Finance and Performance Committee – August 2015. Efficiency Savings. #AKLPols

The name of the game is Efficiency Savings.

Making our Council operate as efficient as possible for best dollar value possible or in short best bang for buck is often a big catch cry of Ratepayers.

Tomorrow the Finance and Performance Committee will meet (and will be Live Streamed) and one of the big items will be those “Efficiency Savings.” That is how hard and efficient is our Council working for us given the recent furore over the Long Term Plan that went live in July.

The entire Agenda can be read HERE.

Those Efficiency Savings

Finance and Performance Committee – 20 August 2015

Efficiency Savings Update

File No.: CP2015/15983

Purpose

  1. To provide an update on efficiency savings achieved to date and future projections built into the Long-term Plan. The previous update on efficiency savings was in April 2014.

Executive Summary

  1. Efficiency means doing the same or more for less. Since merging eight councils into one, we have delivered more new assets and services than ever before while spending less money than anticipated by the legacy councils.
  2. We do this knowing that the better and smarter we work, the less need we will have for difficult trade-off discussions with our community.
  3. Some of the ways in which we have done this include:
    1. improved use of enhanced information technology
    2. better procurement and tendering processes
    3. bringing more work in-house to reduce our reliance on external providers
    4. reducing the number of office buildings we occupy
    5. enhanced commercial management
  1. Future targets for efficiency savings have recently been reviewed as part of the adoption of the Long-term Plan 2015-2025 as shown in the following table:
Financial year ending 30 June

($ million)

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

 

Savings from prior year 183 224 243 260 267 274 281 288 295 302
Increase 41 19 17 7 7 7 7 7 7 7
Annual efficiency savings 224 243 260 267 274 281 288 295 302 309
  1. Staying on track to deliver the efficiency savings included in the Long-term Plan 2015-2025 remains a challenge.  There are also a range of longer-term cost pressures that may need to be addressed.  Strong leadership and concerted management effort will be required to deliver the increasing savings each year.
  2. The efficiency savings delivered to date are at the upper end of the expectations set during the early discussion on the benefits of regional amalgamation for Auckland.  Without these savings, either:
  3. general rates and/or user charges would need to be significantly higher, or
  4. significant cuts would be required to both the capital programme and service levels.
Recommendation/s

That the Finance and Performance Committee:

a)      receive the Efficiency Savings Update report.

Comments

Scope / Definition

  1. For the purpose of this report, “efficiency” refers to delivering the same level of service for a lower cost than budgeted. Therefore the efficiency savings discussed in this report exclude:
  • cost savings associated with reduced service levels;
  • increases in user charges, the introduction of new revenue sources and/or benefits from PPP structures;
  • operational cost savings resulting from the disposals of surplus assets.

Background

Amalgamation expectations

  1. Amalgamation of the eight former councils into the new Auckland Council established an expectation of significant efficiency gains from centralising procurement, consolidating IT systems and streamlining both internal and external facing business processes. A report produced for the Royal Commission on Auckland Governance by independent consultants in 2009 addressed the level of efficiency benefits that could be expected through amalgamation[6].
  2. Based on financial information applicable to the eight individual former councils in 2008/2009, the report concluded that operating expenditure efficiency gains were estimated to lie in the range $67 million to $96 million per annum representing some 5-7 per cent of the costs amenable to efficiencies and 3.5-5 per cent of the total annual operating expenditure undertaken by the Auckland councils. The same report also concluded that capital expenditure efficiency gains range from $28 million to $46 million per annum representing 2-4 per cent of the total annual capital expenditure programmes of the Auckland councils at the time.
  3. Financial analysis in that report concluded that the financial savings from amalgamation were expected to significantly outweigh the financial costs of amalgamation, even under the most pessimistic of scenarios.  In preparing their financial analysis, the authors assumed that 80% of the potential savings would be realised.

Long-term Plan efficiency savings

  1. Building on $81 million of cost savings achieved for the new council’s first full year of operation, the Long-term Plan 2012-2022 (LTP) included $50 million of additional savings for 2012/2013 taking total savings for that year to $131 million.  These savings were budgeted to increase to $188 million by 2017/2018.
  2. Detailed annual budget reviews undertaken for each of the first three financial years of the LTP have confirmed the achievement of these efficiency savings, despite the need to accommodate additional cost pressures.
  3. Future targets for efficiency savings have recently been reviewed as part of the adoption of the Long-term Plan 2015-2025 as shown in the following table:
Financial year ending 30 June

($ million)

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

 

Savings from prior year 183 224 243 260 267 274 281 288 295 302
Increase 41 19 17 7 7 7 7 7 7 7
Annual efficiency savings 224 243 260 267 274 281 288 295 302 309

Financial strategy

  1. Along with maximizing returns on investment, selling non-strategic surplus assets, maintaining prudential treasury ratios and moving to fully fund depreciation by 2025, ensuring that all spending is as efficient as possible is a core component of the council’s financial management strategy.
  2. Without efficiency savings, either:
  3. general rates and/or user charges would need to be significantly higher, or
  4. significant cuts would be required to both the capital programme and service levels.

