How can cities create sustainable growth and manage risk?
Originally published by Core Cities UK
In the spirit of the season, it is surely a useful exercise to explore the deepest and darkest of the issues afflicting the local investment landscape. This week, with the clocks gone back, days gone dark, and Halloween approaching, Localis’ new report Ride the Wave approaches the most chilling of policy questions – one which sends shivers down the spine of even the most stalwart local government officer – how can local authorities deliver sustainable growth while managing their investment risk?
Ultimately, the challenge of the question derives from that all-tricks-no-treats tension between a government with its sights set on growth, growth, and growth, and a local government sector caught, shakily, on the ledge between innovating its way out of austerity, new statutory planning to include local investment opportunities, and its very necessary requirement of fiscal prudence. As the government unveils its new (and sometimes Frankenstein-ishly repurposed) public finance institutions to introduce new capital to the scene, and as the ecosystem of strategic governance spreads like mould across the English landscape, local authorities are having to adapt quickly to a changing environment in ways that can, at times, seem a bit scary.
It is, therefore, necessary to think about how it might be possible to mitigate the scares, particularly for those Chief Finance Officers (CFOs) in local authorities, who must prioritise the delivery of core services, and in strategic authorities, who must balance financial sustainability with investment at the strategic level.
Plaguing the purview of the local government CFO is the capacity gap that has left authorities without the commercial and financial skills necessary to drive robust business case development and ensure well-structured risk assessments, and that often results in a reliance on that most vampiric of resource drains, the external consultancy. An audit backlog as abyssally deep as Hades has also brought consequences to governance and accountability across the sector.
Likewise, the introduction of new strategic authorities, shifting hierarchies across local government, and enforced local government reorganisation, means that the sector is facing levels of churn not seen since the monstrous Charybdis whirlpool-ed Odysseus across the Strait of Messina. Churn means institutional immaturity, with new structures lacking those established processes that can provide the stability and relationships that the complexities of place investment fundamentally require.
The issue of the capacity gap connects inherently to the profound crisis of local government financing that has somewhat mummified the sector in recent years, holding it back from making any reasonable and significant, preventative change in the face of the extensive statutory expense needs. High profile failures amongst some of those authorities who have made bolder investment decisions and the ever-present chance of incurring those punitive intervention measures that loom menacingly at the horizon, mean that the concept of entrepreneurship as any kind of feasible solution to the local government funding crisis has become, for many, little more than an illusory will-o’-the-wisp.
And what might be, to some, the most off-putting of this shambling horde of impediments to good place-based growth is the idea that the private sector is going to be at the heart of any plan that aligns with the government’s ideas of capital investment. Those new public financial institutions – rather heart-warmingly but not, for the purposes of this post, thematically referred to as “PuFIns” – offer something of an oracular glimpse into the future of infrastructure and urban growth across the UK and its reliance on private financing.
That future may indeed be one defined by the Public-Private Partnership (PPP), the definitive monster at the end of HM Treasury’s bed. Haunted by the history of the Private Finance Initiatives, and therefore often reviled in public opinion, but presented as a solution to the public sector’s capital financing issue, the PPP is perhaps the most visible representation of that balance of prudence and innovation that must define a local authority’s risk management approach. Risks with PPPs are, undoubtedly, present, coming in the form of contractual complexity, long-term political commitment, and a lack of understanding of best practice for achieving Value for Money that is undercut by a historic lack of data surrounding PPPs – all exacerbated by that lack of in-house capacity among local authorities.
However, it’s not all doom and gloom. Ride the Wave offers a number of potential solutions and best practice recommendations for central, strategic, and local government to alleviate the tensions between mandated local growth and hair-raising risk in financial management.
The capacity gap must be addressed by means of a well-resourced strategy to improve local government in-house commercial skills and the national capital investment programme should extend to local government recruitment. The widespread adoption of institutional maturity models can accelerate maturity across the local government sector, helped at the regional level by the inclusion of neighbouring strategic authorities as consultees within the production of statutory local growth plans.
With greater institutional maturity and a diminished capacity gap, the ghoulish PPP becomes rather less frightening. Add to that some clear guidance and contractual frameworks for PPP models to be used across the sector – potentially following the example of the Welsh Mutual Investment Model in terms of optimal risk allocation – and a smattering of smaller-scale PPP projects to build learning capacity and a better, more pragmatic environment for future, larger PPPs, and the concept of the PPP becomes much less an insurmountable behemoth – not much more fearsome than a timorous beastie.