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DEUTSCH COURAGE ‘Levelling up’ lessons from Germany’s reuniﬁcation CORPORATE TRUST Have local authority companies lived up to their promise?

JANUARY/FEBRUARY 2022 PUBLICFINANCE.CO.UK

NATURAL MEDICINE The research revolution with the potential to transform public policy

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New year, new fear Pandemic, recession or war? Experts predict the next ‘black swan’ event

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EDITORIAL

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Unknown unknowns

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ormer US defence secretary Donald Rumsfeld passed away at the end of June 2021, little more than a month before the shambolic departure of the last US troops from Afghanistan. The final flight out of Kabul airport marked the end of a 20-year war, of which the Washington veteran had been a major architect. In a report released the same month, US academics put the cost of the Afghanistan conflict to the US taxpayer at more than $2trn. History is likely to remember Rumsfeld as a cheerleader for disastrous and expensive Western military action in the Middle East during the post-9/11 era. Today, however, he is almost as well known for a 2002 press conference, widely mocked at the time for its inclusion of the soundbites “known knowns”, “known unknowns” and “unknown unknowns”. Much of the derision stemmed from the context – Rumsfeld was using seemingly pretentious language to justify the invasion of Iraq on the basis of non-existent evidence of nuclear and chemical weapons. But the wording had been used in engineering circles as far back as the 1960s to describe different forms of risk, and survived its association with Rumsfeld to enter common usage.

These days, the expression ‘black swan’ is often used in place of Rumsfeld’s ‘unknown unknowns’ to describe catastrophic situations that are impossible to predict. Whether Covid-19 is a true ‘black swan’ is hotly debated, not least by author and statistician Nassim Nicholas Taleb, who introduced the phrase in a 2007 book. He points out that a pandemic was not only predictable but actually predicted years ago. Nevertheless, although far from straightforward, anticipating and preparing for plausible future calamities could help save billions in public money. In our cover feature (p26), we speak to futurologists about where the next nasty surprise might emerge from. On p46, we take a deep dive into the work of the academics who were awarded the 2021 Nobel Prize in economic sciences and how it could help governments make better decisions on targeting their resources. And, with the issue of public standards continuing to dominate UK headlines at the end of 2021, we talk to Margaret Hodge MP, someone who, as former chair of parliament’s Public Accounts Committee, knows more about the topic than almost anyone else (p40). Local government, she says, could provide lessons.

Anticipating and preparing for plausible future calamities could help save billions in public money

COLIN MARRS Editor colin.marrs@publicﬁnance.co.uk PUBLICFINANCE.CO.UK 3

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15/12/2021 16:41

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CONTENTS

JANUARY / FEBRUARY 2022

NEED TO KNOW

Catch up

OECD pandemic recovery warning; EU Global Gateway initiative 10 News analysis

Sunak’s tax conundrum; COP26 financial fallout; Rail plan disappointment 14 Big picture

Delhi smog 16 Talking points 17 World in numbers

OPINION

19 Taxing issue

Demographic changes hindering tax cuts

32 Enterprise culture

Evaluating a decade of municipal companies 40 Interview

MP Margaret Hodge worries about a decline in accountability 46 Eyes on the prize

Nobel-winning research methods could improve public sector decisions

25 Lender option

The UK needs a public development bank

37 Mind your business

Ensuring effective governance of local authority companies 51 Positive identiﬁcation

How a spreadsheet error proved the value of Covid-19 contact tracing

IN PRACTICE 55 Policy

Better planning 57 Ethics

Personal investment rules 59 Regeneration

Managing borrowing 60 Treasury management

IN DEPTH 20 Joined-up thinking

What the UK can learn from the process of 1990s German reunification 26 Waiting in the wings

Futurologists predict the next disaster that could hit public finances

Growing social as well as monetary returns 61 Management

Engaging staff in conversation is vital 63 Procurement

Green purchasing 64 Events 65 On account

Accounting qualification 66 Where next?

PUBLICFINANCE.CO.UK 5

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1SPDVSJOH XJUI DPOEFODF .BYJNJTF UIF WBMVF PG FWFSZ QPVOE TQFOU Robust and compliant procurement is key in the delivery of public services with organisations needing to meet statutory obligations and deliver value for money for taxpayers. CIPFA is committed to helping public sector organisations reduce the costs and risks associated with procurement, and improve outcomes as a result. We offer: Advisory and consultancy: a range of services to support public sector procurement – highlighting areas for improvement against best practice. Upskilling your teams: a range of training to upskill ǋūƭƑ ƎƑūČƭƑĚŞĚŠƥ ƥĚîŞƙ îŠē ĺĚŕƎ ƎƑūƥĚČƥ ǋūƭƑ ǛŠîŠČĿîŕ sustainability.

Find out more Start your procurement conversation today: visit ČĿƎĲîȦūƑĳȬƎƑūČƭƑĿŠĳǅĿƥĺČūŠǛēĚŠČĚ email chris.tidswell@cipfa.org call 020 7543 5600

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N E W S / A N A LY S I S / O P I N I O N / D E B AT E

p10

p12

p19

A FAIR COP? Renewed pledges on climate aid for developing nations

OFF THE RAILS Property schemes hit by highspeed rail plan downgrade

HEAVY DUTY Will Rishi Sunak really be able to reverse his big tax hike?

PANDEMIC RECOVERY

OECD issues warning to policymakers over post-Covid-19 spending plans By Colin Marrs

olicymakers must seize the opportunity presented by economic recovery from Covid-19 to overhaul public finances, according to the OECD’s chief economist, Laurence Boone. In the introduction to the latest OECD Economic Outlook, published in December, Boone said that governments around the world have failed to produce robust medium-term plans for fiscal interventions. He called for new plans to produce more resilient and stable economies in future. In the introduction, Boone also voiced worries that policymakers would fail to act on lessons learnt during the coronavirus pandemic. He said: “The recovery presents an opportunity to revamp public finances — failing to grasp it would be a mistake with long-lasting consequences. We are worried at the lack of discussion about this crucial topic.”

Photography: Getty

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NEED TO KNOW

CATCH UP

AUTHORITIES KEEP BACK MORE FOR BUSINESS RATE APPEALS The level of business rates income held in reserve by UK local authorities to cover future appeals rose by almost a third last year – an increase of close to £1bn. Councils held £3.9bn in their appeals provisions at March 2021, compared with £2.92bn held the previous year.

Although relaxed about the increase in government debt during the crisis, Boone warned that more attention needs to be paid to how additional funds are being spent. “We are more concerned by the use made of debt than its level – the increase in debt during the pandemic was needed to underpin economies during the most intense period of the crisis.” Fiscal support from governments should focus on investment to boost growth, Boone said, highlighting education and physical infrastructure. “Detailed medium-term plans for public finances are missing – work on these should start now,” he said. “A clear, strong and responsible fiscal framework would strengthen confidence that growth will rise and diminish imbalances and risks.” Boone also fears that governments might fail to address weaknesses in health systems highlighted by the pandemic. He said: “Preventive and curative healthcare systems need reform, pandemic preparedness needs improvement, and the distribution of medical equipment and drugs needs better coordination. Failure to take these steps would be inexcusable.” However, recovery plans face a number of risks, not least from new

variants of Covid-19, the report found. It also warned that inflation could “become entrenched at levels above central bank targets”, with major central banks being forced to tighten monetary policy earlier and to a greater extent than projected. The OECD said that underlying inflation rates – which remove the distorting effect of sharp swings in particular items – rose to 4.1% in October. “These developments suggest that the rise in prices has become more broad-based in recent months,” the report said. Writing in the wake of November’s COP26

climate change conference, Boone voiced alarm over whether governments are taking the necessary steps to prevent global warming. He said that “there is too much talk and not enough action when it comes to climate change”. Uncertainty over policy towards net-zero carbon emissions is hindering investment in clean energy and infrastructure, he warned. “The longer governments wait, the greater the risks of an abrupt transition in which energy prices are higher and more volatile. Inaction therefore increases the risks to people’s living standards and may undermine public support for the energy transition.” In a section focusing on the UK, the OECD said the government could help stimulate the economy by being clear about its approach to the transition to a net-zero economy, providing certainty for businesses. The report also called for increased investment in green heating in homes and advised the UK government to focus on improving residential heating alongside infrastructure measures, such as making the electricity system more suitable for much higher volumes and varied sources of renewable energy.

UK government set to publish ‘levelling up’ plans

CIPFA in tie-up talks with ICAEW

Local governments’ credit outlook improves

January will see the long-awaited publication of UK government plans to encourage regional prosperity. The Department for Levelling Up, Housing & Communities has conﬁrmed that its ‘levelling-up’ white paper will be published during the ﬁrst month of the year. The draft legislation is the successor to the abandoned devolution white paper announced in September 2019. According to press reports, the white paper will set out devolution deals for counties and areas with populations of 500,000-plus.

CIPFA is in discussions with global accountancy body ICAEW to draw up plans for closer collaboration, it has announced. The two bodies will now conduct detailed discussions, with the aim of bringing forward firm proposals in 2022. In a joint statement, CIPFA chief executive Rob Whiteman and ICAEW chief executive Michael Izza said: “We believe there is significant strategic benefit in our two bodies working more closely in the future, and our discussions will examine ways of achieving that.”

Central government support for local and regional governments (LRGs) around the world during Covid-19 has increased the sector’s credit outlook, according to ratings agency Standard & Poor’s. But the agency said that 12% of local and regional government credit ratings still have a negative outlook, compared with just 6% having a positive one. “Even though our ratings on LRGs outside the US have been stabilising since the beginning of the year, we note a modest negative bias above pre-pandemic levels,” the report said.

Detailed mediumterm plans for public finances are missing. A clear, strong and responsible fiscal framework would strengthen confidence Laurence Boone, OECD

IN BRIEF

8 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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The Global Gateway strategy will ‘reaffirm the EU’s vision of boosting a network of connections… to provide a level playing ﬁeld’

DEMOGRAPHIC CHANGE

Warning over cost of ageing populations

INFRASTRUCTURE

EU launches global investment initiative By Calum Rutter

he EU has unveiled plans to mobilise €300bn of global infrastructure investment, rivalling China’s massive Belt and Road Initiative (BRI). The total will come from the EU, member states and leveraged investment from the private sector, the European Commission said in late November. Announcing what they have called the Global Gateway, officials said the money will be spent by 2027 on digital, energy and transport infrastructure, plus health, education and research around the world. “We will support smart investments in quality infrastructure, respecting the highest social and environmental standards, in line with the EU’s democratic values and international norms and standards,” said commission president Ursula von der Leyen. “The Global Gateway strategy is a template for how Europe can build more resilient connections with the world,” she added. Photography: Shutterstock

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Although not referring directly to China, whose influential BRI has seen it invest hundreds of billions in infrastructure around the world in the past decade, the plans repeatedly stressed the ethical approach the EU plans to take. “A stronger Europe in the world means a resolute engagement with our partners, firmly grounded in our core principles,” said the commission’s high representative Josep Borrell. “With the Global Gateway strategy, we are reaffirming our vision of boosting a network of connections, which must be based on internationally accepted standards, rules and regulations in order to provide a level playing field.” China’s BRI has faced criticism for contributing to so-called ‘hidden debt’, which can be difficult to track because the borrowers are often state-owned companies, special purpose vehicles, joint ventures and the private sector, rather than central governments with strict reporting requirements.

Growing government spending resulting from increases in life expectancy could cause sovereign debt-to-GDP ratios to rise by 140% in the next few decades if governments fail to act, according to a leading ratings agency. Higher costs from pensions and healthcare, combined with falls in output and tax income owing to a relatively smaller workforce, are set to pressure governments in the coming years, Fitch said. In a paper covering 33 countries, the agency projected that median costs to the public purse would rise by 2.4% of GDP annually by 2045 and 3.6% by 2070, while public debt-to-GDP would rise by 46% and 140% of GDP by the same years. This would probably come with a rating downgrade of an average of 1.1 notches by 2045 and 3.8 by 2070, the paper said. However, the projected impact, based on governments taking no action, varies widely – from a 4.2-notch upgrade for Greece, to a 10.5-notch downgrade for Slovakia by 2070. Fitch said: “Positive or benign projection paths reflect governments’ comprehensive pension reforms in recent years, while more severe demographic ageing proﬁles and insufficient reforms explain the more adverse projection paths.” Some pension reforms have improved prospects in several of these countries in recent times, Fitch said. But it warned that reform could become more difficult politically, as populations age. The paper said most of the projected impact would be seen after 2030. PUBLICFINANCE.CO.UK 9

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NEED TO KNOW

NEWS ANALYSIS

ith the world at a seemingly critical point in the fight against climate change, COP26 was seen as a vital chance for decisionmakers to reach agreement on slowing global warming. Experts in green finance have given a qualified welcome to the outcomes of the event. In Glasgow, rich nations agreed to finally provide $100bn of climate finance per year to developing countries, starting in the next two years – a target first set in 2009 for 2020, when it was missed. But even this figure represents “a drop in the ocean” compared with the trillions needed to shift to renewable energy, said Harald Heubaum, senior lecturer in global energy and climate policy at SOAS University of London. “What the target really does is signal to investors that things are moving,” he said. “It also has a catalysing effect.” By investing wisely, added Heubaum, governments can mobilise private capital. “If you can leverage several times the original investment – or even more – it is important.” The US, UK, France, Germany and the EU announced an $8.5bn deal with coal-dependent South Africa to help it decarbonise its electricity system during the next five years. The deal could form an “important prototype” for how to support a global ‘just transition’, said Danae Kyriakopolou, senior policy fellow at the Grantham Research Institute on Climate Change and the

C L I M AT E F I N A N C E

What did COP26 achieve? Deals at the UN climate summit could see government funds lever in more private ﬁnance for green projects By Calum Rutter

Environment. It includes grants, concessional loans, investments and risk-sharing instruments, focusing on supporting workers in affected sectors, like coal mining, into ‘green’ jobs. “The big issue with decarbonisation is going to be unemployment, especially among the youth and coal miners. Getting South Africa right is really important.” COP26 also saw a shift towards climate finance for adaptation (measures to help communities live with the results of climate change) rather than mitigation

(actions to slow global warming). “Although the commitments need to translate into policies, there has been a realisation that, even in the best-case scenario, we need adaptation,” said Kyriakopolou. “The best adaptation strategy is a successful mitigation strategy,” said Heubaum. “However, we have realised that mitigation has not been as effective as we had hoped.” He added that public finance for adaptation is set to reach $40bn if COP26 commitments are met. “This is a lot of money,

but it has a less catalysing effect than mitigation measures often do,” he said. While energy projects might attract private investors via part-ownership or rate collection, adaptation measures such as flood defences do not. “Adaptation is more of a public good that accrues over a longer period of time,” Heubaum explained. At COP26, 20 governments committed to ending – by the end of 2022 – finance for overseas fossil fuel projects, although some of the world’s most coaldependent countries – such as Australia, China and India – did not sign up. “With strong implementation, this initiative could shift at least $24.1bn per year in direct public finance out of fossil fuels and into clean energy, which will move even larger flows of private finance,” said Laurie van der Burg, global public finance campaign co-manager at research and advocacy organisation Oil Change International. “This is a massive and real impact.”

