managers with delivery skills or potential, but few would make the senior civil service, which still has the mindset of giving operational experience to generalists rather than giving equal weight to promoting senior operational careers.

My final point, however, is about whether it is time to change the constitutional framework of relationships to drive better policy-making, which would give implementation a better chance of success.

Some of this is pretty unthinkable for many, but let’s have the debate that a local authority chief executive, for example, serves all parties by means of open and published advice, so decisions are carefully considered on all the options with an eye on minimal cost.

But for permanent secretaries and

chief execs in central government, advice – even as accounting officers – is privileged, which has perhaps aided and abetted poor decision-making over the years. The Blunders of our Governments by Anthony King and Ivor Crewe is always worth a read as a stark reminder of this.

Many politicians want to change the traditional Northcote Trevelyan settlement, whereby civil servants are recruited on merit, and appoint their own top officials.

If this happens after the next election, perhaps as a quid pro quo, the incoming government could enshrine the independent finance advice and transparent scoring of proposals that we see in some systems overseas.

Rob Whiteman is the chief executive of CIPFA. He will be speaking at the institute’s annual conference in London, 1–3 July 2014 JULY/AUGUST 2014

p010_011_PFIjuly14_opinion_whiteman.indd 11

PublicFinance 11

19/06/2014 10:36

Opinion Fayezul Choudhury

Getting to grips with good governance With its myriad accountabilities and central role, the public sector needs a clearer understanding of good governance. An international framework developed by IFAC and CIPFA offers guiding principles and a chance to challenge poor practices Anyone who works in the public sector knows the major role it plays in society, but the person in the street may not be so well informed. The public sector’s impact on our lives reaches beyond its responsibility for enacting legislation, delivering services, redistributing income and promoting fairness, peace and sound international relations to its significant contributions to GDP, its breadth as an employer and its participation in the capital markets.

The central role of the public sector makes effective governance critical for better-informed, long-term decisionmaking, as well as for an efficient and effective use of resources. The sovereign debt crisis – along with a constant stream of issues such as nepotism, inefficiency, political opportunism, corruption and poor financial management – is a daily reminder of

the importance of good governance.

While governments often establish regulations for good governance in the private sector, the public sector, paradoxically, remains without consistent, comprehensive and transparent protocols.

This is why the International Federation of Accountants, as an advocate of clear, transparent public sector financial reporting and a strong supporter of good governance in the sector, has teamed with CIPFA to release our International framework: good governance in the public sector. This aims to establish benchmarks for governance and provide some guiding principles.

Good governance is characterised by a focus on strong organisational leadership, appropriate checks and balances, management, accountability and oversight, and aims to generate

Greeks bearing debts: The sovereign debt crisis of 2010 exposed poor governance in Greece and the eurozone

12

PublicFinance JULY/AUGUST 2014

p012_013_PFIjuly14_opinion_fayez.indd 12

better outcomes and improve long-term, sustainable performance.

The first step on the road to good governance is to define the intended outcomes and determine the necessary interventions to achieve them. By their nature, public sector organisations don’t have the same free rein that private organisations do; instead, they are usually established with clear parameters and regulations governing what they do and how they do it, and given a specifically defined mandate. They also strive for more than just financial results, market share and happy investors.

Therefore, they must ensure their decisions and actions achieve the intended benefits while remaining within the limits of their authority and resources. They also need to ensure communication and consultation with stakeholders, and to undertake an ongoing review of their decisions, execution and outcomes. This is vital to their success when balancing competing demands for finite resources.

To operate effectively, a public sector entity needs the right structures and leadership, as well as qualified people with the right skills, and the governing body must ensure that the entity has the capacity to fulfil its mandate. Risk management and internal control are integral to achieving outcomes, and the governing body must ensure that the entity implements – and can sustain – an effective performance management system, including strong financial management, strategic resource allocation, efficient service delivery and accountability.

As an example of poor risk management and governance, take the Yucca Mountain nuclear waste repository in Nevada, US. The site was established over significant opposition; later, it was determined that it falsified data on the repository’s safekeeping of nuclear waste. But if governance had been handled appropriately, these risks would have been addressed and managed earlier.

On the other end of the spectrum, Transnet – the South African government-owned custodian of freight rail, ports and pipelines – is a positive example of effective governance.

