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Scottish Parliament
Local Government Committee
Inquiry into Local Government Finance
Initial UNISON Evidence
January 2001

 

Executive Summary

UNISON believes that the aims of Scottish local government finance reform should be to:

  • strengthen local accountability
  • provide for adequacy in supporting councils' revenue and investment needs
  • ensure fairness between authorities taking account of different population needs and revenue raising capacity
  • enable adequate forward planning
  • protect against sharp cash reductions

In supporting these aims of reform UNISON supports:

  • a better balance in funding from central and local government
  • a reformed council tax system with bands added at the top and bottom
  • a regular review of council tax bandings
  • the return of business rates to local councils
  • relaxation in the capping powers of Minister
  • the continuation of the council tax as the main way of raising revenue
  • giving freedom to local councils to raise revenue in other ways in addition to the council tax
  • the possible introduction of a hotel bed tax
  • the treatment of second homes in the same way as main residences
  • an end to hypothecation and challenge funding
  • greater openness and transparency in Scottish local government finance at Scottish and local levels

UNISON is strongly opposed to the use of PFI/PPP in Scottish local government for the following reasons:

  • this is a more expensive way of procuring capital projects
    priorities in local government expenditure are being skewed
  • it is having a detrimental impact on local government workers jobs, pay and conditions of service
  • it is resulting in the privatisation of Scotland's local government services
    the system of PFI/PPP is clouded in secrecy

If PFI/PPP is to proceed UNISON believes that services should be excluded with staff continuing to be employed by local government

INQUIRY INTO LOCAL GOVERNMENT FINANCE
INITIAL UNISON EVIDENCE

1. Introduction

UNISON is Scotland's largest union with 80,000 members employed by Scottish local government. In addition many thousands of our members are employed by the voluntary sector and joint boards and are reliant on local government funding. UNISON is therefore the largest representative organisation of local government employees, directly and indirectly, and we trust that our response will be given due weight as a major stakeholder.

UNISON warmly welcomes the decision of the to undertake a major inquiry into local government finance and we are confident that the Committee's inquiry will be both thorough and independent.

UNISON is itself presently undertaking a review of our detailed policy in relation to local government finance and the following is our preliminary evidence to the Committee. We are commissioning academic research into various issues relevant to your inquiry and it is our intention to submit more detailed written evidence to the Committee at a later stage. We would also welcome the opportunity of providing oral evidence to the Committee.

2. The Case For Reform of Local Government Finance

UNISON believes that the system of local government finance in Scotland is long overdue for reform.

UNISON is concerned that for too long local government has suffered from the effects of year on year cuts in funding coupled with restraints on freedom of action. The effects of persistent neglect can be seen in declining local services and under investment in staffing and infrastructure. Tackling these problems will require imagination and initiative together with the resources to really make a difference.

UNISON believes that the aims of Scottish local government finance reform should be to:

  • Strengthen local accountability
  • Provide for adequacy in supporting councils' revenue and investment needs
  • Ensure fairness between authorities taking account of different population needs and revenue raising capacity
  • Enable adequate forward planning
  • Protect against sharp cash reductions

3. Balance Between Central and Local Funding, The Council Tax and the Non-Domestic Rate

Scottish local government currently raises too small a proportion of its total expenditure, approximately one fifth. If we are serious about the task of restoring local democracy and rebuilding local services, UNISON believes that local government in Scotland should be responsible for raising around 50% of its own revenue. A more equal balance between central and local funding is preferable and would enhance the fiscal responsibility and the degree of accountability of local councils. We accept that there is a continuing role for central funding of local government to ensure a fair distribution of resources to take account of factors such as deprivation.

UNISON believes that the council tax system, which replaced the poll tax, has acquired a large measure of acceptability and that it appears to be generally well understood. We believe the reason for this is the more progressive nature of the council tax (certainly as opposed to the poll tax) but we would like to see this improved by adding new bands at both the top and bottom. At the moment the average bill per pound of property value falls as property values rise, and we would like to see this addressed. Alongside measures to improve the progressiveness of council tax UNISON would also support the need for regular revaluations which would help to improve the fairness of the tax. We think these are both important measures which are needed to help retain and enhance the credibility of council tax in the eyes of the public.

Local businesses should be brought closer to the discussions on, and resourcing of, local services. It has been a major failing of the non-domestic rate that it has helped to separate local government from local businesses. To address these failings we would urge the Committee to support the return of the business rate to local authority control.

UNISON is disappointed that the Scottish Executive is continuing to maintain reserve capping powers. While we welcome the abolition of ‘crude and universal' capping we believe this, in itself, is insufficient. Councils should ultimately be accountable to their local electorates rather than to central government. That is the essence of local democracy.

