Combined authorities: Financial freedoms and devolution

• Cambridgeshire and Peterborough Combined Authority*
• Greater Manchester Combined Authority*
• Liverpool City Region Combined Authority*
• North East Combined Authority
• Sheffield City Region Combined Authority*
• Tees Valley Combined Authority*
• West Midlands Combined Authority*
• West of England Combined Authority*
• West Yorkshire Combined Authority.

When looking at Table 2, it is immediately apparent that there are not currently a set of freedoms in place that would match the description in the quote provided at the start of Section 2, which is: ‘…the ability to manage a single pot of funding with maximum flexibility on a multi-year basis, without intervention from Government.’ In short, with each of the freedoms currently available, there tends to be an extent of central government control over either the raising domain or the spending domain, or both these domains.

This is typically a result of the legislation that underpins the particular freedom or the negotiation with central government. For example, a number of the available freedoms are limited by statute on the spending domain to being used to fund transport infrastructure investment. Equally, devolution deals have placed limits on both the raising and spending domains, for example by having made explicit agreements about the scale of grant funding available to CAs to spend on a specific area (eg land remediation).

In this sense, to date, it is perhaps more appropriate to consider CAs as having financial control, rather than financial freedom. In other words, they have some control over how money is raised in order to meet a certain function, or they have some control over how the money is spent, within broad functional envelopes, once it has been raised. They do not have freedom to do both of these things together. Some key examples are highlighted below.

Gain Share / Investment Fund Grant

In all mayoral CAs, apart from GMCA, Gain Share (or Investment Fund Grant) is an amount agreed between central government and the CA as part of the devolution deal. It can then be used to meet the functions of the Mayor’s office. This means that it ranks “low” on the raising domain and “moderate” on the spending domain; there is no local control over how the money is raised, but there is some local control, within broad boundaries agreed with central Government, over how the money is spent.

Road User Charging

Combined authorities (CAs) which act as the local traffic authority have the power to introduce a Road User Charging scheme. The nature of the scheme can be determined by the CA, and there are a wide range of different schemes (with different rates and overall revenues) that could be envisaged. However, the revenue can only be used to fund projects as part of the local transport plan. This means that it ranks “high” on the raising domain, but only “moderate” on the spending domain; there is local control over how the money is raised (and who from) and some local control over how the money is spent, again within broad boundaries agreed with central government.

Mayoral Precept

All mayoral CAs also have the power to raise a Mayoral Precept on Council Tax with the exception of the West of England Combined Authority. Overall, this freedom has been classified as “moderate” on both the raising and spending domains.

Spending freedom is limited by central Government to areas over which the mayor has authority. This does represent some constraint (although noting that the areas of responsibility can be viewed quite broadly).

It is important to note, however, that any limitation on the raising domain is yet to be determined, as the Secretary of State sets threshold limits for specific precepts each year and these can vary. In 2018/19 (the first year of potential Mayoral Precepts) no limits were set on Mayoral Precepts, however (as shown below) only one Mayoral Combined Authority (GMCA) elected to use their precepting powers.

It is also important to note that, while assessed as “moderate” on both domains, Mayoral Precepts could play an important role in opening up the possibility of using more financial freedoms. This is because Mayoral Precepts could provide a reliable and consistent source of revenue for mayoral CAs.

Given the relatively stable nature of the council tax base, this revenue source could also be used to open up the opportunity for borrowing. This could be particularly attractive given the relatively small number of alternative revenue streams “owned” by mayoral CAs.

Variation in freedoms

It is also apparent that CAs have not all been granted the same financial freedoms; both in terms of the fiscal instruments that they have access to; and the extent of control over spending which they have.

The most obvious distinction is between mayoral and non-mayoral CAs, where mayoral CAs have been granted wider freedoms on both the raising and spending domains. On the raising domain, examples include the Mayoral Precept, the power to borrow and (once legislation has passed) raise business rates to meet Mayoral priorities. On the spending domain, an obvious example is the Single Pot where existing streams of grant funding are combined into a single budget to provide more flexibility. The rationale here is clear; the Government has devolved policy and delivery responsibilities in a range of areas covered by the mayors and, alongside these, financial freedoms have been granted in an attempt to provide the necessary flexibility for mayors to meet their local priorities.

