Penfold Associates

At the time of writing we have been through the excitement of the UK General Election and formation of the Coalition, we have seen the Coalition Agreement and the Queen’s Speech, and had a chance to reflect upon the first £6.2 billion of public spending cuts. We await the 22 June Budget and the Comprehensive Spending Review later in the year. All the signals are softening us up for sweeping cuts over a period of years. The new Office of Budget Responsibility has revised downwards the previous Government’s growth forecasts but has clarified that the budget deficit is slightly smaller than forecast. Cuts were expected whatever the result of the General Election. The Labour Opposition may still be saying that the Government is cutting too deeply too soon and may endanger the still fragile economic recovery but if they had retained power we would have been looking forward to cuts on a similar scale.

The new Government, however, is not just in the business of cutting back to sort out the fiscal deficit – effectively doing less of the same. The Coalition is not into “salami slicing”. Its approach is to look at the purpose and effectiveness of each element of public expenditure to decide whether it is worth continuing with or should be abandoned. Behind this is a belief that the public sector has grown too big and is interfering with elements of people’s lives better left to individuals themselves and their local communities. This is essentially the thinking behind both the Big Society idea and the localism agenda. Coupled with this, the new Government has rejected the previous administration’s attempt to improve public sector performance through process targets and micro-management. The Coalition is deadly serious about these changes. The new approach also fits public perceptions of high public expenditure in recent years failing to deliver the improvements in service standards that were promised.

Another element of the new thinking is the Government’s attitude to high public sector salaries. The Coalition thinks false comparisons have been made with top salaries in the private sector and the taxpayer cannot afford these high rates of pay. Special clearance is needed for any salary higher than the PM’s. The Cabinet’s decision to reduce ministerial salaries was not so much a gesture as a message. The new Government is also making public all high salaries (naming posts and post-holders) in central and local government. Grant Shapps has also taken up this issue with regard to housing association chief executives. The NHF mounted a spirited defence, citing housing associations’ independence and the fact that the larger proportion of their capital investment comes from sources other than public grant. The weakness of this argument is that it ignores the degree to which associations’ revenue streams are composed of Housing Benefit. This helps make the case that social housing is quite a comfortable, low risk, business. With such a strong steer from the Housing Minister we can expect the regulator to show an interest in senior salary levels in future and to take a stronger line on severance payments than the old Housing Corporation ever did.

If public spending cuts and a new attitude about what the public sector should do were not enough, the new Government is also questioning the validity of many delivery bodies, especially non-departmental public bodies or quangoes. Both the LibDems and Conservatives have charted the expansion in the numbers, roles and spending power of these bodies and question whether the arms length approach is a responsible way for Government to run its programmes. The new Government’s presumption is that such bodies are unnecessary unless it can be proven otherwise. Policy functions, it argues, should certainly revert to Government Departments whereas technical operations and decisions which must be transparent, impartial and free from political interference could arguably be passed to quangoes.

The cuts, the revised view of the public sector’s role, and the attitude to quangoes will all have major implications for the housing, planning and regeneration sectors. We are facing a prolonged period of austerity and will need to deliver desperately needed improvements – new homes, improvements to the existing housing stock, action on climate change and new job opportunities – with limited resources and in changed structures.

There are big question marks over the future of some major bodies –

• The Audit Commission has been around for a long time and vastly extended its remit during the Labour years. Both Conservative and LibDem rhetoric before the General Election attacked “tick box” regulation. Tasked with “driving up standards”, the Audit Commission’s reports of almost universally improving public services were not believed by the two political parties that now form the Government or by large sections of the public. Comprehensive Area Assessments have already been abandoned along with routine inspection. Prior to the General Election the Audit Commission allegedly spent money on consultants advising on how it should lobby against views held by the Conservative Party Chairman, Eric Pickles – now Secretary of State at DCLG. The new Government is unlikely to consider this a good use of public money. The Audit Commission is also trying to appoint a Chief Executive at a salary higher than that of the Prime Minister. This request has been put on hold. If nothing else, there must be questions about the wisdom of the body’s leadership. There will certainly be changes in the methods, focus and scale of inspection in the future.

• The Infrastructure Planning Commission would appear to be doomed. Alternative means of obtaining quicker, more transparent and thorough decisions on major proposals will still be needed if we are to meet the Government’s objectives for high speed rail and energy security.

• Grant Shapps has attacked the TSA as “a quango too far”. This is odd when it fits the criteria for decision-making that needs impartiality and when the body’s work in developing new standards has taken tenants’ views as its starting point. Social housing needs a regulator who understands the context providers work in and how they function as businesses. The TSA has helped support the sector through the recession – tenants and public investment have been protected. The TSA also has a puritanical streak that would appear to suit these austere times.

• The Regional Development Agencies at first all appeared to be in the firing line and likely to be replaced at local or sub-regional scale by Local Economic Partnerships with a more targeted economic development remit. This fate certainly appears to be in store for RDAs in the more prosperous parts of the country. Vince Cable has said he sees no point in spending limited public resources in places that do not need assistance. However, he has also said that more popular RDAs may survive. Not surprisingly, the RDAs have been busily rustling up letters of support from influential business interests. There are two big questions that need to be asked about RDAs. The first is about their effectiveness – there have been criticisms about how good they are at delivery and managing their programmes. The second is about commonality of interest within regions – what do West Cornwall and Bristol have in common? Or West Cumbria and Liverpool for that matter?

