Tuesday, 11 March 2014

Wales: the devolution debacle

Since the early days of its creation, the mantra of the European Union has been that of ‘ever closer union’.  If we look at the situation regarding devolution in the UK it appears that a similar mantra exists, but is unsaid, and that is ‘ever more devolution, but not for England’. 

Back in 2000 there was no area of UK public life where policy was devolved to sub-national tiers of government. However, the impact of the 1998 devolution referendums was the creation of a devolved parliament in Scotland and a devolved assembly in Wales (the Northern Ireland Assembly was created some years later), while 84% of the UK (i.e. England) had no form of sub-national government and all aspects of public policy were driven from London.

The former Secretary of State for Wales, Ron Davies, was quoted as saying that ‘devolution is a process not an event’. Davies was presumably implying that devolution would not stop at the 1998 settlement but would continue and evolve. 

In theory, this could have meant that the boundaries of devolution would be adjusted so there was a smaller amount of devolution to Scotland, Wales and Northern. But, in reality, the pressure has been in the opposite direction of greater devolution. Since the creation of the assemblies and parliament, there seems to be a path of ‘ever more devolution, except in England’.
The situation regarding Scotland is well known and may end up in Scotland leaving the UK or, at the very least, having substantially increased devolution (the so-called devo-max option). In Wales, however, we have also seen a creeping devolution taking place.

Following a referendum in 2011, the primary law-making powers of the Welsh Assembly were enhanced making it possible for it to legislate without having to consult the UK parliament, nor the Secretary of State for Wales in the 20 devolved areas. Proposals have also been mooted for the Welsh Assembly to have, in due course, powers of taxation.

In 2001, the Commission on Devolution in Wales (the Silk Commission) was established by the UK government and supported by the Welsh government and by all four political parties represented in the National Assembly for Wales. The commission’s remit was in two parts. Firstly, to review the case for the devolution of fiscal powers to the National Assembly and, secondly, to review the assembly’s powers in light of experience and to recommend modifications to the present constitutional arrangements.

In all of this, there had been little consideration as to how well devolved government in Wales has actually worked in terms of on-the-ground public service improvement. Instead, there was lots of waffle about national status and identity. 

Consequently, in 2013, I presented written evidence to the Devolution Commission concerning its work on extending the powers of the National Assembly. The thrust of my argument, which was quoted by the Commission in its Part 2 report published in March 2014, was:
‘The evidence suggests that the Welsh Government has not performed well with regards to the two key public services of schools education and health, and a similar situation may exist with regard to other public services. It would be best to concentrate on improving core public services and return to the issue of further devolution of responsibilities towards the end of this decade provided the situation has improved.’

In response to my evidence and similar comments from others, the Silk Commission’s report stated that: ‘It is not our function to assess the performance of the Welsh Government in this or any other field… our task is to consider where power should be held rather than the policy decisions of a particular government.’

While this may be true in terms of the commission’s terms of reference, it seems a strange position to take such that decisions about granting enlarged powers should take no cognisance of past performance with regard to existing powers. This must really cast doubt on the workings of such commissions.

Not surprisingly the Silk Commission has gone on to recommend further devolution for Wales. Its 61 recommendations include the devolution of police, youth justice, energy projects up to 350MW and water as well as the limited tax devolution that was recommended in its Part 1 report. This also called for the current conferred powers model to be replaced with a reserved powers model, which is currently the case in both Scotland and Northern Ireland.

To those of us who strongly supported the concept of devolution in Wales, what has subsequently happened has come as a huge surprise. What we expected was a ‘largish’ county council for Wales (after all Wales is not that much bigger than Birmingham or Manchester) with a considerable degree of devolved authority from Whitehall on public policy development and implementation issues.

Instead we got a bloated organisation with many of the trappings of Whitehall and with an executive arm populated by individuals who, in another incarnation would have been local councillors but now bear the grandiose title of ‘minister’, with all that goes with that title. Imagine if the Cabinet members in Birmingham City Council started calling themselves ministers.