There are also distinctions between the mayoral CAs. In particular, GMCA already has a wider range of financial freedoms available to it than other mayoral CAs. For example, in GMCA:

• • The Mayor has taken over the responsibilities of the Fire and Rescue Services and the role of the Police and Crime Commissioner. Each of these roles/responsibilities come with the power to raise a precept that can be used to fund all or part of these responsibilities.
  • GMCA has been provided with a housing investment fund (loan from central Government to meet housing plans), which has not, as yet, been made available to other CAs.
  • A larger range of existing grants have been combined within GMCA, including through the Life Chances Fund, and it has been given more influence over health and social care spending.

Gain Share / Investment Fund Grant

There are also variations in the specification of freedoms that have been provided to all or many CAs. For example, all mayoral CAs have been provided with Gain Share/Investment Fund Grant as part of their devolution deals, however in practice, the nature of these are different across the CAs.

A key difference is the allocation between revenue and capital funding. Most mayoral CAs have grants weighted towards capital funding, with a range between 25 (revenue):75 (capital) for Liverpool City Region Combined Authority and 40 (revenue): 60 (capital) for Sheffield City Region Combined Authority. However, it is worth noting that both the original proposed North East Combined Authority Devolution Deal and the prospective deal for North of Tyne have 100 per cent revenue funding. Interviewees with higher requirements on capital spending noted that this significantly limited the effectiveness of the funding in terms of being able to meet local needs and leveraging additional finance.

As the latter sections of this report show, our interviews have revealed a number of reasons for this. A prime driver is that many CAs, and the freedoms which they can use, are still in their infancy. They have also evolved sporadically over time, through a number of different pieces of legislation and devolution deals.

In this situation, it is not surprising that some amount of time is needed to see the full impacts of the freedoms that have been granted. Over time, we would expect that more of the freedoms that are currently available will be taken up and we hope that this report provides a helpful resource as this work is taken forward.

Freedoms yet to be used

The table also highlights that, as well as the lack of use of the Mayoral Precept, a number of the other headline freedoms have not yet been used. As shown below, one of the main drivers of this is the fact that a number of these freedoms have only just been granted and it will take time for CAs to develop strategies and detailed financial (and delivery) plans for how they will be used in the future. Key examples include:

Bus franchising

Powers over bus franchising were provided in the Bus Services Act 2017. All existing Mayoral CAs have been granted automatic access to franchising powers (although the potential North of Tyne Mayoral Combined Authority will not, as transport powers are held across the North East region) and other CAs can access powers with agreement of the Secretary of State and subsequent legislation.

Whilst none of the CAs have yet to develop a bus franchising scheme, this is hardly surprising given the legislative (and contractual) requirements around consultation and the publication of an assessment of the scheme (see Box 2). However, a number of mayoral CAs have already signalled their intent to develop plans for a scheme (eg Greater Manchester Combined Authority has already commissioned an assessment for a new scheme, and Liverpool City Region and Cambridge and Peterborough Combined Authorities are both undertaking strategic reviews of local bus services, including the consideration of a franchising scheme) or have outlined details of the circumstances under which they would consider developing a scheme (eg West Midlands Combined Authority).

The potential for these schemes is significant. They could provide the opportunity to coordinate bus services across the CA, potentially providing better, more efficient, cheaper and more reliable links for people to access jobs, housing, education, healthcare and a range of social activities. They also give CAs greater financial control. This comes with risks, but also opportunities; Transport for London (TfL) receives around £1.5 billion a year in fares through their franchised bus services. Combined with fares from the tube network, this provides a significant and stable revenue stream through which TfL can use to secure borrowing and undertake strategic investment across the network.

Box 2: Assessment of bus franchising schemes

The Bus Services Act 2017 outlines that the CA seeking to introduce a bus franchising scheme must produce an assessment that:

1. describes the effects that the proposed scheme is likely to produce
2. compares making the proposed scheme to one or more other courses of action.