SEPTEMBER/OCTOBER 2020 10 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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NEED TO KNOW

NEWS ANALYSIS the number of years since UK taxes were as high, according to the OBR

AUTUMN BUDGET

Sunak’s tax-cut desire faces hurdles The UK chancellor may ﬁnd it hard to reverse his record-breaking Budget hike By Oliver Rudgewick

n December, a UK tabloid newspaper ran a front-page report, seemingly based on a briefing from the office of chancellor Rishi Sunak. Treasury officials, the story said, had been told to draw up plans for tax cuts before the next general election. Sunak seems keen to quickly shake off his reputation as a high-taxation chancellor after his October Budget saw him impose what the Office for Budget Responsibility identified as the highest tax bill for 70 years. But experts believe that reversing this move will be far from easy. Tom Pope, deputy chief economist at think-tank the Institute for Government, said that increased taxes have been on the cards for a few years, owing to an ageing population and rising social care pressures. “The factors that have led to this increase in tax are really longer-term, structural ones, but maybe the political imperative to do it was strengthened by Covid-19,” Pope said. James Smith, research director at think-tank the Resolution Foundation, agreed, saying higher taxes are the only way to ensure proper funding for public services. “They are inevitable, given the size of the hit from the pandemic

to the public finances and the legacy of 10 years of austerity,” Smith said. “It means that public finances have to be repaired, and that has to be achieved by raising taxes, rather than trying to cut public services that have already been cut a lot.” Departmental allocations in the Spending Review, announced alongside the Budget, tell an interesting story about Sunak’s attitude towards taxing, borrowing and spending, according to Pope. “It was notable that the biggest spending increases come in straight away next year, which should help departments deal with any coronavirus issues and service backlogs,” he said. “The increases are less generous beyond that, but most of the tax increases will have their biggest effects in

a couple of years’ time. So he seems willing to borrow to deal with Covid-19 issues in the short-term but not willing to borrow for longterm public spending.” But rushing to reverse the tax rises too quickly could cause problems on a number of levels, Smith said. “That is the sort of thing that economists have highlighted as a problem for years. You get governments borrowing to fund giveaways in the runup to a general election. That ends up ratcheting up your debt. Doing that would be textbook bad policy.” Smith warned that the process of mending the public finances following Covid-19 cannot be rushed. “The desire to cut taxes is unsurprising, given the electoral cycle,” he said.

UK chancellor Rishi Sunak seems keen to shake off his reputation for high taxes

Photography: Getty, HM Treasury

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“But we would not really be repairing the public finances enough to cope with the next recession that comes along.” Sunak’s hopes rely partly on how well and quickly the UK economy bounces back from Covid-19, warned Pope: “Sunak may not have said it explicitly, but he has certainly briefed it implicitly that he wants to unveil tax rises now, earlier, to get things on a sure footing, and then announce cuts later. That is contingent on the economic forecast. If it continues to look like a relatively good recovery, then I suspect he could either reverse some of those tax increases, or find some other way of cutting taxes so he would have more money to spend, within his fiscal rules.” Tony Travers, director of the Institute of Public Affairs at the London School of Economics, warned that if the government wants to maintain its commitment to funding healthcare, then higher taxes are probably here to stay. He said: “The forecast growth rates in the final couple of years in the run-up to the next election are not particularly impressive, so it is difficult to see how there can be lower taxes.” PUBLICFINANCE.CO.UK 11

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NEED TO KNOW

NEWS ANALYSIS

hen the UK government launched its reduced (but still £96bnworth) of rail plans in November 2021, two noises could be heard across northern England. One was an almighty roar of outrage. The second came from the tapping of figures into spreadsheets, as public bodies examined how their economic plans would be affected. In simple terms, the eastern arm of High Speed 2 (HS2) will now only reach as far as East Midlands Parkway in Nottingham, with trains between there and Leeds to be run on conventional lines. Northern Powerhouse Rail, the intended high-speed link between Manchester and Leeds via Bradford, has been scaled back into disparate improvements that should quicken journeys – though by how much is unclear. The Midland Main Line between London and Sheffield will, however, be electrified. Councils that had planned for increased land values and business rates from the original HS2 and NPR plans must now rethink. The most aggrieved is Bradford, which has slow connections to its two dead-end stations. It had been due an NPR through station, giving rapid links to Leeds and Manchester. Bradford Council leader Susan Hinchcliffe estimated that this could have delivered 27,000 jobs and £30bn in gross value added over the next decade. Now the UK’s seventh largest city feels marooned. “We are getting pretty much nothing,” said

I N T E G R AT E D R A I L P L A N

Watered-down rail plans hit regeneration ambitions Leaders in the north of England say the scaling back of government rail plans is a hammer blow to business cases aimed at sparking renewal By Oliver Rudgewick

Hinchcliffe. “This is not just about connectivity and transport – important as that is – but about opening up development land. A through station would have opened up land south of the city centre equivalent to three times the size of London’s Canary Wharf, and the land values would have increased to allow us

to develop it. Businesses could move away from Bradford if we cannot find them space to grow.” The council still plans to relocate its wholesale market from the through station site, as it can still develop that, said Hinchcliffe. “But it will take a lot longer as land values will not increase as fast,” she warned.

The pill was sugared with a promised mass transit system for Leeds and Bradford, but Hinchcliffe said: “Although that is welcome, it does something different. Mass transit connects up streets and towns, which is fine, but it is not what heavy rail does.” Transport for the North, the regional transport body, was designated as co-client on NPR with the Department for Transport, but, after criticising government plans, it has been demoted to ‘co-sponsor’. This new status is among much that TfN is seeking to understand, according to chief executive Martin Tugwell. “There is no change in our powers or role,” he said, “but we were co-client on Northern Powerhouse Rail, which made sense as the team designing the business case and the evidence base is here. Now we must have some conversations with the DfT.” Tugwell said NPR’s driver was not just connectivity but increased business

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HS2’s Interchange Station will make Solihull the bestconnected place in the UK by rail, road and air

D ATA

The value of rail Size of markets served by HS2 stations

Photography: HS2

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1.37m £42.2bn

Gross value added

1.31m £9bn

366k £2.8bn

1.97m - Leeds 405k Wakefield

Glasgow City Region

Annual journeys to and from London (2018-19)

Edinburgh & South East Scotland City Region

114k - Bradford £73.5bn

727k £42.9bn

KEY

Newcastle upon Tyne

Darlington

1.4m £6.3bn York

727k £4.5bn Preston

576k £5.7bn Stoke-on-Trent

South Yorkshire Combined Authority

Nottingham

1.37m £7.1bn

346k £7.5bn

Greater Manchester Combined Authority

Derby Warrington

Source: UK Department for Transport

Stafford

1.31m £9bn

411k £3.2bn

Liverpool City Region Combined Authority

Sheffield 930k Doncaster 709k £27.3bn

1.7m - Liverpool £33.6bn

West Yorkshire Combined Authority

3.9m - Manchester 680k Stockport £71bn

confidence. “You only need to look at what is happening around Curzon Street in Birmingham – years before the HS2 station actually opens – to see what happens when the private sector knows investment is going into a major station. Rail capacity creates a catalyst for regeneration.” NPR was based on driving economic growth. “Anything less provides less social benefit,” said Tugwell. “We are trying to determine the difference between NPR and the government’s plans.” He added that northern civic leaders are keen to see if a future uplift in land values from rail projects could help finance those works now, or if they could use a business rates levy as London did for Crossrail. Norman Baker, a Liberal Democrat transport minister under the 2010-2015 coalition – which also used the current government’s line about ‘the largest rail investment since the Victorians’ – takes a

sanguine view. “The amount invested would be seen as quite good if Boris Johnson had not over-promised the earth,” he said. “Even though it is different to what was expected, the big thing is that the Midland Main Line gets electrified, which speeds up journeys. The new Transpennine Route can be made to work, but it is rather mix and match.” Christian Wolmar, author of numerous books on railways, also sees some merits. “They have cut a chunk of HS2 to Leeds that would have served Toton – which is in the middle of nowhere. But now it will run almost to Nottingham, which will also get the electrified Midland Main Line,” he said. “The change to the Transpennine Route is more of a problem, but this plan still provides about twothirds of it.” He added: “The place that really has a problem is London, with threats to Transport for London’s funding.” In late November, London mayor Sadiq Khan talked of closing an underground line unless the government bails TfL out of its financial plight, caused by slumping passenger numbers during the pandemic. Just like TfL, the original HS2 and NPR plans – which, Wolmar concluded, were based on an assumption of growing rail traffic – could have been hammered by homeworking. The trend may have upset all calculations around future rail passenger numbers in ways about which there cannot yet be any certainty.

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NEED TO KNOW

BIG PICTURE

INDIA

Smog hits Delhi GDP

eople ride a boat across the Yamuna river, on a smoggy November morning in Delhi, India. The city’s authorities closed schools and colleges for two weeks that month after air pollution rose to dangerous levels. After a short reopening, educational institutions shut again, following an intervention by India’s Supreme Court. A ban on construction was also implemented, with restrictions placed on the movement of trucks. In December 2021, the city was named as having the world’s poorest air quality for the third year running, with concentrations of dangerous particulates at nearly 10 times the target set by the World Health Organization. A report published by the Clean Air Fund in April 2021 found that poor air quality costs Indian businesses 7 lakh crore (US$95bn) every year – equivalent to 3% of the country’s economy. The figure for Delhi is 6%. Costs to the economy are felt in lower labour productivity, reduced consumer footfall, premature mortality, lower asset productivity, increased health expenses and welfare losses, the report found. Separate research by the Energy Policy Institute at the University of Chicago found little difference in air quality between poor areas and richer, more leafy, areas of the Indian capital. In an article in the Hindustan Times, published in November 2021, the authors said: “In Delhi, where not even the rich are breathing clean air, it is in everyone’s interest to solve this problem.”

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Poor air quality costs Indian businesses the equivalent of 3% of the country’s economy every year, and 6% in Delhi

Photography: Alamy

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NEED TO KNOW

TALKING POINTS

FROM ONLINE

Comment from PublicFinance.co.uk k One online reader blamed a politicised and dysfunctional nal civil service after MPs said d the UK’s Department for Work k and Pensions had lost its grip on fraud and error within the universal credit system.

GDP feature spread from the November/ December 2021 issue of PF

“Hardly surprising, given that LETTERS most of the civil service [is made up of] metro liberals who do not really care if their actions damage a Conservative government that has implemented key policies We were delighted to see your latest (like leaving the EU) to which edition participating in the debate they are politically opposed. about GDP and its relevance The civil service is not as a measure of progress. fit for purpose, but The Office for National TER its ridiculous terms Statistics and other TWIT o t and conditions parts of the UK f CEO o-1 in o make it painfully government have o i t t ra expensive to do undertaken a “The ay was 21- 1989. rp in e anything about it. great deal of work 1 k r o o t k w l 1a 6 T d . Like redundancy to build upon 1 n a 1965 it is 351-to n” pay, which gives six weeks’ pay Today out inflatio r at the ab for each year fesso , h, pro alifornia c i e of service.” R C er of ert

Growing pains

Rob Austin

Rob niversity and form or U ley, f lab Berke cretary o e US s

measures of economic growth to include wider elements of welfare and environmental impacts. ONS has long argued that GDP is good for understanding some issues, but not others. ONS officials have been active in all parts of the revision of the System of National Accounts (see Ehsan Masood’s Viewpoint, p44, PF, November/December 2021). The UK is one of the pack of leading countries looking at alternatives to GDP, either through the Inclusive Wealth framework and measures proposed by Sir Partha Dasgupta in his Economics of Biodiversity report for the Treasury or ONS’s recent work to develop augmented metrics, building on available data sources. Richard Heys, deputy chief economist, ONS

“The econ economy is expandin expanding at its fastest p pace in many ye years, carrying tthe promise of a return to maxim maximum employme employment” US Federal Reserve chair J Jerome Powell, after being nominated to sserve a second term by president Jo Joe Biden

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NEED TO KNOW

WORLD IN NUMBERS

136

The number of nations that have agreed to OECD’s overhaul of minimum global corporation tax rates, which will see governments collect an additional $150bn each year.

The amount US GDP grew in the three months to September – signiﬁcantly slower than the 6.7% seen in the previous quarter, according to ﬁgures from the Department of Commerce.

2070 The year by which India plans to become carbon neutral, according to prime minster Narendra Modi. This is 20 years later than many other countries.

1.8%

The increase in funding for English councils over the next three years, once income from the government’s health and social care levy is accounted for, according to the Institute for Fiscal Studies.

$700MILLION

WORLD IN NUMBERS

The size of a loan rejected by the Nigerian Senate Committee on Local and Foreign Debt. President Muhammadu Buhari had requested the loan to fund a water hygiene project.

$8.5BN

The combined funding pledged by the US, the EU and the UK to aid the transition away from coal power in South Africa. The ﬁve-year agreement will aim to reduce reliance on fossil fuel, which contributes to 90% of energy usage.

£57.8BN

The reduction in the UK government’s planned bond sales for 2021-22 since its April forecast.

£15.2BN The amount of tax lost to fraud in the UK in 2019-20 – equivalent to 43% of uncollected income, according to campaign group Taxwatch.

1.5

The percentage point rise on the main lending rate at Brazil’s state bank, Banco Central do Brasil. It raised the rate to 7.75% to stave off inflationary risks. PUBLICFINANCE.CO.UK 17

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10/12/2021 14:16

OPINION

AUTUMN BUDGET 2021 DAN CORRY

reports, but it is perhaps only now biting – partly brought into focus on the back of the Covid-19 crisis. For some years, the answer was to cut everything else – including welfare, criminal justice and local government. But that could not go on forever. People were starting to notice. Add to this the Conservative voter coalition that emerged from the 2019 election – they cannot afford private health or private schools. They do not have three cars and nannies. They do use welfare, at least sometimes. This creates an issue about what to cut if you choose not to put taxes up. So, Sunak is confused. The Treasury is probably confused. The opposition will have to work out what its lines are. We could be moving into a new economic era. Perhaps the new economic debates will be much less about tax and more about how we get better growth and productivity in this post-Brexit era. Perhaps future elections will be a contest of what we spend public money on and how we do that well – not just the amount. Maybe we will we see Brand Rishi’s signature on that sometime soon?

Is Rishi Sunak a ‘cakeist’?

