Contact: Paul Carey-Kent, ext 7525

1. Introduction

1.1 Following a consultation exercise in the Autumn, the timings of which did not enable member involvement but to which the County Treasurer responded via the Local Government Association, the Government has now issued its framework for delivering efficiency in local services. This was due before Christmas, but did not appear until 28 January. In the time available, therefore, this paper provides an initial view prior to fuller assessment of how the County Council stands in relation to the requirements.

1.2 The framework has three main components:

· setting out the targets to be achieved

· advice, following Gershon report approaches, on how to achieve the efficiencies (together with offers of help from various task forces); and

· rules for how to set out an Efficiency Plan and to measure efficiencies achieved.

2. Targets to be met

2.1 The Government requires year on year efficiency gains of £2.15bn from Local Government, which equates to 2.5% annually. It requires that half of this (1.25%) should be cashable. Efficiencies achieved in 2004/05 that continue through to the end of the Government's current spending review period (ie 2007/08) can be counted towards the 2005/06 target. In effect, the Government is requiring that 7.5% efficiency gains be demonstrated covering the period 2004/05 to 2007/08, of which 3.75% are required to be cashable.

2.2 The spending from which these efficiency targets are calculated incorporates both capital (net of capital receipts) and revenue, but excludes transfer payments and grants. Full assessment of those factors is not straightforward, and details of the Council's targets will be calculated once the budget is finalised, but efficiency gains in the order of £7.5m cashable and £15m in total are likely to be required.

3. The nature of efficiency savings

3.1 The Government states that `efficiency is not about cuts, but about raising productivity and enhancing value for money', and goes on to explain that efficiency gains accrue when projects achieve one or more of the following:

· (E1) reducing inputs (money, people, assets etc) for the same outputs;

· (E2) reducing prices (procurement, labour costs, etc) for the same outputs;

· (E3) getting greater outputs or improved quality (extra service, productivity, etc) for the same inputs; or

· (E4) getting more outputs or improved quality in return for an increase in resources that is proportionately less than the increase in output or quality.

3.2 Certain types of activity are not acceptable as efficiency gains:

· re-labelling of activity (eg reclassifying inspection as advice);

· cuts that result in poorer services for the public; or

· increased income purely from higher prices in fees and charges to the public.

3.3 Two points of note here are that:

· the Government is silent on the question of inflation for efficiency types 1, 3 and 4 above. This suggests that if, for example, productivity were to improve by 5% for a group of staff whose pay increased by 5%, then a 5% efficiency gain could be claimed. This contrasts with the position in the Government's consultation paper, in which all efficiencies have to be measured against a base inflation rate using the GDP deflator (2.5% for 2005/06). Thus, in the above example a cost increase of only 2.5% would have been allowed so that with a 5% pay award made, 2.5% efficiency gains would have been required merely to stand still and to claim a 5% increase in efficiency would have required a 7.5% improvement in productivity.

· Increases in income which are not purely from increases in charges now appear to be allowed, which was not the case in the consultation material. This means that improved debt collection can count as an efficiency. Increases to charges may remain an important part of any sensible budget strategy and might in some circumstances be seen as improving efficiency by targeting services more effectively, but they will not count as efficiency gains under the Government's measure

· Efficiencies of Type 2 above, ie related to purchasing, are affected by inflation. The measurement is against the 2.5% assumed rate of inflation so that, for example, if prices between one year and the next go up by only 1% then a 1.5% efficiency gain can be claimed. This definition of efficiency gains through purchasing is highly counter-intuitive as it takes no account of the actual movement of prices in the market. For example, there is little prospect of the Council achieving efficiency gains from purchased social services as inflation rates in the market are likely to be 3-5%. On the other hand, it might well be possible to demonstrate efficiency savings in IT due to the nature of that market. It appears, therefore, that market forces will be a far more significant factor than any action which the Council may be able to take in generating so-called efficiency gains in this area.

4. Cashable and Non Cashable Gains

4.1 The Government says that `cashable gains represent the potential to release resources for reallocation elsewhere. By contrast, non-cashable gains are achieved through such means as improved quality or additional outputs for the same level of resources'. For the Gershon work streams, this implies the following:

· Procurement efficiency gains realised through greater economies of scale or lower prices are cashable. This includes instances where prices have been negotiated to below the level of inflation. Where higher quality goods and services are procured for the same prices (after allowing for inflation), gains are non-cashable;

· Corporate services will be cashable for those cases of less expenditure for the same outcomes, non-cashable where better outcomes are achieved for the same expenditure;

· Transactions follows the same approach as corporate services. In the case where improved output is claimed, it must be clear that the improved output is genuinely beneficial to the end user;

· Productive time cashable gains include those where input costs have decreased. Increased input levels (such as through reduced absenteeism) or increased output levels represent non-cashable gains.

