Can the public sector survive the pandemic?

When Croy­don Coun­cil declared in late August it feared immi­nent bank­rupt­cy, the intense finan­cial pres­sure fac­ing local author­i­ties in the pan­dem­ic were plain to see.

The coun­cil, which had to ramp up spend­ing on every­thing from per­son­al pro­tec­tive equip­ment to care ser­vices, faced a £65.4‑million over­spend in the 2020–21 finan­cial year, but only had £10 mil­lion of reserve funds.

Coun­cils don’t go bust like pri­vate sec­tor busi­ness­es do; they issue what is known as a Sec­tion 114 notice where all but essen­tial spend­ing is banned by White­hall.

But that in itself can be huge­ly dam­ag­ing, says Den­nis Vergne, who runs the pub­lic sec­tor trans­for­ma­tion con­sul­tan­cy Basis. “It means you can’t make spend­ing deci­sions and have to cut back non-statu­to­ry, pre­ven­ta­tive ser­vices.

“It also cre­ates uncer­tain­ty for sup­pli­ers, many of whom are relied upon to deliv­er crit­i­cal ser­vices rang­ing from sup­port­ing the council’s IT infra­struc­ture to pro­vid­ing home care to vul­ner­a­ble res­i­dents.”

Not all organisations get the same support

Pub­lic sec­tor organ­i­sa­tions of all kinds have faced chal­lenges since the UK went into lock­down in March, but some have fared bet­ter than oth­ers. On the front­line of fight­ing the virus, the NHS has been promised many bil­lions in extra fund­ing, with chan­cel­lor Rishi Sunak say­ing it will get what­ev­er it needs to pro­tect the coun­try. 

Uni­ver­si­ties, hit by a sud­den drop in lucra­tive over­seas stu­dent recruit­ment rev­enue, can cov­er some of their loss­es with emer­gency gov­ern­ment grants and loans, but some warn of bank­rupt­cies with­out a big­ger bailout.

It’s also been hard for coun­cils that have a pub­lic duty to sup­port their com­mu­ni­ties and have found them­selves inun­dat­ed with requests for help from peo­ple and busi­ness­es.  

This has ampli­fied finan­cial pres­sures that already exist­ed, says the Local Gov­ern­ment Asso­ci­a­tion (LGA), and comes along­side a reduc­tion in income from things like busi­ness rates and com­mer­cial income.

Despite being giv­en £3.7 bil­lion in new fund­ing by cen­tral gov­ern­ment to cope, the LGA says Eng­lish coun­cils face an £11-bil­lion bud­get short­fall. At least five may have to issue a Sec­tion 114 notice with­out extra gov­ern­ment sup­port, a BBC inves­ti­ga­tion found in July, includ­ing some of the UK’s largest uni­tary author­i­ties: Leeds, Wilt­shire, Traf­ford, Tame­side and Bar­net.

What can public sector organisations do?

Some lazi­ly assume pub­lic sec­tor organ­i­sa­tions are not agile enough to adapt in a cri­sis, but Basis, which works with around 25 UK coun­cils, says the oppo­site is true. Vergne, who used to work for large con­sul­tan­cies includ­ing Accen­ture, says coun­cils usu­al­ly lead the way when it comes to deploy­ing new IT sys­tems and ser­vices, and have years of expe­ri­ence in mobil­is­ing emer­gency com­mu­ni­ty ser­vices.

One exam­ple is London’s Newham Coun­cil which, ear­ly on in the pan­dem­ic, launched a ser­vice to help strug­gling small busi­ness­es that match-made them with local vol­un­teers. It has helped small­er enter­pris­es get free advice on things like finan­cial plan­ning and IT with­out incur­ring extra costs for the coun­cil. “It was up and run­ning with­in two weeks; that’s not the sort of timescale you’d see in the pri­vate sec­tor,” says Vergne.

How­ev­er, pub­lic sec­tor organ­i­sa­tions undoubt­ed­ly have few­er options when it comes to man­ag­ing their own finances. Uni­ver­si­ties and coun­cils can bor­row from the mar­kets by issu­ing bonds, but can­not tap investors for cap­i­tal in the way strug­gling pri­vate sec­tor firms can. That leaves most reliant on gov­ern­ment sup­port.