Transnet embeds risk management Photos: Reuters/AP

19/06/2014 10:36

publicfinance.co.uk/opinion

Data derailed Set up despite heavy opposition, the Yucca Mountain nuclear waste repository was discovered to have falsified data

While governments often establish regulations for good governance in the private sector, the public sector, paradoxically, remains without consistent, comprehensive and transparent protocols within its entire business. Its 2012 annual report explains its risk management arrangements, with examples throughout of actual risks encountered and measures taken.

Another step on the road to good governance is promoting transparency to ensure that decision-makers are responsible for their choices. To demonstrate that they have delivered on their commitments – and, in doing so, used public resources effectively – public sector organisations should issue annual reports so stakeholders can evaluate performance. And, of course, audits, both external and internal, also promote transparency and contribute to effective accountability.

The central government of New Zealand’s audited annual report, for example, gives all stakeholders the ability to evaluate performance and

resource stewardship. The report provides a detailed comparison of budgeted amounts to actuals, as well as brief analyses of major variations. It also includes a description of the progress the government has made in implementing its fiscal strategy.

Budgets and forecasts are prepared on the same accounting basis as is used for the accounts. The forecasts comply with New Zealand accounting standards which, among other things, require that assumptions be reasonable and supportable, internally consistent and published.

This ties in quite closely to IFAC’s view on public sector reporting. The international framework – although not intended to replace national governance codes – provides guidance for updating existing codes, and where specific rules do not already exist, helps to stimulate

progress. It can also serve as a tool to challenge governance in public sector organisations where substandard practices have persisted.

IFAC has also developed a supplement that includes key questions along with implementation tips, examples and readings for all types of public sector entities. So whether you’re a regulator, a practitioner or one of the myriad public sector stakeholders, the framework should help you to play your part in achieving good governance.

Fayezul Choudhury is chief executive of the International Federation of Accountants. He is speaking at the CIPFA annual conference on 1–3 July 2014. More information on the framework can be found at the IFAC Global Knowledge Gateway at www.ifac.org JULY/AUGUST 2014

p012_013_PFIjuly14_opinion_fayez.indd 13

PublicFinance 13

19/06/2014 10:37

Watchdog

Watch WHAT’S GOING ON IN THE WORLD OF REGULATION AND INSPECTION National Audit Office The National Audit Office qualified the Whole of Government Accounts for the fourth successive year because of continuing issues with the quality and consistency of data.

Comptroller and auditor general Amyas Morse again expressed concern that bodies such as Network Rail and further education institutions continue to be excluded from the accounts, even though accounting standards require them to be included.

But he said that if the Treasury were successful in its plans to address the issues that have led him to qualify his opinion, he might be able to remove a number of qualifications in the next four years.

The latest set of accounts shows the in-year shortfall between income and expenditure decreased from £185bn to £179bn, largely owing to falls in the government’s cost of borrowing and increases in revenue.

Overall net liability increased in 2012/13 by £283bn to £1,630bn.

Morse said more could be done to

exploit the WGA’s potential as a reporting mechanism.

At CIPFA, chief executive Rob Whiteman said the detailed information in the WGA needed to be used to manage public money effectively.

‘CIPFA also hopes that the Treasury will start to lead the way in this by using WGA in the presentation of fiscal events such as the Budget and the Autumn Statement, including by reporting outturn against budget for the whole public sector, and publishing forward balance sheet forecasts.’

Meanwhile, the NAO said the Ministry of Defence’s programme to cut the size of the army had left the force exposed to significant risks that could affect its ability to achieve its objectives.

Auditors said the decision to implement the Army 2020 programme, which reduced the size of the regular force by around 20,000 and increased the number of reserves by 11,000, was taken without any appropriate feasibility testing.

‘The department and army must get a better understanding of significant risks to Army 2020,’ said Morse.

Risky manoeuvre The MoD’s decision to launch Army 2020 without sufficient testing has left the army open to risks, the NAO warned

14

Separately, the NAO warned the government that a lack of consistency in the funding of road maintenance for both the Highways Agency and local authorities was putting public value at risk. Unpredictable funding cuts made it difficult for authorities to plan their maintenance programmes effectively and increased costs in the long term.

Ofsted Ofsted’s review of 21 schools and academies in Birmingham revealed that some academies breached their funding agreements by failing to provide a ‘broad and balanced’ curriculum.

Inspectors visited the schools in March and April this year because of concerns about leadership and management and the effectiveness of safeguarding.

