The big squeeze

As public sector spending is being slashed across Europe, Bob Papworth considers the implications for corporate travel.

SHOULD YOUR TRAVELLERS, or your clients' travellers, have been awaiting the 2013 advent of a high-speed rail link from Portugal's second city Oporto to the shoppers' paradise of Vigo, across the border in Spanish Galicia, you can tell them to calm down - it ain't going to happen any time soon.

Equally, the planned high-speed Lisbon-Oporto link, due to come into being in 2015, has been shunted into the metaphorical sidings, even though the new fast-track services - along with Lisbon-Madrid - were deemed only three years ago to be priority routes for development funds.

The problem is that the body doing both the 'deeming' and the 'funding' just happened to be the Portuguese government, and Portugal turns out to be a little short of cash right now.

Vigo-bound shoppers aren't the only ones to suffer as the Lisbon government snaps shut the public purse. Portugal's military spending is to be cut by 40 per cent by 2013, income tax and value-added tax are being ramped up, and public sector pay-packets - including those of politicians - are to become 5 per cent lighter.

Having seen both Greece and Ireland compelled to take their begging bowls to the European Union (EU) and the International Monetary Fund (IMF), Portugal is anxious not to assume the mendicant mantle. So far, its austerity measures seem to be working, which is more than can be said for the Oporto-Vigo tracklayers.

And, of course, it is not alone in stamping on its public sector spending brakes - spending more than you receive in tax revenue seems to be somewhat de rigueur throughout the EU at the moment .

As budget deficits grow, so does the size of the interest payments and, with costs rising and Europe's population ageing, there is a clear need for rather less prodigality - governments across the continent are looking to spend less, and to spend better.

Inevitably, that has huge implications for the travel management and supply sectors. However, it remains unclear whether the impact will be negative, in that travel volumes and spending will be slashed, or positive, with government departments outsourcing travel management and consolidating travel requirements to mainstream suppliers.

The economy drives also have implications for the wider business community, which will have an indirect impact on corporate travel. If government departments decide to buy all their IT kit, or stationery, or loo rolls, from a single supplier instead of half-a-dozen, the travel requirement - on both the supply and demand sides - is drastically reduced.

Obviously, the greater the public spending cuts, the greater the potential impact on public sector travel. And although Greece and Ireland have attracted all the negative headlines, their spending cuts - cushioned, admittedly, by massive IMF loans - are relatively modest.

Greece's government, which negotiated a €110 billion (£93bn) bailout, is looking to cut spending by €30bn (£25bn) over three years; the Irish government, which agreed a rescue package of around €85bn (£72bn), is cutting spending by €6bn (£5bn) this year and by €15bn (£12.5bn) by 2014.

The UK government, to put this into context, is looking to make savings of €95bn (£81bn) over four years; the Germans want to slash their budget deficit by €11bn (£9bn) this year and by €80bn (£68bn) by 2014; and the French are cutting spending by €45bn (£38bn) over the same time-frame.

Not all of the 'savings' come from spending cuts. Income and value-added taxes are going up across Europe; higher retirement ages mean greater tax revenues as well as reduced state pension pay-outs; and, most particularly in Greece, authorities are cracking down on tax dodging and corruption within the tax services.

Slashing public sector jobs is a more complex balancing act. Many governments, somewhat optimistically, have suggested that the private sector will take up at least some of the slack.

However, scrapping or shelving major projects - such as Portugal's high-speed rail schemes - will mean that private companies, notably in the construction industry, will have little or no room for manoeuvre.

In many instances, the scale of the job cuts is probably too great to be absorbed by the private sector.

Ireland, for example, is cutting nearly 25,000 public sector jobs; and UK Chancellor George Osborne is looking to reduce the public sector workforce by 490,000 over the next four years. The Italian government is relying on natural wastage - but will only recruit one newcomer for every five departures over the next three years.

If it is any consolation to the confused, even the experts cannot agree. One side says that the cuts are too big, too soon. They claim that the private sector, hampered by the banking crisis, needs more time to recover.

Once private companies are back on their feet, the argument goes, they will start to invest, expand and recruit - and generate more tax revenues. In the meantime, governments should maintain the public sector status quo, cutting jobs and projects only when the 'real world' of the private sector is in a position to take over. Other economists argue that the time for action is now. Investors will only pump money into economies where bullets have already been bitten - governments that are seen to be making hard choices will be first in the queue, while those that stall will simply sink deeper into the monetary mire before they too are forced to reach the same conclusions as their smarter neighbours.

There are plenty of other hypotheses, of varying degrees of loopiness. One school of thought suggests that countries will start to try to outdo each other - former chancellor Alistair Darling calls it "competitive austerity" - by unsustainably cutting costs further, deeper and more quickly than their commercial rivals in the hope of impressing the money markets.

