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Chris Leslie
Civil Service World

There is a new obsession in politics today; the anxiety about the size of our national debt and budget deficits. Whether it is correct to place this at the front and centre of all policy considerations, the fact is that the coming decade will be shaped by the downstream consequences of this driving feature. Many commentators have already foretold the scale of public sector reductions – some suggesting an incredible 25% over three years in the ‘non-ringfenced’ departmental spend, such as local authority grant. We know that capital allocations are set to halve from their current £44billion to £22billion by 2013/14. And should a change of administration see an emergency budget next year, who knows where else the axe may fall?

A greater level of preparedness is urgently needed by those frontline agencies likely to feel the brunt of reduced grant levels. Yet the conditions under which local authorities in particular (and other local agencies too) have operated during the past three decades have unwittingly stripped many of the ingenuity and autonomy to cope with these changing circumstances. Take, for instance, the apparent largesse of the ‘prudential borrowing’ framework where councils have freer access to capital loans from the Treasury’s Public Works Loans Board (PWLB). These loans are at extremely low interest rates, and have removed the need for councils to do deals directly with capital markets, other than of course through the private finance initiative where this has been insisted upon by the centre. Councils have grown dependent on either grants and loans at the Treasury’s discretion – and this has never been particularly problematic until now, when we risk a change of heart at the centre of Government and the prospect of the taps being turned off and the flow of capital slowing dramatically. Should this occur, councils may be left without the ability to sustain the capital repairs and maintenance to much needed local infrastructure. And at the same time the problems encountered by a private finance initiative less able to raise investment may leave small and medium sized schemes unable to progress. In a country with £19billion of housing repairs outstanding, a £30billion backlog of transport works and the modernisation of key facilities such as energy-from-waste plants a supposed priority, surely some thought should be given to how local institutions are meant to continue when the centre of Government goes into deep-freeze?

In our new report “Capital Contingencies” we set out a series of reforms that may go some way to counteract the national obsession with debt and allow a little wriggle room for councils to make some progress. Our principal recommendation is that councils should be positively encouraged to innovate in their capital finance strategies, rather than channelled down a particular PFI route or stand in line for a diminishing grant or loan facility. Once upon a time, local authorities issued municipal bonds directly to institutional investors, a mechanism that is more common than not in most other developed countries especially the US. While ‘general obligation’ bonds secured on tax revenues may be frowned on by the Treasury still, ‘revenue bonds’ constructed as off-balance sheet endeavours could be a route worth revisiting, even though it has been prohibitively expensive until now.

Whitehall needs to throw a few concessions towards localities if it is to grow the leadership and entrepreneurialism it so often bemoans as missing. The pre budget report ought to pilot tax increment financing arrangements through ‘Accelerated Development Zones’ in our core cities. If possible, five year commitments to the capital grant that does remain could help inject some much needed security and stability so deals can be pulled together more effectively, especially by the new ‘Multi Area Agreement’ council coalitions. Single capital pots have been raided to provide short term cash to fund high-profile intiatives, a trend that will have the unfortunate side-effect of reducing rather than enhancing joint commissioning, partnership working and pooling of budgets. So a Treasury commitment not to reduce – but to enhance – single capital pots and build unringfenced resources is more important than ever.

Finally the culture of Whitehall decision-making and ‘clearances’ for local schemes needs to be gripped and harmonised, moving away from ad hoc assessment processes and different hurdles from department to department. Instead a more transparent framework against which all prospective capital innovations can be judged would help speed things up, as would the nomination of ‘lead’ departments acting as single points of contact with HM Government.

There are the best intentions at the centre of Government, but historically Whitehall has sometimes killed local ingenuity with its own kindness. Allowing local institutions to mature and do their own capital deals, with greater latitude for innovation, may be the best prospect for salvaging the core of our nation’s infrastructure in what may be a very dark period ahead.

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