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Stern test for councils

Turnout in the May 2002 local elections is expected to plumb new lows. Even average council tax increases of 8.2% – more than three-times the rate of inflation – are unlikely to spur more than around a third of voters to the polls. But the government is hoping changes proposed in its white paper, Strong Local Leadership, Quality Public Services, launched last December by Stephen Byers, may rekindle interest in parish politics.

The white paper signals the biggest shake-up in local government finance in a generation. Byers wants to reverse the control-freak tendency which took hold during the Thatcher years and which resulted in central government keeping local spending on an ever-tighter leash. However, some council FDs may find letting go of nanny’s hand a frightening experience. Besides, government spending restrictions have always proved a useful excuse when councils have been forced to defend the quality of their local services – and the Audit Commission’s most recent report (2001) notes that 60% of inspected services were only poor or fair. “It is of particular concern that the poorest services are often judged the least likely to improve,” it added.

Byers plans to end the use of reserve powers to cap council tax increases, to remove a swathe of restrictions on capital spending and to give local councils more power to spend money they collect in fines. He wants to come up with a new formula for distributing central government money to local councils. And he wants to help councils which excel in particular services – paying benefits, for example – to provide outsourced services to others.

Yet there are already concerns among council FDs about some of the ideas.

Byers is planning, for instance, what he calls a “lighter touch inspection regime”. Up to a point, this makes sense. Local councils live in a Gogol-like world where they’re constantly being checked by an army of government inspectors.

However, Byers also wants to make councils subject to a single comprehensive performance assessment (CPA) that will bring together auditors’ views of the finances and performance indicators, with service inspectors’ reports in education, social services, housing and environment. What councils don’t like is that all this will be wrapped up in a single system that will grade councils as “high performing”, “striving”, “coasting” or “poor performing”.

In February, the first 10 guinea-pig councils submitted themselves to a trial of the new system by the Audit Commission. By the end of the year, the commission expects to have graded all 150 county and unitary councils in the country. But Steve Freer, chief executive of the Chartered Institute of Public Finance and Accountancy, is doubtful whether it will prove helpful to slap such a simplistic label on councils. “The situation in many councils is likely to be mixed,” he says. “If you put on a label which says an organisation is somewhere in the middle, that might flatter the bits that are poor and demotivate the bits that are good.”

Whether Byers’ reforms work depends on whether senior local managers are up to the challenge of managing the ever-more diverse and complex organisations that local councils are becoming. The omens aren’t promising.

The Audit Commission’s 2001 report, Changing Gear, suggested two-thirds of councils are either “coasting” or “performing poorly”. It said: “In some cases this is because they lack the capacity or systems to improve themselves. More often, and more worryingly, it is because they lack the will to ask challenging questions or the vision to tackle difficult choices.”

But it is possible for even the worst to change. At the beginning of the 1990s, the London Borough of Camden was a financial basket case. It lacked adequate reserves to cover its debts, didn’t have enough insurance and discovered a deferred purchase agreement nobody claimed to have known about which knocked a huge hole in its budget.

This year, Camden won the Local Government Chronicle’s coveted Council of the Year award – the local authorities’ Oscar. What happened to engineer the change? The short answer is Steve Bundred. He took over the council’s finances at its lowest ebb and went on to become chief executive. Bundred and his successors in the finance officer’s seat have created a financial management regime at Camden which is unusual among councils.

John Mabey is currently Camden’s controller of financial services. He points to two key features of the borough’s financial management which have helped it onto the straight and narrow. The first is that the annual budget is set with strict cash limits for each department, but departments are permitted wide discretion about how they spend the money within those limits. “There are certain levels where they have to get approval, but generally the principle holds good,” Mabey says. While many London borough’s social services departments overspent last year, Camden’s kept within its limits even though it had to take painful decisions and raid its reserves.

The second unusual feature is that departments are able to carry forward any underspend. This avoids last minute spending sprees where departments use up cash so they can justify a larger budget. One council, for example, blew a six figure sum on new PCs even though it had re-equipped six months earlier.

At Camden, departments can carry forward underspend into the following year, or save it for a large project. Mabey says the policy helps departments take sensible decisions about spending on projects which are less popular than front-line services, such as children’s playgroups and social services.

“You can’t have successful services unless you have the basic administrative infrastructure in place,” he says.

Camden’s approach to financial management is backed by strong performance management. The chief officer’s management team monitors indicators which go beyond those specified by the Audit Commission. For example, Camden watches the level of general debt as well as outstanding council tax and business rates. “If you don’t monitor your performance, you don’t know whether you need to take remedial action,” Mabey says.

Another former financial basket case which is well on the way to reform is Liverpool City Council. In the past three years it has held its council tax steady. This year, it managed a 3% cut, which means that, for the first time in years, it doesn’t have the highest tax in the UK. Salford, Hartlepool and Rutland are all now higher. Phil Halsall, Liverpool’s executive director of resources, says that since 1998 the council has cut expenditure by £100m.

One of the keys to Liverpool’s success has been its willingness to explore joint ventures with private sector partners. With BT, it set up Liverpool Direct to run a one-stop call centre for residents enquiring about any council matters. It has also set up a joint venture with BT to take over the running of some back-office functions such as benefit payments. Now the council is hoping to find a private sector partner to take over running care homes. This approach brings in private sector money but keeps the council in charge of standards.

Halsall says: “In the past the council was over-managed. When anybody tried to make savings, the bureaucracy got together and took the money out of front-line services. We have done it the other way round, which is to reduce the level of red tape and give people at the sharp end more freedom and flexibility.”

Halsall says that the real power in a local authority is now in its data and information flows, so Liverpool is also in the process of integrating its scores of databases so that it can get a single view of each resident.

In this way, it will increasingly be able to answer questions in its one-stop shops at the first point of contact. Halsall claims this tactic is already beginning to remove huge information processing transaction costs.

This year, Liverpool also hopes to save a further £5m by centralising procurement. The council spends £100m of its £570m annual budget on external goods and services. “Rather than just allowing people to have order books and go and buy things, we are bringing all the people together so we will then have a much greater focus on what we buy and who we buy from. As a result, we will be able to benefit fully from our buying power,” Halsall says.

Like Liverpool, most local councils are now making more use of contractors.

But they are not always an easy route to savings. Last year, Brighton & Hove City Council’s refuse collection contract with Sita collapsed amidst mutual recriminations and heaps of uncollected rubbish in the streets. The council is now paying £3m more to do the job itself.

Besides running routine services, one of the biggest challenges for councils is introducing e-government at local level. Halsall sees the fact that Liverpool has embraced the electronic agenda as being a key driver of future savings. Mabey agrees: “If local authorities don’t get into the modern world and start to deal with enquiries and payments online, they will end up as poor relations in the public sector.”

But after a decade of constant change, the immediate challenge is whether local government is capable of taking on board all the new changes Byers is determined to throw at it.

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