When the credit crunch begins to bite

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Belt tightening is a more familiar concept to local government than it has been to most of this country's population over the past few years.

But as everyone from City high-flyers to call centre staff come to terms with both the effects of the credit crunch and rising food and fuel prices, so too must town halls the length and breadth of the nation.

Traditionally, economic hard times point to a likely decrease in business rate income, as well as increased demand for social housing and other local authority services that are not under as much pressure during wealthier periods.

Add the as-yet unrealised spectre of rising unemployment into the picture, and more residents on housing benefit and council tax benefit is a logical progression.

Today's concerns, however, are more closely linked to upwards inflationary pressures,  which are fuelling increased pay demands, and the continuing effects of the credit crunch.

Councils under pressure

Research last week from 4ps, which advises local authorities in England and Wales on setting up public/private partnerships (PPPs), warned that councils would come under increasing pressure to deliver efficiencies.

Its survey of 200 local authority officers cited a host of inflationary fears, as well highlighting the number prepared to make cuts as a way of dealing with those increasing costs (see box).

The need for efficiency is nothing new, and after achieving £4.2bn in savings over the last comprehensive spending review period, local government is now tasked with finding a further £4.9bn over the next three years.

However, the increased goal could well have to be delivered against a radically different economic backdrop.

Efficiency drives

No one disputes the parlous state of the banking industry as the extent of its exposure to the US sub-prime housing market has emerged, resulting in the credit crunch that began last summer. But opinions vary on the extent to which it has affected the cash available to fund the PPPs that are a key element of many local authorities' efficiency drives.

LGC understands that the brakes have been firmly applied to some deals as a result of the current financial turmoil and its diminished liquidity.

Most commentators claim, though, that the fundamental appeal of good PPP deals remains undiminished, both for investors and providers, and that getting them completed has merely become harder.

Tim Stone, chairman of the global infrastructure project group at financial services consultancy KPMG, sees a definite slowing of completion dates for PPP deals as financing problems take an increasing time to resolve.

"I suspect that most of the deals that are in the process now will get done," he said. "But a lot more close dates are slipping."

He believes that a resolution to the market's problems will depend on the full picture of banking losses that lies behind the crunch. But he added that the only PPP deals likely to be dropped completely are the "flakier" ones.

"Firstly, all of the bad news has got to come out, and trust has got to come back," he said.

Mr Stone added that early 2009 is the likely time for the full picture to emerge. After that, he predicts a return to normal service — regardless of any further increases in inflation and rises in unemployment.

"The people who would want to invest in these things will still have the money to invest," he said. "When things do open up again, I think we will see that there is really strong interest in backing PPP deals."

More optimistic still is Paul Davies, partner in the public/private advisory directorate at PricewaterhouseCoopers.

Mr Davies queried whether deals are taking longer at all, but agreed that financing has become "harder". "The thing about PPP agreements is that they are not deals that people do quickly, and to that extent they get carefully checked," he said.

"There's quite a lot of anecdotal evidence that the banks are beginning to push up margins, so the impact of the crisis is now having an effect on pricing up deals."

John Tizard, director of the University of Birmingham's new Centre for Public Service Partnerships, said that PPP represents an oasis of stability for private sector cash when other aspects of the economy are uncertain.

"You know what needs to be done with private finance initiative [PFI], and you deliver to specific contracts," he said. "The questions are 'are we heading for a deeper crisis than we have now,' and if PPP investments are going to be attractive?"

Chris Wilson, executive director of 4ps, said that councils looking to improve their efficiency need to start with streamlining their operations before seeking external tie-ups, but insists this is nothing to do with  finance problems in setting up PPPs.

"The PFI programme is holding up well," he said. "Projects are a very suitable place for private sector investors to invest."

Mr Wilson said that streamlining sometimes idiosyncratic services — especially corporate and transactional roles — was a good in-house way to find efficiencies. "We are pointing to certain areas where we think there is an opportunity for more improvement," he said.

But he believes that partnerships are the long-term route to more efficiency.

Somerset CC chief executive Alan Jones agreed. "The credit crunch and the economic downturn, which I don't think is going to be a recession, is going to have far-reaching consequences," he said.

"A lot of people are going to look much harder at the prospect of working together."

Mr Jones said any drying up of traditional funding streams could force local authorities to be even more innovative and seek new opportunities. "This economic downturn is causing local authorities to think much more creatively about how they can work in partnership with other organisations who might have a different kind of approach," he said.

He added that partnerships such as his council's Southwest One joint venture with IBM, Taunton Deane BC, and Avon & Somerset Constabulary — which is expected to save the county council £200m over the next decade — allowed for more creative thinking on issues that could be affected by inflation.

"When you look at things in the round, you find opportunities that you might not have thought about, and then it's possible to address those issues. Where are you buying your fuel and are you managing people's own vehicles? Are you managing car sharing?"

Tony Reeves, chief executive of Bradford City MDC and board member of the British Urban Regeneration Association, said authorities could not afford to focus on short-term issues.

He said economic downturns were good times to invest both in regeneration projects and partnerships.

As long as employment remained high and interest rates low, the macro-economic conditions for growth would still be right, he said.

"We need to be aware of the danger of talking ourselves into bigger problems.

"I remain confident that places like Bradford can carry on with our regeneration plans. The medium-term outlook is good and we have got a great opportunity to regenerate the country."

Whether town halls see the economic cup half empty or half full, however, the issue of belt tightening is not going to go away.

The only questions are how many extra notches, and how quickly.

And the answers will only appear when the full extent of the corporate sub-prime lending binge is known.

Economic downturn survey

Fears

• 50% concerned about rising costs for providing waste management services

• Nearly 20% concerned about the rising costs of corporate services

• 10% concerned about increasing public transport costs

Solutions

• 50% would cut sport and leisure services to save cash 

• More than 50% would cut staff recruitment and new buildings 

• 49% would reduce community grants