• The Homes and Communities Agency has already suffered significant budget cuts, has placed uncommitted projects on hold, and is reducing the scale of its senior management structure. It looks like a body preparing for a smaller future and its budgets will certainly be smaller. Boris Johnson is making a bid for the HCA’s role in London to be passed to the Mayor and Assembly along with a truncated London Development Agency. This would appear to meet Government objectives of making quango functions democratically accountable and could conceivably be replicated by City Region bodies elsewhere.

Before the election the LibDems and the Conservatives had similar views on planning. Both parties opposed the regional housing targets being set by the Regional Spatial Strategies. Both wanted local communities to have a bigger say – with the carrot of incentives for housing land release rather than the stick of top-down targets. Both were also critical of a housing density regime that delivered flats rather than family houses and of “garden grabbing” which was damaging the character and amenity of suburban areas. The Coalition is already acting on these issues. While it is impossible to argue against the validity of making planning decisions as local as possible, the big question remains as to whether the reforms will deliver the rate of housing land release necessary to deliver the needed number of new homes (always assuming the economy recovers sufficiently to allow that pace of completions).

A similar “But will it work?” question overhangs the Big Society ideas for getting more people involved in making the decisions that affect their lives and getting more community and voluntary groups actually taking over the running of public services. The social housing sector perhaps gives an insight into the reality here. Many housing associations in the past were started by a few individuals who saw a problem and decided that, as no statutory body was doing anything about it, they would fix it themselves. Over time these organisations grew and service delivery was taken over by professionals with the role of the enthusiasts becoming that of independent board members overseeing the organisation. Housing associations are therefore a model of how this sort of local community action can transform into large-scale social businesses. It is also possible that in many local areas existing housing associations with strong community ties could be ready-made bodies to take on the sort of functions that the Coalition thinks could move out of the public domain.

Another area where there will be questions about whether the Coalition can deliver is welfare reform. They will inevitably be criticised for cost-cutting and targeting the poorest people, but the Prime Minister and Iain Duncan Smith argue a strong case that the present system effectively parks people on long term benefits and prevents them from joining the workforce. Reform that removes the penalties people can face when they get a job will help disadvantaged communities and boost the economy by expanding the number of economically active people. But New Labour also came to power wanting to tackle inter-generational worklessness and Frank Field was asked to think the unthinkable. The unthinkable proved unpalatable and nothing radical was achieved. Ironically, Frank Field is now advising the Coalition on poverty issues.

Actually delivering housing and regeneration projects at a time of much-reduced public funding is going to be extremely difficult. Grant will be a rare commodity and should be concentrated where it will have most impact and on essential schemes that would not proceed without it. Cross-subsidy from commercial elements including housing for sale looks like being unrealistic while margins are tight and sales levels not guaranteed. Schemes need to be fundable which means they need an income stream sufficient to repay investment and meet other costs. This will probably allow more intermediate rent housing to be built but all the figures show a growing need for more social rent stock as well. Other ways of funding schemes are still needed. PFI is one proven mechanism. The LibDems have traditionally been opposed to PFI. They cite design failures and claim the system is expensive. You can put design failures down to weak clients failing to specify what they want properly. As to PFI being an expensive procurement route, you need to remember what you get – facilities that are maintained in a fit-for-purpose state from beginning to end of a 25- or 30-year contract. This contrasts with old-style public “investment” where money is borrowed to build a facility, revenue money is not however available to maintain it, the facility deteriorates rapidly, and it then has to be replaced ahead of its intended life. Longevity of quality is one of the big advantages of PFI. Options like PFI need to be kept on the table and thought needs to go into new partnership and investment structures. One promising idea put forward by the Business Secretary and the Scottish Government is the proposal to fund infrastructure and social housing through long term government bonds sold to UK pension funds. These bodies often take up such bond issues abroad because no equivalent product is available in the UK.

So we are definitely going to get cuts and the new Government has very definite views about what the public sector should be doing and what public money should be funding. It has strong views, too, about quangoes and how much people should be paid in the public sector and in organisations getting their money from the public purse. What it does not have – and what has been missing for thirty years now – is any idea of public sector ethos. Public bodies have been encouraged to behave in a business-like manner (fair enough when they have achieved it) and – more dangerously – to think of themselves as “businesses” with “customers” instead of patients, tenants, pupils, etc and with Audit Commission and other targets as their bottom lines. This may actually be where it all began to go wrong! Maybe it would be a good idea to get back to the idea that public services and public servants exist to serve the public. The public sector is different from the private sector and blurring the differences through slack use of language only serves to hide their respective roles and responsibilities. This does not mean one sector is good and the other bad. They are different and should have different objectives and values. Both sectors are necessary and need to work together to benefit the country. Perhaps the new Government should add re-establishing a public sector ethos to its objectives of re-defining what the public sector does and what it pays for.

Kim Penfold – June 2010