In the past 14 years the Welsh government has presided over a significant decline in the standards of health services and schools education in Wales. This situation is compounded by the fact that Wales is essentially a one-party state with the government being various combinations of Labour, Labour-LibDem or Labour-Plaid Cymru, so there is little chance of implementing radically fresh policies that might reverse the decline. 

Fast forward to last weekend and we see yet another catastrophic policy failure. Consequent on the poorer GCSE examination results in Wales compared to England, over many years, the Welsh government decided to introduce new courses in English and several other subjects designed to boost Wales' disappointing exam results. Publication of the examination results of the first pupils to take the new English examination produced a set of results that could not be believed let alone explained.

Pupils predicted to get grade A* in English received a grade D or unclassified. Schools where 60% to 70% of the children were expected to get a grade C or better in English obtained rates of 27%.Typically, the Welsh government has ordered an enquiry and no doubt there will be endless buck passing taking place, but the truth must be that something has gone catastrophically wrong with the implementation of the new examinations to get discrepancies of this magnitude. Fiascos like this are getting increasingly commonplace and follow a previous fiasco last year where thousands of scripts had to be remarked.

Devolution has been a huge disappointment for Wales, and yet the Silk Commission is calling for more powers for the National Assembly. We should not be giving greater responsibility to an already bloated and ineffective institution

Wednesday, 5 February 2014

Costing the earth: Welsh local government restructuring

An earlier blog of mine expressed scepticism about the recommendations of the Williams Report concerning Welsh local government restructuring. Since the publication of the Williams report there has been a furious debate, in Wales, concerning its proposal to reduce the number of unitary local authorities from 22 to 12. One of the key themes of debate was the financial implications of such a major restructuring and various numbers have been flying about. The Williams Commission itself suggested that restructuring could save £100 million while a report by Deloittes for the Welsh Local Government Association suggested that restructuring could cost £200 million.

These figures on costs and savings are vitally important for three main reasons. Firstly, this would be the first local government reorganisation in Wales to take place during a period of financial austerity. Previous re-organisations have taken place in an environment of growth in resources but Welsh local authorities can only expect small increases in the cash amount of grants meaning significant reductions in real-terms funding. They are already “under the cosh” as a consequence of these funding reductions. Referring to a recent report from the Welsh Audit Office the Auditor General for Wales commented that despite coping with considerable pressures up to now, "cracks are beginning to show" for some authorities. “Too many councils are falling short and running out of time," he said. Secondly, local government in Wales, like the rest of the UK, is having to cope with the pressures of an ageing population and the impact on service demands, particularly for social care. Thirdly, there are some major problems with key local authority services in Wales. Nearly a third of Welsh local education authorities are in special measures.  To this we can add a number of individual schools in special measures, plus another few local authorities who came pretty close to being placed in this situation (and probably would have been if there hadn’t already been an unacceptable number). Also, some local authorities have been in special measures for social services with others coming close.

Taking these three themes together, it should be obvious that if local government restructuring resulted in a higher cost base this could prove disastrous. Try to explain to the parents of children in a failing school or elderly persons whose day care centre is closing that this is happening while at the same time major costs are being incurred in reorganising local government and abolishing their local council.

When you get a range of impacts from £100 million savings to £200 million extra costs it is clear that the people doing these calculations are making fundamentally different assumptions about what will happen as the basis for their costing. Based on my previous experience of local government re-organisations in Wales (I was involved in the two previous events) and extensive experience of mergers in other parts of the public sector such as health and education I am strongly of the view that costs will increase, at least in the short term and possibly in the longer term as well. Why do I say this? Well having also observed mergers and other sorts of changes in the private sector, it is clear to me that such mergers are much more speedy and brutal than anything that takes place in the public sector. I once observed a situation where a major private sector organisation, in order to improve its business position,  shed 8% of its workforce overnight though compulsory redundancy. In the public sector we get a process which is much slower, more consultative and more employee friendly than what might be seen in the private sector. This is not to suggest that the public sector approach is wrong but that it is very different and adds to costs.

