Contact: Jon Pittam, ext 7400

1 Introduction

1.1 The Audit Commission's strategic plan has a clear commitment to make value for money a more significant priority in its assessment and assurance activities. This was reflected in its recent consultation on the revised framework for comprehensive performance assessment (CPA) for 2005. This set out the intention to strengthen the `use of resources block' to deliver clear value for money judgements and a new framework for assessing wider aspects of financial management.

1.2 As part of the corporate assessment a revised `capacity' theme will focus on the extent to which each council has maximised its capacity to deliver on its ambitions and priorities, including financial resources, human resources, information and communication technology and contributions through partnership working. Overall this judgement will look at the way each council has `maximised its impact, not least through developing innovative approaches to augmenting its capacity to deliver still further'. The County Council can point to the Enterprise project (SAP) and Enhance (nursing care homes) as good examples against these criteria for improving `capacity'.

1.3 The revised `use of resources' judgement will mainly focus on financial management and value for money issues, as part of the annual audit of accounts. The Commission is intending to assess value for money using a range of evidence including, but not limited to, financial data. It is likely that it will use government returns and Cipfa data to identify areas for further investigation and to prompt questions.

1.4 The Cabinet will also be aware of the 2.5% efficiency savings target built in to Spending Review 2004 and the implications of Gershon's independent review of public sector efficiency `releasing resources to the front line'.

1.5 The report therefore sets out:

· some steps required to ensure value for money is more explicitly and formally built in to decision making and especially budget decisions, which determine efficiency savings or allocate resources for new spending pressures and priorities

· some broad cost comparisons to remind Cabinet where questions might be prompted on the Council's relative spending priorities and its value for money compared with other counties. (Much of that is covered in the appendix on historical trends presented annually with the budget - for example council tax levels, workforce, debt and spending statistics)

· proposed definition and approach to building value for money improvements and efficiency savings in to the next three-year budget cycle.

1.6 The Office of the Deputy Prime Minister has also recently published an independent report from a study on the Best Value regime which is being conducted by the Centre for Local and Regional Government Research at Cardiff University. The interim findings show that Best Value is having a positive impact on the internal culture and structure of many local authorities, producing better outcomes for local people by making positive changes, for example, through competition and public-private partnership. Drawing on information from 2002, the interim findings confirm that Best Value principles are now firmly embedded within councils' performance management arrangements, and continue to provide the foundations for improvement and assessment.

1 Possible areas for improvement:

1.1 It is understood that the Audit Commission is piloting its new approach to value for money and will publish a consultation paper on the use of resources block, annual service assessments and the overall CPA assessment framework in November 2004. This will be tight in terms of the 2005/06 budget round so some additional steps are proposed now, which can be refined in the light of the published consultation documents when budget guidelines are set in December.

1.2 Some of the Commission's concerns with the current approach appear to be:

· focus on process results in higher scores than justified by actual performance

· value for money is not assessed at all

· longer term financial planning is not covered

· quality of financial management is not assessed directly

· management of the capital programme is not covered and review of performance in setting the capital programme is limited

1.3 This report concentrates on value for money. Longer term financial planning has been built into the budget process and the Council continues to look at its budget strategy (for example the use of the grant equalisation and other reserves) over three year rolling periods. Further work has been and is being done on integrating the Corporate Strategy and short-term Cabinet priorities with forward planning and performance review, and in integrating workforce planning with the budget cycle. Improvements in the monitoring of the capital programme are being put in place but the County Council has a good record in its management of the capital programme including its capital strategy, asset management plans and overall arrangements for the management of its assets. The Cabinet has also recently reviewed its capital programme, in addition to the normal process of integrating the development of the capital programme with the revenue budget. It is not known how the quality of financial management will be assessed but again the Council can point to a good track record politically, managerially and professionally in its financial management.

1.4 It is understood that the value for money review would assess the relationships between costs and quality, taking account of the local context, and would also judge each council's performance in managing and improving value for money. This would include the way in which procurement, for example, is used to improve value for money.

1.5 The Audit Commission's approach to value for money is understood to include the following steps:

· to review current costs

· to see how each council improves value for money over time

· to assess the actual impact of managing value for money in decision making

Costs

1.6 These are likely to include current cost comparisons and trends, adjusting for differences where appropriate (for example whether or not Fire is a separate authority).

1.7 The important test here will be to ensure that both short and longer term costs are considered when making key decisions. All reports include the appropriate financial analysis. Longer-term financial sustainability is becoming more complicated because of more partnership working, introduction of pooled budgets with other organisations, changing specific grant regimes, use of external funding and new unsupported borrowing. All decisions will need to demonstrate clearly how they are affordable and how the longer term funding position will be maintained (a good example again is the project for extra nursing care beds).

Improving value for money

1.8 The tests here are likely to be to ensure that changes are reflected in forward spending plans, that there is clear financial evidence compared before and after each best value or other review, and clear value for money targets built in to procurement exercises. Again the Council's innovative procurement approaches on revenue and capital should provide suitable evidence.