Following this exercise, Ofsted announced that five of the schools were being placed in special measures, with all falling down on both safeguarding and leadership and management measures.

In his advice note to Education Secretary Michael Gove, chief schools inspector Sir Michael Wilshaw also highlighted that some of the academies inspected were in breach of their funding agreements with the Education Funding Agency.

‘Some of the academies inspected, for example, did not meet the requirement to provide a broad and balanced curriculum or to provide the appropriate balance in religious education,’ Wilshaw said.

Ofsted was also critical of Birmingham City Council, which it said had failed to support a number of schools in their

PublicFinance JULY/AUGUST 2014

p014_015_PFIjul14_watchdog.indd 16

19/06/2014 11:50

publicfinance.co.uk/news

COMINGUP… Ghost tags: The scandal of suppliers’ payment for electronic tagging of non-existent offenders has provoked NAO scrutiny

SERVICES EXAM The National Audit Office is conducting a study of the progress made by the Home Office and Ministry of Justice in outsourcing key services such as asylum-seeker accommodation and electronic tagging. The study, which parallels other NAO work across Whitehall, comes in the wake of some high-profile contract failures – most famously paying suppliers for tagging nonexistent offenders and those who had served their sentence.

Auditors will examine whether contracts are managed strongly.

VALUE EVALUATION efforts to protect children from potential radicalisation and extremism.

Ofsted has affirmed that its revised inspection criteria for children’s services is succeeding in shifting assessments on to the experiences of children, young people and families.

The watchdog published an independent analysis by child social care expert Professor Eileen Munro, which confirmed that judgements under the new regime were ‘fair and secure’, the watchdog said.

Meanwhile, Ofsted has introduced a revised inspection framework for teacher training. Since June 9, a twostage process applies, with inspectors reviewing the quality of training in the summer term and then following up to check whether the teachers are implementing what they have learned once they begin teaching in the autumn.

Audit Commission The Audit Commission has urged councils to ensure they implement a strategic approach to asset and property management after finding £2.5bn of the local government estate could be put to better use.

Its Managing council property assets report found that in 2012/13, the local government estate was worth an estimated £169.8bn on net book value.

Although the value has fallen by nearly a third since 2004/05, the commission said there remained £2.5bn of assets deemed ‘surplus’ by councils.

Under International Financial Reporting Standards, local authorities are required to account separately for property assets deemed surplus.

According to the commission’s Photos: MOD/PA/Getty

p014_015_PFIjul14_watchdog.indd 17

HM Revenue & Customs’ ‘Aspire’ IT contract with Cap Gemini and its other subcontracted suppliers – now in

its fourth year, with another three to go – is also under review. The NAO is scrutinising the performance achieved to date and the likelihood of future value for money as HMRC implements a new IT support model in line with its policy of shorter-duration, lower-value IT contracts.

RATE REVIEW In October, the first batch of NHS mental health providers will be rated under the Care Quality Commission’s new approach. Inspectors will be examining four providers in Leeds and York, Sheffield, Southampton, and Norfolk and Suffolk to ensure services are safe, effective, responsive to people’s needs, caring and well-led. Providers will receive

analysis, the amount deemed surplus was potentially worth nearly five times more than assets held for sale, which was valued at £500m on NBV in 2012/13.

‘Councils should ask themselves – do we have an appropriate estate?’ said Audit Commission chair Jeremy Newman. ‘In order to extract the most value from their assets, councils should not sit on valuable land and buildings that can be better used as a resource to support their wider service and strategic objectives.

‘This might mean selling or transferring them, or investing in them to make them fit for purpose.’

Separately, the Audit Commission’s National Fraud Initiative has uncovered £229m of incorrect and dishonestly obtained payments across the UK public sector in the past two years.

In its last NFI report before the initiative is moved to the Cabinet Office next April, the commission said £74m of fraudulent pension payments had been detected by comparing data held by a number of public sector bodies. Incorrectly claimed singleperson discount for the Council Tax, worth £39m, was also detected, as was £33m of Housing Benefit.

SMCP Commission The government lacks a credible plan to meet its target to eradicate child poverty by 2020, the social mobility watchdog has warned.

In its examination of the government’s

overall ratings of ‘outstanding’, ‘good’, ‘needs improvement’ or ‘inadequate’.