The UK chancellor touted his low tax credentials while raising taxes to their highest level since the 1950s in his Autumn Budget

have been lucky enough a small-state Conservative. to have been involved in He is a clever man. He must drafting Budgets. I have have known that the Institute helped politicians respond for Fiscal Studies and others to them, and I have done a would quickly find he would lot of writing about them. I be increasing tax to the am used to flowery language, highest level since the early DAN CORRY is overclaiming, confusing the 1950s; that far from shrinking chief executive of New Philanthropy punters by mixing up real the size of the state, he was Capital and a former with cash amounts, single raising it to the highest level adviser to No 10 years with multiple years, and since the late 1970s. and the Treasury leaving them trying to work Sunak did not choose to out what was new and what keep spending very tight to was a clever re-announcement. But I was bring down the debt and reverse some pretty flabbergasted by one aspect of UK of the earlier tax rises. Instead, he chancellor Rishi Sunak’s speech in his counted the extra money raised and October Budget and Spending Review. chose to spend a good chunk of that Sunak spent most of his speech too. So what was going on? telling us that the floodgates of public One theory is that Sunak did not spending had now opened. Suddenly, really want much of his own Budget to there was money everywhere. Austerity be there. Rather, it was his big spending, was not only over but had a stake hi-viz-jacket-loving neighbour, the driven through its heart. To top it all, prime minister, who forced it all on the chancellor proudly made clear him. Maybe. But that would make him that – for the first time in ages – all sound truly powerless departments would get a real-terms – not a good look increase in their budgets (if one believes for any chancellor. the inflation figures, of course). Perhaps more likely is But then, in spite of everything he that he – along with had just said, Sunak told the House of other small tax, small Commons and the nation that he wants state advocates – does to bring down taxes; that he is really not really know how to deal with the way the world is going. As our population gets older, we are seeing health, pensions and care gobbling up more and more of what the state feels it can afford to spend. This has been obvious for years and much written about in various specialist

The chancellor spent most of his speech telling us that the floodgates of public spending had now opened

Illustration: IKON

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FEATURE

LEVELLING UP

ore than two years after UK prime minister Boris Johnson promised on the steps of Downing Street to “unite and level up”, arguments continue over what the project should encompass. Yet Johnson himself knows where to look for an ambitious blueprint for the ‘levelling up’ agenda. In July, Johnson cited the example of German reunification in the 1990s. As he pointed out, this exercise in political reorganisation and national reconciliation was also economic – to bring West German standards of living, infrastructure and

TEARING DOWN economic prosperity to East Germany. Is it possible for the UK to repeat the trick? The comparison is a sound one, says Kathrin Enenkel, an analyst at the Centre for Cities think-tank. “Directly after reunification, productivity in East Germany, including Berlin, was at around 60% of West Germany’s. It is now at around 85%,” she says. “While the former East Germany has still not fully closed the gap between itself and former West Germany, it now has a GDP per capita higher than many parts of Northern England and Wales.” Clearly, the UK in the 2020s is in a different place and time to Germany following the collapse of the Berlin Wall in 1989. But the parallels between then and now are striking. “Investment in basic public services was badly needed in East Germany. Housing was a mess and the infrastructure was falling apart,” says Felix Rösel, professor of economics at the Technical University of Braunschweig, who specialises in urban

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Can C an le lessons essons ffrom rom tthe he rreuniﬁcation euniﬁcation o off G Germany erm many help UK government’s up’ agenda? help tthe he U Kg overnment’s ‘‘levelling levelling up p’ ag gen nda? ?

THE BARRIERS W O R D S DAV I D P R O S S E R

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FEATURE

LEVELLING UP and regional economics. “Plus, the population of West Germany was far wealthier.” The UK faces similar issues today, ranking lowest for regional equality among OECD countries. The Institute for Fiscal Studies points out that while the average resident of wealthier London boroughs earns more than £700 a week, the figure in Blackpool is just £379; 89% of working-age people in parts of the South East are in employment against 63% in places such as Middlesbrough and Barrow; 70% of adults in Cambridge have a degree qualification, whereas the figure is just 15% for Great Yarmouth. The biggest lesson of all from German reunification is that such disparities can be tackled. GDP per worker in 1992 was around €40,000 in East German cities, against €60,000 in Western cities; today, East German productivity is €80,000, closing in on West Germany’s €95,000. How have such gains been achieved? The answer, says Rösel, starts with clarity of vision and specific objectives. “The overriding priority from day one was to close the income gap between East and West,” he explains. “There was a recognition that financial subsidy would not be enough: the focus also had to be on improving education, so that people had the skills they needed, and on improving infrastructure, so that employers and employees could operate effectively in East German communities that were also nice places to live and work.”

Funding gap

Leipzig has emerged as a boom town after being at the forefront of toppling the Communist government

Clearly, funding is crucial. Research from the Free University of Berlin estimates that, between 1990 and 2014, around €2trn was spent on reunification projects, including substantial transfers from western to eastern areas of Germany via social security systems. “Commitment in the UK is going to be needed on a similar scale,” says Enenkel. The Centre for Cities points out that Germany has spent the equivalent of £71bn a year – against just £4.8bn allocated to the UK’s Levelling Up Fund in total so far. However, another lesson from Germany is that the shape of funding matters as much as the volume. “The German government was determined to give individual states and regions as much autonomy as possible when it came to how they invested in education and economic development,” says Dr Benjamin Klement, an economic geographer at the Fraunhofer Center for International Management and Knowledge Economy. “It recognised that the regions of East Germany were better placed to understand their strengths and how to capitalise on them.” Large-scale infrastructure projects aimed at driving nationwide connectivity remained the preserve of national government, but much of the work of regeneration and investment was outsourced to 22 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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local officials, Klement says. That brought its own challenges. The former East Germany lacked the federal structures of West Germany, having been run centrally for so long, making devolution very challenging. “The only option was to transplant the entire West German political system onto East Germany,” says Klement. That happened almost overnight, with thousands of West German civil servants employed to recreate the West’s localised political structures in the East. Such radical reforms caused some resentment. “There was a perception that East Germany was suddenly being ruled by the political elites of the West,” says Klement. But without creating new systems of government and governance, it would have been difficult for local communities to exercise power. UK observers may wonder whether initiatives such as the introduction of metro mayors in some parts of the country will need to be augmented. Indeed, some in Germany believe that not enough power has been devolved. “My advice to the UK would be not to try to define what ‘levelling up’ means from the centre – lean on local authorities and respect local identities,” Photography: Getty

14/12/2021 17:25

Rösel says. “Too often, the very different cultures and characteristics of East Germany were ignored,” he argues. Although cities such as Leipzig and Rostock were able to embrace their own identities and prosper accordingly, large swathes of rural East Germany have not fared so well.

Long-term commitment Certainly, many Germans would accept that there is more work to do – signalling another lesson for the UK. “Germany said it would not stop its programmes until living conditions were equalised across the whole country – and that hasn’t happened yet,” says Enenkel. “The UK needs to accept that ‘levelling up’ will not be completed within a single parliament.” This will require an attempt to reach at least some degree of political consensus. Without cross-party co-operation and agreement, every government initiative will be dogged by doubts about its longevity. “We have to try to take the politics out of this and see it as a long-term reset of the country,” says Daniel Burke, a partner at PwC, who works with government and public sector bodies on reform. Without a broad group of stakeholders working with local communities to deliver their priorities, ‘levelling up’ is unlikely to succeed, he warns. “The defining characteristic of failed regeneration projects is

IN NUMBERS

German spending has worked out at the equivalent of

Level playing field? The average resident of wealthier London boroughs earns more than

£700 a week The ﬁgure in Blackpool is just

£379

70%

of adults living in Cambridge have a degree qualiﬁcation, but the ﬁgure is just

15%

£71 bn a year against just

£4.8bn allocated to the UK’s Levelling Up Fund in total so far

in Great Yarmouth

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Germany has greatly improved regional parity, but, in some areas, the ‘blooming landscapes’ of reuniﬁcation promised by chancellor Helmut Kohl in 1990 still look more like ‘barren meadows’

FEATURE

LEVELLING UP

GLOBAL LESSONS

Shaping ‘levelling up’ Comparisons between ‘levelling up’ in the UK and German reunification resonate with Jeffrey Matsu, chief economist at CIPFA. He is leading the institute’s research into how cities around the world have deployed a range of strategies to tackle regional inequality. The findings are set to be published in January, but Matsu says it is already clear that the most successful ‘levelling up’ initiatives share some common characteristics. One conclusion, he explains, “is that having well defined metrics and indicators is vital”. Policymakers should be ambitious, he says, but they also need to be clear about how they will be judged on whether their ambitions have been realised. Those measures need to be agreed on during the design stage of policy initiatives. Successful initiatives also feature strong leadership and accountability. “We do need a sense of ‘we are all in this together’, but we also need to decide who is leading, whose policies are being pursued,

and who is responsible,” Matsu says. That does not necessarily mean central government. Local authorities, the private sector, charitable organisations and even philanthropists may all have a role to play, he adds. Funding is also imperative, Matsu warns. “There has to be enough funding in place, but also the right mechanisms to get it to where it is needed.” The UK already appears to be slipping into inflexibility, he cautions. Local pots of funding are ringfenced for particular needs that some authorities may not have; they then have to hand unspent cash back to the government. One option, Matsu suggests, is simply to be less restrictive; alternatively, local authorities could be allowed to exchange funding they cannot use for the unspent funds of others that are able to deploy the money. “When we talk about ‘levelling up’ within the UK, it has to be more than just economic,” Matsu argues. “To reduce longstanding inequalities, we are also going to have to embrace social, cultural and governance change.”

that people feel reform was done to them, rather than with them.” PwC recently polled 4,000 Britons on their expectations of ‘levelling up’. “The government’s initial analysis seemed to focus on infrastructure, but our research suggests that citizens want something broader: they point to the need for affordable and good-quality housing, jobs in their areas and vibrant local communities,” Burke says. The private sector can support those goals, particularly when it comes to education and training, so that a broader range of people have the skills required for the future of work. That will also help employers to be more imaginative about where they base themselves, with less reliance on London and the South East. This is particularly important, given how the UK’s dominant capital city currently sucks in talent and resources from the rest of the country.

Mass migration One cautionary tale from German unification is mass migration of East Germans to cities in the West during the 1990s. This left large parts of the East with an ageing population and skills shortages. Such difficulties were less marked where local authorities could play to their strengths. Leipzig has benefited from its creative economy, for example, while Saxony has become a centre of excellence for microelectronics. Elsewhere, however, Klement warns: “The blooming landscapes that [the then German chancellor] Helmut Kohl promised look more like barren meadows.” These issues become self-perpetuating, with businesses unable to operate in locations where they cannot recruit. This is another reason why the ‘levelling up’ agenda has to be broad, Klement argues. “You have to create communities where people actually want to live,” he says. “There must be good public services, good housing and good infrastructure, so people can travel to and from work, as well as good opportunities.” And therein lies the ‘levelling up’ prescription for the UK’s prime minister. In July, Johnson said: “We do not need to look at what has happened in the old East Germany… we can look at our own history and the ability of places to recover and regenerate.” No doubt there is some truth in that, but Germany certainly provides plenty of food for thought for policymakers.

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VIEWPOINT

LEVELLING UP M O L LY S C O T T C A T O

Banking on change Germany’s public development bank provides a model for driving both economic and sustainability goals

As a public bank, interest payments can be reinvested for public beneﬁt rather than being extracted by wealthy shareholders

t is a source of regret that the UK has traditionally never had a public development bank – a situation that has forced public authorities’ social businesses to borrow at commercial rates. The most impressive public bank I know is Germany’s KfW (Kreditanstalt für Wiederaufbau or Reconstruction Credit Institute). It is akin to banks operating in emerging economies, on the understanding that certain sectors are always emerging, even in high-income economies. KfW was founded to provide finance to rebuild the German economy after the Second World War, before going on to fund the poorer parts of Germany after reunification. It is now providing finance for the green transition. Public banks have the same powers to create money through lending as private banks, but they are owned by a public body, such as a national or regional government. This means that they can invest the money they lend for public benefit and that the profits they make on lending are also reinvested according to social priorities, rather than being paid as dividends to shareholders. Public banks can also finance innovative markets that are not sufficiently well established to attract the confidence of private financiers. Germany’s banking system – its regional and local cooperation banks, as well as its public banks, of which KfW is the largest – is a key reason for the success of the German economy, but one that is rarely discussed. KfW lends money to young entrepreneurs at favourable rates, especially in the areas of renewables and energy efficiency. It also provides loans for home retrofits and conversion and offers favourable mortgage rates for energy-efficient homes. Having a requirement to lend in the public interest means that public banks can mirror public policy and the priorities of state,

regional or supra-national governments, making finance available to enable the projects and infrastructure they require. The European Investment Bank is an example of such a bank – owned by the EU’s member states – that is now able to finance the European Green Deal. EIB has led in the area of green finance and issued the world’s first green bond in 2007. It also supported the offshore wind sector before it became a stable and mature market. This has included providing over €3bn for developing and expanding the UK’s offshore wind industry. Far from the image of shareholders and pinstripe suits, this ‘bank’ is a powerhouse of sustainability. KfW has been instrumental in financing Germany’s energy transition and is empowered to invest especially in economically depressed areas. As a public bank, interest payments can be reinvested for public benefit rather than being extracted by wealthy shareholders. In 2019, it supplied funds totalling €77.3bn, 38% of which was spent on measures to protect the climate or the environment. KfW was one of the first five institutions to be accredited by the Green Climate Fund for the implementation of grant financing. Its first project with GCF was launched in Bangladesh, providing a grant of $40m to fund a project to improve protection for infrastructure from the consequences of climate change. This article is an edited section of a chapter from Sustainable Finance – Using the Power of Money to Change the World, published next month by Springer

MOLLY SCOTT CATO is the UK Green Party’s ﬁnance spokesperson, a former MEP and professor of green economics at Roehampton University PUBLICFINANCE.CO.UK 25

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FEATURE

BLACK SWAN EVENTS

ON A

WING AND A PRAYER

As 2022 begins, experts predict the next big threat that could shake public ﬁnances W O R D S A DA M B R A N S O N

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t must have come as quite a shock. In 1697, Willem de Vlamingh and his group of Dutch explorers sailed up what is now the Swan River in Perth, Western Australia. What they encountered confounded centuries of received wisdom. Up until that point, all the empirical evidence available to Europeans supported the assumption that all swans were white. But, to their surprise, the Dutch expedition had accidentally stumbled across a black variety. As a result of the discovery, the collective noun for a group of swans had to be changed in the Oxford English Dictionary from a ‘whiting’ to a ‘bevy’. Moreover, the term ‘black swan’ came to be used to refer to an event that is characterised as both highly unlikely and serious in terms of its consequences. But quite what counts as a black swan event is a matter of hot debate. Commonly cited examples include the 9/11 attacks on the US, the global financial crisis and latterly, of course, Covid-19. Certainly, all those events had serious consequences – which will continue to be felt for years to come – but they were, to a greater or lesser degree, predictable. After all, it was already a matter of record that Osama bin Laden had orchestrated attacks against US assets, while journalist Michael Lewis chronicled, in his book The Big Short, multiple investors who saw the sub-prime crisis coming and made huge sums out of it. And Covid-19? Well, scientists had been saying for years that the world was overdue a global pandemic. In a sense, the debate is academic. Whether unpredictable or merely highly unlikely, the important thing is that governments expect the unexpected and make contingency plans. The problem is that they – along with people generally – tend to be poor at doing so.