The assessment must also include consideration of:

• whether the proposed scheme would contribute to the implementation of the local transport plan and/or the implementation of neighbouring authorities’ local transport plans
• how the authority or authorities would make and operate the proposed scheme
• whether the authority or authorities would be able to afford to make and operate the scheme
• whether the proposed scheme would represent value for money
• the extent to which the authority or authorities are likely to be able to secure that local services are operated under local service contracts.

The assessment must then be audited by an independent person, before any decision is made. Guidance on this assessment and the auditing and consultation process has been published by the Department for Transport (see DfT, (2017), The Bus Services Act 2017 - Franchising Scheme Guidance. DfT, London.

Borrowing

The other main freedom yet to be used is the ability to borrow to fund Mayoral priorities. Again, these powers have only recently been granted and frameworks / limits agreed with HM Treasury. As such, it is unsurprising that these have not yet been extensively used. In future, this freedom would be an obvious way in which to fund long-term investments to deliver Mayoral priorities.

However, a note of caution was raised by a number of those interviewed for this project (see more detail in Section 5). This was that borrowing was only a feasible option with a steady and guaranteed revenue stream through which repayments could be financed in future. With very few current revenue streams provided to CAs, those interviewed felt that borrowing powers were, in practice, fairly constrained. Even those authorities in receipt of significant revenue-based Investment Fund Grant and/or Local Growth Funds highlighted that these were only committed in the short term,

Over the course of this project, the team undertook 15 in-depth semi-structured interviews with senior officers from combined authorities (CAs), civil servants in central government and experts in local government finance and devolution. As well as contributing to our understanding of the range of financial freedoms currently available to CAs, and how they are used, these interviews allowed us to gain insight into a range of questions. These included:

• The challenges faced by CAs in operationalising the financial  freedoms currently available to them.
• Where financial freedoms had been utilised, the lessons learned from this experience.
• Appetite for more financial freedoms.
• Areas where relatively small changes to the existing freedoms would make them easier to use or more effective.

These interviews were held confidentially, so it is not possible to fully summarise the findings of them. However, the insights gained from them have fed into the observations throughout the report and our recommendations for next steps on fiscal freedoms in Sections 5 and 6. The main themes are summarised briefly below.

Financial freedoms available are only a small step away from fiscal centralism

The majority of interviewees acknowledged that the range of fiscal freedoms available to them had increased over the last 10 years. However, it was also noted that the UK is starting from a system that is unusually fiscally centralised and that, while progress has been made, there has been only a small step towards addressing this fiscal centralism. It was also felt that the range of freedoms currently available had not met Government’s stated ambitions since 2010.

There are also important differences in the freedoms that have been given and the practicality of their use. For example, there are differences in splits of funding between capital and revenue grants, which have important implications for the extent of spending freedom for CAs. It is also clear that Greater Manchester is using its accumulated experience to make more of the freedoms available than any other CA (and has been granted a wider range of freedoms).

It can be challenging to use existing powers effectively

Whilst there are a range of freedoms available, the majority of interviewees agreed that it could be challenging to use these powers in practice. There are a number of reasons for this:

• Uncertainty of future funds: Significant challenges were faced because grants (eg Local Growth Fund, Investment Fund Grant) lack certainty into the future and the majority of CAs have limited revenue sources. This means that it is hard to make meaningful plans for the future, which is particularly challenging when considering large scale infrastructure investments. This has also reduced the viability of borrowing to invest, since CAs have a lack of clarity over their ability to service future debt repayment.
• Restrictions and monitoring are counterproductive: It was noted that a number of streams of funding (particularly grant funding) come with significant requirements over how and when the money is spent. For instance, splits between revenue and capital have been set and restrictions placed on the ability to roll over funds between years. Whilst this might make accounting sense for central government, it was argued that it led to short termism and squeezed out strategic

thinking in local government. It also made it more difficult to structure investment to meet local priorities, as central government came with a set view about how the money should be spent.