MONEY MINDERS Government auditors in Northern Ireland will shortly publish a report on the Court Funds Office, which provides a banking and investment service for the civil courts, looking after monies when children are awarded damages and managing the finances of those deemed mentally incapacitated.

It currently manages around £290m in cash and equity holdings on behalf of 14,000 clients. The Northern Ireland Audit Office will report on whether clients are benefiting from an efficient banking and investment service, and on the standards of customer care.

Missing the point: The government’s child poverty plan ‘falls far short’, said SMCP Commission chair Alan Milburn

draft child poverty strategy, the Social Mobility and Child Poverty Commission said it estimated that 3.5 million children would remain in absolute poverty by the end of the decade.

The government’s new strategy, published in February, was a ‘missed opportunity’, it concluded. Although it included good elements – such as the extension of childcare support for low-income families and greater acknowledgement of the problem of working poverty – not enough action was being taken to prevent child poverty from rising over the coming years.

Commission chair Alan Milburn said: ‘The government’s approach falls far short of what is needed to reduce – yet alone end – child poverty in our country.’

JULY/AUGUST 2014

PublicFinance 15

19/06/2014 11:51

Voice of the

Nations Scottish independence referendum

CIPFA aims to lift fog on figures NEWS FROM THE DEVOLVED ADMINISTRATIONS tland S Scotland cotland

BY KEITH AITKEN IN EDINBURGH

CIPFA Scotland’s long-awaited referendum ‘balance sheet’ will be published shortly, accompanied by a plea for more transparent reporting of Scottish public finances, regardless of the outcome of the independence vote on September 18.

As Public Finance went to press, the 30-page paper, with the working title Scotland’s future: in the balance, is expected to offer itself to Scots with the express aim of giving them a reliable tool to help assess the increasingly sweeping financial claims and counter-claims peppering the independence debate.

Don Peebles, head of CIPFA Scotland, told PF: ‘There’s so much financial information flying around, and it must be so complex for people that I think they’re just not getting it, so what we’re trying to do is give them a “you are here” sign.

‘Once you’ve got that, then you can start to frame questions and put the answers into context.’

The Yes campaign says independence

would leave Scots £1,000 a year each better off, while the No side claims they would be worse off to the tune of £1,400.

Peebles made clear his scepticism about such figures: ‘The accountants’ viewpoint is that we want to use our financial skills to think in terms of what the assets and liabilities are, rather than gallop into a conclusion about what might be statistically based figures,’ he said.

‘The information we have produced is from independently verified and audited financial statements. It seems likely that the figures that are producing single costs on whether we would be better or worse off might be based on statistics rather than audited figures.’

Such figures also made assumptions about the policy choices an independent Scotland might make, and the outcome of the negotiations to disentangle Scotland from the rest of the UK in the event of a Yes vote.

They ignored the absence of any standard or agreed formula for

For better or worse?

So far, the public has received conflicting figures from the Yes and No camps, but CIPFA’s balance sheet report aims to help clarify the issues

16

PublicFinance JULY/AUGUST 2014

p016_017_PFIjul14_VoTN.indd 16

calculating Scotland’s share of UK assets or liabilities, or projecting future tax inflows or public expenditure.

‘What we’re definitely not going to be doing is taking one political side or the other. We don’t see it as our job to do that,’ Peebles said.

‘We’re doing it because this is frankly the biggest public finance and public services issue that most of us have ever faced in our careers. It’s not an option not to say something about it.’

Pulling the paper together has taken the best part of a year. Peebles said that Dr Ellie Ray, on secondment from the Welsh Assembly, had read hundreds of papers to find out where the relevant and reliable information was, while Gareth Davies, CIPFA Scotland’s policy and technology officer, crunched the numbers.

The paper will recommend that Scotland develops more transparent reporting systems, regardless of whether an independent or a devolved polity emerges from the referendum. ‘If, as accountants, we were asked our opinion, what we would do is ask to look at the books,’ Peebles said.

‘The problem is that Scotland doesn’t have books: whole-Scotland accounts.

The UK does.

‘Much of the fog that surrounds the financial information comes because we’re so intertwined as part of the UK financial reporting framework.’

Peebles acknowledged the political risks of wading in to such a febrile political debate, but added: ‘What we want to do is to act in the public interest by recognising that much of the information is complex, and we have genuinely tried to simplify that down so that it’s easy to understand.’

Photos: Alamy

19/06/2014 10:38