A year ago, green consultancies faced slack demand from their private sector clients, while public sector demand stayed buoyant (ENDS Consultancy Market Guide 2009, pp 4-9). Now the balance has shifted. A private sector recovery is under way, but the public sector spending squeeze is about to bite.
Brad Blundell, WSP’s managing director, sums it up: “We’re seeing an upturn in private sector client demand, but at the same time, we are mindful of the ‘cold winds’ of the UK’s public sector contraction. However, we recognise that this may be balanced by a great opportunity,” he says.
And contraction will occur alongside the delivery of the coalition government’s programme, which will itself be constrained by the straitjacket of public sector austerity.
Moreover, the spending axe will be sharper and fall earlier than envisaged. The outgoing administration planned to cut £11bn of spending by 2012/13 (ENDS Report 423, pp 6-7). Now, cuts of £83bn are pencilled in by 2014/15, with £6.2bn of savings slated for 2010/11 alone (ENDS Report 425, p 8). But with the recovery fragile, the risks of the fiscal squeeze tipping the economy into a further period of sluggish growth are real. Even the possibility of a ‘double dip’ recession has not disappeared yet.
The implications for consultancies are significant. Indeed, of the 40 environmental, carbon and sustainability consultancies responding to ENDS’ survey this summer, the state of the wider economy was the most cited constraint on their growth prospects. Almost four in five respondents noted it, while half cited the public sector spending squeeze (see figure 1).
“Public spending issues are going to affect all aspects of business and environmental consulting is no different,” says Mr Blundell. “It depends on the degree of exposure to the public sector, and whether that is central or local government.”
David Nancarrow, director at Atkins, concurs: “Clearly, there are going to be reductions in spend by central government and by the non-departmental public bodies, executive agencies and government-funded organisations such as the Homes and Communities Agency, the Environment Agency, the Carbon Trust and the Coal Authority,” he says.
“Less work will be commissioned and some programmes will be reprioritised. But I think environmental consultancy will be less hard hit than management consultancy, as the technical skills of environmental consultants are not so easily replaced.”
Nevertheless, the bearish outlook will impact environmental consultancies’ employment levels. More than one in three respondents expect to see their staff numbers remaining unchanged over the coming year, and for many, this is from a low base. Three in ten foresee single digit percentage growth at best, while 4% expect to lose staff.
Similarly, there is little hope of a rebound in average fee rates. Liquidity is still an issue for clients and it’s a problem that won’t go away soon. While the period of heavy downwards pressure on fees has passed, two in five consultancies see average fees flat-lining this year. One third foresee growth of 10% or less and one in nine expect to see more erosion.
Of all the government departments, the environment department (DEFRA) has found itself in the front line of the spending axe. Proportionately, it will be among the hardest hit. It initially faced £194m of cuts by 2012/13, including £25m from its consultancy spend. Now, DEFRA and its arms length bodies are looking at cuts of £162m in 2010/11 alone; some 5.5% of its budget. The cuts will focus on staff numbers and overheads, as well as the delivery of specific programmes.
The energy and climate department (DECC) faces cuts too. And they are steeper than first envisaged. While the outgoing administration pencilled in savings of £32m by 2012/13, DECC and its arms-length bodies are now being asked to save £85m in this year alone; some 2.5% of its planned spending. In addition to efficiency savings being sought, the axe will fall on “lower priority programmes”. Some £34m will be cut from DECC’s business support programmes, including the earlier closure of the Low Carbon Buildings Programme (ENDS Report 425, p 17).
Other government departments whose focus is at least partially environment-related also face tighter budgets. The business department (BIS) is among them. It now faces £836m of efficiency savings and cuts this year, equivalent to 3.9% of its budget.
But the cuts faced by DEFRA, DECC, BIS and others are small beer, when compared to those being asked of local government. Councils face cuts of £1.165bn to their 2010/11 budgets and there are further cuts in store.
The New Local Government Network (NLGN) – an independent think tank – cites the £1.165bn as “relatively small, compared to the tsunami of funding cuts that will hit councils over the course of this parliament.”
In its analysis, the NLGN says councils could lose as much as one third of their central government funding over the next four years, amounting to more than £12bn. The delivery of council services will inevitably be affected and environmental services such as waste collection and street cleaning will be likely candidates for savings.
And for consultancies counting government bodies and councils among their clients, the cuts’ immediacy and scale are of significance. Martin Buckland, director of sales and marketing at ADAS, acknowledged that some of its clients have been hit. “Previously, there was scope for ‘nice to do’ consultancy spend,” he says. “Now, it comes down to the ‘need to do’ issues, such as food security, climate change and sustainable resource use.”
Mr Buckland is also concerned at the risk of turmoil in client organisations hit by the cuts. “The one thing we can’t control is the impact of the cuts on the organisations themselves,” he says. “Our main concern over the next year is the risk of paralysis taking hold in public sector organisations that are in a state of flux. It brings uncertainty and that is difficult to deal with.”
In such an environment, maintaining and strengthening client relationships will be vital, for consultancies trying to steer a course through the fog. But that in itself may well open up closer and more fruitful dialogue.
