CIVIL SERVICE RELOCATION

FROM LONDON AND THE SOUTH EAST

14 September 2005

The Honourable Percy Downe
Room 620
Victoria Building
The Senate
Ottawa

Dear Senator Downe:

                         Further to your request of 26 August 2005, please find attached a paper entitled Civil Service Relocation from London and the South East .   

                        In 2004, the British government announced the relocation of approximately 20,000 civil service positions from London and the South East to the regions.  O ver a 15-year period, the move is expected to generate savings in excess of £2 billion.  While progress has been slow some 4,600 positions have already been relocated.  Unfortunately, there is very little information available on the realized savings and costs to date.  The attached paper provides an analysis of the expected benefits in the context of previous decentralization efforts.

                        Should you require further information on this or any other subject, please do not hesitate to contact the Parliamentary Information and Research Service.

Yours sincerely,

Tara Gray
Economics Division
Parliamentary Information
and Research Service

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CIVIL SERVICE RELOCATION

FROM LONDON AND THE SOUTH EAST

INTRODUCTION

                        This paper provides a discussion of the planned relocation of civil service activities from London and the South East announced in 2004.  It includes the departmental relocation plans and estimated savings and costs.  Where available, an update on the progress of the relocation is presented.  Finally, the current dispersal is analysed within the context of earlier relocations of civil service posts from London.  

BACKGROUND

   A.  The Lyons Review

                        In 2003, the British government asked Sir Michael Lyons, Director of the Institute of Local Government Studies at the University of Birmingham, to conduct an independent study into relocating a substantial number of public sector activities from London and the South East of England to other parts of the United Kingdom (UK).  The study is part of a larger, ongoing government program aimed at improving the efficiency of the public service and of public service delivery.  The larger program, including the planned relocations, is expected to produce substantial gains, the bulk of which relates to the sale of government assets. ( [1] )

                        The study conducted by Sir Michael included detailed relocation targets advanced by government departments.  In all, departments identified some 20,000 posts that could be moved out of London and the South East and a further 7,000 posts would no longer be required as a result of efficiencies following the move.  As part of the review, Sir Michael commissioned independent research into previous public and private sector relocations to assess the economic impact of further decentralization from London and the South East (refer to Analysis section below).  Property consultants were commissioned to research alternative locations outside London and the South East to guide departments in their plans.

                        The report, "W ell Placed to Deliver? Shaping the Pattern of Government Service , " was published on 15 March 2004. ( [2] )  Known as the Lyons Review, the report made ten key recommendations in addition to the departmental proposals for relocation (refer to Appendix A).  Foremost among those recommendations was a complete reshaping of the pattern of government.  The ongoing concentration of national public sector activity in and around London was seen as conflicting with long-standing government objectives, including the efficient delivery of services and improving regional economic performance.  He found that many public sector positions in London relate to the delivery of national or UK-wide functions, which in theory could be carried out just as or more effectively and efficiently somewhere else in the UK.  In this, the government was failing to take full advantage of advances in information and communications technology.

                        The report acknowledged that London, as capital, would continue to need a governmental core in support of ministers.  However, it recommended that no new government business units should be located in London and the South East without an overriding business reason to do so.  Moreover, to take advantage of cost savings, when relocating more self-contained functions (i.e., back-office work such as finance, personnel, IT, transactional services, and customer contact centres), they should be located outside major urban areas.

                        The British Government adopted all of the recommendations contained in the Lyons Review and confirmed the relocation plans in its 2004 Spending Review. ( [3] )  The following table summarizes by department the number of posts relocating from London and the South East by 2010.

Table 1 

Departmental Relocation Proposals

Source:  Office of Government Commerce.

   B.  Estimated Cost and Benefits

The Lyons Review estimated that relocating 20,000 posts could result in over £2 billion in savings over 15 years .  Financial savings would arise from three main areas:  savings in pay; lower property costs; and savings arising from efficiency improveme nts.

                        Relocation would allow departments to align remuneration with regional market conditions, resulting in considerable savings in pay.  The Lyons Review also noted the ongoing problem of recruiting and retaining staff in the public sector in London.  This problem is compounded by the high cost of housing in London and the South East, given that public sector salaries typically lag behind the private sector.  One study commissioned by the Lyons Review found that the London salary premium is 41% in the private sector compared to 26% in the public sector. ( [4] )   Thus, while London civil servants were better paid than their regional counterparts, their salaries were below equivalent positions in the private sector.

                        Office accommodation costs are also high in London as compared to other cities in the UK.  The Lyons Review cited a 2002 survey which reported that the average cost of a workstation was 65% higher in London compared to the average outside London and the South East.  An added benefit is that relocation could lead to the improved use of accommodation, resulting in greater savings.

