New report encourages cash-strapped local authorities to set up innovation funds, helping them discover new ways to provide better services at lower cost

David Cameron’s Big Society is a topical antidote to the wave of public sector spending cuts expected over the next five years. But according to research commissioned by NESTA, communities are already beginning to fill the void created by cash-strapped local authorities. Last year, Middlesbrough Council joined forces with residents in an attempt to reduce the decay of back streets and alleys, which in some areas had become magnets for fly tipping and arson. The Council identified four wards where the problem was at its must acute, rolling out a back-alley improvement project in partnership with a variety of stakeholders.

According to the Council, the project has exceeded its brief, turning poorly maintained areas into attractive public spaces. The clean-ups were coordinated by residents, giving local communities greater ownership of the problem and its solution. According to Glyn Gaskarth, policy analyst at the Local Government Information Unit (LGIU), Middlesbrough’s model is typical of the type of innovative solutions already being rolled out by cost-cutting councils around the country. “The best examples of local government innovation are typically found in small-budget, discretionary services,” he says.

All local-government activity is divided into statutory and discretionary services. Statutory activity is decided centrally and required by law, while any services a local authority wishes to provide on top must be funded from a discretionary budget. It’s no coincidence that these non-statutory services are the most likely to suffer from cuts over the next few years, says Gaskarth.

While innovations such as Middlesbrough Council’s back alley project might seem parochial, Gaskarth is convinced innovative, discretionary projects can help reduce the burden on statutory services, such as law and order. “It would be a great shame if some of these projects disappeared. Because if you run a discretionary project, an early intervention project, which stops people going into a life of crime, then you can save huge quantities of cash later on. If you just simply cancel discretionary services it can actually lead to [greater statutory] expenditure.”

Gaskarth’s LGIU report for NESTA, entitled Small is Beautiful, Innovation from the Frontline of Local Government, also highlights how community engagement can aid local small businesses. In an effort to resurrect its high streets as economic centres of activity, Rochford District Council developed an initiative called Shop at my Local, promoting localised consumer spending over spending in out-of-town shopping centres and online. The aim was to provide an incentive for residents to shop locally, through voucher schemes, and to help local businesses form buying groups.

Michael Harris, NESTA’s director of public and social innovation, believes the best ideas often come from the least expected sources. “We are interested in innovation through new sources led by new groups of people who aren’t necessarily involved in the innovation process,” he says. “We’ve been dealing over the past 20 years in a top-down model of innovation. Our interest at NESTA is in how frontline workers and users of services can be involved in generating new approaches to public service delivery: better, cheaper, but fundamentally different.”

It’s a concept rapidly growing in popularity. Last month, social enterprise The Innovation Unit published its Radical Efficiency report, which featured a range of public service innovations delivering improved outcomes for users at lower cost. Most of the 100 ideas highlighted in the report offered brand new, user-centric perspectives on existing problems—so-called design thinking for the public sector. According to the report, such innovations have “clear implications for the immediate funding crisis in public services”. The ideas, which ranged from mobile banking in Kenya to virtual crime mapping in Chicago, delivered between 20-60 per cent in savings, while also “improving the quality of services.”

According to Gaskarth, local government innovation must create a financial return in order to maximise its impact. Either a proportion of discretionary expenditure, or the entire budget, could be allocated by local authorities to create special innovation funds, he suggests. Each fund would dispense capped loans to social enterprises. For local authorities, says Gaskarth, the key is to “develop a clear set of principles under which you are going to lend that money. One is that after three years it must become an independent operation. The money should be paid back, plus interest, which would be used to augment the innovation fund.”

If the innovation is non-revenue generating, he suggests, it should be able to demonstrate savings in another area. Public sector innovation “has to be successful and achieve a return,” just like it does in the private sector, he says.

The Innovation Unit’s managing partner Matthew Horne doesn’t necessarily agree. Horne believes loan capital places undue pressure on a fund to achieve results, especially when there are other grant-making innovation funds available. “I don’t understand why you focus on loan capital as opposed to grant and equity capital,” he says.

“There’s a wealth of organisations with capital funds out there that social enterprises can go to for investment, whether it’s NESTA itself, or the Social Enterprise Investment Fund, or Futurebuilders. These guys have got years of experience running innovation funds and capital funds for projects like this. It would probably be more helpful for local authorities to help local enterprises access these external funds rather than set up their own funds.”

But “in an era of 40 per cent cuts,” says Gaskarth, “if you set up a fund that gives out a load of grants and that money is not replenished, next year what are you going to do? The idea of getting a return on the money, and thinking about how this is going to be viable when we’re not here to sign the cheques, I think is key.” At local government level, the brightest innovations will not simply be about saving money, but making it.