4.42 To some extent, more constrained capital and revenue settlements than in the past may provide additional incentives for property sales. But to deliver efficiencies in the medium term, departments have to make up-front investments that allow them to build and move to more efficient estates. They need to be strongly encouraged to make these investment choices.
4.43 HM Treasury teams routinely scrutinise and challenge departments' performance and future plans as part of a continual drive to improve value for money. These discussions are most intense during the negotiation of departmental spending allocations. This process needs to be extended, and supported, so that it takes into account departments' previous performance on property, and sets the capital spending allocation so that it drives greater efficiency.
4.43 HM Treasury teams routinely scrutinise and challenge departments' performance and future plans as part of a continual drive to improve value for money. These discussions are most intense during the negotiation of departmental spending allocations. This process needs to be extended, and supported, so that it takes into account departments' previous performance on property, and sets the capital spending allocation so that it drives greater efficiency.
4.44 HM Treasury teams will need better data on departments' property performance, enabling them to provide a powerful challenge to departments. This was recognised by Sir Michael Lyons in his review of public sector assets.29 The new central property function would coordinate the data required by HM Treasury.
4.45 The central property function (see paragraph 4.33) would also challenge departments in identifying underutilised and surplus assets, and would oversee the implementation of asset disposals across government. It would also provide assistance with complex and major property transactions (including projects where different public sector bodies cooperate).
| Recommendation 4.2: In producing new departmental spending plans, HM Treasury should take steps to ensure that departments make choices in their capital investment plans which deliver a rationalised and more efficient estate. The new central property function would assist HM Treasury teams in this process. |
4.46 The workstrand recognises that the current depreciation and cost of capital mechanisms are ineffective and agrees with the recommendations of HM Treasury's Clear Line of Sight project.30 These include:
• HM Treasury working with the Office for National Statistics to remove the need for the current ring-fence around depreciation in departmental budgets.31This will provide a greater incentive on departments to reduce depreciation costs through better property management as any savings could be redeployed to fund other priorities;
• the removal of the existing non-cash cost of capital charge from departments' budgets;32 and
• allowing cost of capital charging to be retained within departmental families (the organisations that central departments sponsor). Evidence from the Clear Line of Sight project has shown that cost of capital charging may have an incentive effect within departmental families as those organisations have the freedom to reallocate savings from a reduction in such charges into other parts of their budget.
4.47 Similar action should be taken to ensure that the financial frameworks within the wider public sector also create incentives on organisations to make efficient use of the property they hold. Local government has already taken steps towards depreciation charges for new assets funded by prudential borrowing. Consideration should be given to extending the impact of depreciation charges for local authorities and other relevant local delivery bodies to incentivize them to focus on the efficient management of their existing asset bases.
| Recommendation 4.3: HM Treasury and Communities and Local Government should together investigate whether a depreciation mechanism for local authorities and other local delivery bodies would be workable, considering in particular the advantages and disadvantages of a depreciation charge and any potential impact on the public finances. |
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29 Towards better management of public sector assets, Sir Michael Lyons, 2004.
30 For further details of the proposals for change, see Alignment (Clear Line of Sight) Project (Cm 7567), HM Treasury, March 2009.
31 This reflects the fact that the Office for National Statistics currently uses its own model to determine economy-wide, and public sector, depreciation data, rather than using the data collected by HM Treasury and departments in accordance with GAAP (Generally Accepted Accounting Principles). This means that, in National Accounts, GAAP depreciation is subtracted from public spending totals and the ONS depreciation measure is added in.
32 If the current cost of capital charge were made a near-cash cost at a departmental level it would create a fiscal risk by allowing departments to increase real spending by more than expected and by creating a significant new misalignment between the accounts, estimates and budgetary frameworks.