Whatever the truth of the matter (and many may suspect there is no single, pan-European solution), one thing is clear - public sector spending cuts are being pushed through by almost all European governments, and those cuts will certainly have a sizeable impact on the corporate travel management sector.

What will that impact be? Buying Business Travel asked three major travel management companies (TMCs) for the views of their country managers.

One said that "due to the sensitivity of the issue" European-based employees were "unable to talk about particular issues in detail". Another said that managers in Germany, Luxembourg and Belgium did not have "the necessary information to determine the impact" of public sector cost-cutting. The third TMC did not reply at all.

One can only hope for their sakes that they do not have to endure the same sort of confusion that is now besetting the UK government's procurement team, Buying Solutions, which is being 're-organised' yet again. Buying Solutions is expected to be scaled down, and its remit restricted to central government procurement, rather than extending to public sector bodies in general.

Chief executive Alison Littley is understood to have resigned.

The group's future will be decided next month, when ministers have considered a review prepared by John Collington, who was appointed director of commodity procurement at the Cabinet Office's Efficiency and Reform Group - which controls Buying Solutions - last year.

Buying Solutions acts as a go-between between for public sector bodies - such as government departments, local councils, NHS trusts and, since January, charities - and approved suppliers. Accredited travel companies include the likes of Carlson Wagonlit, Redfern, NYS Corporate, BSI and Expotel.

One possible outcome of the review process is that the so-called Buying Solutions 'framework' will be available only to central government bodies - precisely the opposite of the proposition put forward by Adam Knights, group sales director with ATPI, who wants to see the service made more, not less, widely available.

Charities have only recently been allowed to use the framework, and the Royal British Legion took immediate advantage by appointing York-based NYS Corporate to handle its travel.

"It's a triple win for the Legion," said the charity's head of procurement, Frank Wright. "Previously, people were using a wide variety of processes for booking and paying for their travel. That made it not only difficult to get a clear picture of our costs, it prevented us from benefiting from volume discounts.

"Now, everyone will use the same [NYS] system, whether they are in head office or in the regions. We will get consistent management information for managing our budgets, and we anticipate savings of up to 30 per cent by going through one supplier. The third element is that the system is very easy to use, which saves time for people and ensures they are accessing the best rates quickly."

However, if smaller organisations are denied access to the 'leaner and more efficient' Buying Solutions framework, the Royal British Legion could be the one of the last beneficiaries of the system.

POOLING RESOURCES

Confronted with the desperate need to make huge reductions in its procurement spend, the public sector has a unique opportunity to totally overhaul the way it buys travel.

At the same time, argues Adam Knights, group sales director with ATPI, civil servants could bring about a radical change in the way travel management providers service their public sector clients.

"Right now, it's all too fragmented," says Knights. "The Buying Solutions model is not a bad one, but there is now a real opportunity to make it infinitely better, with real benefits to the sector and, ultimately, the taxpayer.

"On the one hand, you have countless public sector bodies, from the Home Office down to comparatively small local councils, NHS trusts and the like, and on the other hand, scores of travel management companies, hotel booking agencies and other specialist agencies.

"Driving collaboration, on both sides, could pay massive dividends."

Under the present system, just nine travel and hotel management companies feature in Buying Solutions' so-called 'framework'. Use of those accredited organisations is not mandated, so public sector bodies can use any - or none - of the participants.

Equally, there is little or no consensus among the buyers; the Home Office does not have to use the same service provider as the Foreign Office or the Ministry of Defence, any more than Birmingham City Council has to use the same provider as the Metropolitan Police Authority or the East Sussex Hospitals NHS Trust.

Pool that little lot, says Knights, and public sector buying power goes stratospheric.

Controversially, the ATPI sales chief doesn't stop there. Why not insist, he asks, that the service providers pool their own resources?

"I can see a situation where you might have five or six established players teamed with a similar number of well-qualified, professional companies - like ours - which, although they may not be part of the overall framework, have a real contribution to make," he says.

"If we can then collaborate, even on an informal basis, we could between us drive down prices even further. Where the collaborative approach works, we could agree a common transaction price, for example, and still make huge savings.

"Where it doesn't work - for example if one client has a TMC-negotiated preference for a particular car hire company - we can agree to differ, and go our separate ways."

Knights reckons big opportunities are currently being missed. "There is a huge amount of talent, spread across a wide range of public sector organisations, and there is an equally huge amount of talent, spread across a huge range of TMCs" he says.

"Pull all that together, and everyone wins."

GOVERNMENT FINANCES: (PERCENTAGE OF GDP) IN 2011

Note: Selected nations only

Source: EC Spring 2010 Economic Forecast