Memorandum from Dr Peter Mallaburn, Managing
Director, Policy to Practice Ltd
SUMMARY
— Central Government progress on carbon
savings is beginning to accelerate, but there is no sign that
a programme to deliver the scale of change needed is in place
especially to stimulate a material and sustained capital investment
programme across Whitehall.
— The principle reason seems to be that,
although Government faces many of the barriers faced by similar,
private sector organisations, there are some additional barriers
faced by departments, especially around organisational fragmentation
and accounting rules.
— Government, in collaboration with its
delivery bodies, has realised this and is beginning to put in
place the basis of an effective organisational change programme
through the work of the CESP.
— However, this is almost certainly not
going to be enough without the introduction of new capital and
a significant forcing function, such as budgetary top-slicing,
designed to systematically overcome these organisational barriers.
— An approach of this nature could easily
be delivered on a department by department basis but would be
most effective as a cross-Whitehall programme, with departments
bidding into a central fund. It would make sense for this fund
to be administered by Salix Finance, working closely with the
Carbon Trust.
CONTEXT
1. Central Government progress on carbon
savings is beginning to happen, but very slowly. Driven by the
SDiG agenda, and more recently by the sustainable procurement
agenda and the CESP, most departments have Carbon Trust Carbon
Management plans and, as a result, many have implemented a range
of no—and low-cost measures. But to deliver its share of
an 80% emissions reduction target, realising the "low-lying
fruit" is simply not going to be enough. All cost-effective
energy management and capital projects need to be implemented,
and this investment and effort must be sustained across the estate
over a number of capital replacement cycles.
2. This lack of progress is surprising when
set against the opportunities presented by a successful programme.
It would deliver on the Government's oft-repeated desire to show
market leadership. If the Government decides, for example, to
only procure low carbon buildings, this could cause a disproportionally
strong impact on the property sector because Government is a valued
client. Procurement leadership can also be used to drive emerging
technologies into the wider marketplace. Finally a successful
programme would also, if structured properly, allow significant
"spend-to-save" benefits using the energy savings.
3. Superficially it is easy to criticise
Government for lack of progress. But it is more important to move
beyond this to collectively understand why a group of medium-to-large
energy-using, office-based organisations, which has so much to
gain from delivering on its promises, still finds change hard
to implement. Until we know the answer to this question, persuading
the rest of the economy to follow suit will be very difficult.
BARRIERS, RISKS
AND OPPORTUNITIES
4. The classic barrier to energy efficiency
is the fact that energy costs are a small proportion of turnover
and, as a result, energy efficiency investment is marginalised.
However, the regulatory regime around climate change is now so
strong that carbon management is becoming a strategic risk for
many private sector companies, and once this happens investment
into energy efficiency project tends to flow. This is particularly
true of sectors sensitive to reputational risk, such as retail.
5. The Government faces many of the same
barriers and drivers as a similar office-based company. But when
it comes to implementation unfortunately the private sector approach
does not always work well with a department because it is not
organised or managed like a company. Public bodies have no profit
motive that can be exploited. They also have highly structured
accountability and procurement rules and a highly diverse set
of core priorities which results in a high degree of organisational
complexity.
6. This organisational and financial complexity
introduces four fundamental barriers that the private sector tends
not to face, and certainly not all at the same time:
— Lack of capital—public sector programme
and administration budgets are under severe pressure and investments
in energy efficiency are usually well down the priority list even
if they pay back quickly because they are not directly related
to the core business of the organisation.
— Accounting barriers—a number of
these operate. The simplest is that there is no "budget line"
for energy efficiency. Far more difficult is the barrier where
the public sector finds it very hard to use revenue budgets to
repay capital outlay, which is at the heart of any business case
for energy saving project. There are also perceptions that revenue
savings will need to be repaid to the Treasury.
— Organisational fragmentation, of which
there are two types:
— Operating within departments—even
with a committed department a number of operational teams must
be aligned for investment to proceed. These are typically Ministerial
and policy teams who suffer the reputational fall-out for lack
of progress, estates or facilities management teams who have to
find the time and resource to implement the investment programme
and finance, who have to pay for it.
To illustrate this point, even though Defra had a
functioning carbon management plan and strong Ministerial commitment,
Salix spent nearly two years working with officials to establish
a capital fund. The main problem was that five separate parts
of the department (climate policy, sustainable development, estates,
finance, and procurement) all had to be aligned to make the necessary
investment case and implement the programme.
— Operating between departments—organisations
of a similar type who form part of a group (eg Central Government)
often are wary of exposing their lack of progress to others. The
diversity of approaches to energy procurement can also be a problem
in terms of co-ordinating a response and producing guidance and
toolkits to help departments respond.
— Skills and resource issues—the
co-ordination and implementation of an investment programme falls
usually to the energy manager who is typically an engineer without
the right negotiation skills and degree of influence. Energy managers
who have the right skills can be tempted away from the public
sector by higher salaries in the private sector.