4. Alternatives to the Council Tax

UNISON supports the continuation of the Council Tax as the main way revenue is raised by Scotland's local councils.

UNISON believes that local government should also have the freedom to raise revenue in a range of other ways. We would emphasise that these other ways should be in addition to the Council Tax rather than as an alternative to it. We believe the principle of flexibility is key. What may be appropriate for one local authority might not be appropriate in another.

UNISON would ask the Committee to consider the option of a hotel bed tax, to be implemented at the discretion of local authorities. Large amounts of public finance are often invested in events and projects designed to attract tourists. The beneficiaries of this investment have been hotels, restaurants and shops, which contribute nothing directly to these activities. For example, the New Year Celebrations in Edinburgh are very successful, but is only possible because of the investment from the local authority and the Local Enterprise Company. Tourists are attracted to Edinburgh during the low season and tickets are allocated to hotels for the event. UNISON feels it is only reasonable for the hotels to make a contribution to the local authority costs involved in staging events such as this. We would emphasise that the introduction of a bed tax should be at the discretion of local authorities. We are aware that tourism as an industry goes through peaks and troughs and we would not wish to take any action that adversely deterred tourists from coming to a particular area.

UNISON believes that a local sales tax has some merit and notes that such a tax is used extensively elsewhere outside the UK. We recognise, however, that a sales tax could have practical difficulties, particularly regarding its collection and that it is also largely regressive.

A land value tax, or its local government equivalent site value rating, is used in countries such as Denmark, South Africa and parts of Australia and the United States. Its method is based on taxing the value of land as opposed to the building on the land. It has similar advantages to the Council Tax in terms of broadly equating fairness with ability to pay and it is a difficult tax to evade. But it is an alternative to the Council Tax and whilst willing to give it further consideration we support the continuation of the Council Tax for the reasons given above.

UNISON strongly believes that second homes should be treated exactly the same as the main residence and owners should be required to pay the full Council Tax on these properties. Discounts on second homes are unfair and often lead to abuses of the system.

5. Hypothecation and Challenge Funding

UNISON is strongly opposed to both hypothecation and challenge funding. Our opposition stems from our support for the principles of local government finance reform set out in section 2, that is, that the system of local government finance should aim to strengthen local accountability and provide for adequacy in supporting local authorities' revenue and investment needs. We believe that both hypothecation and challenge funding undermine these principles because the decision on allocation of resources becomes one for central rather than local government.

Hypothication, or the earmarking of expenditure, has resulted in welcome increases in expenditure in certain areas but at the cost of disproportionate cuts in other equally important areas. It has skewed and distorted local government budgets in recent years leading to significant cuts in non-ringfenced area.

UNISON believes that central and local government should seek to work in a spirit of partnership with both central and local government equal partners. Such an approach should involve dialogue and agreed objective setting. This approach is much preferable to one driven by central government and the priorities of a particular Minister or Department.

6. Local Government Capital Finance, PFI/PPP and the PSBR/PSNCR

UNISON recognises the continuing real crisis of investment in the provision of local services. This situation is not helped, however, by a continuing reliance on the Private Finance Initiative / Public Private Partnerships (PFI/PPP) and we set out our detailed concerns below.

UNISON has had serious concerns about PFI from its inception under the last UK Conservative Government. These centre on the impact on our members in their places of work, but also the wider impact on public services and the public finances.

Many of the advantages claimed for PFI are actually the benefits of a more sophisticated public procurement process. As a result of PFI, far greater resources have been put into refining procurement, at all levels of government. The expertise and knowledge gained can be used for future procurement of assets and are not restricted to PFI.

Many of the disadvantages of earlier public procurement were due to circumstances outside the control of the procuring authorities and the contractors. For example, the starting and stopping of funding and the lack of provision for maintaining assets over their life times. It is disingenuous to claim that PFI is a superior form of procurement because it will not be subject to funding cuts. In reality, whilst PFI schemes may be proofed against cuts, the rest of the public sector is not. UNISON is especially concerned that whilst public funds for PFI schemes are protected and guaranteed, the remaining public services will have to disproportionately bear the brunt of any future cuts in funding.

Local services are not like other commodities. They exist where a community decides that a particular activity is vital for the general interest and cannot be provided by the market alone. The state then assumes some degree of responsibility for the service. This could be by funding the service or at the other extreme by regulating for its quality and delivery. In undertaking this, the state also assumes the ultimate responsibly for the risk of the service failing - a risk for which there can be no adequate financial compensation and a risk that cannot be transferred from government. These risks are one factor that uniquely define public services and that are not adequately taken account of in PFI deals, where it is often assumed that risks of failure can be transferred to a private, service provider.