                        The business case advanced by the Lyons Review included other, less tangible benefits to relocating departments related to efficiency improvements.  It was felt that relocation could be used by government departments as a catalyst to implement broader reforms, such as adopting new technologies and business practices.

                        The review identified significant upfront costs associated with relocation.  These include relocation packages, redundancy costs, and costs of recruiting new workers.  On the accommodation side, costs include lease exit penalties, removal costs, and fitting-out costs.

                        The table below sets out the costs and benefits under two scenarios:  a base case scenario and a more optimistic scenario.  In the latter, a centrally coordinated approach to accommodation and property issues would yield additional savings.  For example, where possible, departments would coordinate relocations with areas where there are to be workforce reductions.  (Note that Sir Michael's analysis does not include the impact of moving towards more market-sensitive local pay rates, which would likely increase savings).

Table 2 

Relocation Costs and Benefits:  Lyons Review Estimate 

 Source:  Lyons Review Annex C.

Note:  All costs and savings discounted at 3.5%.

                        According to the model used by the Lyons Review, the upfront costs of removing 20,000 posts from London and carrying out the activity elsewhere in the United Kingdom would be approximately £942 million over the seven years.  Savings generated by relocation over that period offset these costs to a significant extent and the costs are fully paid back after six years.  The permanent annual savings in the longer term would be £377 million.  Over a 15-year cumulative period, discounted net savings would be in excess of £2 billion.

   C.  Additional Considerations  

                        Sir Michael also considered the consequences of the plan on the economies of London and receiving regions.

                        The economic impact of the relocation on London and the South East was expected to be minimal, with the disadvantages outweighed by the benefits to both London and the regions.  In London, the loss of 20,000 jobs was seen as negligible set against a labour force over 3.6 million workers.  On the other hand, the benefits would include relieving congestion, and the growing pressure on labour and housing markets within the City core. 

                        Receiving towns and cities would likely experience significant benefi ts.   Based on past public and private sector relocations, it was found that relocation could help stimulate local economies and spur job creation.  These benefits would be derived from increased spending by the relocated department and its employees on goods and services, which boost demand and create jobs related to public sector activities.  Broader, less tangible benefits to these areas were also found, in terms of boosting skills and investment, and building confidence for future development and investment. ( [5] )  These benefits were contingent on aligning local pay with local market conditions, entailing an average pay reduction of 27%.  If not, it was felt that an influx of well-paid relocated public sector jobs could run the risk of crowding-out or bidding-up the cost of local j obs.

                        The review examined relocation on a personal and professional level.  Dual-income families would require special consideration.  Relocated staff could feel isolated and under-valued in comparison with those remaining in London.  On the other hand, relocated staff could benefit from an improved quality of life due to reduced commuting time and less expensive housing.  Broader benefits would include extending new job opportunities for individuals who are not able or prepared to move to London to pursue a public service career.

Sir Michael was careful to characterize the move as one of relocating activities, not people.  He addressed the problem of those workers who would not wish to move.  Where there is a relatively high staff turnover (for example, call centres), he felt that natural attrition will to a large extent take care of this problem.  For the others, he noted the importance of the early engagement of trade unions, following best practice in the design of relocation packages, pursuing a voluntary approach where possible, and reabsorbing elsewhere in the public sector staff who do not move with their relocated posts.  With these principals in mind, civil service unions have given cautious support to the program, although they remain resistant to aligning pay with local conditions.

                        Staffing in the regions was not expected to be an issue.  Many organizations' past experience was that labour markets outside London and the South East delivered a good supply of qualified staff, particularly at more junior grades.  This not only improved productivity, but improved recruitment and retention rates, delivering further savings in recruitment and training costs.  Recruiting new staff also provided the opportunity to develop a new organizational culture, for example with a better customer focus, and to introduce new working practices.

Sir Michael warned that the relocation of senior staff would represent a particular challenge.  Past experience with public sector relocations had shown that senior staff can be reluctant to move.  The perception, strong among senior civil servants, is that that career opportunities outside London are limited.  Another issue was the need for senior staff to travel back to London for meetings with stakeholders or ministers.  The cost of this both in terms of staff time and fares could be high, and there is a further human cost arising from the stress and burden of regular travel.  While the U.K. itself is not large - slightly less in area than the State of Oregon - its population density is the third highest in all of Europe.  Sixty million people live in the U.K., and of this, 84% live in England itself.  Travel distances are not great but complicated by the high population density.

Previously relocated departments failed to take advantage of technological developments in video-conferencing and Internet-based systems to reduce the need for physical meetings.  He saw greater use of communication technologies as necessary to facilitate the move.

PROGRESS

   A.  Implementation 

                        Overall responsibility for coordinating the Lyons Review implementation was given to the UK Office of Government Commerce (OGC) as part of its management of the larger government-wide efficiency program.  This responsibility includes monitoring progress by departments in meeting commitments and coordinating the separate work streams involved (e.g. the property aspects of relocation and the effective use of workspace; workforce/human resource issues; location choices and regional regeneration).  The work is carried out by a separate unit within the OGO - the Government Implementation Relocation Team.