PROGRESS SO
FAR
7. It appears that progress is slow primarily
because the Government has underestimated the scale of resource
(human and capital) that is needed to overcome these barriers,
and particularly the organisational ones. This is true across
the public sector but it is particularly prevalent in Central
Government. However the creation of the CESP, and the recent appointment
of the new Director, seems to have triggered a refreshing change
in attitudes in OGC. It is too early to tell if this will be translated
into action.
8. The delivery bodies funded by DECC have
made a significant contribution to understanding and addressing
the problem. The Carbon Trust pioneered Central Government Carbon
Management with Defra. However, progress here has been too slow
because the Trust has had to pick departments off one by one.
However, the Trust is starting developing a pan-Government approach,
with the co-operation of OGC, which is welcome.
9. The Carbon Trust also established a capital
investment fund for the public sector in the form of Salix Finance,
which was eventually spun out as a separate company. Salix now
controls funds of around £80 million (including matched funding
from the public sector). Central Government however forms a very
small part of its client base. Also Central Government is facing
strong competition for funding from elsewhere in the public sector,
which would, unless more funding is found, leave little room for
a major Central Government programme.
WHERE DO
WE GO
FROM HERE?
10. The Government is attempting to implement
a major change management in an organisational grouping that has,
in the past 20 years, evolved as 20 or so independent
entities each with their own priorities and with increasingly
diversified energy procurement processes and differentiated cultures.
In many cases energy and facilities management services have been
outsourced, introducing an additional barrier to energy saving.
It is hardly surprising that progress has been slow.
11. If it were possible to following a typical
"change management handbook", the Government has put
in place most of the main elements of what should be a successful
change management programme:
— Political commitment through various
Ministerial announcements and publications.
— A clear delineation of the nature of
the problem through the work of the SDC.
— Strategic advice and support from the
Carbon Trust's Carbon Management programme.
— Capital support through Salix's revolving
loan programme.
— The beginnings of a pan-Government focus
on implementation through the work of the CESP.
— Senior management commitment through
the Permanent Secretarie's KPI process.
12. But the fact that these initiatives
aren't really working at scale clearly shows that something important
must be missing. What else is needed?
13. It seems to be fundamental to find some
way of addressing the organisational fragmentation problem exemplified
by Salix's experience with Defra, described above. Work with other
parts of the public sector shows that one way of dealing with
this is to force the issue using a process known as "top
slicing". A proportion of the energy budget of the department
roughly equivalent to the amount of energy that could be saved
(say 20%, or c £1million for a medium-sized department) is
withheld and only released by the centre on condition that it
is spent on energy saving technologies through a recycling fund
that is replenished using the energy savings. After the investment
is paid back, the department would be free to keep the ongoing
savings for use, if necessary, on front-line services. This is
the approach used by a number of successful Salix client organisations.
14. The distinctive feature of this approach
is that it forces the system to change so that the capital investment
is made to recover the funding, which at a stroke joins up the
finance department and estates or facilities team. Secondly, over
time, the approach introduces an incentive that in effect creates
a revenue stream which initially is used to repay the fund, but
in time can be released into the department's main budget. This
creates a momentum of its own where the energy manager is seen
to bring value in to the department and the fund continues to
grow and attract resources and attention from senior management.
15. An approach on these lines could work
for individual departments. However, the opportunity exists for
a cross-Whitehall programme, consisting of a centrally administered
fund established, into which departments could bid. Such a fund
could be funded by top slicing the Central Government energy budget,
or with new capital funding, and it would make sense for the fund
to be administered by Salix, working closely with the Carbon Trust.
If top-slicing was not used the programme would have to apply
the same degree of forcing, for example by requiring departments
to work with Salix in some meaningful way.
16. In addition to the above, there are
a number of issues that need to be considered at the same time
that have not tended to receive enough attention.
— Make a virtue out of the problem. Currently,
departments are wary of admitting that they are failing, even
to each other. Whilst understandable, this is highly counterproductive,
for two reasons. Firstly it prevents departments learning from
each other and developing common tools and approaches. Secondly,
and arguably more importantly in the long run, it is holding back
progress in understanding the nature of a problem that affects
hundreds of similar organisations in both public and private sectors.
— Share success. A culture of failure could
well develop and once it does it can be self-sustaining. Unfortunately
there are signs that this is happening; many departments are reluctant
to address accounting barriers because a fear that "the Treasury
won't allow it". In setting up its Defra fund, Salix successfully
worked through these issues with the Treasury. This is not of
course to say that all barriers have been removed, but it is clear
that the Treasury is keen to work with departments and not against
them.
— Address the skills issue. Energy managers
are absolutely central to this. But they are often under resourced
and untrained to handle the complex inter-directorate negotiations
that are needed to implement change and influence senior management
and the Board. Those that do have the skills are often poached
for significantly higher salaries by the private sector.
— Provide more capital. This sounds like
a no-brainer, but it easy to overlook the fact that energy efficiency
investments are usually more expensive up front. However it is
possible to make a strong case that additional capital funding
will pay back in time as a "spend-to-save" programme
as long as it is delivered through a revolving, recycling fund
on the Salix model, and implemented using a top slicing approach
or something with a similar organisational effect.
May 2009
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