Nevertheless, several areas of environmental consulting are vulnerable to the public spending squeeze, especially those least strongly aligned with the coalition government’s priorities. Contaminated land is one such area. It remains a big fee earner for many consultancies, but is also the most widely cited discipline expected to be constrained over the coming year, noted by 28% of respondents (see figure 2).
Contaminated land capital grants have been an early target for cuts. Funded by DEFRA, they enable councils to investigate and remediate land identified through Part 2A of the Environmental Protection Act 1990. But £7.5m has been cut from the initially agreed 2010/11 budget of £17.5m.
It is a big cut, but needs to be seen in context. The revised £10m budget still slightly exceeds the £9.5m spent by councils on contaminated land projects in 2009/10. And DEFRA considers it sufficient to support councils in dealing with all sites posing a major risk.
The Environment Agency has recently taken over the scheme’s management and aims to allocate funds by the end of September. And councils have been urged to bid for them. “Underspend of this grant risks sending the message that it can withstand further cuts,” said Lisa Crews, policy officer at Environmental Protection UK (EPUK).
The private sector provides the base-load demand for contaminated land consulting, but the grants underpin activity and concerns about more funding cuts have surfaced.
Steve Moreby, contaminated land officer at Gloucester City Council, explains: “I know most of the organisations that have met with DEFRA in recent months have highlighted the vital role that capital grant funding plays for local authorities,” he says. “I think we all know very little real proactive work would get done if it were no longer available.”
And further steep cuts would have wider implications. The UK’s contaminated land skills base would become eroded and consultancies’ ability to export their sector expertise would be hit, according to Russell Thomas, principal scientist with Balfour Beatty-owned consultancy Parsons Brinckerhoff: “Contaminated land risk assessment has always been technically complex and the UK is a market leader in the sector. The cut in funding will damage our capability to further develop our approach to contaminated land, people will end up being redeployed and knowledge and skills will be lost,” he says.
EPUK and the Chartered Institute for Environmental Health (CIEH) argue that further cuts would undermine the UK’s negotiating position on the Soil Framework Directive, and its ability to deliver effective action, should agreement on it be reached.
Philip Mulligan, EPUK’s outgoing chief executive said: “While we appreciate budget cuts must be made, it is essential that the upcoming spending review does not further reduce the money available to local authorities for the fulfilment of their statutory duties under the contaminated land regime.”
Graham Jukes, CIEH chief executive, concurs: “This is a very modest budget but one that yields significant benefits through pump-priming the regeneration process. It would be a great mistake to cut it too far,” he says.
Agriculture has also become a target for spending restraint. And although the coalition government professes its support for the sector, DEFRA will make cuts to several programmes this year. Savings will be sought from the Rural Development Programme for England (RDPE), including a reduction in capital payments, while the Whole Farm Approach scheme will see a scaling back of IT investment.
DEFRA’s £200m organic-environment scheme has also come under fire from the National Audit Office (NAO), which slammed it as having failed to deliver value for money. Amyas Morse, head of the NAO said he would have expected greater benefits to stem from the scheme, given the taxpayer’s funding contribution. His assessment must place significant doubt over its future funding levels, while diminished spending on agricultural programmes as a whole augurs poorly for spending on agri-environment consulting.
Of the other disciplines tipped to be most constrained over the coming year, impact assessment (EIA/SEA) and planning consulting was cited by a quarter of respondents. Conversely, it was also cited by 35% as offering good growth prospects.
The policy, permitting, compliance and government relations field was cited as an area likely to be constrained by 22% of respondents, and stakeholder relations by one in six.
But despite the spending cuts, the actions of government and regulators will continue to exert a big influence on the consultancy market. When asked to identify the three main drivers for their services, 82% of the consultancies polled by ENDS cited legislation and enforcement. Half noted government policy initiatives, 45% noted client relationship management and 42% noted development, regeneration and infrastructure (see figure 3).
As Martin Buckland says: “The government still has a programme to deliver, albeit with less money to spend.” And it is the detail that is vital. The coalition government’s programme contains several pointers as to its priorities and where it will focus less attention and funding (ENDS Report 424, p 5).
But it also states that the deficit reduction programme takes priority over all the measures detailed in it. Moreover, implementing measures with a cost to the public finances will be subject to decisions made in the forthcoming comprehensive spending review.
Yet there remains much for environmental consultancies to be positive about. “On the one hand, it’s a ‘half-empty’ picture because of the spending squeeze and cuts to consultancy budgets,” says Mr Blundell. “On the other, the glass is ‘half-full’ because of growth possibilities and policy developments. There’s as much an opportunity as a downside.”
And the shifting political environment and the rebalancing of the public and private sectors’ relative size means there is much to play for. Rolling back the state gives rise to outsourcing opportunities and the possibility of providing ‘bundled’ suites of services to government and councils, for example.
“It seems likely that more of what is currently done in the public sector will be done by the private sector a few years down the line,” says Mr Nancarrow. Indeed, one in ten consultancies cited growth in outsourcing as one of the three main drivers for their services. But they will need to be highly responsive to client needs, in order to benefit from the available opportunities.