It is an issue that was raised by Jagan Chapagain, secretary general of the International Federation of Red Cross and Red Crescent Societies, and Dr Andrew Steer, then president and chief executive of the World Resources Institute and now president and chief executive of the Bezos Earth Fund, in a submission to the World Economic Forum at the height of the pandemic. “The world has been planning for the future in the mistaken belief that it will resemble the past,” they wrote. “But as Covid-19 coincides with cyclones in South Asia and the Pacific and vast locust swarms in East Africa, the need to prepare for a world of unexpected shocks has become clearer than ever.” The pandemic is a global wake-up call, they added: “In particular, Covid-19 and recent climate disasters have shown that we must step up investment in preparedness now, instead of waiting for the next crisis to hit. The choice is clear: delay and pay, or plan and prosper.” As Chapagain and Steer pointed out, it is not possible to pinpoint when or where the next natural disaster will happen, or when another nasty virus might raise its ugly head. But they were clear that such events are inevitable and that it is far more cost-effective to put meaningful contingency plans in place than for governments worldwide to bury their heads in the sand. “To be sure, preparing for major shocks involves substantial outlays,” they said. “Building resilience to climate impacts could cost $140bn-$300bn a year by 2030, while meeting World Health Organization minimum standards for pandemic preparedness will require up to $3.4bn per year.” Despite being eye-watering sums, these are “small compared with the costs of not being prepared,” wrote Chapagain and Steer. “Natural disasters already cost hundreds of billions of dollars a year. With a 2˚C increase in temperature, one estimate shows that damages from climate change could reach $69trn by 2100.” So, what key risks to government finances are currently underestimated? And what would be the consequences if they came about? PF speaks to experts who analyse where the world is headed.

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FEATURE

BLACK SWAN EVENTS

DEBT TRAP Inflation is currently running relatively high in many Western countries, certainly significantly above most central banks’ targets. In part – and in some places – that is down to deliberate government strategy, according to US futurist Dr Bill Conerly. “The Federal Reserve wants to run the economy hot,” he says. “It wants a job market where a dropout from high school with a prison record can get a job. I like the idea of people being able to turn their lives around, but in order to help the most disadvantaged people in the job market, you have to run the economy very hot – and then you get inflation.” Traditionally, the monetary response of central banks to high inflation is to raise interest rates, something that at first glance should be more than possible, given that rates remain at historic lows in most countries. There is a problem, however – debt. “Global debt has grown explosively,” wrote Robert Wade, professor of political economy and development in the Department of International Development at the London School of Economics, in a recent paper. “The Institute of International Finance US futurologist Dr Bill Conerly estimates that global debt hit a new record of $281trn in 2020, with public spending on the Covid-19 pandemic contributing ‘only’ $24trn to that figure.” Much of that borrowing is held privately, meaning that indebted households – including all mortgage-holders – would see their disposable income reduce significantly if interest rates were to rise significantly, thereby reducing demand in the economy. At the same time, government debt around the world has rocketed as a result of the pandemic, no matter the fiscal positions of individual states pre-crisis. Raising interest rates is therefore highly problematic. The result is what Wade describes as the ‘debt trap’ – enduring inflation would make it both politically necessary yet fiscally next to impossible to raise interest rates. Some governments will find the appropriate balance, but inevitably others will fail, triggering a recession. Wade predicts that, if that failure is sufficiently significant, a recession on the scale of the global financial crisis is possible before the end of 2024.

“The Federal Reserve wants to run the economy hot. It wants a job market where a dropout from high school with a prison record can get a job”

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Photography: Getty

14/12/2021 16:03

A DEADLIER PANDEMIC Speaking of public debt, what happens if another pandemic – a new virus, rather than a variant of Covid-19 that could be dealt with by adapting existing vaccines – emerges? After all, with government debt at record levels, could the world cope with another $24trn bill? This is not as fanciful as it sounds. Governments and much of the media have been fond of describing Covid-19 as a once-in-a-hundred-year event. The reason for that is obvious – the last time the world saw a pandemic on this scale was in 1918, when troops returning from the First World War spread the so-called ‘Spanish flu’. However, the world has changed significantly since then. First, we are far more interconnected, meaning that if a new virus does emerge, it will spread quickly, just as Covid-19 did in January and February 2020. Moreover, scientists are concerned that as mankind encroaches ever more on the natural world, the likelihood of animal-to-human transmission of naturally occurring viruses increases. “This is not the last pandemic,” says futurologist Dr James Bellini. “The consensus is that this is the beginning of a pattern of pandemics and we just have to learn to live with them and deal with them. We do not live in a world of silos. We live in a world where everything is interconnected.

It has been on the move for a few years, but only recently has it become truly globalised.” Fellow futurologist Benjamin Butler agrees – and points out that, however horrible, Covid-19 has been relatively mild compared with previous pandemics. “It is not the worst pandemic that the British Isles has ever faced,” he says. “In a serious pandemic, like the Black Death, 20% to 50% of the population dies. With Covid-19, we are talking about less than 1% [of people who] get infected dying.” If something worse emerges, central governments might be able to find additional resources, although their ability to continue creating money is not infinite. Local authorities do not even have the option. “For local government, it really comes down to resilience, because, unlike central government, it does not have the capacity to just monetise away the debt,” says Jeffrey Matsu, chief economist at CIPFA. “But, in any case, you cannot just keep printing money.”

“It is not the worst pandemic that the British Isles has ever faced. In a serious pandemic, like the Black Death, 20% to 50% of the population dies” Futurologist Benjamin Butler

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FEATURE

BLACK SWAN EVENTS

WAR While no one would wish to belittle the human tragedy of recent conflicts, the world has not seen an intercontinental ‘hot’ war for more than 70 years. However, there are plenty of informed commentators who fear that could change relatively quickly. Perhaps most worrying, it appears that China’s designs on Taiwan are growing ever stronger – and US president Joe Biden recently took the unexpected step of saying that his country would defend the territory. “I look at what is happening with China and the potential for a war over Taiwan,” says Conerly. “President Biden has said we would defend it, which was a surprise, because nobody else thought we were actually saying that. We wanted to be vague.” Butler is also concerned that the US could end up sleepwalking into a conflict. “Any declining empire often flails around and tends to get into wars and fights,” he says. “Many years ago, I said that China would probably take Taiwan.” In November, it was reported that satellite images had shown that China had constructed mock-ups of US naval vessels, presumably to war-game future scenarios in which the countries engaged over Taiwan or potentially other issues. “[The Chinese] could be thinking of this as a defensive attitude, to make sure they do not get pushed around by the US, but it could be a prelude to invading Taiwan,” says Conerly. “That would be disastrous for the people who live there now and not good for the global economy at all.” For his part, Bellini is concerned that Japan is also showing signs of increasing militarisation in response to growing Chinese belligerence, following decades when the role of the country’s army was largely confined to domestic duties. “After the Second World War, Japan agreed that it would never have any warlike preparations of any kind, so its armed forces are limited to policing really,” he says. “It is now trying to get rid of this in anticipation of being in a part of the world that is increasingly unpredictable in terms of conflict.”

“I look at what is happening with China and the potential for a war over Taiwan. President Biden has said we would defend it, which was a surprise” US futurist Dr Bill Conerly

PUBLICFINANCE.CO.UK 31

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FEATURE

MUNICIPAL COMPANIES

PRICE THE

A wave of local authority commercialism has been hampered by the ﬁnancial squeeze that unleashed it W O R D S K E R RY LO R I M E R

32 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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FREEDOM OF

he squeeze on public budgets after the global financial crisis created an environment in which entrepreneurialism has had the chance – and encouragement – to flourish. The general power of competence, unleashed a decade ago

by the Localism Act 2011, promised councils in England the freedom to set up companies to deliver services more imaginatively and, in the process, generate revenue independently of strapped government coffers. It has not been plain sailing – the travails of the London Borough of Croydon’s housing company (see panel, p35) and the energy company that lost Nottingham City Council millions before being shut down serve as highprofile warnings of what is at stake. However, an analysis of council-owned companies that were set up in the wake of the legislation shows what a potent tool the general power of competence has become for local authorities seeking innovative and cost-effective ways to deliver services. Cuts to public sector budgets have seen a staggering rise in the number of English local authorities setting up their own companies, the research

found, with the number of these bodies nearly trebling from 312 in 2009 to 803 in 2019. Authorities grappling with higher levels of debt are more likely to be involved in the creation and operation of companies, as are larger councils and those serving disadvantaged and less densely populated areas.

Late joiner In Wales, where a general power of competence was extended to local authorities only last year, the number of local authority companies grew far more slowly – from 28 to 37 – in the same period, with these arrangements relating primarily to waste management. Rhys Andrews, professor of public management at Cardiff Business School and one of the authors of the research, says there has been a strong desire from councils to make use of the general power. “In England, nearly all of PUBLICFINANCE.CO.UK 33

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FEATURE

MUNICIPAL COMPANIES them have been doing it in one way or another – political make-up does not seem to have made a difference,” he says. “The main thing is fiscal pressures and dependence on grants, rather than any sort of ideological commitment.” The most striking finding is the extraordinary growth in profitmaking companies across English local government – used mainly for economic development, central services, such as IT and HR, and social housing. This is in contrast to use of the non-profit model, which has remained almost static. “It is clear there is a financial driver,” Andrews says. “As the grants have been taken away, it is a way of continuing a service on the one hand, but on the other it is a way of trying to replace revenues. [Councils] are typically risk-averse organisations, but the financial situation has pushed them towards making decisions that perhaps they might not have made 15 or 20 years ago,” he adds. That is particularly true for ventures in the property and energy sectors, where local authorities have traditionally had less expertise and are at greater risk of becoming unstuck. “My feeling is that they should be wary of involving themselves in that type of activity, but that seems to be where a lot of the take-up has been, particularly in the past four or five years,” he says. Laurence Ferry, professor in accounting at Durham University

There has been a strong desire from councils to make use of the general power. In England, nearly all of them have been doing it in one way or another – political make-up does not seem to have made a difference Rhys Andrews, Cardiff Business School 34 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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Business School and fellow author of the research, says that austerity and subsequent budget cuts have forced councils to take risks they might not otherwise have countenanced. The success of the power of competence must be measured against the challenging backdrop of austerity, the pandemic, Brexit and climate change. Judging councils for the success or failure of these ventures is therefore difficult in a world that bears little resemblance to the one in which the legislation was introduced, he says. “Crises have become the new norm,” he adds. Given the complex role played by local authorities, a purely commercial judgement on a venture is too simplistic, warns Ferry. “If your council invests in your main town centre, even if it does not make money – even if it makes a slight loss – the impact on that area could have been far worse without that investment,” he says. “We have got to be careful about judging property investments as a success or failure mainly on whether they are making money [rather than whether] they actually give something back to the community.”

Proper understanding According to Rob Hann, head of local government at public law firm Sharpe Pritchard, a proper understanding of the power of competence is more crucial than ever after Covid-19, as schemes to promote economic regeneration begin to proliferate. “It has never been more important for people to know their way around this somewhat complex legislative environment, so they can do deals properly and not fall into the problems we had in the bad old days,” he says. The Allerdale case of the 1990s, in which a council pleaded its own lack of powers to escape a £6m guarantee liability to a bank, fuelled a reluctance on the part of the market to engage with the public sector in long-term deals. Progress was made with the Local Government (Contracts) Act 1997, which provided councils with powers to certify which statutory controls they were acting under Photography: Getty

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CASE STUDY

Brick by Brick, Croydon It was a scheme that promised to revolutionise housing provision in a London borough facing a chronic shortage of affordable homes. Instead, it became a byword for the failure of municipal entrepreneurialism. Brick by Brick was established by the London Borough of Croydon in 2016 to deliver 1,000 homes – half of them for affordable rent and shared ownership. The homes were to be delivered across a diverse portfolio of small sites that had proved unattractive to traditional developers, with any development-related proﬁt creating a dividend to be returned to the council as sole shareholder. But, four years later, auditors found that Croydon had yet to receive any return on the £200m it had paid to the company in development loans. A further review found the company had “signiﬁcantly underperformed” against its 201920 business plan and warned that delays in completing promised

homes had put the council cil at serious ﬁnancial risk. At the end of 2020, Croydon was forced to publish a Section 114 notice, with more than half of its £66m in-year budget shortfall attributed to undeliverable dividends and interest payments from the company. The borough was excoriated by former communities secretary Robert Jenrick for having “damaged the good name of local government and… wasted millions of pounds of taxpayer money”. Last July, Croydon decided to wind down the company as soon as sites under construction were completed – expected to be in summer 2023. By the autumn, when founder and chief executive Colm Lacey announced his intention to step down, the company had completed 460 homes across 18 sites previously owned by the council, with 311 homes under construction. Of the completed properties, 56% were affordable, of which more than half were to be council homes. PUBLICFINANCE.CO.UK 35

14/12/2021 16:08

FEATURE

MUNICIPAL COMPANIES

It has never been more important for people to know their way around this somewhat complex legislative environment, so they can do deals properly and not fall into the problems we had in the bad old days Rob Hann, Sharpe Pritchard

and to agree remedies in the event of a future ultra vires finding that they had acted beyond their remit. Although the Local Government Act 2000 introduced a power for English and Welsh local authorities to promote the economic, social and environmental wellbeing of their areas, the facility was little used in practice. Its credibility was dented by the 2008 London Authorities Mutual Limited case, which found that the power could not be used by London boroughs to cut their insurance premiums by establishing their own mutual company. That finding intensified calls to replace the wellbeing power with a broader and more clearly defined general power of competence. The power now in place represents the soundest and most flexible basis for operation that local government has ever had, says Hann. “But the devil remains in the detail, because you still have to look for any restrictions, prohibitions or limitations on that power,” he says. “Those are quite subtle distinctions. It is quite difficult sometimes to pick your way through what the legislation

actually does and does not allow you to do.” Authorities keen to navigate this complex area successfully will be aided by a document due to be published by CIPFA early this year, outlining best practice in setting up local authority companies, drawing on experience across the sector.

Good oversight A full understanding of the risks involved is critical, particularly when considering markets in which a local authority may have less experience, says CIPFA local government policy manager Joanne Pitt: “It is important that councils wanting to look at new ventures learn the lessons from both the failures and the successes and take those on going forward. You need to understand and go in with your eyes wide open as to what that industry or service requires. And once you are in there, respect the governance and the reporting and the assurance part, so there is good oversight.” From a perspective of financial sustainability, the bottom line is to understand what the total exposure of the council would be if the venture

were to fail, Pitt says. But she believes councils are far better placed now than they were when the legislation was introduced. “A decade on, we have examples of both successes and failures, [and] there is more experience, more understanding and more appreciation of the risks,” she adds. Amardeep Gill, partner at law firm Trowers & Hamlins, believes that, in the current policy climate, new councilowned companies are likely to focus on existing commercial markets – such as real estate development or telecare services – or areas offering significant savings from transferring staff into a local authority company – for instance, waste services and social care. During the past 10 years, it has become clear to local authorities that the success of council-owned companies rests on the strength of the underlying business case, Gill says. “After an initial surge in council-owned companies – some of which simply carried on running in-house services without much additional commercial success – we now see policymakers giving close scrutiny to the bottom line before incorporating a new company.”

