HS2 Funds Reallocation: A Lifeline or Liability for Local Authorities?

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HS2 Old Oak Common. Site of the new station/terminus, viewed over the wall from the Grand Union canal towpath.
The site of HS2 Old Oak Common. Image credit: diamond geezer Flickr.

Dr Alice Moore, Assistant Professor in Public Management and Public Policy – School of Government

The government has reallocated £4.7 billion that it would have spent on the cancelled legs of HS2 to a Local Transport Fund. From 2025, 27 areas in the North of England and Midlands will get an allocation to spend on transport projects including improving bus services, maintaining roads, and electric vehicle charging points.

More money for local transport may sound like a great idea, but unfortunately, suddenly landing local authorities with huge amounts of money is a recipe for inefficient and short-sighted projects. Chronic underfunding means that councils don’t have the administrative capacity to manage this kind of spending effectively. They will have to resort to expensive consultants and prioritise easy wins over long-term improvements.

Councils at their limit

Local authorities are operating on a shoestring. They were some of the public organisations worst hit by austerity, losing 40% of their funding from central government from 2010 to 2020, and have limited powers to make up the difference by raising taxes. Since 2018, thirteen councils, including Birmingham, have issued a “section 114 notice” declaring that they have run out of money and one in five councils are in danger of following suit.

In principle, more money for local public services like transport is welcome. Cuts to council funding have been reflected in reductions in their transport spending and we know that well-functioning public transport systems are a major factor in economic growth.

In practice, tasking already overloaded councils with managing huge amounts of capital spending means that it’s unlikely the money will be spent as effectively as it could be. All the functions needed to deliver major transport projects, from planning, to procurement, to legal have been stripped back to their bare bones.

Restrictive spending rules

The problem gets worse when we consider that councils will be restricted in how they can spend the money. The government categorises public spending into resource spending and capital spending. Resource spending is for ongoing running costs, such as offices and staff, whereas capital spending is for one-off costs, such as resurfacing a road. The Local Transport Fund will be “predominantly capital”.

However, you need a lot of resource to spend money on capital. There are sizeable administrative costs involved in selecting and planning projects, appointing suppliers, monitoring how money is being spent, and then managing any services, like new bus routes, that are set up.

The government has promised to include a “resource element to ensure local authorities can deliver their plans” but doesn’t give any concrete numbers. Central government has consistently underestimated the resource it takes to make good capital investments, so the chances are they’ll do the same again.

Inefficient workarounds

Local authorities’ limited capacity and restrictions about how they can spend the reallocated money will likely lead to two outcomes. First, without capacity to plan, councils will have to prioritise the projects they can get off the ground easily, not the best investments.

The Local Transport Fund only includes funding up to 2032 and councils must develop delivery plans by this autumn. Getting as much as £494 million (Lancashire’s allocation) out of the door in only seven years is a tall order, so local authorities will have to hit the ground running if they want to spend all the money. This encourages councils to come up with projects that are quick to plan and complete, not necessarily those that will have the greatest impact for the area.

Second, councils are likely to use consultants to manage the spending, rather than their own employees. Consultancy fees can be paid from capital expenditure because they are limited to the duration of the project.

However, consultants are much more expensive than in-house teams and must be paid for time spent getting up to speed with the local environment. Consultants also have incentives to boost their fees with more hours and extra add-ons. In-house procurement departments operating with skeleton teams will struggle to detect and counter these tactics. As a result, it’s likely that a large proportion of the reallocated money will be wasted on inflated consultancy fees.

Sustainable funding for local government

The problems with the Local Transport Fund show why funnelling billions of pounds through cash strapped local authorities won’t work unless it is backed up by more sustainable funding. In this sense, Labour’s criticism of the plan as “back of a fag packet” has merit. Yet Labour are also planning to rely on councils to deliver many of their own plans. Local government has a major role to play in their five “missions”, especially on building, energy, and education.

Whichever party forms the next government, they need to invest in rebuilding capacity within local authorities if they want them to manage capital investments on their behalf. Otherwise, they risk throwing a lot of that money down the drain.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.

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