Source of savings achieved to date

  1. A range of initiatives have contributed to achieving the LTP efficiency savings. Over the last few years these initiatives have focused on:
    1. improved use of information technology
    2. better procurement and tendering processes
    3. bringing more work in-house to reduce our reliance on expensive outsiders
    4. reducing the number of office buildings we occupy
    5. enhancing commercial management
  1. Technology changes have allowed us to improve and streamline some of our back office processing areas. This includes the use of scanning technology to improve invoice processing and GPS tracking of fleet vehicles to enable more efficient use of council vehicles.
  2. While simpler and better technology has delivered significant savings to date, the full implementation and delivery of benefits associated with consolidating IT platforms and applications has yet to be achieved. That consolidation, with the most significant element to be delivered through the New Core project, will enable the radical transformation of key customer-facing services while reducing the cost to serve each customer.
  3. Significant procurement savings have been achieved through commercial negotiations and the consolidation of suppliers and contracts in some high value/opportunity categories including property maintenance, parks maintenance and office consumables.
  4. More generally management have also applied widespread targeting of savings in combined staff and consultancy budgets to encourage departments and CCOs to identify more streamlined solutions, primarily for back office support functions.
  5. Cost savings have also been achieved in relation to corporate accommodation as we move from seven buildings to three in the CBD.
  6. Some initiatives have delivered savings that mitigate inherited and new cost pressures, rather than achieving savings relative to budget. For example, the project to consolidate the council’s data centres and move data storage to “the cloud” was estimated to be $5.4 million per annum cheaper than next best option for meeting the council’s data storage needs.  However, because the baseline budget had not adequately provided for these storage needs, the $5.4 million benefit from this project and related initiatives was required to just achieve the existing budget and therefore not available to contribute to delivering the LTP efficiency savings.  This project will also provide other benefits in terms of business continuity, lower operational risk and a stronger platform for future technology enhancement projects.
  7. Achieving efficiency gains within council’s capital expenditure budgets has tended to focus on maximising value for money on individual projects and programmes, rather than across the board efficiency initiatives. Work is progressing to improve the visibility and consistency of capital expenditure efficiencies. Focus has also been applied to efficient management of interest expenditure through executing step change procurement initiatives such as establishing the Local Government Funding Agency and accessing offshore funding.
  8. A detailed schedule of the efficiency savings initiatives we have pursued to date is included as Attachment A.

Planned future savings

  1. Staying on track to deliver the LTP efficiency savings remains a constant challenge.  Strong leadership and concerted management effort will be required to deliver the incremental savings each year growing to $309 million in 2025, being accumulated savings of $2.74 billion over the ten years of the Long Term Plan 2015 – 2025.
  2. In time, changes to the organisation’s culture through “The Way We Work” will foster an environment of continuous improvement that will see staff at all levels of the organisation actively engaged in delivering greater value for money on a day-to-day basis.
  3. In the meantime, a range of specific initiatives are in place to enable us to meet the immediate financial challenge. Key initiatives include:
    1. continued enhancement and streamlining of our back office processing areas as part of the making size work strategy;
    2. delivery of key technology projects including New Core and the digital rollout to transform our key customer-facing services and reduce cost to serve;
    3. continuing to bring more work in-house, such as the continued development of an in-house design studio as part of the Communications and Engagement Review, Legal Services, etc;
    4. strategic procurement to move from opportunistic and tactical procurement to systematically enhancing the end to end procurement process including taking an enterprise approach to planning and identifying opportunities, strategic sourcing and supplier relationship management;
    5. continued consolidation of corporate office accommodation and fleet;
    6. shared service opportunities including those with the CCO’s.
  1. A detailed schedule of planned future efficiency savings initiatives is included as Attachment B.

Consideration

Local Board views and implications

  1. Efficiency savings budgets apply to both local and regional budgets. As efficiency savings are identified at a detailed level, local board budgets may reduce.  However, by definition, efficiency savings will not affect local service levels.

Māori impact statement

  1. The achievement of efficiency savings may reduce some budgets relating to Māori outcomes, but will not impact the associated service levels or actual outcomes.

General

  1. Budget changes related to efficiency savings could be significant under the council’s significance policy, although this is unlikely given that service levels are not impacted.
  2. There are no implementation issues as this report is for information only.

Attachments

No. Title Page
AView Efficiency savings initiatives pursued to date 107
BView Future efficiency savings initiatives 109

Signatories

………………

The live stream can be viewed here: http://councillive.aucklandcouncil.govt.nz/

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