So what are the sorts of events that will probably take place in local government re-organisation in Wales that will, in my opinion force up the costs. Some examples are discussed below.

·         Redundancy – in merger situations, local authorities will, unlike the private sector, probably utilise a process of voluntary redundancy. This will result in a considerable number of people in their fifties taking a generous severance package and leaving the authority.  However, quite often, because of their experience, these are the very people that the local authority can’t afford to lose and they have been paid large sums to leave. They are often of such importance that the local authority may try and entice them back into employment in some sort of paid consultancy role thus adding to costs.
·         Harmonisation – when two or three local authorities are brought together in a merger it is quite common to find variations, between the authorities, in employee remuneration and conditions of employment, and in the standards of public services being delivered. It is untenable to retain such differentials for long periods of time and attempts may be made to harmonise. However, it is probably politically impossible to harmonise downwards to the level of the lowest and so upward harmonisation takes place leading to higher costs.
·         Salary creep – because of increases in responsibility, new postholders in the merged organisation are likely to expect, and receive, a substantially higher salary than that received in the same post in one of the constituent (to merger) local authorities. Such “salary creep” is likely to take place in relation to a wide range of management posts. However, it is also true that this should be offset by savings in the numbers of posts involved but there are still the costs of severance payments or protected salaries which are discussed below. For example consider the chief executive post of a new authority formed from the merger of three existing authorities. Possible, one of the existing CEs will be appointed to the CE position in the new authority but at a higher salary. The other two CE posts would be technically redundant and the postholders may take redundancy or be slotted in somewhere in the new organisation but with a protected salary both generating high levels of cost.
·         Redundant facilities - It is likely that following reorganisation there will be certain facilities which are no longer needed but which will still be kept in operation because of a lack of political will to do otherwise. One example of this concerns civic buildings and town halls. The merger of three local authorities will mean that two of these civic centres and town halls will become redundant but a lack of political will to divest themselves of these assets means that running costs associated with these buildings will continue to be incurred. No doubt these surplus buildings will not be left empty and some use will be found for them but this is essentially a fig-leaf to disguise the fact that they are no longer needed. .
·         Transitional costs – there are a number of costs which may only be incurred once or for a limited period of time but will not go on indefinitely. However, these costs are likely to be substantial and may include:-
Ø  Costs of severance payments to staff made redundant
Ø  Travel costs, for several years, consequent on staff relocation
Ø  Costs of integrating disparate IT systems of the merging organisations
Ø  Merger facilitation costs (e.g. consultancy, overtime etc)
These are just some examples of potential cost pressures associated with mergers in the local government sector and there may be others. These additional costs must be considered alongside the pressures for resources discussed earlier. One important point to note is that we will probably never know the true costs associated with such a reorganisation because there will be no attempt made to keep a track of the additional costs involved.

This blog was first published on the website of Public Finance Journal: www.publicfinance.co.uk

Tuesday, 21 January 2014

Mergers in Welsh local government: Return to the past

The American philosopher, George Santyana, was famously quoted as saying “Those who cannot remember the past, are condemned to repeat it”. Maybe this could be applied to the restructuring of Welsh local government.

The state of local government in Wales has been a concern for some time. The pressures of financial austerity and growth in service demands piling on top of  a situation where quite a number of Welsh local authorities have already been managed by external commissioners (for some or all of their services) suggested a structure of Welsh local government which was seen as unsustainable. This came to a head in April 2013 when the Welsh Government created a Commission on Public Service Governance and Delivery charged with the task of examining all aspects of governance and delivery in the devolved public sector in Wales. Of the many recommendations contained in the report of the Commission the most eye catching and controversial one is the proposal to reduce the number of local authorities in Wales from the current 22 to 12. Of the 12 proposed local authorities, three already exist in current form while nine will involve mergers of existing local authority units. 

