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Let's avoid looking round for someone to blame for the credit crunch and instead, concentrate on what we can do to help sort it out, says Jim Brooks. Chief executives attending the recent SOLACE conference were able to get some temporary relief from the horrors of the credit crunch when they got to meet other seniors facing similar problems. Suggestions for dealing with the current situation, as well as tips on organising priorities, emerged during a panel session with myself; efficiency guru, Sir Peter Gershon; SOLACE president and Worcestershire chief executive, Trish Haines; and David Clark, director general of SOLACE. Here are some suggestions: Support your local director of finance Directors of finance become vulnerable when financial institutions get into difficulty. History tells us that the descent into crisis is steep and rapid. As the situation unfolds, it is often difficult to answer what seem like simple questions, ie, Is our money safe? Will we get it all back? Why did we have so much money in that bank? As well as managing the overall finances of the organisation, finance directors also plan for the short-term cash shortages and surpluses which crop up in the normal course of events. For example, the main monthly revenue support from the Government arrives in the middle of the month, but the greatest single cost – salaries – usually goes out at the end of the month. Among the many thousands of transactions which affect the bank account every week, there are opportunities to earn valuable interest for the organisation by proactive management of cashflows. There are also ways to avoid expensive overdraft charges if the cashflows are negative. In cash terms, the timing of large sums arriving, say from the sale of assets, can have a big impact in the short term, as well as in supporting the strategic finances. In large authorities, it is not unusual for these cashflow calculations to total many hundreds of millions of pounds. At the margins, a good treasurer can make a big difference – and they do, on a regular basis. Of course, some are more prudent than others and prefer absolute certainty – with lower interest income – to any sort of risk management. Other councils will go for a higher performance, making the money work harder to protect local services. But even the most entrepreneurial approach is tempered by prudence and caution. Public service organisations are renowned for their aversion to risk. They have financial advisers and support from CIPFA, as well as internal expertise and experience. The approach to treasury management is approved by members on an annual basis, and performance is reported routinely on the stewardship of cash and investments. Finally, of course, the external auditor will have been commenting annually on performance and risk management. So the director is entitled to some support and recognition that he or she operates entirely on the approved policies and principles of the organisation, and in its best interests. The speed of the contagion affecting the world's banks has alarmed everyone. There is no absolutely safe place for daily cash dealings, and directors of finance operate within that acutely-nervous, uncertain and difficult market, where banks are scared even to lend to each other. There will be an inevitable search for the ‘culprits' to blame for the collapse of confidence in financial institutions, but for now, at least, authorities need to pull together to get through it. Take stock of the financial situation Support from the corporate management team could help the director of finance to engage in some very difficult thinking about possible scenarios going forward. The starting point is the degree to which the authority is committed to borrow this year. That calculation is predicated on many factors, many of which are uncertain and difficult to predict. For example, the capital programme may be dependent on the sale of surplus assets to help finance the costs. With land and property values falling sharply, it may be prudent to seek alternative funding streams and delay disposal. It may even be sensible to slow the programme down, and reduce future commitments, at least in the short term. PFI schemes will be harder to finalise, and the scrutiny from the Treasury is likely to be tougher. Partner funding will be less certain as other organisations review their spending plans. Planning obligations payments – Section 106 in England – will be much harder to negotiate, and builders are likely to return to the council to try and re-negotiate existing agreements. Next year's capital and revenue planning will be at a fairly advanced state, but with still much to finalise. Now is the time to have an honest and open discussion about the prospects of sustaining the outline plans as they stand. Without this discussion, the director of finance is likely to have to take the most pessimistic view, and plan for the worst. Assess the impact on local services There has already been material published about the likely impact on local services. With the crisis deepening, now is the time to look more broadly at the impact on local people, as well as on local services. Again, the corporate management team could have a key role in this. The outcome might be an early and fairly authoritative report to members in advance of budget decisions. The initial thinking has centred on housing and finance, the two economic drivers most immediately affected. As other commentators have pointed out, every local service will find unexpected impacts as well as those already planned for. Education, social services, transport, housing, health, planning and leisure will all be affected. But, some wider thinking might help the impact on families, general health and welfare, the provision of financial advice to individuals, benefits information and take-up campaigns, recruitment and retention issues, the role of the third sector, social cohesion and community safety. Study housing and regeneration schemes Few regeneration schemes these days do not have a significant housing element. Housing regeneration and town centre projects will be more difficult to get moving in the new climate of retrenchment. Developers will be much less sanguine about investing in a falling market, where land and property values are much less likely to allow a reasonably-rapid return on capital, and the capacity to securitise the investment in the secondary market. So, it will be harder to translate the vision for an area into building contracts. Even if they are already committed or progress is actually made, the marketing and sales strategy will need to be looked at. Price reductions may be inevitable. There will certainly be difficulties for individuals and companies trying to raise the capital to switch accommodation, either to move into a new house or transfer to retail and commercial property. Banks were becoming increasingly fussy about who they lent to even before the present situation. Looking ahead, this will be a major issue, even if the Government's package of support is successful. Against this backdrop, it is clear that the supply of much-needed affordable housing is unlikely to be improved for some time. Given the current situation, I can see no significant improvement in the supply of affordable housing before 2011. The supply chain of orders for building contractors will be thinning out, so there will be opportunities to get greater value from contractors as order books empty. Public service organisations need to be cautious in terms of recognising the greater likelihood of companies failing in mid-contract. But, at the same time, there is an issue about not being too quick to exploit weakness in the cashflows of suppliers and contractors. One very positive suggestion from the SOLACE conference was councils should consider guaranteeing to pay all creditor invoices within, say, seven days, to support businesses engaged with the public sector and not adding to companies' cashflow woes. Adopt the James Bond approach SOLACE has been increasingly supportive of viewing local government as a whole, and the discussion at conference was measured, thoughtful and reflective. It was welcome to see a predisposition for action, with chief executives asking what they might be able to do to promote a broader approach back in their own areas. Such an approach will need the engagement of local councillors, whose knowledge and experience is essential in difficult times. The new James Bond film, Quantum Of Solace is out next month, and it would be a lost opportunity not to spot the link to our society. As well as being the best-contrived acronym in local government, chief executives are best placed to support the director of finance and the authority as a whole through these difficult days. After all, in the City, it is always said that: ‘My word is my Bond'. Jim Brooks is executive director of Sector Treasury Services, and a former city treasurer and council chief executive

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FINANCE

The role of the chief executive during the credit crunch

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