                        Individual departments were made responsible for implementing their own commitments to relocate including the choice of location.  Departments were to be guided by their own business needs, an assessment of locations, and a draft guidance issues by the central government setting out how departments should reflect government policy in the decisions they make about new locations for their business. ( [6] )   However, departments have tended to prefer locations in which they already had a presence, as well as locations closer to London itself.

   B.  Progress to Date  

                        According to the March 2005 Budget, of the 20,000 posts to be relocated, over 4,300 posts have already been moved out of London and South East.  This includes: 

· 1,230 Ministry of Defense posts;  

· 2,300 Department of Work and Pensions posts;  

· 600 Office for National Statistics posts; and  

· 220 Revenue and Customs posts.

The 2005 Budget announced a further 3,600 post as having been identified to be relocated by March 2008.  Plans include: 

· 500 posts within the Department of Health; 

· 600 posts within the Department of Culture, Media and Sport; 

· 300 posts within the Department for Environment, Food and Rural Affairs; and 

· 450 posts within the Foreign and Commonwealth Office.

 According to some reports, resistance among some larger government departments is slowing down the process. ( [7] )

   C.  Realized Benefits 

                        As it is early in the exercise, very few departments have reported on the cost and savings generated by the relocations.  A complicating factor is that this program is part of a larger program designed to deliver savings through public sector reorganization and may not be reported separately.  Among other initiatives, the program calls for workforce reduction of some 84,000 civil service posts across all departments to be implemented by 2008 as well as a reduction of positions through greater efficiencies due to relocations.

ANALYSIS 

The current relocation is not a new government initiative.  In fact, there is a long history of relocation of government work from London and the South East, reflecting the persistent differential in operating costs between London and other parts of the UK, and the long-standing wider government aim of supporting lagging regional economies.

According to research commissioned by the Lyons Review, the first major relocation exercise was conducted in 1963.  Of some 57,000 posts identified, 22,500 were relocated between 1963 and 1972, with around 70% of these posts going to "assisted areas." ( [8] )   A further 9,490 posts were established outside London.  This resulted in the relocation of several self-contained blocks of processing, accounting, and statistical functions.  In 1973, a review identified a further 31,500 for relocation, although in the end, only 11,500 of the posts identified were moved between 1973 and 1988.  Between 1989 and 1993, a further 19,000 posts were relocated or established outside the South East. 

Given this long history, the proportion of civil servants in London and the South East has been declining for many years.  On 1 April 2004, less than 17% of UK civil servants were working in London, down from 26% in 1976.  By 2004, over 70% of the public service was located outside London and the South East, down from 60% some twenty years earlier (these figures do not include the remaining planned relocation of some 16,000 civil servants yet to take place as a result of the Lyons Review).

Chart 1 

Estimated Regional Distribution of Staff by Government Office Region,

Full-time Equivalents (1976, 1997 and 2004)

Source:  Library of Parliament.  Complied from Cabinet Office:  Civil Service Statistics 2004, 1997, 1976.

                        This overall picture masks some significant variations both by civil service level and department.  The proportion of senior civil servants based in London is much higher than for the civil service as a whole.  As of 2002 (the latest year for which detailed figures are available), nearly 75% of the senior civil service is based in London, compared to only 13% of administrative staff.  There is also significant variation by department; some departments are highly centralized while others are not.  For example, all Treasury staff are based in London as are over 75% of Cabinet Office staff, while only around 10% of Inland Revenue staff and 11% of the Work and Pensions Group are based in London. ( [9] )

                        The current relocation exercise is unlikely to change this well-established pattern.  Most of the posts earmarked for relocation by the Lyons Review were at a junior level, and tended to be support functions such as information technology or human resources; policy posts accounted for less than 3%. In this respect, the Lyons review mirrors earlier relocation exercises dating back to the 1960s.  In each move, very few senior grades were relocated; better paying managerial and policy jobs remained concentrated in the Greater South Ea st.

The Lyons Review was criticized for being too limited, representing only a small portion of the civil service still based in London.  Moreover, the Lyons Review failed to address the issue of whether senior decision-making functions should be relocated, choosing instead to maintain the status quo.  Sir Michael himself expressed disappointment that most departments had not submitted more radical plans for reorganization and relocation, and called for greater central direction in the next relocation exercise.  He saw this as a first phase of a greater decentralization eventually involving up to 60,000 public service positions. 