36 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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VIEWPOINT

MUNICIPAL COMPANIES HELEN RANDALL AND HENNA MALIK

Good company A number of recent cases show why careful governance of local authority ventures matters

Do not simply appoint councillors onto the board, as running a commercial business is not political

undreds of companies are now owned by UK councils. Many are quietly successful, so you never hear about them. But confidence in commercialisation has been shaken by recent reports into local authorities’ governance of business ventures. One of the latest, by CIPFA on the Sutton Decentralised Energy Network, follows Best Value Inspection reports on Croydon’s housing vehicle, Liverpool’s Teckal trading firms and a non-statutory report into Nottingham’s energy, housing and transport companies. Issues are not isolated to specific sectors – albeit the current energy market is particularly difficult. Applying lessons from others’ misfortunes can aid pre-emptive action. Provided that care is taken with the business case and that people with the right skills and experience are appointed to the board, a company should prosper and generate profits. Legally, as a shareholder in a company, a local authority enjoys limited liability, However, many choose to cashflow potentially loss-making trading companies rather than risk the reputational hit of winding up a loss-making company. As w well as potential issues about unlawful p public subsidy, this can put the council in b breach of its value for money obligation, c causing taxpayers to lose out. Bankrolling a fa failing business is simply kicking the can of re reputational damage down the road.

Lesson 2: Appointing directors A local authority company can fail because the directors are not equipped with suitable skills or are not seasoned experts with experience in that particular business sector. Do not simply appoint councillors onto the board, as running a commercial business is not political. Instead, plan what skills are needed to achieve the company’s business plan objectives and appoint accordingly. This may necessitate external recruitment. Councillors can instead be a valuable resource for holding the company to account via the shareholder or service commissioning functions.

Lesson 3: Cashflow and profit Remember the dictum that ‘turnover is vanity and profit is sanity’. The directors should be able to interrogate management accounts and the assumptions upon which the cashflow and any profit is founded.

Lesson 4: Clear documentation The Liverpool inspection found a lack of formal contract between the company responsible for highways maintenance and the council, with no best value or competitive benchmarking. It recommended the creation of explicit shareholder agreements and appointment of nominated shareholder representatives. If you do not have these in place, it is not too late to start. But even if documents are in place, consider whether they reflect current circumstances.

Lesson 1: A solid business case L S Start with an HMT-format business case, including a rigorous market analysis. In in its review, CIPFA stated that the Sutton it Decentralised Energy Network was a D novel proof of concept undertaking, which started without the Treasuryrecommended ﬁve-case model and seemed to be based on “optimistic” assumptions.

If these four key lessons are applied, then your authority’s commercial venture is more likely to succeed than fail.

HELEN RANDALL (right) is a consultant and HENNA MALIK an associate at law ﬁrm Trowers & Hamlins LLP PUBLICFINANCE.CO.UK 37

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DATA

MUNICIPAL COMPANIES LEGAL BASIS

TYPICAL FORMS Municipal institution (eg, public law corporation)

Corporatisation: the international perspective

PUBLIC LAW

Inter-municipal company/consortium (eg, community association)

Mixed enterprise (eg, public-private partnership)

Th The UK is catching up with countries that have a longer history of municipal-owned ventures

waste crisis in Amsterdam triggered serious problems, not only for the Dutch capital but for the surrounding areas and other nations that rely on the city’s incinerators to burn their rubbish. In July 2019, four out of six incinerators operated by AEB – a company owned by Amsterdam’s city council – had to be shut down to ensure the safety of personnel after years of failure to invest in maintenance. “This spelt an acute financial disaster for the municipality,” says Bart Voorn, assistant professor in public administration at Radboud University in the Netherlands, who studies municipal corporations across the world. “Suddenly, millions of euros were required from the municipality each month merely to keep the company afloat, and an injection of another €50m-€100m was necessary just to restart the incinerators – a figure previously unseen in the Dutch refuse collection sector.” After proposals to privatise the company were rejected, the city council was left with the choice of cutting services, incurring debt or increasing taxes by €120 per resident – a steep price to pay for mismanagement, says Voorn. While corporatisation is still a relatively youthful phenomenon in

the UK, having taken off in the wake of the Localism Act 2011, other countries have been trying to make the model work for far longer. From its origins in the US in the late 1970s, corporatisation was embraced in the following decade by Scandinavia and much of the rest of mainland Europe, with momentum growing in the south of the continent during the 1990s. “England has seen exponential growth in the model in the past 10 years, but, in other countries, that growth took place 10 or 20 years earlier,” says Rhys Andrews, professor of public management at Cardiff Business School. While there has been a similar trajectory in the use of profit-making models on both sides of the Channel, the need to replace lost revenues has been less of a driver in the rest of Europe, where the primary motivation has been improved service delivery and where there are also more established procedures for political oversight, he says. According to Voorn, European corporatisation has been widely seen as a means of achieving the best of

Single purpose authority (eg, special districts)

Proﬁt-making company (eg, limited company, joint-stock company)

PRIVATE LAW

Not-for-proﬁt company (eg, public beneﬁt corporation)

Association (eg, charitable organisation)

Co-operative (eg, community mutual)

Foundation g trust) (eg, grant-making

en England has seen th exponential growth in the model in the past 10 years, but, in other countries, that growth took place 10 or 20 years earlier

38 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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POLITICAL AUTONOMY

SERVICE SER AREAS

COUNTRIES

100%

Low

Savings banks, welfare services, public transport

Austria, Germany, Norway, Switzerland,

100% – can have multiple local government owners

High

Utilities, public transport, environment

Canada, Germany, UK, US

Usually 100%, although sometimes open to non-proﬁt participation

Medium

Utilities, transport, infrastructure, environment, back office

France, Germany, Italy, Netherlands, Scandinavia, Spain

Many > 50%, but some < 50%

High

Utilities, infrastructure, public transport

France, Germany, Italy, Portugal, Spain, South America, UK

Many 100%, but some < 20%

Medium

Utilities, transportation, environment, infrastructure, back office

All

Many 100%, but some < 50%

Medium

Social services, housing, education, leisure, culture

Greece, UK

Some > 50%, but many < 50%

Medium

Social services, welfare services

Israel

Most 0%, but some 100%

High

Housing, leisure, energy

Denmark, Germany, Norway

Most 0%, but some 100%

High

Culture, education

Italy, Netherlands

both worlds – the efficiency of the market under the watchful eye of public control. “Most countries in Europe want the same thing: for their public services to be as efficient, effective and democratic as possible,” he says. However, in Spain and Portugal, the case for corporatisation has come under scrutiny in recent years, amid concerns over corruption and cronyism, leading to a fall in the number of companies being established. In western and northern Europe, rates of corporatisation are

also stabilising, because of growing unease over whether the governance of these bodies is fit for a modern democracy. France and Germany in particular are seeing a backlash, after water and energy companies set up in some areas came to be seen as de facto monopolies. According to Voorn, the success of municipally operated companies depends less on where they are located than on the governance arrangements that underpin them. “Whether these commercial entities do well or not

Source: forthcoming article by Rhys Andrews, ‘Corporatisation at the Local Level’, in the Edward Elgar Handbook on Local and Regional Governance

PUBLIC OWNERSHIP

really depends on governance, or on how they are controlled,” he adds. Although some countries have fared better than others at defining an effective structure, it is an issue that every country has struggled to get right. Nevertheless, well controlled corporatisation continues to be seen in many instances as a better middle way than leaving either politicians or the markets solely in charge. “Even with governance problems, there is a strong perception that, in some situations, the alternatives are worse,” Voorn says. PUBLICFINANCE.CO.UK 39

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FEATURE

INTERVIEW

40 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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ON THE LEVEL WORDS COLIN MARRS

P H OTO G R A P H Y A K I N FA LO P E

In December, MP Margaret Hodge announced that she will not stand for parliament at the next general election. The former Public Accounts Committee chair speaks to PF about her worry that the UK is in danger of losing its reputation for rigorous ﬁnancial oversight

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FEATURE

INTERVIEW

argaret Hodge’s office sits atop a narrow staircase in Portcullis House, the modern extension to the UK parliament’s estate. Shelves each side of the bannisters are lined with framed photos of the MP’s family, friends and colleagues. The climb ends in a large working space with timber walls that call to mind a cosy ski chalet. As we chat, two assistants beaver away, keeping one ear on the conversation and providing instant prompts if their boss cannot immediately recall a relevant name or date. Hodge was first elected as MP for Barking in 1994, and famously fought off a challenge from the then British National Party leader Nick Griffin in 2010. “We gave them a good kicking,” she says, proudly. Serving for 12 years in ministerial roles under Tony Blair and Gordon Brown, she played a leading role in developing Labour’s Sure Start programme for pre-school children and their parents. Hodge became chair of the Public Accounts Committee in 2010, rapidly transforming its proceedings into a compelling gladiatorial arena. Her no-nonsense treatment of witnesses frequently ruffled feathers – particularly those of the many senior civil servants she skewered. Recent events in UK politics have brought Hodge back to the centre of the fight to protect public money, thanks to her current role as chair of the All-Party Parliamentary Group on AntiCorruption and Responsible Tax. Even though, just a month after our meeting, Hodge announced that she will not stand as an MP at the next election, her eyes still sparkled with fiery energy as we discussed the unrelenting spate of news stories relating to government ‘sleaze’. “I call it the age of impunity,” she says. “We have a leadership at the moment in the UK that is scarily amoral. The ruling party thinks that taxpayers’ money is their money.”

Another century on, and politicians are still tying themselves in knots over their standards of behaviour. My chat with Hodge takes place just hours after MPs finally voted to endorse a report censuring one of their number, Owen Paterson, for breaking paid advocacy rules. As Chris Bryant, chair of the select committee on standards, summed up to the House of Commons: “He did the one thing that he was banned from doing: lobby ministers time and again in a way that conferred a direct benefit on his paying clients. That is expressly forbidden. It is a corrupt practice.” The furore surrounding the government’s failed attempt to spare Paterson from being suspended from the House for 30 days led to the unprecedented spectacle of prime minister Boris Johnson assuring a COP26 press conference that the UK political system was not corrupt. Despite the echoes from history, Hodge is convinced that the episode highlights a profound shift that has taken place in political culture. “The great difference between past times and now is that, when things like this happened previously and were uncovered, it created real reputational damage for those involved. What is awful now is that people barely raise an eyebrow. I think we are living in very different – and very scary – times.” Hodge also worries that the UK’s accountability problems go much wider than political lobbying scandals. She cites September’s FinCEN leak of US government documents that described the UK as a “higher risk jurisdiction” in relation to money laundering, and the UK’s worsening performance over recent years in Transparency International’s Corruption Perceptions Index, which ranks countries by perceived levels of public sector corruption. “Because of my PAC experience, I am often wheeled out to give talks to people on how to hold governments to account,” she says. “I used to be quite comfortable doing that. Now I am embarrassed.”

“I call it the age of impunity. We have a leadership at the moment in the UK that is scarily amoral”

Historical precedent The year 2022 marks a century since the fall of the UK’s last Liberal prime minister, David Lloyd-George, amid allegations that he had raised significant sums for his party by selling peerages. In July 1922, Tory peer Alan Percy, the eighth Duke of Northumberland, told parliament that the Liberal government had “been responsible for inaugurating a system of corruption such as has not been seen in this country for a hundred years”.

Secrecy issues As a Westminster (and former local government) veteran, Hodge has spent many years sharpening her views on the institutional and cultural issues she believes have helped to fertilise a new climate of unaccountability. Firstly, she blames a lack of transparency around private companies’ financial activities for encouraging a growth in economic crime. “We have a lot of secrecy in our system, not only within the UK but in our relationship with our overseas territories and our dependencies, which are tax havens. We have become a jurisdiction of choice for international criminals,” she says. Hodge does not exempt the government in which she served from responsibility for what she says has been a gradual erosion of effective financial oversight. “It was

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PROFILE

Margaret Hodge After working as a teacher, Margaret Hodge began her political career in 1973, when she was elected as a councillor in the London Borough of Islington. She chaired the authority’s housing committee before becoming deputy leader and then leader of the council for a decade until 1992. In 1983, she helped found the Local Government Information Unit, where she then served as vice-chair. After a short spell as a public sector consultant for accountancy firm Price Waterhouse, she was elected as MP for Barking in 1994. Before the 1997 general election, Hodge developed the Labour Party’s policy on early years education and childcare, Sure Start. She served as chair of the education select committee (1997-1998), before being appointed junior employment and equal opportunities minister (1998-2001). In 2003, she was appointed the first minister for children. She then served as minister of state for work (2005-06), for industry and the regions (2006-07), and for culture, creative industries and the regions (2007-10). Following the 2010 general election, Hodge was appointed as the first female chair of the Public Accounts Committee. She is currently chair of the AllParty Parliamentary Group on Anti-Corruption and Responsible Tax. PUBLICFINANCE.CO.UK 43

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heralded by Margaret Thatcher and actually supported by Gordon Brown during his time as chancellor,” she says. “We have got toothless regulatory bodies that are not properly resourced. Therefore, even though we have regulation, the bodies responsible do not really pursue financial crime and wrongdoing.” Over the past decade, Hodge has crossed swords on numerous occasions with one of the bodies charged with keeping private companies on the straight and narrow – HMRC. As PAC chair, she helped extend awareness of problems relating to corporate tax avoidance beyond readers of Private Eye to the general public. Earlier this year, her APPG called for new laws to bring deals between HMRC and large corporate taxpayers – which are currently often kept secret – into the public spotlight. Hodge is clear that the problem lies squarely with the remit given to the department by politicians. “I am not blaming them. They are operating under the law and under the political priorities of the government of the day. They are doing what they are told. The problem is that their task is to get the money and it is not to prosecute people who deliberately avoid or evade tax. So they do sweetheart deals with big corporations – they get very cross if I call them ‘sweetheart deals’, but I think that is an appropriate way of describing what happens.” Hodge has kinder words for spending watchdog the National Audit Office, praising its role in uncovering the details of Covid-19 test-and-trace contracts signed by central government, after the Department of Health & Social Care failed to meet government deadlines for publishing the details. “I think the NAO does a great job. I am a great supporter.” However, the straight-talking MP then adds that “sometimes, I think they could be a little bit more direct”.

spent. A lot of private providers would actually welcome that, because it would give them a badge of respectability.” But Hodge rejects the suggestion that private sector involvement in delivering services is, in itself, a breeding ground for corruption – unlike some of her Labour Party colleagues, Hodge is not opposed to privatisation as a matter of principle. However, she does criticise the way much of the programme has been pursued by successive administrations: “I am less concerned with the ‘who’ of delivery than that the outcomes are in the public interest.” But, she adds, “there has been an ideology of ‘public bad, private good’ that has driven privatisation. That is the wrong motivation for deciding how you deliver a service. You have got to decide how you can best deliver that service in the public interest.” She also fears that privatisation of public services has not succeeded on its own terms. With a nod towards the collapse of construction firm Carillion, she says: “We have allowed all sorts of players to emerge that have become too big to fail, because if we allow these companies to fail, it will create chaos within our public services,” she says. “So we have not encouraged the competition that is at the heart of the thinking that the private sector will perform better.”