And while the government’s ‘more from less’ approach means consultancies face a conundrum in meeting the challenge, Mr Nancarrow is optimistic that the sector is moving in the right direction. “Environmental consulting is evolving rapidly in response to societal and legislative change,” he says.
It also presents an opportunity for the most innovative, flexible and forward-thinking consultancies to shine. Some will diversify, while others will have to adapt in order to survive. It should also accelerate the pace of restructuring and consolidation in the sector, and deliver leaner, highly client-focused and flexible organisational structures.
And despite the subdued outlook for the market as a whole, there is optimism about the growth prospects in specific environmental consulting sectors, particularly those related to carbon and energy.
Indeed, when asked to nominate the ‘top three’ disciplines with growth prospects, almost half (48%) cited carbon measurement, management and reduction (see figure 4). Energy management was cited by one in three (see features, pp 11-13 and pp 13-15).
The market growth will be driven by the evolving climate change agenda, the shift to a low carbon economy and development of the associated legislative framework.
“Notwithstanding the money shortage issue, I believe the coalition government has set out a good programme for energy and environmental issues,” explained Mr Nancarrow. He cited the proposed floor price for carbon as an example. “This will help the government in convincing investors that it is serious about the low carbon economy.”
But in the face of stiff competition and pressure on fees, environmental consultancies will need to raise their game further, improve the quality of their offerings and their depth of insight, in order to secure a growing share of the carbon and energy work.
“We can’t be those with an environmental hammer for whom every problem looks like a nail,” says Mr Nancarrow. “The challenges associated with the low-carbon economy are often complex and nuanced. They need more than ‘the solution we delivered last week’.”
Power generation and transmission is a key area offering scope for environmental consultancies to flourish. The rapid development of new power generation capacity, much of it needing to be low carbon, poses a challenge that consultancies are well-placed to assist with. Growth in energy from waste, anaerobic digestion, biogas, and renewables as a whole, also offers huge scope and plays directly into the environmental consulting space.
Waste consulting should also shrug off the economic woes and public sector spending cuts. Waste management and recycling consulting was cited by more than a fifth of consultancies as set for further growth.
Andy Street, technical director at SLR Consulting, says much of the impetus will stem from the forthcoming review of English waste policy. This could see anything from recycling targets being changed to landfill bans being introduced (ENDS Report 425, pp 44-45). Scottish and Welsh councils must also adapt to challenging new waste strategies (ENDS Report 425, pp 45-46 and pp 46-47).
“Despite the spending squeeze, there is a continued legislative push to do more on waste and sustainability,” he says. “Councils will still have to deliver and there is strong pressure for ongoing investment in waste and recycling infrastructure, despite the funding squeeze.”
Many councils will be looking to lever more private sector involvement in expanding and improving their waste services. As a result, Mr Street remains bullish on public sector demand for waste consulting.
“Notwithstanding the economic weakness and budget cuts, there’s no question waste will remain a growing area, driven by the need to divert waste from landfill,” he says. “Local authorities will be scratching their heads as to how they can deliver, and they will need consultants’ help to do this. Many will be looking to invest [in consulting] to save.”
The UK’s more holistic approach to waste management and its rising focus on industrial and commercial waste offer more growth opportunities for consultancies – as does the greater appreciation of links between waste and energy policy. This is driving the rise in alternative waste technologies such as anaerobic digestion, gasification and pyrolysis. While some projects may be delayed by financing constraints, the upward trajectory of waste consulting is set to continue.
Of the other green consulting disciplines, impact assessment (EIA/SEA) and planning was cited by one in three (35%) respondents. Despite the ongoing economic weakness, consultancy work in the area is expected to stay buoyant on the back of continued infrastructure development. Work related to the Olympics, urban transport projects and the development of high-speed rail will all provide some bedrock demand. Meanwhile, changes to the planning regime will offer further consultancy opportunities in the field.
Finally, ecological and landscape management consulting, cited by 28%, is another area tipped to exhibit growth in the coming year (see pp 16-18).
A year ago, consultancies were focused on cost control, client retention and survival, and aiming to stay on a sound footing for the expected upturn. But with recovery patchy and the outlook still shaky, many of their positions have barely shifted this year.
Indeed, when asked to outline their top priorities for the coming year, almost half of respondents’ replies related to staying in business, retaining clients or maintaining current activity levels. Fewer than half spoke of growth, expansion or development, whether domestically or overseas. And the general tenor was one of cautious optimism at best.
Similarly, consultancies’ impressions of client priorities have changed little. Many note a focus on ensuring regulatory compliance, and doing it efficiently. Andy Harrop, managing director of Conestoga-Rovers & Associates, sums it up: “Our clients’ top priorities are as ever cost-effective environmental management.”
It is worth remembering that assisting clients in achieving this will always be a core focus for green consultancies. And, however hard this year may be, consultancies’ skills will remain in demand.
ENDS Green Consultancy Review 2010
A special report, sponsored by RPS(energy and environmental consultants)