• Sometimes not fit for purpose: A related point was that the restrictions placed on the use of grants (and funds from other financial instruments) sometimes meant that, in practice, they were not too helpful. For example, restrictions on the focus of the spending (on particular types of projects or functions) could mean directing available resources towards an area that central government deemed a priority, rather than those which had been locally determined as priorities. The same is also true of distinctions between capital and revenue, which many interviewees felt was unhelpful as it put pressure to spend on short-term projects to meet pressure from central government, rather than on local priorities (which may be classed as either capital or revenue).
• It takes time: Many CAs are planning to use existing freedoms, however, either powers have only just been granted or it is too early in their life cycle to have managed to implement strategies to utilise them. Prime examples include bus franchising and borrowing for Mayoral priorities. Another clear example is Sheffield City Region Combined Authority where a Mayor has only just been elected. The experience of GMCA was also noted; their use of financial freedoms has been developed over decades of joint working and capability building. It was acknowledged that it would be likely that many new Combined Authorities would take a number of years to develop capabilities and use flexibilities in the same manner as GMCA.

Catch 22 of resourcing

Most interviewees thought that CAs had, or could find, the necessary expertise to take forward financial freedoms. However, there was a distinct challenge that it was hard to justify hiring expertise into finance teams before financial freedoms were in use. This meant that, without the upfront investment in the expertise to develop the strategy and business case, it was then challenging to make a compelling case for the use of freedoms.

A similar argument was made more generally about the size of mayoral and CA offices. In general, these are currently very small, which means that there is limited capacity to think beyond day-to-day priorities and to develop significant programmes of long-term strategic work. A comparison was made with Greater London, where the GLA has a staff of over 800, which enables them to actively engage across a wide range of policy areas. Again, it was recognised that it would take time to develop this sort of capacity and the benefits of expanding Mayoral offices would need to be  effectively communicated to ratepayers and wider stakeholders. To some extent, allocations from the Mayoral Capacity Fund could address these concerns, however, with this only lasting two years and being relatively small, there is still the question of how any expansion could be funded in the longer term. More broadly, it also needs to be considered that future recruitment will need to be considered in the context of significant other calls on talent, including from major national infrastructure development programmes and the relocation of major UK businesses, from London to other parts of the UK.

Make the most of what we have, then move on

When thinking about the future, a number of interviewees argued that before pushing for further freedoms, there would need to evidence the fact that they had “maxed out” existing freedoms and that this had led to significant benefits. Without this evidence, they acknowledged that central Government could be reticent to provide further flexibilities.

Overall it is clear that the system of government finance in the UK remains highly centralised. Reforms since 2010 have improved the range of freedoms available to local areas, including mayoral and non- mayoral CAs. However, there has been an inconsistent approach to how the freedoms have been provided in practice (for example, there are differences in requirements on capital: revenue splits of Investment Fund Grants). Combined with freedoms already available to councils, Local Enterprise Partnerships (LEPs), Police and Crime Comissioners (PCCs) and Fire and Rescue Services (to name a few), this has also left a rather complex web of fiscal freedoms available across the country.

Overall, this has meant that the ambition of these reforms has not been realised in practice. We also believe that there are significant opportunities for further fiscal devolution to CAs to be used to support central government’s policy agenda, for example in achieving ambitious house building targets.

This section outlines a range of activities that could be taken forward (or at least started) within the next 6 – 18 months to make more of existing freedoms. It also provides a set of proposals for central government for how freedoms could be improved or extended.

Extending and improving existing freedoms

During the course of this project, we have identified a range of specific areas where existing freedoms could be improved or slightly changed to ensure that they function more effectively. These include:

1. Removing restrictions on revenue/capital splits in the Investment Fund Grant.
2. Further relaxing requirements within the “Single Pot”, so that all money within it is completely flexible both over function and timing of expenditure.
3. Extending the timeframe of the Investment Fund Grant and/or Local Growth Fund allocations, for example, making the next agreements over a ten-year period (rather than five).
4. Committing to the continuation of the Mayoral Capacity Fund over the course of the next Spending Review.
5. (As above) Seeking a Presumption in Favour of CA Financial Freedoms, to ensure that all existing freedoms are opened up to all CAs and that any new freedoms are automatically granted to all CAs, unless there are specific reasons not to.

