A key emerging feature of the current public sector recession is a significant rise in external investment in local government, according to KPMG, which is increasingly brokering transactions between local authorities and external investors.
As well as responding to the significant challenges directly resulting from spending cuts, the more proactive organisations in the local government sector are also exploring and finalising new and different opportunities for service development by taking advantage of the large scale investment finance available.
Iain Hasdell, Partner and UK Head of Local Government at KPMG, says: “As with all recessions, change is driving new business opportunities; in this case, a powerful trend of closer links between the two parts of our economy is emerging. New investor entrants are becoming more and more involved in the provision of front, middle and back office local government functions.
“I predict a further 15 percent growth in the value of external investments in local government, excluding routine outsourcing, in the current financial year (2011/12).
“This new investment momentum is extremely wide ranging. It is coming from a continuum that spans private equity players such as Sovereign Capital and Bowmark Capital, right through to overseas pension funds such as Ontario Teachers.”
This investment trend will trigger wider ranging change within local authorities that wish to leverage it according to Hasdell:
“As the quantum of these transactions increases, the sector stands to benefit from fresh commercial acumen and focus as investors demand to be part of the management and governance of their portofolio of local government businesses.
“This injection of both cash and skills spells good news for local government - as the client for the services involved - and for customers and citizens who should expect better performance and outcomes.”
There are, however, challenges for the sector to overcome in order to grasp the potential offered by these new sources of investment:
- Local authorities will need to become more adept at creating commercial relationships that have payment by results at their core.
- Councils tend to have general objectives regarding what they want to achieve, which need to evolve into specific businesses on which investors can focus their capital and/or expertise.
- A balance needs to be struck between the need for quick wins, necessary to achieve cost savings in the short term, and the desire for long term partnerships that have the capability of promoting economic growth by creating employment. There needs to be a genuine alignment of private and public objectives rather than policing detailed contracts.
- The public perception and political viability of divesting of services will require careful management, as will sensitive practicalities such as employee transfers and TUPE implications.
- Investors need to be convinced that public/private partnerships can work in practice and that the sector is willing to embrace change.
Hasdell concludes: “Notwithstanding the hurdles that, on the whole, have yet to be overcome, there are a range of areas where our experience indicates new private investment could be a catalyst for development. These include property and facilities management, sport and leisure, and health and social care.
“This trend is an example of the market moving in the direction the government desires. Indeed, it has the potential to signficantly help in the transformation of local government and lubricate part of the transition to the government’s new localism agenda.
“Government should consider how we can build on the existing momentum and how it might wish to implement additional fiscal incentives for this type of new investment into local government.”
For further media information please contact:
Alison Anderson, PR manager, KPMG on 0113 254 2980 or at firstname.lastname@example.org
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.