LOCAL AUTHORITIES COULD INCREASE THE AMOUNT OF MONEY CIRCULATING IN THEIR AREA BY 400% BY EXAMINING HOW THEY SPEND THEIR MONEY, AND FOSTERING LINKS WITH LOCAL SUPPLIERS.

These are the results of a year-long collaboration between nef (the new economics foundation) and Northumberland County Council, released by nef on Monday, 7 March 2005.

Northumberland used nef's Local Multiplier 3 (LM3) methodology to track the value of its local spending, to measure its impact - and how that impact could be increased.

Northumberland's research found that:

• In addition to the initial contracts, local suppliers in Northumberland re-spent on average 76% of their income from contracts with local people and businesses, while suppliers from outside Northumberland spent only 36% in the area.
• This means that every £1 spent with a local supplier is worth £1.76 to the local economy, and only 36 pence if it is spent out of the area. That makes £1 spent locally worth almost 400% more.
• A ten per cent increase in the proportion of the council's annual procurement spent locally would mean £34 million extra circulating in the local economy each year.
• If councils across the UK made a ten per cent increase, it could mean an additional £5.6 billion re-circulating in local economies across the UK.

This is a powerful and vital tool for Local Authorities who need to target the benefits of spending on disadvantaged areas.

Stewart Wallis, nef's Director, said: "In areas where funding is an acknowledged issue, such as school meals for instance, the implications for local government of Northumberland County Council's work are huge. By focusing on the impact of their procurement spending, Northumberland have shown not only the true potential of local sourcing, but also how to do it."

Based on the results of their analysis, Northumberland used the renewal of the council's food supply contracts to increase their local impact. Food procurement has been the subject of much national debate recently, for example on the question of how little extra would be needed to substantially improve the nutritional standards of school meals. To improve local impact, Northumberland:

• organised seminars communicating contract needs to small and local suppliers, as well as those already supplying the council.
• linked local businesses with local business support services and altered the specifications for the tender to level the playing field, allowing local businesses to compete more easily.

"This is the most robust large-scale test of LM3 so far. We surveyed nearly 400 local council contractors representing 70% of the total council spend to reveal how much of the county's money gets re-spent locally, where money leaks out of the county and assess the value of every pound spent. The results, which measured the common economic benefits a contractor brings to the county, make it clear that local companies keep the money local for longer. Our LM3 study has led to us undertaking a fresh dialogue with local contractors about how we can improve access to public contracts," said Barry Mitchell, who led the project at Northumberland County Council.

The result of the food contract tendering process was a fivefold increase in local suppliers expressions of interest, which resulted in four of seven product categories (meat, milk, bread, fruit and vegetables) being awarded to local suppliers - almost half the value of the county's £3 million food procurement budget.

Breaking a contract into lots, as Northumberland did, allows local suppliers to enter the tendering process, and gives the contracting organisation a more customer focused and competitive service overall. Northumberland found that developing stronger links with local suppliers also strengthened community spirit - the 'social glue' that holds communities together and plays an essential role in regeneration. There is more administrative work involved, but council officers found that this was repaid by the quantity and quality of the tenders received, and the community links developed.

Notes:

1. LM3 (the Local Multiplier 3) is a methodology that can be used by community organisations, business leaders, or government officials - to measure how much organisation, initiatives or spending impacts on the local economy. More importantly, LM3 enables people to identify where changes need to be made to improve that impact. LM3 takes its name from the Keynesian multiplier, which has been used since the early 20th century to measure how income entering an economy then circulates within it. The theory is that a change in income has a multiplied impact on that economy. nef has adapted it for use at the local level, and measures only three 'rounds' of spending: hence Local Multiplier 3.

2. Northumberland County Council Regeneration Division took the pioneering step of employing a full time staff member, to apply LM3 to the council's procurement spend, analyse its local economic impact, and work to improve that impact.

NEF Publication: The Money Trail

NB. Presumably there would be a more diffuse local bonus in urban conurbations and metropolitan areas like Hackney. The methodology seems sound though and even a 100% increase in the amount of money circulating within the local economy would be a big step in the right direction.