1.9 The Buildings, Land and Procurement Panel has already set out a corporate procurement strategy for the Council. In anticipation of future corporate performance assessment being linked to procurement and efficiency gains, the Panel has already agreed that an independent health check of the Council's corporate procurement strategy be carried out later this year, or early in 2005. The detail of this review will be submitted to the Buildings, Land and Procurement Panel in October. The current strategy is to benchmark the County Council's performance against the national procurement strategy for local government. In practical terms one way forward would be to establish the part which efficiency and value for money will play in the Council's budget and council tax strategy and then to set out on an annual basis a corporate action plan for efficiencies and procurement gains. The County Treasurer and the Director of Property, Business and Regulatory Services are currently working out the development of this approach. It may be important also to consider what incentives might be given to a programme of future procurement and efficiency.

1.10 In determining future efficiency targets the Council will need to demonstrate to the Audit Commission how these are set, the extent to which they are targeted at areas with relatively high costs or where there is known scope for efficiency savings, or towards areas with relatively lower priority.

Managing value for money

1.11 There is likely to be a greater emphasis on how the public's money is managed and the extent to which the Council (managers and councillors) are focussed on value for money.

1.12 It means a return to the three `Es' - economy, efficiency and effectiveness in the management of services and the extent to which such improvements are constantly sought and achieved.

1.13 As a result value for money considerations must be seen to be built in to routine processes and decision making and in to the annual budget setting process.

1.14 Reports and decisions should demonstrate the impact each budget change has on value for money as well as how it will improve performance. This can be built in to the review of budget pressures and efficiency measures during the Autumn and within budget guidelines in December 2004.

1.15 It is also anticipated that the inspection process will put an emphasis on how value for money is built in to the Council's procurement processes. This could include the extent to which a `whole-life' approach is taken to spending and procurement decisions to assess the full long-term and broader public costs and benefits of each procurement decision. The Director of Property, Business and Regulatory Services and the County Treasurer will ensure that these issues are built in to future procurement decisions and in to capital project appraisals.

1.16 It could also be expected that best value and other reviews should be used to demonstrate how they will improve value for money and competitiveness.

2 Formula spending share (FSS) comparisons

2.1 The 2004/05 budget comparisons with FSS were set out in the budget report to Cabinet on 12 February 2004. The percentage variations of budget from FSS are familiar to Cabinet as follows:

2.2 Budgets exceed FSS on EPCS and Highway Maintenance mainly because Government has not regarded these services as high a political priority as resources devoted to schools and social care in recent years. The Council has recently allocated additional resources to the maintenance of local roads and footpaths as a short-term political priority to reflect the views of the public expressed in the MORI surveys. The waste management contract of £37m has no specific support in EPCS or private finance initiative credits, and it is a major reason for the budget gap over EPCS FSS. But the County Council has also chosen to continue spending above average on other environmental, planning, and cultural services.

3 Building value for money improvements in to forward three-year budget plans

3.1 Some definitions around the Audit Commission's assessment of value for money improvements are necessary; as well as a mechanism to look for value for money improvements over the next three-year budget plan. These need to take account of SR2004 and Gershon requirements as soon as they become more clearly defined. The purpose of this part of the report is therefore to provide a framework and methodology for reviewing value for money and efficiency savings during the autumn round of meetings between the Leader and Executive Members on the budget for 2005/06 and the forward budget plans for 2006/07 and 2007/08 which will be compatible with SR2004.

Definitions

3.2 Value for money may be defined as achieving economy, efficiency and effectiveness. Those in turn may be defined as:

· economy - minimising the cost of resources acquired or used, having regard to appropriate quality, ie to obtain inputs on the most favourable terms. This relates closely to procurement practice, which is the area of economy on which the Gershon Report concentrates.

· efficiency - maximising the agreed outputs obtained from a given level of input, again having regard to appropriate quality. Gershon gives four types of efficiency: reduced inputs for the same level of service provision; additional outputs; improved ratios of output per unit of input; and greater output for the same inputs.

· effectiveness - ensuring that the outputs lead to the intended results of the activity - that is, the right outcomes are achieved.

3.3 For example, in running an older persons home the inputs to be obtained at minimum cost would include: buildings, provisions and the appropriate staff (eg avoiding the use of overtime and expensive agency staff). To obtain maximum outputs from these inputs implies, for example, a high occupancy rate to maximise the number of older people looked after with given relatively fixed resources. The outcomes required might include a level of care for the residents which meets inspection requirements, providing stimulating activities, maximising longevity, successful return to living at home etc and there is also an income maximisation consideration.

Gershon

3.4 The main scope for savings identified by the Gershon review fit primarily into economy and efficiency:

· improved procurement practice by professionalisation and combination to gain the benefits of scale (ie economy in obtaining resources)

· savings in back-office functions, essentially by improved combination within and between organisations (ie efficiency in that fewer staff should then be able to deal with more transactions)

· improvements in transactional services with the public by using electronic means and self-service (another means of improving efficiency)

· increasing the productive time of front-line staff through improved personnel practice (reduce sickness and turnover) and IT investment (again, efficiency improvements).