If these mergers take place, this will be the third reorganisation of Welsh local government in just over forty years. In 1974, the complex local authority structure was rationalised to a binary system comprising 8 county councils and 38 district councils with a distribution of functions largely similar to that in England. In 1996 a further reorganisation took place involving the abolition of those existing authorities and their replacement by a structure of 22 unitary authorities based largely on the boundaries of the existing district councils. As one of these rare people who was directly involved in both of these mergers of local government in Wales I look at this unfolding scene with interest and some trepidation. During the 1974 reorganisation I was an employee in a Welsh county council and during the 1996 reorganisation, I was a management consultant advising a number of Welsh local authorities about their new organisational arrangements.

These 1996 arrangements with 22 local authorities, which were significantly smaller in terms of population than English or Scottish local authorities, was criticised heavily at the time of the reorganisation and many of us at that time preferred a system of unitary authorities based on the eight county councils. There were concerns that such small local authorities could not deliver services efficiently and would have difficulty in adequately resourcing some specialist services (e.g. adoption). Furthermore, the 1996 arrangements left a lack of co-terminosity between local authorities and the various other public bodies in Wales including health boards and police authorities etc. This lack of co-terminosity is often argued to be a major inhibitor of effective strategic planning.

Subsequently, these concerns have been debated endlessly in academic circles but what has really thrust Welsh local government into the limelight are the twin issues of financial austerity and poor service performance. In future years, Welsh local authorities can expect small increases in the cash amount of grants but this still implies significant reductions in real terms funding. However, in England, councils are facing cash reductions significantly larger than being felt by the hardest hit authorities in Wales but even so the impacts of such reductions in Wales have major implications for organisations used to receiving annual growth in resources.

A number of options present themselves as a means of resolving the problems of Welsh local government including the following:
·         Abolition – abolition of local government in Wales with the Welsh Government directly managing all existing services directly. This is not as outlandish as it might seem because Wales is a small country. A variation on this theme might have been to retain local authorities with a service profile similar to English district councils but transfer the delivery of major strategic services such as education and social care to WG. This was never really a starter. I doubt if the Welsh Government would have the ability or will to directly manage locally based services in an effective and efficient manner and WG Ministers would not then be able to blame local councillors for the failings in such services as they do at present
·         Collaboration and consortia - this would aim to overcome the problems of small size by developing collaborative arrangements (often formalised into some form of consortia) for the delivery of certain specific and possibly specialised services over a number of local authority areas. However, in practice, so many of these initiatives seem to run into problems of various kinds including: lack of public understanding, dubious governance arrangements, lack of benefits realisation, poor cost control, political acceptability etc.
·         Mergers – this would involve taking the existing local government units and merging them into a smaller number of larger units without amending any existing boundaries or service responsibilities. The relatively simple approach is basically the approach favoured Commission on Public Service Governance and Delivery.
·         Complex restructuring – this would involve creating a smaller number of local authorities but possibly with boundaries significantly redrawn to reflect changing circumstances such as population size and mix, economic profiles, population movements, income base etc. Also consideration might also have been given to the transfer to local government of some public services (e.g. public health) currently the responsibility of other public authorities

There has been considerable support in Wales, for some time, for there to be a merger of many of the existing local authorities in order to create a smaller number of bigger units which might overcome the alleged problems of small size. This approach would probably be popular with the public as it would involve a reduction in the number of paid councilors but is also often beloved of politicians because it does give the impression of doing something to deal with a major problem. Remember the words of the Roman courtier Gaius Petronius who some 2000 years ago said:
“We trained hard ... but it seemed that every time we were beginning to form up into teams we would be reorganized. I was to learn later in life that we tend to meet any new situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization"

