Stephen Hughes on finance and the future for local government

Stephen Hughes is chief executive of Birmingham City Council and was speaking here to Jo Tura for the first issue of Room151 Quarterly magazine. 

Room 151: How big a part has your finance background played in the chief exec role?

SH: Critical. It’s probably what got me the job in the first place. I came here in February 2004 and four months later the Conservative Lib Dem coalition took over from Labour here. I did a couple of things that year, one being the refinancing of the NEC debt. I did a particular piece around the accounts which saved a one-off £11m just by looking at some technical thing: I put a deminimis level on accruals. I’ve done that at each authority I’ve been in. That money was used to support the employees who lost their jobs at MG Rover in 2005.

Then, because the administration had not really thought through a full programme in advance (this was to be expected because they were two opposing parties), the first year was largely spent dealing with an overspend in social care. I’d already sorted out a similar problem at Brent, so with help I was able to get that turned round. When doing the parties’ first budget I guessed they would want to spend some money so as part of the budget preparation we found £7m to use as ‘partnership priorities’. This was a way of identifying a resource which would enable them to do the things they wanted without having to go round slashing things here there and everywhere. The consequence of all of that was we had joint discussions between the two parties to agree a budget and there was one budget for 2005/6, not two. The two parties had gone in assuming they’d devise separate budgets then bring it together. That set the tone for the rest of the administration.

In June 2005 Lin Homer, then chief executive, left to go to the Home Office and they asked me to be acting chief exec. I think that was because I had demonstrated my usefulness. So how important was finance in getting me the job? It was the whole reason. And their approach, their banner, was fiscal discipline; they wanted to focus on making better value for money. You would expect a new director of finance to find a few things like that but the core of what I was doing was the business transformation and that made the difference: the partnership with Capita, and plan to save £1bn net over 10 years and significant changes in services.

Room 151: How much money has the transformation work saved the council?

SH: The original target was £100m net of the investment, cashable savings over 10 years starting in 2006. We’re on target to achieve that but the actual saving is greater because that would translate to £100m a
year. But over the last three years we’ve saved £377m through a range of things like service redesign and reductions. We’ve had a vast increase in the productivity of staff, supported by the changes that we made. Nebulous, non-cashable savings really came home through the savings exercise that we’ve done over the last three years. So I think the total amount saved is huge. It has modernised the council and made us more capable of being flexible and changing in a way that we weren’t previously.

Room 151: As everyone is looking at West Somerset* and saying it’s too small, is it possible for a council to be too big? Is Birmingham too big?

SH: Certainly if you want to run it on a command and control model, it’s too big. You’d get clogged up with decisions right at the top because you couldn’t possibly know everything that’s going on. It’s too big if you’re going to use the heroic leader approach to service delivery, because there’s no way you can
get to meet everyone. You have to have distributed leadership and influence negotiations so it’s not the chief exec that runs the organisation – everything is the team. That’s the nature of the organisation, it’s so big that it only works as a collaborative effort.

Room 151: Should there be more financial autonomy for councils like yours?

SH: I’m on the record as saying we believe we’ve got much greater capability for delivering things. If you
think about how funding streams are fragmented before they get delivered at a local level, each of the central government departments have a series of programmes to achieve and when they hit the ground here they’ve gone through so many routes from Whitehall to Birmingham that there is hardly any
connectivity at all. A good example of that is schools and employment where you have three departments – Department of Education, DWP and BIS, all providing different interventions. Of course, we are doing some of it too. Our argument, and Heseltine’s, was that if you brought all that money together and gave local control, you’d get much better results. It’s not that centrally-driven programmes aren’t good, it’s that they lack the connection to other programmes in the place. With the money comes responsibility back up to government departments and Parliament. We’ve not been very good at convincing government that, first of all, we have passion for our place – we don’t want the money to be irresponsible with it, we actually care. We have to convince them to trust us more with it.

That comes back to the thing we talked about on different types of councils having different capabilities. If government looks at West Somerset* and says ‘there’s no way we can give them the responsibility for delivering all these government programmes because they haven’t got the capacity’, yes. But we’re different from West Somerset* – we have got the capacity and capability. There’s also an argument for self-sufficiency. One issue we have around the economy is the incentives are wrong. We work to create jobs and get people off the dole, but all the benefits go to DWP, Treasury or someone else.

We’re quite keen on something similar to the Manchester earn-back model, but there might be a more radical solution. Suppose the government took away all of our grant, left us with retained business rates, council tax and some percentage of locally collected VAT receipts. There would be a number of advantages. Firstly we wouldn’t have to worry about what grant we’d get next year, giving some stability.
And you’d have an inbuilt incentive, because there’s a close correlation between improvement in employment and those things, and VAT. I don’t expect anyone would do this, but I throw the thought out there because there are different models of how local government could be financed. We don’t have to be this massively grant-dependent organisation. It’s the grant dependency which creates the instability in planning ahead and the scale of savings we have to make.

Room 151: What makes a good Section 151 officer?

SH: The traditional view is of the man who never gives anything away, but I think the job is more about finding solutions to the challenges. So finance role: vital. Always has been, always will be. Being a good S151 is a balance. You have to understand and be firm about your statutory responsibilities because that’s what the 151 bit means, but if that’s all you do, you will just be seen as a blocker and people will work round you. To be at the heart of an organisation, the finance director has to be seen as
the person who will solve the problems. That’s equally true of the lawyer or the HR person but the finance man has a particular role because you can’t do anything without some money.

Room 151: The relationship with central government is the interesting one perhaps?

SH: We have really difficult decisions to make. We’re doing service reviews and all of that but it isn’t helpful when the context for the debate is trivialised. My Leader has put out his jaws of doom graph about the savings we need to make over 2010/11 through to 2017/18. When Cameron was in town opening a free school or something he was asked what he thought and he said ‘Well, you’ve only had a 0.7% reduction in your spending power.’ True. For one year. In 2015/16 we’re going to have a 15% cut in grants in one year. Then there was the bit about ‘All you need to do to solve your problems is sack the chief executive’. There’s a left wing equivalent of that where people locally think all we have to do is sack our private sector contracts. We have to get beyond the political ping-pong to a common understanding of the scale of the challenge and therefore the real policy choices that we need to make.

We know what’s going on. My Leader is saying it, Merrick Cockell is saying it, the LGA is doing its rewiring public services thing and there are Leaders from every political party saying the same. Local
government gets it, but time is short. This is a really serious situation, it’s not about batting allegations around saying who is being efficient and who isn’t. It’s beyond that discussion, the numbers are beyond
that. 2015/16 is the big crunch time and that’s 18 months away now.

* Correction: In the printed version of Issue One of Room151 Quarterly we made reference to North Somerset in the third questions of the interview, a reference which was later repeated by the interviewee. We had intended to refer to West Somerset (as corrected above in the online version of the interview). 

The article was first published in Room151 Quarterly magazine. Didn’t receive a copy? Local authority heads of finance, resources, procurement and chief execs can email subscriptions@room151.co.uk for a complimentary subscription.