Financing the future: mitigating cuts through smart investment
Published: 20 June, 2016
Councils can still invest in services – despite further budget cuts – by using asset-financing techniques. investing in efficiency-focused technology may even provide assets at zero net cost, says Chris Wilkinson, of Siemens Financial Services
Recent research by the Local Government Association (LGA) found that 60% of UK councils would not be able to absorb the budget cuts by delivering existing services more efficiently in 2015-16. Until now, many had done so.
Since 2010, councils have faced a 40% cut in funding from central government. Between 2010-11 and 2013-14, authorities collectively achieved savings of £10 billion, mainly by making existing services more efficient. But they are now feeling the effects of budget cuts and the research also found that, under the current circumstances, nearly a third of authorities (30%) consider that they have very little or no scope to reconfigure services further. In addition to this, more than a fifth of respondents in the survey (21%) were still unclear about what strategy to employ.
Yet they are only half way through cuts planned by central Government and need to repeat their achievement of £10 billion savings in the next two years. Local authorities have coped in the past but further measures are required to maintain the savings momentum in line with on-going cuts.
Against this background, an increasing number of technologies are emerging that could help better manage resources and ease the pressures placed on local authority budgets. For instance, there are now traffic management systems through which councils can remotely maintain traffic flow from a single facility.
Typically, highway authorities have previously resorted to multiple control centres to manage their networks, which require office space, control-room infrastructure, numerous computer systems, communications infrastructure, control-room staff, staff-training and then they rely on periodic updates from suppliers. However, an integrated, all-encompassing control system has the potential to eliminate the need for multiple centres and create savings by streamlining processes and managing traffic more effectively.
An additional option for savings is the switch to low emission vehicles (LEVs). The most commonly cited reason for acquiring an ultra-low emission vehicle over an internal combustion engine (ICE) vehicle is the money saved on fuel in the long-term. LEVs also produce 30% less greenhouse gas emissions than diesel. There are also added benefits from reduced air-pollution which contributes to 29,000 deaths-a-year in the UK.
The low-carbon bus market has reached an important stage in its development and is now becoming a mainstream movement. According to the Low Carbon Vehicle Partnership, such buses currently account for just 2% of the UK bus market but this means there is substantial room for investment. And deferring investment further could cause a serious ‘investment shock' in the future as new vehicles in bus fleets will have to meet strict emissions standards under Euro VI regulations.
Another area gaining the attention of local government is energy-efficient technologies that can reduce energy consumption and generate savings. Local authorities consume an estimated 26 billion KWH of energy per year. This produces more than 6.9 million tonnes of CO2 emissions at an annual cost of £750 million. An effective energy management programme has the potential to yield significant economic and environmental benefits.
One study from the Scottish Future's Trust found that a £300 million investment in LED lighting systems across the whole of Scotland could save up to £900 million over 20 years. Switching to LED traffic lights could produce further savings from increased energy efficiency and reduced maintenance as LEDs have an expected lifespan of up to ten years while traditional halogen bulbs are changed once-a-year.
With councils' spending power facing average cuts of 8.8%, authorities might be inclined to dip into reserves to finance debt. But an alternative would be to consider financing solutions, such as leasing, to protect working capital and help budget management. Asset-financing techniques, like leasing, can pay for a variety of useful equipment.
Such financing techniques spread the cost of the equipment over an agreed period. Payments can be aligned with the expected benefits of the asset, for example increased efficiency or productivity, energy savings or improvements in quality of service. This means the authority can potentially acquire the new asset at zero net cost, avoiding the need for a large, initial capital-outlay and gain immediate access to up-to-date equipment and its attendant benefits of use, despite tight budgets.
Asset finance can provide significant benefits in the preservation of working capital and cash flow management as the financing period can be flexed to suit an organisation's budgets, with fixed regular repayments.
Councils planning to upgrade their equipment could consider the benefits of leasing with a specialist financier, with a deep understanding of both the challenges and requirements of public sector financing. Unlike traditional, general lenders, who might lack comprehensive technical knowledge to evaluate the impact a potential investment can bring to the council, specialist financiers understand the technology and its practical application in the public sector.
Forward-thinking local authorities are already using flexible finance to upgrade a wide range of assets, from leisure equipment, mobile libraries and ICT to larger industrial pieces, such as sweepers, refuse collection vehicles and excavators.
As budget cuts increase and pressure on local authorities to fulfil their statutory obligations rises, councils are required to focus scarce resources on investments that will strengthen and improve their localities and services.Improving efficiency will be crucial for councils in their efforts to build a sustainable community and achieve financial returns in the process.
Through a combination of using more efficient assets and financing techniques, such as asset finance, local authorities will be able to deliver sustainable savings well into the future.