Economic Development Association Scotland (EDAS) Seminar

Economic Development Association Scotland (EDAS) seminar

‘Where is the Public Sector going in Scotland?’

15 May 2006

Speech by Iain McMillan, Director, CBI Scotland

‘Public sector re-structuring in Scotland – CBI Scotland’s views on the challenges, implications and impact relating to local government and enterprise network re-structuring plans’

Chairman (Brian), thank you very much for your kind introduction. And can I say how pleased I was to have been invited to speak at your seminar and, of course, to be here with you all this afternoon.

The work EDAS does in stimulating debate about economic development in Scotland is very welcome, and today’s event about public sector restructuring is no exception. It will be very interesting to see what appears in the various party manifestos when they emerge next year ahead of the elections to the Scottish Parliament.

CBI Scotland represents and promotes the interests of over 26,000 businesses in Scotland, both large and small of almost all sectors. Many of our members have direct relationships with the two organisations about which you have asked me to speak – the Enterprise Networks and local government – and, of course, all of our members have an interest as both the funders and beneficiaries of much of what these two organisations undertake.

Let me deal with the reform of the Enterprise networks first.

The effectiveness and success of the Enterprise networks, understandably, is an area where Scotland’s business community has a crucial interest. This interest applies to those firms who do benefit from its business support programmes, and those who will in future. It applies too to those who – as I mentioned earlier - ultimately help to fund the enterprise networks to the tune of £550 million each year.

Scottish Enterprise has clearly had a challenging few months, if press and media comment is anything to go by, including CBI Scotland’s own contribution to the issues.

Frankly, the debate about the management of Scottish Enterprise’s finances has been a very unhelpful distraction from the real issues and it should not deter us from asking tough questions about what the agency and the wider network is for and its future direction.

The issue of the re-focusing and re-structuring of the Enterprise Networks is one that the CBI Scotland Council has taken a great interest in. As part of CBI Scotland’s deliberations on this issue, our Council has received several briefings from the agency and subjected their senior management to fairly rigorous questioning. First, in early January the second, in late January, both with Jack Perry, and then in mid-February, at our regular Council meeting, with Sir John Ward.

Our members have welcomed the proposals to re-focus the Enterprise Network, with its targeting of some key sectors which have potential to deliver transformational growth and benefits to Scotland’s economy. Putting taxpayers’ money where it will make the greatest difference is the right decision, and which resonates well with those in business. It is a change of emphasis that our members actively pushed for and instinctively knows is right.

We believe the focus on some key priority sectors, coupled with wider organisational reforms along metropolitan lines – should:

• make the enterprise networks more effective and responsive;
• fit with the Scottish Executive’s own Cities strategy;
• improve the support on offer to Scottish business than is currently the case;
• and deliver for business and for taxpayers a bigger ‘bang for their buck’ for the money they provide.

While we do support the broad thrust of the proposals, our members do feel the ultimate changes could have been more ambitious in terms of the support that Scottish Enterprise received from the Executive.

More could have been done to bring to an end the existing fragmentation of the LEC network, and to remove the burdens of governance and compliance placed on them and their local board members, who after all run businesses and only have a limited amount of time to bring to the role. Do they really want to spend increasing amounts of time pouring over audit committee reports, developing heaven knows how many Key Performance Indicators, and so on? Our members favoured removing this regulatory burden, making the LEC boards much more focused on local investment decisions and delivering for businesses in their areas. There would also have been scope to reduce costs in the network as well.

Hopefully this is something that can be addressed in future, with politicians and others able to look past undue parochialism over geographical boundaries to the bigger picture. However, realistically that is probably quite far away.

While supporting the re-structuring of the Enterprise Networks, to maintain the support of the business community, it is crucial that:

• business is kept informed and involved as the changes bed-in;
• that robust systems are put in place to ensure effective co-ordination and links between the new metropolitan structures;
• that the priority industry teams are led by individuals of exceptional calibre and expertise, ideally from the private sector but not necessarily from within Scotland itself;
• and that the focus is always on outcomes.

