Mark Johnson considers the outlook for local authority projects against the backdrop of spending cuts.

So a new age of austerity is upon us. The scale of the public sector deficit is becoming clearer and politicians of all persuasions are facing up to the harsh reality that spending cuts are inevitable. The structural deficit is estimated at 7-8% of GDP (approx £100bn). It has been said that this could be managed down over a painful five-year period – although the feasibility of this depends on the timing and amount of tax revenues.

Barring a dramatic turn of fortunes, a change of government seems likely. A Tory administration has signalled a wide-ranging review of capital spending programmes, as well as scrutiny on the method of delivery of public services – signposting a greater role for the private sector, as well as the third sector (charities and social enterprise) in the delivery of public services.

Future areas of opportunity

Even before the current fiscal crisis, local government spending was already under scrutiny. The Gershon efficiency reviews set demanding targets for local authorities to find efficiency savings of 2.5% year on year by 2007 (around £6.5bn). These targets were increased to 3% in last March’s budget.

There will continue to be much scrutiny of the back-office and procurement functions of local authorities, as well as the way authorities use and manage their property estate and infrastructure. The Carter review of government property is likely to lead to more projects which maximise opportunities for clustering and co-location; developing campus-style sites at key locations, and more joint working with the construction and property industry to achieve buildings of the highest environmental standard.

It seems likely that projects focused on generating savings through sharing of back office services will also experience a renaissance as a way of enhancing the efficiency of corporate support functions, such as finance, human resources, information technology and procurement. These could take the form of partnerships between authorities, as well as joint ventures with private sector service providers. For example, Essex County Council recently chose IBM as its preferred supplier for a major transformation project that aims to save £200 million over four years.

Projects which extract value from authorities’ property portfolios are also likely to be in vogue. In the past two years the emergence of the local asset-backed vehicle has generated a lot of interest, with a trailblazing scheme signed in Croydon and schemes in procurement in Manchester and Newham. The essence of these has been to create a special purpose joint venture vehicle between the council and developer into which property assets can be transferred and developed or disposed of, with the council sharing in the resultant gains. However, the success of these arrangements is likely to depend on credit markets continuing to loosen to allow a greater flow of debt finance and an upward swing in property values.

Schools for the Future – but not necessarily new ones

Building Schools for the Future was supposed to be a programme worth £50 billion over a 10-15 year period from 2004. The target was to renew 3,500 secondary schools in England. The building industry had placed heavy reliance on this programme, along with showpiece projects like the Olympics, for a future pipeline of opportunities. Five years into the programme, only 78 new schools have been delivered. The National Audit Office (NAO) recently concluded “Original expectations of how quickly schools could be built were overly optimistic”. The pipeline of future big capital projects is looking under threat.

The Tories have already signalled that the future programme of investment will be reviewed. They argue a shift of emphasis away from shiny new buildings, to improving the quality and choice of schools. They have advocated using existing buildings, such as offices and commercial space to house new education providers. This is likely to stimulate a range of innovative projects around establishing new schools – some will be academies, others will be parent-promoted schools or perhaps franchises operated by charities or even private sector operators like former OFSTED chief Chris Woodhead’s Cognita or Swedish voucher school pioneer, Kunskapsskolan.

Demand for housing remains strong

Social housing is a sector that ought to generate a decent pipeline of opportunities. The UK is still short of five million social housing units. The government has recently announced a new pipeline of ten pathfinder schemes worth up to £1.7bn using the private finance initiative and has floated the idea of giving councils back their powers to build new housing and even to offer cost-effective mortgages.

Demographics will spur action on health and social care

There is already much focus on local authorities working closer with NHS institutions, through more integrated services, pooling of budgets and sharing of staff. These often start as section 75 partnerships, but increasingly I believe we will see full-scale merger of operations into new governance models.

Falling birth rates and an increasingly ageing population will require local authorities to make strategic decisions now to cater for the increasingly complex needs of the growing elderly population in ten years’ time. This may include increasing the stock of specialist accommodation, extra care and sheltered housing, as well as specialist dementia and nursing homes. We have recently worked with a leading national care charity on two innovative mixed health and social care campus developments, in Malmesbury and Chipping Norton, which have provided viable replacements for outmoded community hospitals and a showpiece for integrated working between PCTs and local authority social services. Integrated models like these will to generate a lot of interest.

Authorities in areas which have a LIFTCo partnership up and running will be able to make use of this procurement vehicle to improve infrastructure in areas outside health. Oldham MBC is using LIFTCo to replace leisure facilities and Lambeth Council is using the LIFTCo route to procure a new joint service centre. The Express LIFT programme was launched last year amid much fanfare, as a way for all PCTs to manage and renew their estates, but the pipeline of projects has been small, with just NHS Cumbria going into procurement so far.

Waste and climate change

Stringent EU targets on landfill waste and increasing recycling will bite from 2013: these are likely to stimulate new procurements and partnerships. The Greater Manchester Waste scheme was a showpiece project signed in April, but ultimately had to be saved from the effects of the credit crunch by the Treasury’s infrastructure finance unit.

The NAO recently found that the risks faced by waste infrastructure projects are different from those found in other PFI infrastructure projects, which could make them less attractive to funders. They include: uncertainty over the volume of future waste throughput; planning permission difficulties due to concern by residents; the risks of different types of waste treatment technology and dwindling markets to sell products from waste treatment.

Innovative trading models

As councils strive to find economies and generate new income streams, there is likely to be a lot of interest in arms’ length trading entities. We have advised on a wide range of new projects over the past 18 months, ranging from housing maintenance, to legal services, PR and communications services and education support services.

Necessity is the mother of invention

There seems little doubt that a new age of austerity will impact on capital spending programmes, with scarce resources being targeted towards priority infrastructure, such as housing and waste management. New project financing techniques, such as municipal and community bonds may emerge to supplement PFI and prudential borrowing.  However, service remodelling projects look set to increase in number and variety, in the pursuit of efficiencies and economies of scale.

Local authorities will find that competition between advisors is intense – fee levels will be highly competitive. Some advisors will exit the projects market altogether if they can no longer offer attractive rates.

The nature of projects is likely to change as the vision for public services evolves. Future public service partnerships are likely to involve greater personalisation of services to individual needs, this will in turn lead to payment mechanisms linked to successful outcomes or ‘social return’ on investment, rather than inputs or outputs. Already we are seeing this with the new generation of welfare-to-work contracts. Increasingly, in the light of the spending squeeze, we may also see the citizen being asked to make a co-payment towards services (for example on tolled rolls, education top-up fees), which will change their role into a more assertive and informed consumer.

New governance models are likely to emerge, involving partnership between local authorities, private and third sector. These will throw up some tricky issues, not least around local authority powers following the LAML judgment and workforce issues where staff transfers occur. There will be big opportunities for authorities equipped with the right skills set to succeed.

Mark Johnson is managing director of specialist public services law firm TPP Law