SUMMARY

                        There are obvious costs associated with relocation programs, among them relocation expenses, disruption, and additional communications and travel costs.  However, significant savings on accommodations and staff costs are expected.  In all, over a 15-year cumulative period, discounted net savings are expected to be in excess of £2 billion.  Moreover, additional, less quantifiable benefits are expected from:  relief on the infrastructure in London and the South East; the stimulation of local economies; broader choices for public servants; increased efficiencies; and a more settled and stable workforce.

            While it is premature to conclude if the benefits will outweigh the costs, it is already apparent that this exercise follows the pattern of earlier relocations.  Senior managers are reluctant to relocate; the better paid, senior policy and management positions will likely remain in London, while lower-paid, lower-skilled jobs such as administrative and service delivery posts are being relocated elsewhere.  Unions have again shown resistance to the move and to establishing regional pay, considered key to realizing many of the benefits of relocation.  There is also evidence that resistance among some of the larger, more centralized departments is slowing down the process.

                        In all, the 20,000 position identified for relocation represent only a small portion of the civil service that currently totals some 525,000 full-time employees across the U.K.  It also represents only a small portion of the 3.6 million people in London's labour force.  As Sir Michael inferred, there is scope for more radical reorganization and relocation.  However, stronger central direction would be needed to move beyond the relocation of back-office activities or non-strategic functions to moving policy and managerial positions.

Appendix A 

Lyons Review:  Conclusions and Recommendations

1.      Departments have identified more than 27,000 jobs that could be taken out of London and the South East, including up to 20,000 jobs for dispersal as a first tranche.  Plans for these dispersals should be taken forward urgently as part of Government's forthcoming spending review.

2.      Major dispersals are unlikely to offer a quick payback and they incur considerable costs up front.  The Government must be prepared to make the necessary investment.  Equally, there is a strong case for sharper incentives to encourage departments to seek the benefits of locations out of London and to keep their presence in the capital to a necessary minimum. 

3.      Departments should implement their relocation plans alongside efforts to align their pay with local labour market conditions.  My review has demonstrated that failure to make progress on locally flexible pay will limit the efficiency gains from dispersal, and could undermine the economic benefits for receiving locations. 

4.      Whitehall headquarters should be radically slimmed down, reflecting a clearer understanding of what is really needed in London, and of the distinction between policy and delivery. 

5.      There should be a strongly enforced presumption against London and South East locations for new government bodies and activities; for functions such as back office work and call centres which do not need to be in London; and for bodies and functions whose effectiveness or authority would stand to be enhanced by a location outside London. 

6.      Cabinet needs to give continuing political impetus to the locational agenda.  Leadership should be provided by a Cabinet Committee and, in the short term at least, a lead Minister.  These arrangements should be supported by a small, short life unit at the centre, to act as a ginger group, to monitor and report on progress with dispersals, and to ensure that best practice is disseminated and embedded. 

7.      Permanent secretaries and other public sector chiefs are responsible for managing their departments' resources, accounting to ministers and to Parliament.  Locational considerations must be an integral part of these responsibilities.  The aim should be to mainstream the locational aspect of business planning.

8.      The Government must take responsibility for the whole pattern of its locations, developing a strategic framework of guidance for departments and ensuring a mechanism for reviewing and where necessary challenging departments' locational preferences. 

9.      The Government office portfolio must be much more tightly managed.  In particular, exits from London should be coordinated to ensure overall value for money and to strengthen individual relocation business cases. 

10.    The civil service needs a more coordinated approach if it is to minimize the costs and the adverse impacts on staff associated with relocation and redundancy.

( [1] )     To 2007/2008, savings are to be realized through:  improvements in government procurement; a target reduction of 84,000 civil service posts; the relocation of 20,000 posts out of London and the South East; and £14 billion of public sector assets disposals.

( [2] )     A copy of the report is available on the HM Treasury Web Site at:

http://www.hm-treasury.gov.uk/consultations_and_legislation/lyons/consult_lyons_index.cfm#final .

( [3] )     Spending Review is a governmental process in the United Kingdom carried out by HM Treasury to set firm and fixed three-year departmental expenditure limits and, through public service agreements, define the key improvements that the public can expect from these resources.  The equivalent in Canada would be Part III of the Estimates documents (Departmental Plans and Priorities).

( [4] )     See Lyons Review Table 3.2

( [5] )     Experian Business Strategies Division.  The Impact of Relocation:  A report for the Independent Review of Public Sector Relocation , A report commissioned by Independent Review of Public Sector Relocation led by Sir Michael Lyons, January 2004.

( [6] )     A copy of the draft guidance can be found on the OGO Web site at:

http://www.odpm.gov.uk/stellent/groups/odpm_regions/documents/page/odpm_regions_033865.pdf .

( [7] )     The Relocation Consortium Press Release, 7 March 2005.

( [8] )     An assisted area is a UK region available for special government allowances to try to encourage employment in an area that has consistently high unemployment.

( [9] )     House of Commons Research Paper 01/30, Economic Indicators , April 2004.