“We have got toothless regulatory bodies that are not properly resourced”

Power boost Hodge also believes the NAO’s powers should be expanded to give it access to contracts where private companies are delivering services on behalf of the government. Pointing out that more than half of public services are now delivered by private providers, she says: “At the moment, the NAO cannot go into those contracts and look at the appropriate value of the money, and the efficiency, the effectiveness. I think that its authority should extend to wherever taxpayers’ money is

Systemic reform Hodge is of the firm belief that the current focus on issues of probity and transparency over the public finances have demonstrated a need for fundamental systemic reform. Retraining her fire on the political arena, she says: “Under the current regime, civil servants are just sacked if they disagree with ministers. Look at how many permanent secretaries have gone. It is shocking. I would absolutely rewrite the code for ministerial responsibility.” She believes that Whitehall could learn from the statutory regime that applies to local authority governance. “I would take lessons from local government to try and get much greater transparency and decision-making – and to not have civil servants only answerable to parliament through their ministers,” she says. “I am always saying that the position of the Section 151 officer in local authorities is a really important one. It allows you to have a challenge to decisions – and to open a debate about contentious issues – which, in the end, leads to better public policy.” PUBLICFINANCE.CO.UK 45

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FEATURE

NATURAL EXPERIMENTS

A revolution in economic research methodology has been rewarded by Nobel Prize judges. How could work on ‘natural experiments’ help the public sector? W O R D S C A LU M R U T T E R

WEIRD SCI 46 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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E ENCE

veryone strives to make good decisions, not least in the public sector, where financial health often relies on actions working as intended. In order to make the right choices, we need to understand the consequences of decisions made in the past – how did an action or policy change people’s lives? But determining the relationship between cause and effect can be near impossible without a crystal ball through which to see what would have happened had the action not been taken or the policy not introduced. Academics have traditionally attempted to address such questions with theory, while researchers have often turned to randomised experiments, in which two or more groups of people, including a control group, are studied to try to observe the differences in outcomes between them. However, another method that has become more prevalent in recent decades is the so-called ‘natural experiment’ – a study of measurable variations between groups of people whose experiences were not set by the researcher, but are already recorded in pre-existing data. In October, three of the pioneers of natural experiments in the field of economics, David Card, Joshua Angrist and Guido Imbens, received the Nobel Prize in economic sciences. Their work, as well as that of the late Alan Krueger, showed that these experiments – long used in the study of health – can also tell us a lot about causation in economics. But what are the lessons for public sector policymakers?

Causal effects Natural experiments could enable the study of many economic and societal phenomena and policies, where randomised controlled trials are often impossible, says Arthur Turrell, deputy director for research and capability at the UK’s Office for National Statistics Data Science Campus. The latter can be “impractical, unethical or expensive”, he says. “If we can find a suitable natural experiment, methods such as synthetic control, difference-indifferences and regression discontinuity provide a way to construct counterfactuals – to ask what would have happened in the absence of a policy change. This allows us to estimate the allimportant causal effect of a change.” PUBLICFINANCE.CO.UK 47

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FEATURE

NATURAL EXPERIMENTS From an ethical point of view, natural experiments are better suited than randomised trials to many policy areas because of the nature of interventions being studied, according to Vicki Sellick, chief partnership officer at UK policy and research organisation Nesta. While randomised trials might be useful for determining the effects of new medication, for instance, it might be unfair to deliberately withhold from a control group something that is likely to confer life advantages. “There is an ethical challenge in research: when is it right to run experiments and when is it not?” she says. “And natural experiments are really helpful. It might be unethical to offer a set of schoolchildren more help or more schooling, because you have to have a control group that misses out.” For example, it could be argued that while it would not be right to force people in a study to drop out of school or university, people who left education of their own volition can ethically be studied as a group in a natural experiment. The work of Card, Imbens and Angrist became influential in the early 1990s, and natural experiments grew in prevalence and esteem. Economics’ subsequent ‘credibility revolution’ as it is often termed (Angrist co-authored a 2010 journal article, crediting the transformation with “taking the con out of econometrics”) has made economic study more empirical, says Turrell. “It is called a revolution for a reason,” he adds. “It has completely changed how economists think about key areas of economics.” He gives two examples – economists believed that immigration lowers wages and that minimum wages increase unemployment, until studies by Card in the 1990s showed the reverse.

Two-step process Imbens’ and Angrist’s conclusions then explained exactly what cause-and-effect implications can be drawn from natural experiments. Put simply, a natural experiment can be thought of as randomly dividing people into the ‘treatment’ and ‘control’ groups. A two-step process can estimate the effect of the programme or policy under investigation: first, work out how the probability of participation is affected by the experiment; then take this into account when evaluating the effect of the intervention. The researchers developed the ‘local average treatment’ effect, which estimates the total 48 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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RESEARCH FINDINGS

Minimum wage Alan Krueger and David Card’s work on the minimum wage challenged the economic orthodoxy that increasing salaries for the lowestpaid workers reduces employment. The accepted thinking at the time was that employers would cut jobs when forced to pay their staff more. The pair looked at the impact of New Jersey raising its minimum wage from $4.25 per hour to $5.05 in April 1992, surveying 410 fast-food restaurants both there and in Pennsylvania, where the minimum wage was unchanged. They also looked at changing employment levels in shops in New Jersey that were already paying wages above $5 and compared them with those in shops that were directly affected by the increase. They found no indication that the rise in minimum wage reduced employment in either case. In fact, they even saw a small increase in employment in New Jersey’s fastfood restaurants, but concluded it was not statistically signiﬁcant.

Immigration Card also studied the effect of immigration on the labour market – which is difficult, because immigrants are likely to choose areas with employment opportunities, so simply comparing regions with high and low immigration cannot provide evidence of a causal relationship. But a unique event provided the opportunity for a natural experiment, when in 1980 Fidel Castro allowed Cubans who wished to emigrate to do so, leading to 125,000 people leaving in ﬁve months, with many moving to Miami, Florida. Card looked at wage and employment trends at the time in Miami and four other cities, ﬁnding no negative effect on Miami residents with low levels of education – the demographic believed to be at risk from high immigration. Photography: Getty

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Real-world observations can be extremely helpful in determining the impact of public spending Richard Lloyd-Bithell, CIPFA

number of people in a study who were actually affected by the experiment. Some people might not have had their behaviour changed – they might have stayed in school, attended a service or chosen to eat in a certain way, for example, regardless of the policy under investigation. Researchers will know the numbers of people who did or did not act in a certain way, but they will not know their reasons for doing so. Therefore they cannot know whose behaviour was changed by the experiment, and thus affected by the intervention. The local average treatment effect estimates this, allowing researchers to draw conclusions. “Imbens’, Angrist’s and Card’s contribution is great and I have been waiting for them to win the Nobel Prize every year,” Turrell says. “This is very well deserved. Their work allows us to bring data to understanding some of the really really big questions in economics. We do not have to guess with a theorem, which is still important to map out ideas, but we can then go to empirical analysis and get the real answer – at least for that particular time in those particular circumstances.”

Public spending “Real-world observations can be extremely helpful in determining the impact of public spending,” says Richard Lloyd-Bithell, senior policy and technical manager at CIPFA. ”At a macro level, natural experiments have been used to look at differences in economic or fiscal policy between jurisdictions – differential income tax rates between Scotland and England is a prime example from the UK. However, they can also be helpful in determining changes in demand for – or use of – public services, and the most effective use of the public pound.” Lloyd-Bithell says public health policy interventions, such as food labelling, advertising, smoking bans and targeted taxes, are often evaluated this way. “Such natural experiments or ‘nudge’ approaches can be helpful in terms of providing evidence for more ‘downstream’ interventions, which can affect public spending through demand for public services and improving value for money, as prevention is often more costeffective than treatment,” he explains. Natural experiments are also becoming more prevalent in other areas of policy study, according to Heikki Hiilamo, professor of social policy at the University of Helsinki in Finland. He says that a “new kind of thinking” in policymaking – putting more emphasis on evidence – is emerging, albeit slowly. “I see some positive developments and some more educated policymakers,” he says. “Recent studies have shown that pre-existing PUBLICFINANCE.CO.UK 49

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FEATURE

NATURAL EXPERIMENTS The emerging field of causal machine learning is exciting, because machines are very good at predicting and can process a lot of data, so our understanding of causal relationships can only grow Arthur Turrell, Office for National Statistics Data Science Campus

research than it can bear in real life, when the context might be different or there are other complications,” Coyle says. “Academics need to have a sophisticated understanding of political context and politicians, while officials need to treat research more seriously.”

More access to data

assumptions do not always hold. People do not behave the way they are expected to, and this Nobel Prize has promoted that kind of thinking.” However, the political cycle restrains research, according to Hiilamo. “When we have governments in office for terms of four or five years, they want to get results before their mandate is over,” he says. “These studies are often helpful not for the present government but the next one, and the current government does not know who that is going to be, or whether they want to help them.” Politicians and researchers need to work together better to ensure that our improved understanding of causality translates into real benefits for society, says Diane Coyle, Bennett professor of public policy at the University of Cambridge. “Policymakers do not always take academic research findings on board,” she says. “The research might run against their beliefs or what they promised in a manifesto.” “There is also a danger of academics overgeneralising or placing more weight on the

To accelerate the wider use of natural experiments and evidence-based policymaking, public servants need more access to the data that exists around them, according to Sellick. “Potential natural experiments are everywhere, because the point is that the dataset often already exists,” she says. “Making use of it is partly about knowing it is there in the first place, partly about data analytics skills in the public sector, and partly about ensuring they have access to data not just in their organisation but from other services, civil society and the private sector as well.” “The question to ask is ‘What next?’” says Turrell. “I think that is going to come at the intersection between data science and economics. The emerging field of causal machine learning is exciting, because machines are very good at predicting and can process a lot of data, so I think our understanding of causal relationships can only grow.” Whatever comes next, the contribution of Card, Imbens and Angrist to our understanding of causality is undeniable, and the Nobel Prize win cements that legacy. Striving for better decisionmaking should be at the heart of a forward-looking public sector, and while we must acknowledge the real-life difficulties and pressures that research cannot account for, basing government decisions on ever-more-solid evidence is surely a good thing for the people that policies aim to help.

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VIEWPOINT

NATURAL EXPERIMENTS THIEMO FETZER

Learning opportunity A spreadsheet error came at a high cost but enabled a natural experiment on the UK’s Covid-19 test and trace programme

on-pharmaceutical interventions – methods of ﬁghting the pandemic without medical treatments or vaccines – are a vital part of the public health toolkit. Yet, unlike medical treatments or vaccinations, many NPIs cannot be evaluated using experiments with randomised treatment and control groups. This is particularly the case for contact tracing. While strong theoretical reasons suggest it can be a very effective intervention, many aspects of its effectiveness may rely on the ﬁner details of implementation – sometimes, well intended policies can have unintended consequences if poorly implemented. In the absence of controlled experiments, the next best way to evaluate contact tracing is through leveraging naturally occurring experiments. In recent research, we exploited a peculiar natural experiment in the context of the English test and trace system. Between 25 September and 2 October 2020, a dataprocessing error meant that 15,841 Covid-19 cases in England (around 15% to 20% of all cases) were not immediately C O N TA C T T R A C I N G referred to the contact tracing system. Case information had been truncated from an Excel spreadsheet because of a row limit. 30 By chance, the loss of case Tests dates affected by information was more severe Excel error 20 for some areas of England than others. This allowed us to investigate whether areas 10 more strongly affected by the lack of contact tracing 0 subsequently experienced a Sep6 Sep13 Sep20 Sep27 Oct4 Oct11 Oct18 Oct25 worse spread of Covid-19. We found that, during the time Area split based on local fraction of Covid-19 cases affected by delays in contact tracing owing to Excel error that the data glitch occurred, Above median Below median actual cases spiked, but

If these 15,841 cases had been effectively contact traced, this could have led to around 1,500 fewer Covid-19 deaths

Incidence of Covid-19 Mean and 90% confidence interval (per 100,000 population)

Covid-19 data error impact

reported cases stayed relatively low. This error was corrected on 3 October, resulting in a large rise in reported cases. If the number of cases affected by this data glitch was distributed uniformly across England, we would not be able to study the pandemic impact. Conceptually, it would be akin to trying to work out the effectiveness of different dosages of a drug in a medical trial, but giving all trial participants the same dose. However, it turns out that the contact tracing error resulted in much more pronounced jumps in some districts over others. We used a generalisation of methods pioneered by this year’s Nobel laureates in economics, David Card and Joshua Angrist, to empirically evaluate whether the differential exposure to the tracing error led to differential pandemic progression – a method called ‘difference-in-differences’. The chart (left) highlights how all districts were evolving in a very similar fashion in terms of infections, just prior to the error occurring. Subsequently, infections increased signiﬁcantly, especially in districts that were more affected by the Excel glitch and the resulting failure to carry out contact tracing in a timely fashion. Our results suggest that if these 15,841 cases had been effectively contact traced, this could have led to around 120,000 fewer infections in the six weeks following the discovery of the error and around 1,500 fewer Covid-19 deaths. This highlights the importance of contact tracing as a public health response. But the context in which this evidence is being created further highlights the importance of robust datasharing systems and information flows.

THIEMO FETZER is a professor in the economics department at the University of Warwick PUBLICFINANCE.CO.UK 51

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PARTNER CONTENT

V I R T U A L R O U N D TA B L E

Achieving true business partnering A recent PF/Workday roundtable discussion highlighted how culture change and technology can help government departments transform their ﬁnance function into a faster and smarter partner, better equipped to help the organisation succeed

inance business partners can play a critical role in ensuring government departments continue to deliver services amid the fiscal pressures brought on by the Covid-19 pandemic. That was a key message from participants at a recent PF/Workday roundtable discussion, which brought together a host of government finance leaders to share their views on exactly what successful finance business partnering is; the challenges to implementing business partnering; and how those challenges can be overcome. As the former head of the government finance function, CIPFA president Mike Driver, told Civil Service World last year: “There are still many places across government where we need to push further to ensure that, at all levels, finance is at the right meetings, involved as a submission is written, and at the shoulder of the decision maker when they are taking those big decisions.” The session – held remotely due to the ongoing coronavirus restrictions – began by defining what business partnering really is, and demystifying some of the confusion around the term. “When I think back to my

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days in the Home Office in the 1990s, we used to call ourselves financial advisers, rather than business partners,” said Edward Bass, government financials lead, EMEA, at Workday. “But, all told, it was the same thing – providing help from finance to get finance on the agenda, to make better use of what we had available to us and to get better outcomes – and that really has not changed today. As we move out of the pressures of Covid-19, finance partners will be needed even more to help operations and policy teams face down the mounting budgetary pressures as they seek to deliver the fullest range of services.”

What good business partnering looks like Mark Smith, chief ﬁnancial officer at NHS Property Services, said that, for him, ‘good’ business partnering is both a capability and a function. “I have an absolute view that business partnering can be done by everybody and that it is everybody’s role in some form,” he told the group. “Good business partnering is about having a seat at the table and a voice – things that are

hard won and easily lost – but that is a good sign that you have business partnering in place. For me, good business partnering is also about being a conduit between the financial part of life and the operational part – with that join being seamless.” Peninah Achieng-Kindberg, senior finance business partner at HM Prison & Probation Service, agreed, adding that, for her, being a valuable business partner is also about having a “strong business focus”. “Finance has long been seen as this separate unit that sits by itself and does not always make decisions that are for the benefit of the business,” she explained. “But our role as business partners is to be that credible engine that does not just talk about the policies or the ‘rules’, but that can help us use those policies and rules to drive the change they want to see in their business area. It is about redefining that traditional view of the finance function. We can be part of the design, part of the delivery and part of the policy.” Emma Gibbons, deputy director, financial policy and compliance, at the UK Health Security Agency, agreed that business

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not be a big hop for them to go and actually run the operation. That is what I like to look for – that it is almost seamless in terms of who is talking at an operational level and who is talking at a ﬁnance level.”

