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CHAPTER ONE: INTRODUCTION

1.1 Introduction

This project aims to develop an understanding of the benefits and costs of delivering services in rural areas in a co-located form. This research consisted of four original objectives:

• To conduct a scoping study of the issues associated with designing a study to estimate the costs and benefits of co-locating services in rural Scotland
• To estimate the benefits associated with co-locating services in rural Scotland relative to current models of service delivery
• To estimate costs associated with co-locating services in rural Scotland relative to current models of service delivery
• To compare the costs and benefits associated with co-locating services in rural Scotland relative to current models of service delivery.

The remainder of this chapter provides background to the issue of service provision and co-location in rural areas and sets out the direction for later chapters of this report. This includes the objectives of the project and the methodological approach adopted for the study.

1.2 Policy background

The use of services in rural areas is often affected by the difficulties or expense of getting to them ^{2, 3, 4}. The problem is exacerbated at low population density ⁵ meaning that private and public services are less likely to be used, which can in some cases lead to pressure for closure. In rural areas, a lack of rural services can itself inflict social (or non-market) costs on communities that need to be taken into account. Financial pressure on service providers has led to interest in alternative models of service delivery. In addition to mobile or electronic methods of provision, service providers are increasingly considering the feasibility of co-locating ⁶ services (such as banks/postal, primary health facilities, community education, childcare, libraries, day-care services, youth clubs and training facilities). This approach has the potential to reduce both costs to users and providers' overheads, and maximise the uptake of services through cross-referral. Above all, as an alternative to other low cost means of delivery, the continued presence of services in rural areas addresses a key element of social policy: the maintenance of social capital and human interaction between residents. Recent research on the role of post offices in rural communities confirms this (Hilton, 2006). This element is thought to be important for community cohesion and the continued survival of rural communities.

The economic challenges faced in providing rural services are common to both private and public suppliers. Yet, the adoption of social inclusion objectives, and the presence of basic market failure, tend to shift the onus onto government service delivery. Private involvement will in many instances only be viable if public leverage is available.

The search for alternative service delivery methods can be seen in the context of a wider Scottish Executive ambition to make delivery more efficient using the Modernising Government Fund. An agenda of service objectives under the 'Customer First' initiative aims to develop a common infrastructure for delivery, with a baseline level of services to all users. The development of a "customer account" will aim to consolidate all user information in a database that will facilitate user and supplier needs. A Further initiative to "Close the Opportunity Gap" identifies rural services as one of the indicators of social inclusion ⁷, which is itself a frequently targeted objective in Scottish Executive literature.

But this agenda on efficient delivery of public services faces specific challenges in rural areas where more flexible and innovative routes may be necessary to deliver basic services. In theory there is a range of models or configurations ⁸ for the supply of co-located services. Berry ( op cit) Harrop and Palmer ⁹and Pickering ¹⁰all provide case study evidence on the merits of co- location. Pickering details a range of good practice examples in Scotland. Harrop and Palmer provide one of few studies to address the costs of co-location. The report, however, does not propose any reasonable costing model. A Scottish study on one-stop shops ( OSS) ¹¹ provides the most recent qualitative evaluation of the experience in Scotland and a useful template for this study. Existing research suggests that successful models of co-location can be area and service specific, with better cost sharing potential and wider social benefit attainable when some services are combined. It has also been reported that the success of co-location or joint provision depends on a wider perception of social benefit from having such arrangements. This again relates to the area specific nature of successful schemes. Moseley & Parker (1998) also highlight potential negative aspects of co-location ¹².

The existing research base is predominantly of a qualitative nature, but indicates considerable potential for co-located services to be an efficient and popular method of delivery. While providing several models of good practice, the research does not constitute a robust evidence base for a wider policy decision on co-location. Central and local governments have a key role to play in the nature of service provision and co-location is one among several options. If the wider social benefits of the approach are in fact substantial, then they need to be factored into any rational approach to appraising a programme of co-located services.

1.3 Defining co-location

The term co-location has a specific meaning in this project and for clarity it is often equated with the term 'shared' location or premises to denote the fact that the services will typically be housed in one facility. This definition is similar to the notion of a one-stop shop, which also suggests the notion of a single multi-purpose outlet of services. The Countryside Agency define OSS as facilities that are:

"Staffed, accessible premises that provide a range of public, statutory, private and voluntary sector services to the local community" (Countryside Agency, 2003)¹³".

There are clearly many combinations of services that could feasibly be delivered in this way, but the overall policy interest lies in whether this form of service delivery represents an efficient use of limited public resources that can be directed towards rural services. This question can only be considered with reference to the cost and benefits of delivery and access. In a co-located form, the costs and the benefits of rural services may differ significantly from their urban counterparts. Specifically, they are likely to be affected by different level of service provision that can be based on a willingness to travel and the willingness to rural communities to trade off access and quality.