Increasing the use of existing freedoms

Use of Road User Charging and / or Workplace Parking Levy

None of the CAs are currently using Road User Charging or a Workplace Parking Levy (WPL). However, a number of areas are considering or have considered this option. For example, there have been recent discussions on the WPL at a city council level in both Manchester and Cambridge. This has particularly been considered with reference to the need for local areas to meet legal limits of local air pollution.

Within this context, the approach was rejected in Manchester. This is perhaps unsurprising given the congestion charge referendum in 2008, and strong arguments that central government should not be “passing the buck” for meeting the legal limits.

However, while not necessarily the answer to meeting legal limits of local air pollution, such schemes could be an area to explore to deliver a significant financial freedom and a source of revenue to invest in local transport plans. It is also possible that central government would be attracted to discussions on how these powers could be used; given the predicted loss of revenue from Fuel Duty and Vehicle Excise Duty in coming years, HM Treasury are keen to explore alternative forms of vehicle taxation.

There is also existing evidence that the schemes can be implemented successfully:

• As part of the research for this project, the team interviewed senior officers in Nottingham Council, who have successfully introduced such a scheme. It has raised £44 million in the first five years and is generally supported by businesses as they have seen the benefits the investment has led to. A case study is provided in box 3.
• The Dart Charge (for using the Dartford Crossing in London) is now based on the legislation underpinning Road User Charging (Transport Act 2000).

We believe that there is potential value in further work looking at the role of Road User Charging and/or a Workplace Parking Levy as a powerful financial freedom for CAs.

Box 3: Detail of the Workplace Parking Levy scheme in Nottingham

The Workplace Parking Levy (WPL) is a charge paid by employers in Nottingham who provide workplace parking spaces. A key driver of the WPL’s introduction was the economic cost of congestion in Nottingham, the large majority of which is created by car commuters at peak travel times. The main aim of the levy, therefore, is to incentivise employers to encourage their car- commuting employees to switch to alternative modes of transport.

The legislation allowing for the WPL to be introduced was passed in 2000, but it wasn’t until 2012 that the first charges were levied in Nottingham. It was the Transport Act 2000 that enabled councils outside of London to impose a charge on workplace parking. In 2007 Nottingham City Council launched a consultation on introducing its own WPL, before the Department for Transport gave Nottingham consent for the scheme in 2009.

The WPL applies to all employers in the Nottingham City Council area, although with a variety of discounts and exemptions attached to it. A workplace parking place is defined as a parking place that is occupied by a motor vehicle used by an employee, regular business visitor, pupil or student. Employers with 10 or fewer places get a 100 per cent discount, as do emergency services, NHS frontline services and places for disabled blue badge holders. There are exemptions for customer places, fleet vehicle places and loading/unloading.

When the scheme began in April 2012 the charge was set at £288 per parking place a year and has been set at £402 for 2018/19 (with annual increases dictated by rises in the Retail Prices Index). There has been 100 per cent compliance of employers since year one – with the council having a focus on compliance, rather than enforcement – and approximately £44 million of revenue generated in the scheme’s first five years. It is up to the employer whether or not to reclaim some or all of the charge from employees (the cost of 53 per cent of all liable parking spaces were passed on to employees by employers in 2016).

By law, all funds arising from the WPL are ring-fenced for investment in the objectives of Local Transport Plan. As such, the WPL has paid for extending the tram network, redeveloping Nottingham Railway Station and improving and maintaining the city’s bus service. Fundamentally, the WPL has increased Nottingham’s public transport capacity and quality.

The WPL has also driven behaviour change. Since the introduction of the scheme, the number of liable workplace parking places has fallen and the number of employers with Workplace Travel Plans has doubled. One study showed that the WPL has had a statistically significant impact on congestion, with almost a third of the users of new tram lines having formerly used cars to make their trips.

All in all, the WPL has reduced congestion, increased revenue for public transport and encouraged better car park management.

Preparing the ground for those taking on powers

Within the context of the freedoms already available, we hope that this document is helpful for officers and leaders in areas looking to become CAs or who have recently become CAs / mayoral CAs. There are also existing guides available on the LGA website and previous commissioned work that provides detail of lessons learned in other CAs.