CBI Scotland believes the strategy is the right one, that changes to the enterprise networks are along the right lines, and that they deserve unequivocal support from politicians of all parties, a must for any successful reform of the public sector.

Let me turn now to reform of local government.

While we have the benefit of being involved and knowing what is planned for the Enterprise Networks, the same cannot be said for the much talked about reform of local government.

A promised ‘think piece’ from the Scottish Executive has yet to be published, and if the press is to be believed, Ministers are already back-tracking from an agenda of wide-scale reform.

One option, which would no doubt send a shiver down the spines of local authorities, is the possibility of a reduction in the number of councils. Reviewing whether the structures in place today are sufficient to meet tomorrow’s needs is right and proper. Yet the evidence that larger authorities provide better services or better local government is far from conclusive. The benefits of any significant change of this nature will need to be plain, and clearly articulated. There is also the issue of huge one-off costs, always-present when local government is re-organised.

Business has a genuine stake in the effectiveness of local government, as beneficiaries of services like:

• education,
• a good quality public realm,
• and local roads and transport

… as well as regulatory functions such as:

• planning and development control,
• building standards,
• trading standards,
• and environmental health.

Scottish business is also a considerable funder of local government, through general taxation and the £2 billion paid annually by Scots firms in non-domestic rates, which directly funds local government.

So any proposals which might make the structure of local government leaner and more effective are relevant to business. And we do have concerns about whether councils are doing enough to keep costs under control, and whether they are spending the money at their disposal effectively enough.

With Council Tax in recent years escalating at twice the rate of inflation, and with some councils increasing charges for regulatory services by up to 20 per cent, it is clear that there needs to be much deeper reform in the interests of business and the taxpayer. Against this background of rising taxes and charges – despite more money coming to Scotland through the Barnett formula - it is little wonder that few people in business advocate the repatriation of non-domestic rates to councils.

Business is concerned that too many public services seem to be undertaken by the public sector in an environment where costs rise inexorably.

I mentioned the Council Tax. Although Council Tax is not paid by businesses, the general level of taxes, including local taxes, in Scotland’s economy is of critical importance to business. We want Scotland to be a good and attractive place for people to live and work. Council Tax has already doubled since it was introduced and outstrips the rate of inflation year on year. The Scottish Executive cannot allow this state of affairs to continue. Steps will need to be taken to limit future rises in Council Tax, perhaps by capping or tying the annual rises to RPI.

There are those who call for the council tax to be abolished and replaced with a local income tax. A local income tax would not solve the current problems and, indeed, would make a bad situation worse. First, it would not address the relentless trend of above inflation rises in local tax experienced over the past decade and second, as stated in the consultation by the Local Government Finance Review Committee, only about 60% of Scotland’s adult population pay income tax. In an age of universal suffrage, it would be intolerable for as few as 60% of Scotland’s adult population to shoulder such a burden. That is not something that CBI Scotland could support.”

One area where government at all levels can make a difference is procurement. Businesses selling to councils and the wider public sector have, at times, described the process as cumbersome and overly bureaucratic.

With local authorities and the rest of the state sector accounting for large part of our economy, this is not just an issue for those concerned about best value and efficiency in public services. It goes to the heart of the debate about growing our economy. Selling to the public sector ought to be a great opportunity for Scots firms to win orders and grow their business.

The perception amongst business is often that it is easier to obtain work from private clients than public clients, that it is less time consuming and costly, with the rewards greater too. Measures introduced by the Executive at the start of the year, and in the pipeline with the McClelland Review, build on many of the recommendations put forward by CBI Scotland. These reforms ought to help; good news for both public and private sectors, and taxpayers.

These changes will help deliver more efficient government. However, it needs to be part of a much wider reform of public services, with far greater effort made to involve business in the actual delivery of public services.

More services should be carried out by the private sector, and be subject to periodic and rigorous competitive tender. This ‘contestibility’ will lead to:

• improved performance through competition spurring innovation in service design and working practices;
• better value for money;
• and more affordable public services - for business and other taxpayers - at a time when the public finances are likely to come under pressure in the years ahead.

