Spending Review - A new way forward or the same with
less?
“The Spending Review signals the start of
the Government’s journey to remove the structural deficit by the
financial year 2015-16. Cuts have been agreed with departments,
with projected levels of capital expenditure over the Spending
Review period. One thing is clear; construction, property and
facilities management are still costing too much in the public
sector. Now is the time to focus on intelligent cost reduction
measures to deliver the Chancellor’s targeted savings.”
The Chancellor, George Osborne, set himself the
target of reducing the ‘structural’ deficit to zero by 2015. It is
estimated that £83 billion is needed in spending cuts or taxes to
achieve this aim and the Spending Review marks a major step on this
journey.
We can now see where the Government’s priorities
lie. High-profile spending commitments dominated the headlines. A
surprising amount of detail was presented within the report,
however the real detail will come later once departments have been
able to properly reprioritise their programmes.
Whilst the detail will take time to emerge, that
should not stop us from responding to the fact that the public
sector must deliver more for less across property, infrastructure,
transport, construction and facilities management. Addressing this
is one of the more intelligent ways to reduce costs overall.
More than ever before, local, regional and
national government need to show joined-up thinking and a united
approach, as well as innovation in their engagement with the
private sector in order to unlock value and enable opportunity.
Here, we consider the impact of the Spending
Review and suggest possible solutions to chart a new way
forward.
Health
Health is the number one priority for the Coalition and whilst
there is an annual increase in NHS funding this doesn’t amount to
much of a ‘real terms’ increase as demographics, drugs and
operational expenditure costs will demand the NHS to deliver
efficiencies over the next three years, estimated by the Chancellor
himself to be more than £20 billion. The review sends health in
England up from £98.5 billion this year and £101.5 billion next
year to reach £109.8 billion by 2014/15. When you factor in
inflation, this could potentially lead to a reduction in real
terms, suggesting the need for prioritisation of spend within the
NHS and a reduction in the cost base.
Significantly as shadow Health Minister, Andrew Lansley in his
spring conference speech noted the adverse impact of working from
Victorian buildings. With significant total backlog maintenance
costs running to £4 billion and buildings that are clearly not fit
for purpose, the NHS needs help over this three year period in
capital funding terms. The review allows for a handful of new
hospitals like St Helier and West Cumberland but overall capital
funding will reduce from £5.1 billion to £4.6 billion by 2014.
Many will accept that the need for reform is long-overdue, with
health spending having doubled in the past ten years and the
anticipated productivity gains not being realised. Now is the time
to deliver better health outcomes, more efficiently.
There is significant opportunity. In a recent EC Harris report
into the use and management of the NHS estate assets and
facilities, we found that by undertaking a number of strategic and
linked initiatives, the NHS could generate savings that could lead
to capital receipts of up to £2.5 billion and a revenue saving of
approximately £1.4 billion of its estate operations - whilst at the
same time transforming health services.
The Chancellor also announced funding for GP commissioning
groups. However, there is real danger that the timetable to achieve
Royal Assent for the health bill to enable the GP commissioning
reform could lead to uncertainty within the primary care side of
the NHS for nine months or more. This may well impact on the
ability to achieve the efficiency targets in this financial
year.
Local Government and Emergency Services
As expected, Local Government will bear the brunt of the cuts
with revenue budget cuts well in excess of the anticipated 25%, a
freeze on council tax rises, and the pre-announced abolition of
funding to RDA and I&E bodies politically offset (but by no
means attempting to match the losses) by Tax Increment
Financing.
At first glance, the cuts may appear less severe in headline
percentage terms than previously feared, being an annual target of
7.1% pa for four years. But with population growth, increased
council responsibilities, the council tax freeze, and potential
formula redistribution between local authorities all taken into
account, as well as the impact of four years of inflation and
further freedoms for schools on their own budgets, these levels
will be challenging to meet.
The Spending Review must herald the end of the phoney war on
cutbacks and the start of a concerted drive for practical and
deliverable efficiencies which can protect frontline services and
still enable local economic growth. Councils need to take
fundamental action now.
Given that property (in all its elements) represents
approximately 20% of revenue expenditure and the capital estate
offers a comparatively painless source of efficiency gains, local
authorities should consider intelligent built-asset solutions.
These can generate savings well in excess of the target levels and
often act as an enabler for wider service efficiencies.
We expect to see a real focus on asset led transformation to
generate savings and act as a catalyst for wider change. There also
needs to be a rapid move to greater co-operation between neighbours
to drive efficiencies from the assets themselves, the team
structures which manage them, and the procurement of contractors
who service them.
The emergency services have been set their own targets for
efficiency with the challenge to focus on back office and
administrative targets. Their estates and the associated property
services offer an excellent opportunity to start this process.
Housing and regeneration
The Spending Review has sought to force major reform in the
affordable housing sector. Along with the TSA being one of the logs
on the ‘bonfire’ of the quangos, the NAHP has been slashed to £4.4
billion, representing nearly half of that previously.