Unfortunately, even though reorganisation is an idea dear to the hearts of many politicians in Wales, there are potentially serious issues which cannot be ignored. These include:-
·         Unrealistic cost savings - because of the long winded way such mergers are conducted in the public sector (as opposed to the more brutal approaches in the private sector) the predicted cost savings from merger never actually materialize. Research by Michael Chisholm, a member of the Local Government Commission in the 1990s, showed that the financial cost of the 1994-5 reorganisation of English local authorities was greatly underestimated and that it was unclear whether this was ever recouped through any subsequent efficiency savings. Research I did , some years ago, on the merger of further education colleges produced a similar picture
·         Disruption – those of us who were involved in previous local government reorganisations will clearly remember the level of disruption involved and the impact on service provision. Apart from the monumental workload associated with tasks such as; harmonising working practices, creating new structures, establishing staff terms and conditions, dealing with redundancies etc there will be a huge element of “taking your eye of the ball”. Once the mergers are confirmed, many people, particularly those in senior positions will (quite understandably) spent a lot of their time jockeying for position in the new organization rather than managing existing services to the best of their ability.
·         Residual weaknesses - There is an old adage (especially in the commercial sector) that if you merge two weak organisations what you end up with is one (larger) weak organisation. In the private sector the most likely approach is for a strong company to take over a failing company and turn it around. This would involve kicking out the existing management, quickly changing the way things were being done in the weak company, promptly realising savings and ensuring that the merger resulted in a strong merged company. Unfortunately in the Commission’s proposals, there are a number of glaring situations which involve the merger of weak organisations and it is not clear how this will play out in practice
·         Lack of improved performance - the killer issue is that unfortunately research available (e.g.  Cardiff Business School, DCLG) suggests whatever theory might suggest, in practice, there is little evidence to link size of local authority with performance. While this may be strange and unexpected, what I have anecdotally observed is that when such larger units are created the lack of a market discipline leads them to introduce much more elaborate and complex management structures the costs of which outweigh any savings that might otherwise be made.
·         Politicisation of structures – in the 1970s, the proposed configuration of restructured local government in South Wales involved the creation of two large county councils (West Glamorgan and East Glamorgan) both which would have had solid Labour Party control. At the last minute the incoming Conservative Government changed the plan such that South Glamorgan (Greater Cardiff) was split off from  East Glamorgan (thus leaving Mid-Glamorgan). South Glamorgan was much more likely to be Conservative controlled thus meaning that the capital city was not under the political control of the Labour Party. Hence, in the current day, one must be cautious that the configurations of the new local authorities proposed by the Commission are not altered by the ruling party on the basis of calculations as to the likelihood of them exerting political control in various areas.

It doesn’t seem to me that any of the above options are likely to deal with the problem of squaring increasing demands for local government services (e.g. as a consequence of the ageing population) with a declining resource base. As a former management consultant I was always taught that structure should follow process and culture and not the other way around. Thus rather than tinker with structural issues in Welsh local government the problem would best be addressed by directly addressing the problem of poor performance. We would be better of focussing how to make the existing arrangements work better through improvements in culture and management effectiveness. The focus, as always, should be on the triple issues of: vision, political and managerial leadership and performance management. Unfortunately, these are issues which don’t really excite politicians so don’t expect the structural debate to go away any time soon.

This blog was first published in Public Finance journal

Monday, 2 December 2013

Public finances: Are we being fair to future generations?

In March 2013, UK Public Sector Net Debt (PSND) stood at £1.2 trillion but even with austerity, the government will continue to borrow large sums for many years meaning this indebtedness figure will rise substantially. Interest will have to be paid on that debt for many decades to come and ultimately the debt will have to be repaid. However, this is not the end of the story and many would argue that there are other major public sector liabilities which are not shown on government balance sheets the most significant of which are “black holes” on public sector final salary pension schemes and liabilities stretching out for decades on PFI projects

Currently, there is unrest about these matters. A wave of public sector strikes are clearly stoked by a deep well of discontent about Government plans to reform public sector pension schemes and do something about the black holes. Also, we see certain NHS Trusts, hampered by the legacy of PFI projects, initiated many years ago when there was an expectation of continued and significant growth in funding, faced with the problem of dealing with large financial deficits. These deficits can only be dealt with by rationalisation of service provision – a very unpopular task in the eyes of the public who would prefer to see the Trusts “bailed out” by the Government.