How­ev­er, pub­lic sec­tor organ­i­sa­tions undoubt­ed­ly have few­er options when it comes to man­ag­ing their own finances. Uni­ver­si­ties and coun­cils can bor­row from the mar­kets by issu­ing bonds, but can­not tap investors for cap­i­tal in the way strug­gling pri­vate sec­tor firms can. That leaves most reliant on gov­ern­ment sup­port.

Knock-on impact for related businesses

The pres­sure is not just felt by pub­lic sec­tor organ­i­sa­tions, but also by those serv­ing them. Take GLL, the biggest oper­a­tor of pub­lic leisure cen­tres in the UK, which was formed by Green­wich Coun­cil in the 1990s and now oper­ates as a social enter­prise.

It runs 230 cen­tres on behalf of UK local author­i­ties, but had to shut all of them for six months dur­ing lock­down, and around 40 are still closed. “Last year our turnover was over £300 mil­lion, but we’re not for prof­it so we trade at a tight mar­gin,” says GLL man­ag­ing direc­tor Mark Ses­nan.

“We had £20 mil­lion in free reserves and we burnt it all in six months of clo­sure, despite sup­port from fur­lough schemes and pub­lic bod­ies.”

Like the coun­cils it serves, GLL can’t ask investors for cash and has large­ly relied on loans and grants from its part­ners, as well as a small amount of “gap fund­ing” from a bond place­ment.

Ses­nan says the chain is unlike­ly to go bust, but has had to reshape its busi­ness, based on esti­mates that demand will only recov­er to 75 to 80 per cent of income post-COVID. He expects he will have to cut jobs when the fur­lough scheme ends on Octo­ber 31 and says the future of some leisure cen­tres is in doubt.

A GLL cen­tre in Pre­ston ear­marked for clo­sure serves around 500,000 peo­ple a year, rang­ing from chil­dren to the elder­ly. “One of the things we need to do as a char­i­ty is pri­ori­tise the health of the nation, but when cen­tres close com­mu­ni­ties suf­fer,” says Ses­nan.

How organisations are innovating to adapt

For now, pub­lic sec­tor organ­i­sa­tions will have to work with­in the con­straints imposed on them, but some are find­ing workarounds. Vergne at con­sul­tan­cy Basis high­lights one coun­cil that was about to move into tem­po­rary offices when the pan­dem­ic hit, as it had been rebuild­ing its town hall. It has since ditched the move and told staff they will be work­ing from home for a longer peri­od, sav­ing a large amount of mon­ey in the process.

Cash-strapped coun­cils are also group­ing togeth­er for the first time to raise hun­dreds of mil­lions of pounds via the bond mar­ket to shore up their finances. A group of up to 30, includ­ing West­min­ster City in Lon­don and Barns­ley in York­shire, will issue three bonds this year through the UK Munic­i­pal Bonds Agency, an enti­ty set up five years ago to help local author­i­ties access cheap­er debt, but which until 2020 had nev­er made a place­ment.

Experts believe UK uni­ver­si­ties may also issue bonds to help them get through the cri­sis, as peers in the Unit­ed States and Aus­tralia have already done. UK high­er edu­ca­tion providers have been allowed to access the government’s busi­ness and job sup­port schemes, while £2.6 bil­lion in tuition fee pay­ments is being pulled for­ward to ease cash-flow prob­lems.

Still, there are fears some pub­lic bod­ies will end up on their knees if the gov­ern­ment doesn’t offer more. “Much like the NHS, coun­cils have had to increase their spend­ing to meet the ris­ing needs of their ser­vice users dur­ing the pan­dem­ic,” says Vergne. “How­ev­er, unlike the NHS, where many deficits have been writ­ten off by the gov­ern­ment, local author­i­ties are get­ting only par­tial com­pen­sa­tion and are pushed fur­ther into the red.”

It fol­lows years of aus­ter­i­ty that had already stretched coun­cil bud­gets to break­ing point. “Some are fac­ing sec­ond lock­downs and ask­ing, ‘How do we do this? We need emer­gency mon­ey’,” Vergne con­cludes.