Public Spending for Public Benefit

Every way the public sector spends money has the potential to achieve regeneration aims.

For many years, the proposed solution for regenerating urban and rural areas has been to attract more money into them, whether it is in the form of tourism, agriculture, corporate relocations, and other forms of inward investment. There is, however, a different approach that can have an even greater, more sustainable, impact: regenerating the local economy from within by taking advantage of the resources that communities already possess.

UK public sector bodies, including local authorities, hospitals and schools, can deliver both regeneration outcomes and budgetary savings targets by developing solutions to local problems that promote local economic linkages.

The Local Multiplier - Promoting Local Economic Linkages

It's not just where you spend your money that matters. It is also important where the people you give it to spend it.

The Local Multiplier 3 (LM3) tool has been developed by nef to help organisations to measure the impact they have on a local economy by tracking where the money they receive is then spent and re-spent. The purpose of tracking and measuring this spending is to identify opportunities to get more money circulating locally, which is of particular importance for areas experiencing economic disadvantage. Communities experiencing economic disadvantage can achieve more local circulation of money by strengthening linkages in their local economies.

The name 'Local Multiplier 3' indicates how the tool works. The multiplier is an economic tool, usually applied at the national or regional level, to measure how income into an area circulates, and hence multiplies, within the economy. nef has adapted the multiplier for use at the local level. The multiplier measures how money is spent and re-spent, we stop after three 'rounds' of spending rather than continue onwards. This is where the bulk of spending takes place, and it also becomes unfeasible to keep tracking beyond this point.

LM3 works like this:

  • Measure an organisation's income, which may be a combination of public and private funds (Round 1).
  • Then look at how that organisation spends its income in a defined local area (i.e. parish, ward, district, or 30 mile radius) - suppliers, staff, subcontractors, and overhead are typically the principal expenditures (Round 2).
  • Then look at how the local people and local businesses who received money from that organisation - the suppliers, staff, etc. - spend their money (Round 3).
  • Finally, run through some quick maths to arrive at the LM3, which tells you how much spending by the organisation impacts the local economy, by expressing the total local spend as a proportion of the original contract sum.

Here is an example of an LM3 analysis applied to two contracts for comparable concrete work, a sea wall constructed by the Contractor 1 and a car park constructed by Contractor 2 for Norfolk District Council. Since such work requires little specialised labour or materials, it was possible for both contractors to use local labour and supplies for the respective jobs.

LM3             Local ContractorNon-Local Contractor
Round 1£72,000 £120,000
Round 2£57,600£20,400
Round 3£24,987£6,768

The LM3 for Contractor 1 to be 2.15 (£154,587 / £72,000), while the LM3 for Contractor 2 was 1.23 (£147,168 / £120,000). This means that for every £1 spent with Contractor 1, an additional £1.15 was generated for North Norfolk, while only 23p was generated by Contractor 2. This application illustrates quite clearly that it is not the quantity of money but the 'quality' - how the money then circulates in the local economy afterwards. Even though the local authority spent nearly twice as much money on the contract to Contractor 2 (£120,000 versus £72,000 paid to Contractor 1), the spending on Contractor 1 actually generated more money for the North Norfolk economy.

LM3 has been widely used since its development in 2001 as a measure of local impact of spending. In the North East of England (PDF) 25 Local Authorities have used the approach benchmark their local spending. This approach has also been used by private sector and third sectos organisations.

Sustainable Procurement

Public sector procurement can not only create a positive multiplier effect through opening up local employment and business opportunities in the way they commission and procure goods and services. It can also be used to create positive social and environmental outcomes for the communities.

nef have developed a new Sustainable Commissioning Model which is an approach to support public sector spending to become:

  • Outcome focused, capturing the value of outcomes created by commissioned services at both the service-level and wider community-level, including economic, environmental and social outcomes (the 'triple bottom line').
  • And track the value to the service, council and wider public sector of the achievement of these outcomes.

The Sustainable Commissioning Model contains two key elements:

  1. An Outcomes Framework to ensure social, economic and environmental impacts are accounted for in the tendering process and delivery.
  2. A Valuing model (in development) which tracks social, economic and environmental outcomes and includes a financial savings component.
Together, these two components create an outcomes focused performance management approach which is embedded throughout the commissioning and procurement process through to contract management.
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