However funding is divided between HCA programmes, it must now
be used in a more flexible and creative way to maximise its impact.
The creation of an investment fund that could be used across a
number of potential housing and regeneration sites, with the
potential to create self financing business plans, is a compelling
possibility for new build.
New and radical delivery models can result with further new
freedoms. Recent EC Harris research, entitled Unlocking Capacity
from the Affordable Housing Sector in England, identified
significant capacity in existing affordable housing stock and
provided a high level route map to unlocking up to £125 billion
extra capacity from the sector for potential reinvestment. This
begins to be possible if business models, adopted by the existing
providers, are re-engineered and incentivised to act more
commercially; The Chancellor has commenced this journey with his
approach to charging intermediate rents and reforms to security of
tenure on new affordable housing.
The expected confirmation to pass legislation to use growth in
future business rates to create upfront investment funds through
the implementation of a Tax Increment Financing scheme is welcomed.
This will undoubtedly complement the localism agenda and create one
of the key funding mechanisms available to the newly formed Local
Enterprise Partnerships.
The Chancellor confirmed the £1 billion per annum regional
growth fund, which will be focused on supporting balanced regional
growth across England. An additional £0.5 billion is promised for
year three, which is to be welcomed, but could this have been
brought forward?
Education
Education has returned as a political priority for investment,
with the Government recognising that the recovery will require a
strong skills-based economy. The Chancellor’s announced real-term
increases in funding for schools in each of the next four years -
the budget rising from £35 billion to £39 billion spend (including
inflation rises).
The report implied a clear direction for schools investment
against the three headings of: condition; basic need;
new/refurbished schools (focused on Free Schools and Academies) but
a great deal is still unclear - for example, how is the real term
growth really going to be achieved?
Beyond the two key areas for Schools and Early Years, there are
developments which will require support in Higher Education. This
is an area where there is a need for greater efficiency in the use
and operation of the estate.
Finally, there is mention but no detail, regarding the changes
in the delivery of provision for special needs - does this align
with the stated objective to halt Special School closures and
reverse the trend for ‘inclusion’? There is a shortage of Special
Education Needs provision and many new providers may enter the
market.
The Spending Review represents a challenge for education and the
professionals supporting it. It’s a serious task to completely
re-think how we deliver education environments and make them work.
We need to save money from overburdened overheads but equally we
must recognise the importance of high quality advice to enable us
to get it right first time. The upcoming generation of children in
our schools only get one shot at their education.
Central government
The Chancellor announced a 34 per cent cut in administration
budgets across the whole of Whitehall and its Arms Length Bodies,
saving a planned £5.9 billion a year by 2014-15. Identifying and
generating savings from property and facilities management will be
a priority.
The announcement that part of the Cabinet Office will be moving
into the same premises as the Treasury, highlights the importance
of workplace transformation projects such as the Department for
Education’s Sanctuary Buildings and the BIS property
rationalisation. Both of these demonstrated that major savings and
productivity improvements can be made. How many other departments
and Non-Departmental Public Bodies are prepared to follow suit?
We must now expect greater use of the Buying Solutions
frameworks as opposed to the Official Journal of the European Union
(OJEU), across pan-Whitehall facilities management procurement, as
a more efficient and effective way to generate efficiencies.
Transportation
Transportation has benefited from the Chancellor’s third
principle of the Spending Review, namely growth. The review has
protected high value maintenance and investment.
Key rail and highways investments have been ring fenced.
Crossrail, LUL line upgrades and capital maintenance, the
congestion easing programmes on the M62 and M25, and the Mersey
Gateway Bridge are examples of a reasoned approach to
delivering the longer term transportation strategy. In addition,
the £10 billion allocated to investment in high value road,
regional and local transport schemes, is to be commended.
The raising of the regulated fares cap to RPI plus 3% was largely
expected, with the consumer sharing some of the pain, for the
improvement in rolling stock.
But, and it’s a big but, the devil will be in the detail. Until
Philip Hammond delivers his detailed review next week there will be
continued uncertainty, particularly around departmental cuts. What
cannot be ignored is that the departmental transport budget will
fall in real terms from £5.1 billion to £4.4 billion in 2014/15 - a
fall of 21% and capital expenditure falling from £7.7 billion to
£7.5 billion - a drop of 11% in real growth. However, the
investment will still be higher than 2005/6 levels. It is likely
that programmes may be delayed, with the focus for investment on
those programmes that deliver the fastest and most beneficial
returns to society and the economy.
The Spending Review makes frequent reference to the need for
high value and efficiency, where capital spending on the wider
economy can be maximised. What will be reaffirmed by the Secretary
of State for Transport will be a drive for efficiency and
eradication of waste. This approach can deliver the savings without
significant scope reduction - driving ‘more for less’.
For more information on how the Spending Review impacts built
assets, contact:
Graham Kean
Partner, Head of Public
e graham.kean@echarris.com
Mark Prior
Partner, Head of Transportation
e mark.prior@echarris.com
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'Spending Review - A new way forward or the same with
less?'