UNISON has reservations about the treatment of risk and it is our view that it is not unusual for retained risks to be undervalued whilst transferred risks are overvalued. The calculation of risk is sensitive to small variations in assumptions. There are also issues about the assumptions underlying risk calculations, such as those for time and cost overruns and whether these are representative of the present or based on special circumstances in the past. A further issue is the extent to which penalties reflect risks. Risk is a key element of PFI and UNISON would like to see more information and discussion about the risks in each project.

UNISON also wishes to draw attention to the secrecy that surrounds PFI schemes, despite Scottish Executive advice to the contrary. Public authorities need to make more information available to stakeholders at every stage of the PFI process. UNISON is still meeting resistance to providing information on signed local government deals and projects that are still in progress.

The Implications of PFI/PPP for Scottish Executive expenditure and the definition of PSBR/PSNCR

One of the key reasons why the PFI was conceived by the former UK Conservative government was that it had lost control of public borrowing. The present UK Labour Government has turned the public finances around, so that they are in surplus and this has resulted in significant increases in grant allocation to the Scottish Executive. It therefore makes no sense to insist on public investment through PFI, when it is estimated that for every £1bn of PFI contracts, the cost to the public purse is £50 million per year more than if the public sector could borrow directly.

At the heart of the government's commitment to PFI is a desire to achieve public sector investment without appearing to increase public borrowing. Now that the public finances are so healthy this position is even more untenable. In recent years the Public Sector Net Cash Requirement (PSNCR) (formerly known as the Public Sector Borrowing Requirement) has recorded record surpluses and with more money coming into government than going out, it is absurd to pursue PFI, with its very expensive borrowing. The government could borrow the money to be spent on PFI schemes without breaching the guidelines of either the Golden Rule or the Maastricht criteria.

By sticking to the narrow definition of the PSNCR the government places the public sector at a great disadvantage. First, public enterprises are prevented from borrowing to invest and from developing the enterprise culture that the government values. Second, public authorities are prevented from taking advantage of the full range of cheap loans for investment available in Europe, such as from the European Investment Bank.

The government has relaxed the PSNCR in some cases, such as local authority owned airports and for the Channel Tunnel Rail Link and needs to extend this to a wider range of public bodies.

The GGFD should be adopted as a measure of public borrowing and public authorities should be allowed to borrow to invest from the European Investment Bank and European Investment Fund. These bodies lend at very advantageous rates and since their funds are not guaranteed by governments, they do not count against public borrowing, except in Britain and the Netherlands. Furthermore, under the auspices of the Amsterdam Special Action Programme of 1997, these bodies have been concerned to make funds available for investment in health, education, urban environment and environmental protection. In addition, the EIB and EIF accept direct applications for funding for schemes as small as £6.5m (about ECU 10m). These conditions would suit many of the projects currently in the PFI programme.

The restrictions placed on Scottish local government by the use of the PSNCR definitions are preventing them from borrowing to invest in essential infrastructure, and to optimise Britain's competitiveness within Europe.

Evidence from PFI schemes on affordability and costs

As the body of research and information on actual PFI schemes builds up, a disturbing pattern is emerging of a significant funding gap between what the public authority can afford and the actual, annual charges of the PFI scheme. Even more disturbing is the way in which this gap is being met, namely by cuts in services and by drawing in additional funds, with knock-on effects for other services.

In the NHS, the increased costs of PFI are met from hospital closure programmes, reductions in services and capacity, subsidies from the Treasury and trusts' operational budgets. Higher PFI costs have led to service contraction, and increased pressures on revenue budgets. On average, bed numbers in PFI hospitals will be reduced by 31% over the next 3 to 5 years, a fact that is difficult to reconcile with the recent bed crisis in the NHS. The evidence suggests that decisions on bed numbers in PFI schemes reflect financial expediency rather than clinical judgement.

PFI has not provided additional funds for the NHS but is rather a method
of financing for which the costs must be met from NHS budgets. It allows the government to defer public spending, but at a higher cost. PFI schemes have been subsidised through the NHS capital budget and regional NHS capital allocations. However, these measures have still not been sufficient to make the PFI schemes affordable within existing hospital budgets.

The Public Sector Comparator

The Public Sector Comparator should be a benchmark to ensure that the taxpayer is getting good value for money. However, its role has evolved through the development of PFI and instead of being a genuine comparator it is, rather, an unequal comparator. This is because the PSC and the PFI project may not compare like with like.