In all of this, an important factor to be borne in mind is that of inter-generational equity (IGE) or fairness between generations. Many of the so-called “baby boomers” had the advantage of free university places, a free NHS and a final salary pension scheme. Also, as they get older they will be placing increasing burdens on the health and social care system and extracting pensions for state schemes well above what they have contributed to the scheme. Forget about soaking the rich or squeezing the bankers. It will not happen other than through tokenism. The only people who can pay for this are our children and grandchildren who face university loans, high mortgage payments and inadequate pensions. Are we being fair to future generations by trying to protect our own benefits?

In many ways, IGE has always been politically sensitive issue but trends in society (the ageing population) and economic trends (e.g. declining growth rates) have brought the issue to the forefront of debate. The population of most OECD countries is rapidly ageing. This means that the demand for public services such as health care, pensions and unemployment are likely to increase significantly over time. Traditionally, financial systems were premised on the assumption that economic growth would outweigh the growing obligations deriving from an ageing population. This is no longer the case and ageing populations will have significant implications for societies. However, there are now a number of contemporary issues which, at the current time, are raising concerns about the extent to which IGE is being achieved in the current economic sphere. Some of these are discussed briefly below.

Firstly, pensions. The basic state pension in the UK is an unfunded scheme whereby payments to today’s pensioners are made not from their accrued contributions but from the tax revenues obtained from current taxpayers. Similarly, future generations of pensioners will have their pensions paid from the tax revenues from future generations of taxpayers. The raising of the age for receiving pensions (and possibly other changes) will mean that those paying taxes to finance the current generation of pensioners will themselves receive less generous treatment when they reach old age. Also, most occupational pension schemes in the public sector are largely final salary schemes. Currently many public sector pension schemes are projecting very large actuarial deficits (or black holes) and it is by no means clear how these will be resolved. One possible implication is that the burden of eliminating such deficits will fall, in part, on current generations of taxpayers who, themselves, will not have access to final salary schemes

Secondly, over the last two decades, a large proportion of capital formation in the UK public sector has been financed by some form of public-private partnership, most notably the private finance initiative (PFI). The essence of such PFI approaches are that while services derived from the fixed assets produced will be consumed by current citizens from many generations in society the costs of the project will be spread over a thirty year period through the PFI mechanism and paid for by future generations.

Thirdly, there is the issue of financial sustainability of public services meaning public authorities having access to sufficient finance to make it possible to maintain services, in the long-term, at their current quality and intensity, for both existing and future generations of customers or claimants. Public services of various types are made available to citizens by Government and those public services are in turn financed by the tax revenues collected by Government from its citizens. IGE involves consideration of situations where if one generation is receiving the benefit of government programs financed by deficit spending and debt accumulation, to what extent does the resulting higher debt impose risks and costs on future generations?  Following the great recession in 2008, many countries have followed policies of financial austerity. However, it is still the case that Governments are spending more than the revenues they collect and this is being financed by large scale borrowing which in turns adds to public debt. Clearly the burden of financing and repaying that debt will fall to future generations many decades hence. In the light of this there must be serious questions about the ability to have financial sustainability (as described above) in public services and future generations may well be faced with lower access and standards of service having already paid from higher standards of service consumed by earlier generations.

So, overall, how big is the scale of inter-generational equity (or inequity) in the UK? Nobody really knows as there is no clear information about its magnitude in financial terms. Attempts have been made, using complex statistical analysis of available information to estimate what the magnitude might be and the results of such exercises suggest inter-generational inequities are very large indeed.

Given the likely magnitude of IGE, this begs the question as to whether information on IGE (which politicians may prefer to keep hidden) should be publically disclosed in the statutory financial accounts of public bodies.  Strong criticisms are often been made about the limited relevance and usefulness of current public sector financial reporting frameworks in relation to either of the above purposes. Hence one might ask whether such usefulness and relevance might be enhanced by incorporating into these frameworks information to inform stakeholders about the level of IGE and the future financial sustainability of public services.  
Clearly, IGE is a big issue which should be brought into the open and not kept hidden away which is what politicians would prefer.

A fuller version of this can be found in the December issue of Public Finance. http://www.publicfinance.co.uk/