The outsourcing to the private sector five years ago of the trunk roads management and maintenance contracts is a good example. The Executive attracted criticism at the time, despite savings of £75 million. This best practice at national level, however, hasn’t been taken up with enthusiasm by local government. According to Audit Scotland, just one local authority has contracted out its roads maintenance to a private company. A handful of others have entered into consortia arrangements with neighbouring authorities. Best practice like this ought to become common practice.

Scope exists too for delivering far greater economies of scale through more collaborative working between councils on the provision of common services, or contracting out services to the private sector. Much is happening to deliver on this, but much more needs to be done. The Executive’s new consultation on shared services is a welcome step, and highlights the potential for savings of £750 million a year.

Some argue that what is needed is a wholesale change to the system of funding local government. CBI Scotland remains to be convinced of this but we have suggested to the Burt Committee that they should look at this.

However, income generated through taxation and charges is but one side of the equation. The other is:

• levels of spending,
• priorities,
• and the way services are delivered.

Local government, like business, needs to cut its cloth according to its income. Higher taxes and charges should not be the first recourse, but the last. Too much of what passes for public debate on this issue focuses on that one side of the equation, raising taxes. So we need to be clear about what we want local government to do before we replace all or part of the system for funding it. This is an important flaw at the heart of the review of local taxation being undertaken by the Burt Committee with regard to the terms of reference.

Money is important, particularly as the golden period of funding for Scotland’s public sector is likely to end over the next few years as the rate of increase in funding declines. This, together with demographic changes and the rising expectations of service users – fuelled in part by the rise in taxes and public spending in recent years - means reform will become more – not less - critical, and potentially more difficult.

The right response will be to open up more public sector activity to a diversity of provision, from both voluntary and private sectors. There should be few limits on the contribution the private and voluntary sectors can make.

This growing ‘contestibility’ in public service provision will require an evolving policy framework to ensure competitive neutrality in existing public markets and new ones. We must ensure voluntary and private bidders aren’t discriminated against simply because of their ownership structures. A CBI report earlier this year expressed concern about this very issue, highlighting guidance issued in Scotland to do with the Facilities Management arrangements for PPP contracts. It pointed to in-house bidders gaining an unfair advantage through having the chance to refine their submission following receipt of submissions from external organisations.

A fair field and no favours matters if the users of services are to get excellent services and if public money is to be spent efficiently. Allied to this is the growth of quasi-public bodies – such as leisure trusts – and arms length bodies which benefit from public sector patronage, tax concessions and guarantees. Competitive neutrality is something the Executive must keep under constant review, to ensure a level playing field.

Regardless of the changes Ministers ultimately unveil, local government will require to become ever more efficient, effective and flexible. This will require new skills and a new capacity for managing contracts with a diversity of service providers.

Local government ought to act now, not wait for reforms to be imposed on them from on high by the Executive.

When Ministers do unveil their plans - hopefully George Lyon will this afternoon tell us a bit more about the timetable, if not the detail itself - then there are some key principles that should underpin the changes. These ought to be:

• Diversity of suppliers for public services - councils should focus on their core tasks, with a presumption in favour of always contesting service provision;
• Greater choice for service users – this focus on the customer must be the order of the day, there is little point going against the grain;
• value for money;
• and accountability

Conclusion

Reform of public services and public institutions – like the Enterprise Networks and local government - will always be present. It is the nature of our democracy and all the better for it.

CBI Scotland is explicit in favouring the guiding principles of competition and choice in any reform of the public sector. After all, this is what raises standards, ensures value for money, and delivers what the customers want, in the private sector.

Yes, it can be difficult. But it is not about removing government involvement, but modernising it, and changing the nature of government interventions. Government at national and local level should retain the critical roles of funder and regulator, but not always the provider of services.

This requires leadership from our politicians, who must articulate the benefits of reform, and who have a real opportunity over the next 12 months to bring forward their ideas for delivering on this ambitious agenda.

Thank you.

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