Creating a road map for the future fiscal devolution

As well as short-term steps to improving and extending the existing range of freedoms available to combined authorities (CAs), we also believe that it is important to set out a road map for ensuring that the Government’s stated aims on devolution are met. This would ensure more autonomy for CAs to meet the needs and preferences of local residents and drive growth and improved living standards right across England.

To deliver this, we believe that central government must reinvigorate its approach to fiscal devolution and this should be driven forward by joint working between the CAs and Whitehall departments. We have outlined an approach below that could support the delivery of the short-term priorities outlined in Section 6, and develop further significant steps that can be taken towards fiscal devolution in the next two to ten years.

Joining up thinking across combined authorities

It is clear from the research undertaken in this project and a wide range of other research, studies and commissions (including the London Finance Commission, the West Midlands  Funding for Growth Review and the Independent Commission on Local Government Finance) that there could be real benefits in terms of growth, service delivery and overall living standards to further decentralisation of the UK’s system of government finance. It is also clear that there is an appetite to take this on within CAs.

Local areas have already undertaken significant research and policy development into new fiscal freedoms. For example, a large number of areas have considered options for a tourist tax/hotel levy and some form of Workplace Parking Levy. However, this research and policy development is often only carried out internally, meaning that the lessons and implications are not shared widely across the CA community.

This means both that work is repeated across different local areas and that it is difficult for CAs to come together with a consistent set of concrete proposals for realistic extensions for financial freedoms in the next two to ten years.

It would be beneficial to extend existing work to pull together a comprehensive understanding of the work that has been undertaken on future financial freedoms across CAs and wider local government. This would form an invaluable resource for developing a comprehensive, ambitious and realistic set of longer-term asks from central government. The LGA and the CA Finance Network would be well positioned to coordinate this work.

Creating a shared agenda with central government

Even with a common understanding and set of goals between CAs, the major barrier to making these ambitions a reality then remains the lack of shared vision for the future between local government and Whitehall departments including HM Treasury, HM Revenue and Customs and MHCLG.

A shared vision for future collaboration would benefit central government (who are interested in understanding the impacts of the freedoms they have given and how their impact can be increased) and CAs themselves (who can be frustrated by a perceived lack of understanding and/or interest from central government departments).

To address this, we believe that HM Treasury and MHCLG should convene a working group of senior officials from all interested parties to create a realistic roadmap for the future of fiscal devolution. This should have a number of objectives:

1) Verify and build on the work of this project and other similar projects to: 

• create a central repository of case studies of how each of the freedoms has been used in practice
• develop a shared understanding of the barriers to the use of existing freedoms
• bring together a fully comprehensive understanding of the extent to which existing freedoms could be stretched (based on existing legislation and an understanding of how central government would respond to specific options).

2) Create a timeline for rolling out existing freedoms. This should include:

• providing consistency over the range of freedoms available to CAs and how these are structured (noting that more freedoms are always likely to be given to mayoral CAs) – ie all similar CAs have the same freedoms available to them
• a Presumption in Favour of CA Financial Freedoms. This would mean that, once a new freedom/flexibility was given this should automatically be available to all CAs, unless central government makes a compelling case for why this should not happen. This would mean that all CAs are lifted to the level of freedom of the most flexible deal.

3) Create a road map for future fiscal devolution, this should focus on ensuring that CAs have access to revenue streams that they can “own” in the future. This should include:

• creating a shared understanding of areas where significant fiscal devolution could occur in future. For example, it would be helpful for HM Treasury to outline areas that are in scope and out of scope of consideration in the next two to ten years – so that a constructive conversation can be taken forward. Obviously, nothing should be taken off the table in the long term, but examples of realistic reforms that could be achieved within ten years that were raised as part of this project include, a tourist tax, hypothecation of parts of Stamp Duty Land Tax associated with additionality from local development investment and further reform of council tax/business rates
• providing clarity about the evidence that central government would need to see before bolstering freedoms and reducing requirements around spending. This is essential if future work can be taken forward effectively
• co-developing joint workstreams to take this forward. This should include representatives of each of the relevant central government departments and CAs
• reporting back on how and when a set of realistic options could be delivered over the next ten years; how this could be implemented and the work that would need to be undertaken to achieve this.