The economic difficulties faced by Local Government have never been far from the headlines this year. The withdrawal of central funding has resulted in Local Authorities dipping into their own reserves, with the National Audit Office estimating that at the current rate one in ten will have no more reserves left in just three years' time.
Steps are being taken; from increasing funding received from tax-payers, to restricting the provision of frontline local services. But with every increased car parking fee or cancelled bin collection comes further scrutiny on Local Government. Here are some of the strategic measures that may be available to find savings.
Re-evaluating the provision of non-statutory services
There are certain services, social care for example, that Local Authorities are statutorily obliged to provide. There are however other services that many Local Authorities provide voluntarily. These services may provide Local Authorities with an opportunity to find savings and even additional sources of income. For example, we are advising Newcastle City Council, on its pathfinder scheme to transfer the management of its parks to a charitable trust.
Many Local Authorities have also sought savings through outsourcing the provision of leisure services. This is a particularly effective strategy where existing leisure facilities are loss making. By outsourcing the provision of leisure services Local Authorities can reduce the subsidy provided to each facility (ideally to zero) or even (as we have seen on a number of projects) provide a source of income for the Local Authority.
Varying existing PPP/PFI contracts
Central Government is encouraging the public sector to look at potential savings in operational long term contracts. Potential areas for savings include:
- Refinancing the project: The cost of borrowing is currently much lower than when many projects completed. Savings could therefore be made through utilising new sources of private funding or alternatively prudentially borrowing.
- Changing risk profile: Where general changes in law come into effect during the operational phase of a contract Local Authorities have commonly shared the capital costs of such changes with contractors. There may be financial benefits in the authority taking back the contractor’s share of risk.
- Removing/rescoping soft services: In some cases, it may represent better value for money to remove soft services (for example cleaning services) from the contract.These services could be delivered by the local authority or subject to a separate procurement exercise.
- Reviewing service standards: Local Authorities should consider whether the contract's scope and KPIs these still aligned with its requirements and could services standards be lowered or removed to reduce costs or standards maintained but achieved in a more efficient way for example due to changes in technology.
Utilising existing land assets
As perhaps a Local Authority's most valuable asset, there are a number of approaches that can be taken to maximise savings and generate income from land. Possible options include:
- Selling surplus land for cash: Provided the sale is at "best consideration" Local Authorities can retain the capital receipt from the sale of land. Whilst this will allow the Local Authority to generate capital quickly, it may represent only a short term solution, the benefit from which can soon evaporate.
- Granting a long leasehold interest: The benefit of retaining the Local Authority's freehold interest in its land is that it could receive a sustained income stream by way of market rent whilst profiting from capital growth in its asset.
- Procuring a developer: By procuring a developer, who would have obligations to deliver a prescribed scheme, the Local Authority would be securing a long term investment from which an additional revenue stream could be generated. Alternatively, once the development is completed, the Local Authority could transfer its freehold interest in the land to the Developer and benefit from an increased capital receipt.
- Asset backed delivery vehicle (joint ventures): This more ambitious model, would involve the Local Authority and a private sector partner forming a joint venture (JV) with an overarching business or plan under which various developments could be pursued within a defined term and geographic region. Inevitably, this model would require careful planning regarding a range of issues including what the JV's strategic objectives are, as well as how individual developments would be selected during the term of the arrangement. Its benefits, however, could be significant.
We recently advised a private sector partner on structuring and implementing a JV model that will bring surplus Local Authority sites in to use, whilst achieving regeneration objectives, and optimising the value and return on those sites. In this case, ownership of the assets remains at all times with the Local Authority, with the JV just taking its development profit.
Investing in heat networks
A heat network can help a Local Authority to mitigate the impact of energy cost increases, create new revenue streams and encourage local development, all whilst reducing greenhouse gas emissions.
There are a number of funding options available to Local Authorities, including the £320m Heat Networks Investment Project capital investment programme that is expected to support up to 200 projects in the next few years, and leverage in up to £1bn of wider investment. In order to assist Local Authorities the Department for Business, Energy and Industrial Strategy has also commissioned us to produce guidance on procuring finance for heat networks.
Please contact us know if you would like us to provide any further information regarding any of the above.