Greening Government - Environmental Audit Committee Contents


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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