Barriers to success

partnering is about having a seat at the table – but warned that, in her view, it is critical to think about the type of person that takes up that seat. “I would argue that if you are putting finance people forward to have a senior stakeholder conversation, you need your best people at the table,” she told attendees. “The people who are going to meetings to represent finance must represent the strength of finance - they must be strong enough, confident enough and knowledgeable enough.” Gibbons said this was especially the case for departments, such as her own, involved in technical or niche activities like science or health. “It is really important that business partners can have peer-to-peer conversations,” she emphasised. “But, just as importantly, there needs to be a really good governance framework, so that everyone understands how decision-making can be linked together coherently – and exactly what the role of a business partner is.” Wrapping up on the topic of what makes a good business partner, Smith said: “I think the true sign of success – and that you have a world-class business partner – is that it would

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Despite the clear value on offer, participants at the roundtable agreed that some barriers remain to implementing truly deploying business partnering. The group agreed that one of those barriers can be a lack of understanding within organisations about how to use business partnering. However, citing his own experience with the National Audit Office, George Crockford, head of ﬁnancial strategy at the Royal Borough of Kensington & Chelsea while on secondment from the NAO, said a good way to demonstrate the impact that business partnering can have is to show the impact on overall performance: “In the NAO, we wanted to examine the value of business partnering right through into performance, so my role moved even further beyond general management accounting business partnering to sit between the strategy and ﬁnance teams – to help translate for people in the business how the money we were spending was impacting on performance. That was invaluable.” Daniel Tuck-Martin, head of strategic projects at HM Treasury, agreed that cultural barriers remain to implementing business partnering in some organisations. “Legacy culture is still one of the biggest obstacles to overcome,” he said. “I know it is a cliché, but there are still siloed ways of working in some organisations. That is eroding slowly, but it is still something we have to overcome. We need to ensure there is a clear understanding of roles and responsibilities, particularly around budgetholders – if I am brutally honest, I do not think that literature and guidance is there in a lot of cases.” Gibbons agreed that cultural challenges must be overcome for departments looking

to boost their business partnering credentials. “Command-and-control cultures lead to a management override of controls,” she said. “How do you make sure you are countering that effectively, so that you not only have a seat at the table but have influence and are making sure that things do not go wrong? That comes down to being honest about the barriers and having honest conversations.”

Incremental steps Participants agreed that any remaining barriers can be overcome by two things: taking incremental steps to change; and continuing to embrace technology that drives ever-greater insight across wider and more relevant data. “Data is so important now,” explained Workday’s Bass. “It is not about having a strong chart of accounts that is focused on fiscal reporting. We need to be able to see right down to a transaction level and link, for example, individual project, assets, key contributors aligned to the outcomes, in real time. Advances in AI and machine learning can help further our understanding of key trends and overall insight by offering up automated analysis that spots things that you would not see without the power of a machine. “That is what is really exciting today – we are moving towards a next generation of capability within finance, supported by AI and ML and joined up with HR, that gives much greater and faster insight,” he added. “As finance professionals, it frees us up from some of the more mundane and time-consuming tasks to go and add value elsewhere; i.e. to deliver a fully-resourced finance business partnering function. These savings can ultimately underpin the finance business partners to act as trusted advisors who are essential to driving new policy and delivery planning teams, especially with the additional challenges Covid-19 brings, that will achieve the government’s finance function goal of putting finance at the heart of decision making.”

“We are moving towards a next generation of capability within ﬁnance that gives much greater and faster insight”

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What if your finance planning solution could handle your various what-if scenarios? Change happens fast. Prepare for it with a solution that lets you continuously plan for what’s next—then helps you quickly execute your plans—all in a single finance, HR, and planning system. Workday. For a changing world.™

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TIPS / LESSONS / CASE STUDIES / VIEWPOINTS

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HOLDING BACK Public accountants must take care over personal investments

DEEP IMPACT Targeting social and ﬁnancial returns can go hand in hand

TALK THE TALK Inclusive conversations make for more effective teams

HOUSING

Home truths Greater financial powers for local authorities combined with greater involvement of existing residents could help solve the UK’s housing crisis

Photography: Shutterstock

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IN PRACTICE

HOUSING

he state of UK housing is one of the largest social and economic crises of our times. England built only 44% of the number of homes needed last year. Of these, only a quarter were designated affordable. Meanwhile, more than eight million people live in unaffordable or unsuitable homes, with three million-plus in overcrowded conditions. A further 280,000 people in England have nowhere to live at all. Two sets of people often get the blame for our slow and substandard housebuilding – council planners and ‘not in my backyard’ locals. But both are easy scapegoats for a wider planning system that is fundamentally broken – hampered by complex, top-down requirements, simplistic, quantitative delivery targets and a crippling lack of power at local level. In New Local’s latest report, Housing Beyond Markets and State, we set out a way to flip the conventional wisdom that people will always say ‘no’ to new developments – by designing a system that gives them more

Planners should be equipped with the tools to empower community members and meaningfully involve them throughout the planning process

chances to say ‘yes’. We argue that local authorities and residents can be the key to boosting housebuilding, if they are released from the adversarial, centralised system that is trapping them. UK councils should be given the power to levy taxes on developers sitting on empty land. They should also have the freedom to choose whom to sell land to – with the ability to prioritise community value over monetary gain. And they should be free to partner with the private sector to DR PAWDA TJOA see new developments through. is senior policy Councils should have more researcher at thinkautonomy to raise revenue for tank New Local infrastructure projects locally. In addition, we would like to see them given powers to explore various revenue-raising strategies, including developing their own properties, and to explore innovative solutions to local housing issues. Planners should be equipped with the tools to empower community members and meaningfully involve them throughout the planning process. This means moving beyond consultative tick boxes at occasional, and London’s Elephant & Castle represents a new era of housing development

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often late, stages in the process. Instead, residents should have the opportunity to shape and influence plans as they develop, through consensus-building and deliberative techniques. And local planning authorities should ensure that they involve a broad range of community members in these discussions. It may sound paradoxical that greater community involvement will lead to more developments being approved. But at the heart of the tension between communities and development is a reaction to a system that has excluded residents from important decisions about their place at the key moments. The lack of involvement in crucial decisions about major housing development has led to some communities seeing large amounts of building imposed against their wishes, with little but disadvantages for existing residents, leaving them with a strong feeling of disenfranchisement. Decision-making works best at a hyper-local level. There are huge opportunities around the use of street plans, where close neighbours can select their own design codes. Smaller groups of residents can also opt into ‘gentle intensification’ or infill – building on empty or waste land, such as back alleys or disused garages. Despite a raft of reforms, top-down targets and shiny development proposals, our planning system is still failing to produce the homes that the country desperately needs. The way to solve this is to hand over the reins to the planners and people who know the local area. Through a community-powered planning system, it turns out we could become a nation calling ‘Yes, in my backyard’ after all. Photography: Alamy

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IN PRACTICE

ETHICS INSIGHT

Resisting self-interest

ETHICS

Trading limits A decision to restrict personal investments by staff at the US Fed provides an ethical reminder for public sector accountants

n October, the US Federal Reserve Board announced a set of new rules restricting personal investments by its policymakers and senior staff. The move followed the resignation of two regional Fed chiefs in the wake of a furore over their personal trading activities. The new rules prohibit reserve bank and board policymakers and senior staff from purchasing individual stocks, holding investments in individual bonds, directly or indirectly holding investments in agency securities, or entering into derivatives. “These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” said Federal Reserve Board chair Jerome Powell. In September, advocacy groups had raised concerns about the trading activities of Dallas Fed president Robert Kaplan and Boston Fed president Eric Rosengren. Disclosure forms by Kaplan revealed that during

2020 he had made multiple transactions, including 22 that were worth more than $1m each. Rosengren listed stakes in four separate real estate investment trusts and disclosed multiple purchases and sales in those and other securities. In his resignation letter, Kaplan said his investing activities and disclosures had met the Fed’s compliance rules and standards. But he added: “Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Fed’s work.” Rosengren said he was retiring early, because of a worsening kidney condition. In a statement prior to his departure, he said: “I made some personal investment decisions last year that were permissible under Fed ethics rules for asset types and timeframes for transactions. Regrettably, the appearance of such permissible personal investment decisions has generated some questions, so I have made the decision to divest these assets to underscore my commitment to Fed ethics guidelines.”

Many will be surprised that KIRSTY STANNERS it took a pair of stock-buying is head of CIPFA outcries to force the Fed policy & technical to introduce rules to stop policymakers and senior staff from buying individual stocks and bonds, and to restrict active trading. It would seem to be common sense and prudent to have controls in place to prevent those that have potentially market-moving information from being able to personally profit from this. In a similar way to those officials at the Fed, professional accountants can find themselves privy to information that could be used for their personal gain. This may be at a material level for individuals who are involved in the awarding of contracts or making investment decisions, or in greyer areas, where an introduction or failure to speak up on certain issues will lead to a beneficial personal outcome. The CIPFA Code of Ethics highlights that such circumstances raise a threat of self-interest – where a professional accountant’s financial or other interests will inappropriately influence their judgment or behaviour. In these circumstances, there is a risk that the ethical standards of objectivity, confidentiality and professional behaviour may not be upheld. We must remind ourselves that these fundamental principles, along with those of integrity and professional competence and due care, must be met by all professional accountants as our work must be trusted by society at large, as well as by individual employers, clients and other stakeholders. What we do reflects not only on ourselves but also on our employing organisation, on our accounting institutes and, ultimately, on the accountancy profession – it must be free of personal bias or self-interest. The checks and balances being introduced by the Fed should provide control frameworks that are strong enough to prevent further potential bad judgments. However, as professional accountants, we must remember that the ultimate responsibility to maintain high ethical standards sits not with the creation of an effective control framework but with each of us.

PUBLICFINANCE.CO.UK 57

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14/12/2021 16:38

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IN PRACTICE

TREASURY MANAGEMENT

the risk and whether they are being honest about the level of debt needed to meet the housing targets they are attempting to deliver.

What are the challenges of developing a business case for large-scale projects?

CH: These schemes are inherently complex. You have got to try and forecast, for example, what is going to happen to the London property market over a period of 10 to 15 years. The complexity is dealt with through proper financial modelling and sensitivity analysis, but you can never be 100% certain you have got it right. Critically, it is important to engage early on with members over what would happen if things went wrong. For example, if you foresee interest rates rising, inflating the cost of debt and impacting house prices and rental yields, that would be problematic for any regeneration scheme. It is therefore important to work in phases, which gives you the ability to adjust the scheme throughout, including in the worst-case scenarios, such as reducing the percentage of affordable housing to make it viable.

What is your view on the blend between short-term and longer-term debt in funding regeneration schemes?

CH: Ideally, you should be trying to avoid short-term debt to fund these projects. There may be a small amount that is sensible. For example, it would be reasonable to finance the initial development phase of a project using shortterm debt. However, what you should not do – which I know some authorities have gone into – is to finance long-term investments through short-term borrowing. This tends to generate short-term savings, but means the authority is carrying a very significant interest rate risk. Photography: Alamy

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Newham made headlines over its use of ‘lender option borrower option’ loans. What is the current situation on these?

EXPERT Q&A

Capital gains A senior UK local authority director of resources explores some of the treasury management challenges in financing major regeneration schemes A lot of councils have subsidiary companies to help deliver regeneration projects. Are they still relevant, given recent high-proﬁle failings?

CH: There are a number of good reasons why local authorities use subsidiary companies for regeneration projects. Mainly, the wish is to be agile and to bring in different skill sets and employment practices, along with the strong emphasis placed on board responsibilities. Some of the issues at particular authority-run companies could be put down to mismanagement. Such problems sometimes stem from the fact that the parent council – either directly or as a shareholder – has enabled the company to take risky or unwise developments and investments. Councils should be asking whether they have good arrangements in place to manage

CH: When I joined Newham in 2019, we dealt with a bunch of LOBOs that we held with Royal Bank of Scotland and NatWest, agreeing deals to refinance those. That move will save us £100m£150m over 40 to 50 years. We have a large number of other LOBOs that were entered into by a previous administration. We actively consider our portfolio and how to deal with those, but the issue with these existing loans is that refinancing can be prohibitive. Our starting point is that any new debt we take on will not include products with complicated derivatives. Where the conditions are right and can be agreed, we will look to exit our remaining LOBOs.

Looking more widely, what is your view on the government’s threat to reintroduce debt caps for some authorities?

CONRAD HALL is director of resources at the London Borough of Newham

CH: If you change the financing system, it is inevitable that there will be unintended negative consequences on capital projects that could have gone ahead, would have been affordable and would have generated important social returns. That is a certainty, and one that should be avoided. The government’s focus should be around governance, transparency, reporting and risk management, but to go further and limit access to credit could have very negative impacts. PUBLICFINANCE.CO.UK 59

14/12/2021 16:39

IN PRACTICE

TREASURY MANAGEMENT

What is impact investing and how does it differ from other types of investing?

Impact investing is no different to traditional investing in that people are seeking financial returns. But for a very large number of beneficiaries and owners of capital, financial returns are not enough. During the past few years there has been substantial growth in the number of people who are expecting their capital to bring not only a financial return but also real-world benefits for the environment and society. Impact investing sees an investor targeting a particular set of positive environmental or social outcomes. In their investment process, they manage and actively monitor progress towards achieving those goals and manage their portfolio with that in mind.

What asset classes are suitable for impact investing?

In principle, you should be able to apply an impact investment lens to any asset class. I think an important question for an investor to ask is ‘What am I doing that helps accelerate the ability of those companies to be impactful?’. In some asset classes, it is a relatively obvious answer, because an investment is providing new capital. In other asset classes, like listed equities, it becomes more complicated to attribute changes to a single investor, because, typically, they do not provide new capital directly, and the means available to accelerate impact usually relies on collective action. But, in principle, we think it is a lens that you can apply across asset classes, and the

towards the delivery of both of those goals.

EXPERT Q&A

Point of impact An expert explains impact investing and how public sector investors can use it to achieve social goals – and healthy returns institutional investors we have been working with are starting to try to do that.

Do public authorities engaging in impact investments need to accept lower rates of return?

There was a time when people thought there was a trade-off between financial return and impact. Now we live in a world where people expect both. For some investments, pursuing a specific impact goal might require making longer-term bets, or choosing to be an early investor in something and taking on greater risk. You might have a greater risk appetite, or you might not. However, not everybody is willing to take on risk. That is why we say impact investing is about the investment strategy, focused on both impact and financial objects, in addition to a full spectrum of returns (market rate or otherwise), and then consciously managing

SEAN GILBERT is director of membership and capital mobilisation at the Global Impact Investing Network

How has Covid-19 changed the landscape for impact investment?

