Financing Local Futures Guide

Financial mechanisms: spending money

Together, local authorities spend over £80 billion in England alone. There is huge potential to use local authority spending to maximise environmental, social and economic benefits and outcomes. We explore a number of the means for doing this below:

Budget and resource allocation
Grants: incorporating sustainable development criteria
Invest-to-save
Long-term budget planning
Pensions
Pooling budgets
Procurement, including the Private Finance Initiative

Budget and resource allocation

One of the key ways to put sustainable development at the heart of finance is to use sustainability criteria for deciding how resources are allocated within a local authority. This ensures that budgets are developed to reflect sustainable development priorities, rather than sustainable development being an 'optional extra'. One way of doing this is through sustainability appraisal. Sustainability appraisal can be used against entire budgets or against specific budget proposals. Our Survey (PDF) of local government finance directors found that 40% of those surveyed had appraised budgets or financial decisions against sustainability criteria to help finance sustainable development.

Grants: incorporating sustainability criteria

Local authorities can encourage more sustainable behaviour in groups and organisations in the area through the way in which they give grants. This can happen in two ways. First of all, conditions can be attached to the grant which require the grant-aided organisation to act more sustainably in return for grant money. Secondly, sustainability criteria can be used to decide what type of grants are given in the first instance, through the use of sustainability appraisal for example.

Invest-to-save

Investments in sustainable development often require large, up front costs which pay back financially over a medium or long term timeframe. In this context, invest-to-save means up-front investment in sustainability measures that will lead to financial, as well as environmental, social and economic benefits in the long-term.

There are a number of different ways to realise the potential of invest-to-save to support sustainable development. One solution is to create ring-fenced revolving loan funds for sustainable development initiatives and recoup the costs out of future savings. Once established, these can be self-sustaining. A scheme in which money can be loaned to invest in sustainability measures up front that will then lead to financial savings and sustainability benefits in the long-term.

Kirklees MC created a loan system in 1998 to fund energy and water saving measures in council buildings. To apply for a loan, an applicant must first carry out an audit on the selected building. This should provide costed recommendations for improvements, the costs of installation and the estimated financial savings. Once a loan has been agreed, the applicant then has to pay back half the expected savings each year until the loan is repaid. In this way, even during repayments, the applicant makes financial savings. The main stipulation is that projects must be repayable within 25 years. This fund had lead to savings of over £480,000 by 2005/06.

Useful resources include:

• Salix Salix is an independent, publicly funded company that provides interest-free match funding to the public sector to invest in energy efficiency measures and technologies that will reduce carbon emissions.
• Energy Saving Trust's feasibility study (PDF) into creating revolving loan funds to help householders to invest in energy efficiency improvements

78% of local authority finance directors have used invest-to-save initiatives to fund sustainable development. Ring-fenced revolving funds are under-used however. Only 23% of finance directors say they have been used to support sustainable development initiatives. For more, download the SDC survey (PDF) on financing sustainable development in local government.

Long-term budget planning

Sustainable development involves long-term planning and decision-making. Budgetary decisions taken now will have impacts in the future. Long-term budget planning enables financial decisions to be made with a longer timescale in mind and should ensure that they are more sustainable as result. It also encourages mechanisms such as 'invest-to-save' and 'whole-life costing', which are discussed elsewhere in this section. By moving from annual budgets to rolling three, five, ten year or even longer budgets, local authorities will have to take into account future spending commitments when making decisions about current budgets.

In our survey, 76% of local authority finance directors said that they used long-term budget planning to help finance sustainable development initiatives.

Pensions

Local authorities can use their economic power as investors, in pensions in this instance, to address social and environmental concerns. This is often referred to as socially responsible investment (SRI) or ethical investment. The West Midlands Pension Fund for local government calls on companies to address a number of environmental concerns, for instance.

There are some perceived barriers to integrating sustainable development concerns into pension investments, which include the perception that fiduciary duties require those managing pensions trusts to prioritise profit maximisation above all else. However, a 2005 report for the UNEP Finance Initiative (PDF) found that "this perception is based on a fundamental misunderstanding of the law and the outdated notion that investment decision-making is based on individual investments rather than modern portfolio theory". In fact, the report argues that it may even be a breach of fiduciary duties not to take into account environmental and social considerations.

Pooling budgets

Separate budgets, responsibilities and targets make it difficult for public sector organisations to act on some of the key challenges of sustainable development. If a local authority decides to spend money to improve local health, for instance, it might be the NHS that benefits most. This acts as a disincentive to integrated thinking - a key part of sustainable development.

Pooled budgets, on the hand, allow different departments and partner organisations to invest together to meet shared and joined-up objectives. They help to address issues that cut across service silos or fall between a number of different players - this is very much a sustainable development approach.

Local Area Agreements are a key mechanism for doing this, but local authorities can also explore other opportunities for sharing budgets across departments or partner organisations.

Procurement

Sustainable procurement is about long-term value and assessing true whole-life costs (sometimes called life-cycle costs) of purchasing decisions - from buildings and youth services to furniture and light bulbs. Mounting evidence proves that smart spending - choosing products that support the local economy and have minimal environmental impact - creates real value for money and, in the long run, saves money.

Local authorities in England alone spend around £40bn a year procuring goods and services - a quarter of total public procurement spend. How this money is spent impacts upon our local communities, local economies, the environment and upon a local authority's own policies and strategies.

Through procuring from a mix of small, medium and large businesses and social enterprises, local authorities can invest considerably in the economy and community, contributing to regeneration. The right procurement choices can reduce harmful environmental impacts - like producing less waste, minimising the need to transport goods, reducing carbon emissions and other pollution. Sustainable procurement can also impact on an organisation's reputation and help motivate and inspire staff and residents. Together these impacts can help shape truly sustainable communities.

There are a wide range of resources on sustainable procurement. The most significant is the Sustainable Procurement Task Force's National Action Plan, presented to the UK Government in June 2006. This includes a 'flexible framework' which sets out how the public sector can become leaders in the field, as well as a prioritisation methodology to help public sector organisations assess where their sustainable procurement policies can have the most impact.

The Private Finance Initiative (PFI) is often used for large pieces of procurement, such as the building of schools or hospitals, and can be a key lever for sustainable development, in particular because of the scale of the resources involved. Green Alliance's report, PFI: meeting the sustainability challenge, contains a number of recommendations designed to enable stakeholders involved in PFI projects achieve more sustainable outcomes. Brighton & Hove City Council's £14m Jubilee Library PFI project is one, award-winning, example of how PFI can be used to deliver sustainable development.