4.2 The means by which the Government expects efficiency gains to be made on capital spending are by no means clear. Three possibilities seem to be put forward:

· Avoiding cost overruns. The Government appears to be proposing some method of accrediting Local Government use of the methodologies which Central Government has used on its own capital projects - which are notorious for cost overruns - as a means of demonstrating that overruns which would have occurred do not;

· There is a suggestion that better targeting of capital spend might count as an efficiency; and

· Invest to Save schemes might produce efficiencies - though the principal measure of these is likely to be through the revenue savings gained which therefore impact on the savings counted on the revenue side.

4.3 In practice, there are perhaps two ways in which capital might contribute:

· It seems that capital receipts achieved by disinvesting without detriment to service quality can be counted as efficiency savings if they are used to avoid capital financing costs which might otherwise have been incurred. That could well be the case for example if an uneconomic unit of service were to be closed: service quality and revenue costs would not suffer from the service being purchased from elsewhere, and the capital receipt would reduce the need to borrow to support the capital programme

· Normal Invest to Save principles should be applied so far as possible to capital projects in order to generate the revenue savings which will help achieve the overall efficiency target.

4.4 The other means of assessing capital efficiency might be through benchmarking costs against `norms' but this (rather like benchmarking baskets of goods to evaluate purchasing performance) would allow only for assessment between organisations rather than across time within an organisation, which is the main approach being taken.

5. Measuring and reporting on efficiency gains

5.1 The Council is required to produce a plan by 15 April 2005. This is two months earlier than was proposed at the consultation stage, even though the framework paper was issued a month late! The summary will be a straightforward high level summary using the following format:

5.2 The backward-look should set out the efficiency gains achieved in the past financial year by service sector and cross-cutting area. The backward-look at efficiencies achieved in 2004/05 will be required by ODPM on or before 16 June 2005, and future backward-looks on a similar timescale. Principal Authorities which are not rated `excellent' also have to produce a mid-year report of progress in November.

5.3 The most notable feature of arrangements for reporting on efficiencies gained are that:

· The Government has opted for `self assessment' by Councils rather than attempting to introduce a network of performance indicators through which efficiency will be measured. This is to be welcomed, as Local Government's responses to the consultation strongly emphasised the impracticality of that approach.

· There will, however, be a system of `cross-checks' by which the Government will ensure that the efficiencies gained are not simply disguised reductions in service. At its worst, this might yet prove to reintroduce the attempts to use efficiency performance measures through a different route. On the other hand, a broad common sense approach such as assessing the claims in the light of CPA ratings might be taken.

5.4 The Government is also commissioning research to explore what value should count if it is claimed that quality is enhanced when costs stay constant. For now, the framework under which a council might make such claims is unclear.

6. Prospects for achieving targets

6.1 The requirements set out are extremely challenging even on a one-off basis and unlikely to prove feasible in the longer term unless the Government changes the framework to allow for such factors as market inflation. Looking at 2005/06, however, the County Council has the following advantages:

· The SAP benefit realisation programme is already in place with substantial efficiency gains in an advanced stage of implementation

· 2004/05 gains can be counted, including £0.8m of SAP benefit realisation savings which are already known, together with £3.7m costs of increments absorbed

· £150,000 additional SAP savings are projected in 2005/06, together with a further £4.5m from absorption of staff increments

· the budget strategy for 2005/06 has £7.6m of efficiency and redeployment savings built into it. More assessment is needed to check that at least some of these are countable for the Government's purposes, but this gives a good start.

· The Council has a good record of generating capital receipts, and there is a chance that at least some of these will be countable for efficiency target purposes

6.2 On the other hand:

· Inflation rates are above 2.5% in the majority of the Council's purchasing spend, therefore purchasing efficiency gains as defined by the Government will be very difficult to achieve, and much more will need to be done on achieving procurement savings;

· It may be that absorption of increments will not be countable unless the total pay increase is less than 2.5%, ie staff are regarded as a `purchase' in efficiency terms; and in most areas

· although the Council's record in absorbing pressures such as the additional cost of increments within cash limited budgets is good, it will not be easy to prove that the means by which this has been/will be achieved are efficiency gains as defined by the Government.

6.3 The next step will be for the Treasurer to issue guidance to departments to enable the various components of an efficiency plan to be pulled together. The presumption would be that each department should be expected to make efficiency proposals in accordance with their cash limit.

7. Conclusion

7.1 The details of the Government's efficiency framework for 2005/06 - 2007/08 have now been received. There are elements which either remain unclear or are stated to be subject to further work by the Government. However, achievement of targets does not appear quite as implausible as it would have been based on the original consultation proposals. Further work will be required to assess the extent to which the Council's 2004/05 record and 2005/06 budget plan will yield prospects for achieving of targets.

8. Recommendations

8.1 That calculations of the requirements on the County Council to generate efficiency improvements be reported to the Cabinet on 28 February, and a draft efficiency plan for the County Council be considered by the Cabinet on 21 March and by the Policy & Resources Scrutiny & Select Committee on 7 April and finalised by the County Treasurer and Chief Executive in the light of comments made at those meetings for submission by 15 April 2005.

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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