I think it has accelerated the agenda somewhat. The pandemic has helped make visible some of the fragility in different segments of the economy and our societies. The investors we work with have been expressing a much greater appreciation of the importance of their investment choices in terms of the world that those decisions create and the world in which we live. There is much more attention and interest in understanding how investment strategies relate to that question.

How do public bodies measure the effect of their impact investments?

There are increasingly detailed ways of measuring impacts. The trajectory of our work on developing tools with the investment community has been focused on trying to define what you can measure or what is worth measuring and why. Our tools help to define standardised information that allows investors to evaluate investments in relation to each other. It is no different from having accounting standards that create consistency about financial information and enable access. You still have to do the analysis and the comparisons to decide which investment is most appropriate for you. There are complexities to working in this way, but it is doable, and we are demonstrating how it can be done.

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IN PRACTICE

MANAGEMENT

type of workplace conversation, but all leaders can make a difference by devoting attention to a few specific factors.

WORKPLACE INCLUSION

It’s good to talk Including all staff members in workplace conversations can help finance departments reach their full potential

onversations help build connections and relationships in our workplaces. But we rarely pay attention to how inclusive our conversations are. Unless leaders and managers have genuine aspirations for inclusive conversation, those who are not invited to speak, not heard, or not believed, lose trust and respect for the organisation – and their motivation to do their best work. Only when people learn the art of good conversation will they begin to be equal. The obstacle to this is not ‘knowing’ who we are talking to. Good conversation demands curiosity and equality between those participating. Our differences create mystery, which is why all people are worth talking to. A good conversation generates inspiration from our differences – anything less would be boring. Focusing our efforts on developing the skills and qualities of good conversation is one of the most important ways of establishing equality in the workplace and beyond. Managers and leaders are ideally placed to help improve

Illustration: IKON

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the dynamics of workplace conversation. But they need to know what good conversation looks and feels like. Everybody’s style of speaking and listening is a mixture of echoes emerging from the different experiences and stages of their lives. Our ability to see and hear our colleagues, even if they are right in front of us, is often compromised by bias and unhealthy patterns of talking, developed over time. These are compounded by a culture of always being ‘busy’ and the pressure we put ourselves under to constantly be accomplishing things. If inclusive conversation is everyone’s responsibility, how can you play your part?

Engage others over your intentions

First, state your intention to improve workplace dialogue and facilitate good conversations in all your meetings. Ultimately, every team will have to work out how it is going to talk together. It might not be possible to offer a single set of rules to help every

DEBBIE BAYNTUN-LEES is professor of organisational development & leadership at Hult International Business School

Create conversational spaces

Learn facilitation skills

Plan your strategy for creating the space to talk about how to improve workplace conversations. It is important to gain awareness of how people – especially minority groups – experience talking together. How do they feel during and when they leave a meeting, and how do they want to feel? These initial conversations should be free of blame. Inclusion is everyone’s responsibility, and, inevitably, the subject of bias will come up. It is important that people are supported in the personal effort involved in learning to recognise and manage their own biases. The first step is being able to talk openly about bias and someone being prepared to admit some of their own. This could be you.

Good facilitation skills can help the group increase effectiveness by improving its process and structure. This means helping the group to become aware of how its members talk together, who silences whom, how they listen, share ideas, make decisions, solve problems together and how they handle conflict. Once a team has identified the characteristics of good conversation and how they want to experience and feel talking together, these elements can be documented, used to identify personal development needs and to reflect on progress. PUBLICFINANCE.CO.UK 61

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14/12/2021 10:53

IN PRACTICE

PROCUREMENT

ith COP26 and the recent publication of the National Procurement Policy Statement, there has never been a better time to talk about green procurement. The NPPS highlighted tackling climate change and reducing waste as two strategic priorities for public procurement. However, reducing the climate impact of delivering public services will take considerable time and government investment to deliver. Covid-19 has highlighted the importance of public procurement, with staff working around the clock to equip public bodies with personal protective equipment, temporary mortuary facilities, food supplies and laptops to enable homeworking. ‘Green procurement’ refers to the process of procuring these same vital goods, services and works, but with minimal impact on the environment. Making procurement more sustainable is no easy undertaking – it involves more than merely purchasing ‘green’ goods and services or constructing environmentally friendly buildings. Systemic changes to current procurement processes are needed to handle and mitigate environmental impacts. Practically speaking, this means better forward planning to manage demand, consistent approaches to supply chain control and efficient and continuous contract management. Adoption of these measures requires investment in the skills and capacity of those delivering public contracts. There also needs to be a realisation that net-zero projects may take several years to deliver on the ground, requiring both updated internal skills (like knowledge of recent developments in green technology) and a

PROCUREMENT

Green means go Now is the time for the public sector to fully embrace green purchasing approaches willingness to collaborate with other organisations (both public and private). By mandating common practices around contracts and supply chains, such as green production standards and ecolabels, and embracing whole lifecycle costing, both the environmental and social consequences of procurement should improve. Broad investment and skills development will also help practitioners to manage environmental impact throughout the procurement process, including the critical supply stage. Suppliers are generally responsible for ‘scope 3 emissions’ (such as business trips and waste management), which are often far greater than scope 1 or scope 2 emissions (direct emissions from company vehicles or indirect emissions from purchased energy). One way of identifying and addressing emission hotspots is via investment in contract and supplier management. Organisations need to work

MOHAMED HANS is a solicitor and procurement advisor at CIPFA

closely with suppliers, build in contractual requirements and place obligations on how suppliers can support a sustainable agenda to enable emissions to be monitored more effectively. Collecting data about how suppliers source, manufacture and deliver goods also increases the transparency and sustainability of public contracts. Part of working towards green procurement involves creating a more diverse supply chain to deliver contracts. In turn, this should assist with the development of all types of businesses. Protecting workers’ rights and wages is also an important part of green procurement, improving bodies’ ability to deliver and manage sustainable contracts. Without a doubt, green procurement makes good business sense. Achieving value for money is a key goal for any taxpayer-funded body, and, if the whole-life cost of goods for the business is not considered, true value for money is unlikely to be achieved. Some prime examples of factors that affect value-formoney calculations are electricity and waste disposal costs. By replacing these with sustainable alternatives, green procurement represents longer-term planning and improved stewardship over public money. In an ideal world, procurement could not only be carbon-neutral but also offer environmental gains, such as increased biodiversity or reduced use of unsustainable energy sources. For now, if the government invests in diversifying skills and builds the capacity required to promote effective supplier and contract management, some of the UK’s broader sustainability goals will start to follow suit. PUBLICFINANCE.CO.UK 63

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IN PRACTICE

DIARY DATES

CIPFA is now offering a mixture of physical, online and hybrid conferences and training as we monitor Covid-19 and how it affects live events. Our event programme reflects local conditions and regulations in each of the nations of the UK. The format and provision of events is under constant review – please refer to each event’s details online for the latest information.

EVENTS

Visit www.cipfa.org/training to search for the events you are looking for, or contact customerservices@cipfa.org management skills and help support their organisations. cipfa.org/dpsam

For support and guidance around Covid-19, including webinar and e-learning support, please visit cipfa.org/coronavirus

S TA R T S 7 F E B R U A RY

CONFERENCES 20 JANUARY

CIPFA Housing and Property Conference: Building a Better Future Despite the success of the Everyone In initiative, the housing crisis continues – and the sector is bracing itself for increases in homelessness as the ban on evictions is lifted. After COP26, where next for the climate emergency? And can we ‘build back greener ‘ as we retroﬁt and deliver new public buildings and infrastructure? 24-25 MARCH

Public Finance Live: Scotland 2022 – Future of Public Sector Finance Scotland’s annual conference returns with a physical event at the Radisson Blu in Glasgow. This will be CIPFA’s ﬁrst faceto-face event in Scotland since 2019 and will feature a new condensed schedule to minimise time away from the ‘home office’ but facilitate engagement with long-missed colleagues, peers and friends. We will explore how ﬁnance professionals will be vital to delivering for our citizens, now and in the future. Get insight and advice from experts across a range of sessions, covering sustainability in the

public sector, the future of the ﬁnance workforce, addressing inequalities and the future of place-based, cross-sector working in the public sector, among many other topics. 1 3 – 1 4 J U LY

Public Finance Live, ACC Liverpool CIPFA’s annual conference returns as a hybrid event to Liverpool, offering two days of insight, ideas and guidance, both in person and online. With main plenaries and workshops, CIPFA’s annual conference is ideal for those looking at the big picture and for hands-on updates and insights into public ﬁnance and public service management. publicﬁnancelive.org

WORKSHOP FOCUS VA R I O U S D AT E S I N J A N U A RY

Accredited Counter Fraud Specialist Focusing on the skills and knowledge needed for the effective end-to-end management of fraud – from prevention and creating an antifraud culture to investigating and resolving cases to the highest evidential standards. All CIPFA members are entitled to a 10% discount on the course fee. cipfa.org/acfs

AND FEBRUARY S TA R T S 8 F E B R U A RY

Accounts Closedown and Financial Reporting Workshops 2021-22 Local government accounting professionals should not miss CIPFA’s annual accounting closedown workshops for England, Scotland, Wales and the police sector. Get updates on the latest changes to the Accounting Code’s requirements and recent developments in relation to 2021-22 local authority ﬁnancial reporting.

COURSES

Diploma in Contract Management A qualiﬁcation combining contemporary contract management theory with existing good practice. This course will give participants the knowledge, understanding and practical skills to manage contracts effectively. All CIPFA members as well as employees of organisations that are members of our Procurement and Commissioning Network are entitled to a 10% discount. cipfa.org/contractmanagement S TA R T S 1 5 F E B R U A RY

CONFERENCES COMING SOON 17 MARCH

CIPFA Wales Conference OCTOBER

CIPFA Northern Ireland Conference

S TA R T S 1 2 J A N U A RY

CIPFA ACES Diploma in Public Sector Asset Management A jointly delivered online qualiﬁcation from CIPFA Property and the Association of Chief Estates Surveyors that allows property professionals to develop their asset

Certiﬁcate in Fraud Risk Management This course delivers the in-depth skills and knowledge needed to create an effective, entitywide fraud risk management framework. All CIPFA members are entitled to a 10% discount. cipfa.org/cfrm

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IN PRACTICE

ON ACCOUNT ANNA HOWARD is head of qualiﬁcations and membership at CIPFA

PROFESSIONAL DEVELOPMENT

Learning curve The issues of today are tomorrow’s urgent challenges – public finance leaders can help solve them

f the past two years have shown us anything, it is that we must always be ready and willing to adapt, change and to roll with what life deals us. There is no better time to look forward and focus on the challenges that lie ahead. This is exactly why we have completely transformed and updated our flagship accountancy qualification. CIPFA’s new course, the Professional Accountancy Qualification, will begin in March 2022, with enrolment still open now. At its heart, the PAQ aims to future-proof the next generation of public finance leaders, with a renewed focus on contemporary issues. Now, more than ever, we need talented, passionate and committed public finance professionals to tackle the challenges facing the modern public sector. There is possibly no challenge greater than the climate crisis, which has the potential to change life as we know it for millions of people across the globe. I am certain that for us to stand the best chance of reducing our environmental impact, we must have finance professionals sitting at the top table with the decision-makers, the movers and the shakers. The public sector has a huge responsibility to play its part in this agenda. It must also take the lead in how organisations adapt to reaching net zero. It is the finance leaders of tomorrow who will have to make the tough decisions about where precious funds are allocated. Our qualification is designed to give students the skills to ensure best value for the taxpayer, do right by their communities and

ensure that the public pound is used in a more sustainable way. The updated syllabus will cover sustainability reporting, green finance, performance measures and strategic delivery to help our students understand their vital role in tackling climate change. But the race to move away from fossil fuels is not the only one that is being run. The advance of technology is changing all aspects of our lives – how we work, shop, bank, eat and communicate. It is profoundly changing our understanding of how we interact with the world around us. We need our students to be well prepared for this shifting environment. This is why the new PAQ will include a greater focus on frontier technologies, which will affect how public finance professionals do their jobs. Through a number of course units, the characteristics and use of big data analysis are explored, as well as cloud computing, cyber fraud and artificial intelligence. All of these

technologies will have an inevitable impact on public finance, and we all need to get ahead of the curve. The next chapter in our collective history will be defined as one in which we ensure our survival on earth, as well as one in which our lives are fundamentally changed by mainstream adoption of new technology. Therefore, the public sector must not forget the strict codes and ethics under which it operates. As the first professional accountancy body in the UK to adopt the International Ethics Standards Board for Accountants Code as our own Standard of Professional Practice, there is a renewed focus on this throughout the PAQ syllabus. We have introduced an e-learning ethics module that must be completed before the student begins their studies, regardless of their point of entry. This component is designed to form a central resource bank that can be referred to throughout the learning journey. The role of a public finance professional encompasses those of a steward, enabler, innovator and business partner – all these aspects must be ethically informed in order to be successful and to better the lives of the public. Changes are coming – if they are not here already. While the future looks uncertain – perhaps even scary at times – we at CIPFA are resolute in our belief that, with good public financial management, the future will be better for everyone. For that to happen, we need to enable the students of today to become the outstanding public finance leaders of tomorrow. PUBLICFINANCE.CO.UK 65

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LAST WORD

WHERE NEXT?

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READ…

The latest publications from CIPFA Prudential Code Guidance Notes How to meet the code’s key principles of ensuring that capital programmes are affordable, prudent and sustainable – and explain this effectively to those charged with governance. Treasury Management Code Guidance Notes A document highlighting the requirements of statutes and regulations, as well as common practices and current issues speciﬁc to local authority treasury management. READ at cipfa.org/publications

Visit publicfinance.co.uk and publicfinancefocus.org for exclusive news and opinion on the latest developments affecting public finances. Sign up for news bulletins direct to your inbox BEYOND GDP “Many voices make powerful arguments that a country’s wellbeing should be measured against much more than purely economic factors.” Richard Heys, deputy director and deputy chief economist at the Office for National Statistics, on reforming GDP

DRAGGING ITS FEET “The government has continued to drag its feet on the desperately needed reforms set out in the Redmond review.” Public Accounts Committee chair Meg Hillier, in a joint opinion piece with Clive Betts, chair of the housing, communities and local government committee READ the fu full articles at www.publicﬁnance.co.uk/type/opinion

W are governed more We by companies than by b governments on a wide go ra range of issues – from privacy to sustainability to priv equity and human rights eq

LISTEN

CIPFA speaks! podcast Latest episodes LIANNE DEEMING, chief executive of emergency services support firm BlueLight Commercial, and RICHARD HALLEWELL, chief executive of the CIPFA & CPRAS Technology Procurement Association, discuss improving emergency services’ financial management in procurement and procuring technology in the public sector. RIZWANA TABASSUM, research analyst at the World Bank Group, discusses CIPFA’s work to strengthen public financial management in Bangladesh. LISTEN at publicfinance.co.uk/podcasts

Alec Ross in his book, The Raging 2020s: Companies, Co Countries, People – and the Fight for Our Future 66 PUBLIC FINANCE JANUARY/FEBRUARY 2022

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