Furthermore, UNISON takes the view that in order for a thorough economic appraisal to take place, the costs of both the PSC and the PFI scheme will need to be broken down into their component parts and shown to stakeholders, including trade union representatives. This will also serve to demonstrate the value for money implications of including or excluding services in the scheme. Frequently the economic appraisal of PFI schemes fails to distinguish between the payments for services and payments for availability. This makes it impossible to determine whether the services component represents VFM in its own right. Whilst this may have been sufficient for gaining Treasury approval in the past, if the new policy of only including services where they represent value for money is to be pursued, then the costs of the service component will have to identified separately. This information would also clarify any assumptions about the future pay and conditions of the workforce. If the economics of a PFI project are dependent on lowering pay and conditions, then this should be explicit at the outset, so that the consequences can be taken into account when comparing the PSC.

Differences between the design of the PFI facility and the PSC may mean that service costs may differ between the two options for reasons other than the efficiency of service provision.

If PFI Proceeds then Exclude Services

UNISON believes that PFI is a wasteful and expensive way of procuring infrastructure. If, however, PFI is to continue, in Scottish Local Government then services should be excluded. At the very least, this scales down the size of the projects, and therefore, the amount of resources devoted to PFI, and, crucially, allows services to be retained under the direct control of public authorities and staff to remain as public employees.

Keeping all local government services under a single, public sector employer gives a flexibility that can meet the anticipated and unforeseen needs of the coming years. It leaves the scope for change within the public sector's control, rather than tied up in very long contracts. The public sector can be an agent of change and innovation, and is responsible for many improvements to service delivery. UNISON does not believe that the private sector has a monopoly on innovation or service improvement for public services.

Facilities management contractors want to retain services in PFI deals and this confirms UNISON's fears that in the long run, contractors intend to secure their profits by cutting jobs and the overall pay and conditions of our members. If this were not so, then the same conditions of service would apply to new recruits and not just to transferred staff.

Impact on Staff

UNISON's primary concern is for the impact of PFI projects on staff. The trend in PFI contracts has been to reduce the salaries of staff taken over from the public sector and to cut jobs.

UNISON's earliest experience of PFI has been in health where after lengthy negotiations we have reached agreements with most major contractors on protections for staff. We welcome the progress that has been made but there are still major areas not covered by the agreements.

Even where agreements have been reached UNISON has examples of attempts to get transferred staff accept variations, that is, to accept new, inferior contracts. Where protections exist, they may be limited to a period of time after which the employer may try to lower pay and conditions. Good quality public services require good quality employment practices.

In most PFI schemes, the terms and conditions of staff transferring do not extend to new staff taken on. UNISON wants to see all staff treated fairly and in particular, staff should be paid for the work they do and not the historic circumstances under which they were taken on.

Most contractors make no provision for pensions for new staff. Even contractors with a good record on many issues do not offer pensions for new staff. Where pensions are provided for transferred staff, they are often not as good as those being left.

Most contractors do not yet provide an equivalent and satisfactory injury benefit scheme.

Where PFI goes ahead, UNISON is working to secure proper transfer arrangements working in partnership with contractors, but in general, staff still suffer some detriment from transfer and our experience is that, given a choice most would prefer to stay in the public sector.

7. Other Comments - Openness and Accountability

UNISON believes that more could be done to make the system of Scottish local government finance more transparent and to enable local council tax payers to see how money is raised and then spent on local services. We believe that local authorities themselves can do much more to explain the system - through websites, exhibitions and council magazines.
UNISON would like to see far greater scope for councils to involve the community in the budget making process secure in the knowledge that this will not then be subject to later central government interference. We believe this would improve the general understanding of the role of local government, enhance participation in local democracy, and strengthen citizenship generally.

8. Conclusions

UNISON will continue to make the case for adequate funding for local government services. Our members in local government are committed to the provision of high quality services but need to resources to be able to deliver. The need for capital investment is evident and urgent. Local authorities also continue to need the revenue support to deliver basic services and to give meaning to the role of community planning and community leadership set out by the Scottish Executive.

UNISON is committed to a vision of local government which is vibrant and engaging, in which local citizens feel they have some real say over the distribution of local resources and the future of their local environment. We believe that the local government workforce has a vital contribution to make to the regeneration of communities and neighbourhoods. But we are also clear that enhancing local democracy will only be achieved if the Scottish Executive is prepared to let local councils have the freedoms and powers to take meaningful local decisions.

9. For Further Information

For further information please contact:

Matt Smith
Scottish Secretary
UNISON Scotland
UNISON House
14 West Campbell Street
Glasgow G2 6RX

0141 332 0006 (phone)
matt.smith@unison.co.uk

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