Posted on Tuesday 13 December 2011 by Ulster Business

Matching capital resources with economic priorities

John Simpson takes a closer look at the Government’s recently released Investment Strategy for evidence that the Executive has clear priorities for capital spending.

As part of the Programme for Government (PfG), two separately published documents, one on Economic Strategy and the other on Investment Strategy, will be significant for the local economy.

Both documents give a wide ranging descriptive agenda of the actions proposed by the Executive. Both are, in some respects, disappointing.

They both offer extensive headline reviews of current and proposed policy developments. This has helped to generate a favourable public reception. However, they must now be tested against more demanding criteria. Do they show a coherent analysis which allows the prospective conclusions to be seen and assessed against the action plans? Do they show that plans have moved from a wish-list into assured early implementation? Do they show that devolved Government is using delegated decision-making to maximum advantage? If these strategies are fully implemented, how will the local economy perform?

Public consultation on the Programme for Government (PfG) and the economic and investment strategies is underway and responses are invited up to 22 February 2012.

The focus of this comment is the 50 page Investment Strategy. The Strategy is ambitiously worded but vulnerable to the criticism that some proposals are more aspirational than operational.

The Investment Strategy can be seen as an assertion from the Executive of a wide-ranging series of proposals affecting economic, social and environmental challenges. However, it is not a considered strategy to be tested by the likelihood of achieving stated macro-economic performance objectives. Also, it does not read as coping with a seriously inadequate financial provision which, presumably, is smaller than the Executive would have wished.

If the Investment Strategy is expected to show how priorities for investment have been chosen and how the choice relates to the performance of the Executive, the strategy document is not persuasive. No annual spending figures are specified and no comparisons with recent years, for the main investment areas, are on offer. The Investment Strategy starts from a smaller capital allocation than the Executive would have thought desirable but includes no annual series to show the scale of the reduction and the annual allocations in the next four years.

Public sector capital spending in the four financial years 2011-15 is planned to be £5.4bn. The Executive acknowledge that, under the Barnett formula, earmarked capital funds from the UK Treasury will be over 35% lower in this four year period than in the preceding years. Public sector capital spending at an average of less than £1.4bn each year is a sharp reduction.

Options

The critical test for the Executive is whether there is scope for any constructive variations. Critically, has the allocation from the UK Treasury been sensibly distributed, has the Executive taken steps to release more from current budgets to transfer to capital, and has the Executive used its discretion to develop access to alternative sources of capital?

On each of these questions, whilst there is room for debate, a case can be made that the public sector capital budget could be eased or improved. Some of the options have been explicitly excluded by the Executive which, even if arguable, is its prerogative.

There is scope to take some of the present commitments in the capital budget out of this arena. In England, the public sector budget would not include nearly £200m for capital spending on water services. The English privatised water services would raise capital on commercial markets. Northern Ireland could move to local arrangements, possibly a mutual model, to move the financing of water into an arms-length organisation. The question of water charges might be made acceptable or manageable if hypothecated sums were separated from domestic rates.

The public sector capital budget might be further eased if the Housing Executive was restructured as arms-length (one or more) housing associations established as social enterprises.

In the overall Northern Ireland budget, the Executive has moved some funds from current spending into the capital budget. In principle, this is allowed under the Treasury rules. There is a question about whether these transfers should be larger. A (silent) feature of the public spending plans has been the modest emphasis on reducing current spending and linking this to improved efficiency in the delivery of public services.

The absence of plans to reduce the size of the current provision for the public sector, through efficiency measures, structural reform or plans to reduce the size of the institutions is notable. The absence of a demanding review of the size and functions of the public sector is conspicuous.

Scottish initiatives

A comparison of the responses of the Northern Ireland and Scottish administrations invites serious reconsideration of the scope for ideas to enhance the budget.

The Scottish Government has asked its investment agency, Scottish Futures Trust, to supplement the Scottish capital budget by committing revenue funding, each year, equivalent to 1% of Scottish current expenditure. This is converted to a capital sum which, in Northern Ireland, would mean an extra £1bn capital spending in the next four years. In addition, the Scottish Futures Trust has been encouraged to design pilot programmes using the concept of Tax Incremental Financing (TIF) which will allow other Government agencies to initiate further extra capital projects. These devices would offer a larger source of local capital funding than the current RRI budgetary allowance.

The Scottish plans show that public sector capital spending fell in 2011-12 but then is increasing year by year. Northern Ireland plans show no early pick-up.

These Scottish plans offer a more substantial commitment than the rather incomplete aspiration in the Northern Ireland Investment Strategy to ‘actively explore all options to maintain the levels of investment we believe necessary’. With nearly a year’s advance warning, the Executive response has been too passive.

Inherited deficiencies

Perhaps the most worrying features of the investment plans are the number of occasions when, despite apparently making preparations in earlier years, the new plan makes a virtue out of past failure or inaction. The failure of commitments to have an Outline Business Case for Rapid Transit in Belfast by March 2009 is now overtaken by a claim that funds are now not expected until 2014.

Other serious slippage has hit the original Workplace 2010 ideas, the Maze-Long Kesh proposals and the slow delivery of the Desertcreat public services centre.

Stormont expects to get better management of public sector assets through a strengthening of the Assets Management Agency activities. The strategy says that ‘the running cost of property… diverts money away from frontline services and must be tackled urgently.’ This is not a new conclusion yet decisive actions have been rare. Again, the Scottish Futures Trust is setting an example to emulate.

Our public sector investment strategy is disappointing in scale, coherence and integration with wider economic needs. The policy priorities are logically identified but the decision making sequence to prioritise specific choices should be operationally more demanding.

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