3.5 The approaches in Gershon are very general. Measures of effectiveness tend to be more specific to particular activities. Gershon is consistent with effectiveness but in themselves the actions will not necessarily enhance it. Further guidance for local authorities is expected on targeted areas for savings from the Gershon review.

Types of savings

3.6 Savings can be categorised as:

· specific, ie actions are identified which will lead to the saving required or

· non-specific: there may be a range here, eg there may be no identification of individual areas of savings at all (eg top-slice x% from budgets and hope to manage the same activity with less) or general (eg `turnover savings', `reduced overtime') or imprecise (eg `reduce travel costs' but without stating how the rate of reimbursement or pattern of business / travel are going to be changed in order to effect the reduction) . The Gershon proposals are specific and consistently themed but on a very broad scale. They therefore need to be assessed in particular local circumstances in order to demonstrate how they might precisely work in practice, ie to make them locally specific.

3.7 The more specific savings are, the better as this provides a clearer view of how the savings will be achieved and enables the impact of savings (eg in reduced or remodelled service) to be identified and assessed in advance. That should lead to both more certainty that the savings will be made and more informed decisions about whether savings are acceptable in terms of the impact on services provided. Non-specific savings are likely to be achievable only where budgets have not been subject to previous pressures. That should not be the case to a significant extent in the County Council given that non-specific savings have been imposed regularly over the years through not funding the net cost of increments. The starting point is important. The Council has consistently sought efficiency savings in all its budget rounds. Budget increases have been moderated by not automatically underwriting the full cost of inflation and requiring some new development to be financed by the redeployment of existing resources.

3.8 Whatever savings targets are eventually set it will be essential that they are properly planned and costed so that cash limit requirements can be met during the year.

3.9 Savings can also be distinguished as:

· cashable, ie the budget for a given area of activity can be reduced. That cashable saving can then be used either to reduce total costs (reduce council tax) or to enable other services to be provided

· non-cashable. Two situations are distinguishable here:

- `savings' are made but due to increased demand for the service this only allows more to be done for the same cost without cost reductions; or

- `savings' are made but in the form of many small amounts, eg several staff across the organisation save 10% of their time. It may not then be possible to reduce total staff numbers, but those staff can all take on some extra activity which increases total output

- however non-cashable savings cannot be taken out of this budget or redeployed to other budgets.

3.10 New income sources could be sought as a cashable saving, in addition to the Council's annual budget requirement to maximise the level of its income. Additional income can contribute to both economy and efficiency measures but overall effectiveness depends on user resistance to the new or increased income charge.

Preferred mechanisms

3.11 Non-specific savings targets can be converted to specific savings proposals. The key is to ensure that this occurs in a way which allows an assessment of the impact of those specific proposals. Ideally the choice between the savings options (and the choice between investment options) should be made on the basis of quantified cost benefit analysis, eg as already practised by the County Treasurer's consultancy team using the Treasury Green Book methodology. In practice, at least until such an approach is more fully developed, it is likely that qualitative judgements will often have to suffice but these should nonetheless be as explicit as possible.

3.12 The County Council's aims are to deliver high quality services at the lowest possible cost and, despite Government grant losses over recent years, to deliver relatively low council tax levels. In order to limit the council tax rise to as low a figure possible in 2005/06 ("low single figures") the Cabinet will give priority to savings which are both cashable, specific and certain.

3.13 The most certain way to reduce potential future expenditure is not to enter into new spending commitments. The comparative benefits of new spend compared with those of reducing the existing spend will need to be assessed.

3.14 Transitional costs may well be incurred before savings are achieved, eg in closing a facility or in the form of a capital investment. Building savings into a three-year budget plan therefore makes particular sense.

3.15 Up-front investment should be justified by a business case including cost benefit analysis. Invest to save proposals will require new contributions to a fund set-up for that purpose, or unsupported borrowing using the prudential guidelines already determined by Cabinet. Clearly, the quicker an invest to save scheme repays the up-front costs the better, and the County Council's current policy is that such schemes should repay within a short time scale, with unsupported borrowing limited to a maximum of ten years.

3.16 Invest to save schemes will need to generate cash savings. The up-front investment will mandate a reduction in the budget for continuing costs and cash repayment of the sum invested. The Enterprise Project was set up on this basis.

3.17 Other up-front investment may be required, where potential savings are non-cashable. Budgets in the future are not reduced, but are not increased at all in the future, or not to the extent that would otherwise have been necessary. An example of this is the investment in incinerators for waste management - costs will continue to increase, but not as fast as they would have done had landfill continued to be used in a market with reducing capacity and increasing tax burdens. However, specific resources need to be set aside in such cases where invest to save schemes repaid by cash savings are not possible.

3.18 These guidelines therefore provide the framework and methodology for building value for money improvements and efficiency savings in to the next three-year budget plans. The actual amounts and areas targeted will be developed with clarification of the impact of SR2004 and Gershon, and with the development of the budget strategy for 2005/06 (agenda item 10).

Recommendation

1. The recommendations are contained in the summary decision sheet.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

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