1.4 Cost Benefit Analysis

The focus on benefit assessment in relation to service provision suggests that cost-benefit analysis ( CBA) can be adopted as the framework for the analysis.

CBA offers a number of advantages. First, it is an acceptable format for considering the economic feasibility or efficiency of government spending on economic, social and environmental programmes and projects. Standard guidance on CBA and related economic appraisal can be found in the Treasury Green Book, which guides our proposed approach ¹⁴, or the 3R guidance from the ODPM¹⁵. Second, CBA enables us to adopt different perspectives on the feasibility of this form of service provision. A financial perspective would simply consider whether one or more specific service arrangements was beneficial in terms of the financial costs being covered by the financial returns or revenues. Any private entrepreneur - who uses his or her own resources (property, labour etc) as a basis for delivering services - would adopt this perspective. In contrast an economic perspective would be more inclusive in terms of how it defines costs and benefits. Specifically economic analysis goes beyond financial considerations to consider other non-market costs and benefits - e.g. time savings, social cohesion benefits, social equity and justice. This is typically the perspective adopted by governments when deciding where to allocate resources. An economic analysis is therefore wider than a financial analysis. More typically, rather than focussing on a specific service arrangement, an economic analysis would consider whether a program of specific arrangements delivers an economic (and social) net benefit.

Clearly there is a link between the perspectives in the sense that a set of financially viable service provision arrangements will often be economically viable. But it is possible that a marginally non-viable arrangement from a financial perspective is nevertheless economically viable if other economic (but non financial) costs and benefits are taken into account. This is the more typical scenario that sets the likely context for the current project - a service could be loss making from a financial perspective but once benefits of service provision are taken into account, total benefits may outweigh costs. So, for example, many rural post offices may fall into this category ¹⁶. The main thrust of this project is to consider the economic perspective and consider the issue of these non-market economic benefits (see the next section for further detail). More specifically, at a national scale, what does the cost benefit calculus look like if services are delivered using co-location?

A final point to make about CBA (or extended social CBA) is that it requires benefits and costs to be placed on a commensurate basis so that costs and benefits of options can be directly compared. Although this approach allows quantification of wide of economic and social benefits, this aspect is challenging when dealing with intangibles and social impacts. Other analytical methods are available to set local service priorities. These include multi-criteria analysis and a range of deliberative approaches such as focus groups, citizens' juries and panels. But it is important to note that while these approaches can undoubtedly provide one form of best-value evidence base, the findings may be economically inefficient and therefore potentially non viable at national scale.

In setting this rationale for the study we can in the first instance abstract from any actual service arrangement. Essentially the question being addressed here has a considerable hypothetical dimension. It can be restated as follows. Suppose we could replace the current configuration of service provision in Scotland, itself associated with a range of costs and benefits to suppliers and users, with an alternative configuration that makes better use of co-location opportunities. What would be the likely increase in net benefits (economic benefits minus costs) between the current (counterfactual) situation and the hypothetical scenario? If the difference in net benefit is significant, this suggests a potential improvement from moving in this direction. In essence our problem can be stated as one of cost minimisation or of benefit maximisation.

This evaluation requires a number of elements. First, there is a need to be clear about the services being assessed as potential co-location options. Second, costs and benefits associated with these options need to be identified, preferably in monetary terms. Finally the analysis requires some consideration of the basic counterfactual against which the options are compared. That is, this potential improvement needs to be considered relative to the current service scenario. Clearly this can be complex in that some areas will have existing service arrangements, whilst others will have nothing. The aim of this project is to choose examples where we can measure benefits against both counterfactuals.

1.5 The benefits of service provision

Access, quality and value

The literature identifies numerous benefits deriving from access to and availability of services in rural areas. For example, Bryden et al (2004) identify the following:

• Making life easier for customers / clients
• Enabling services to continue to be provided locally
• Enabling services to be tailored to local needs
• Providing public services more efficiently
• Reducing costs, including joint provision of services, either through the shared use of staff, buildings or vehicles
• Ensuring social inclusion and equity of access
• Providing professional support;
• Creating synergy and sharing of good practice between the different professionals offering support
• A platform for more 'joined-up' and co-ordinated service provision
• Flexible in the way services are offered
• Offering physical convenience and social contact - especially valuable to the more vulnerable members of society
• Providing economies of scale
• Taking advantage of new funding sources, especially those linked with the Lottery.

These benefits can be realised through a combination of quantity and quality improvements. While part of the rationale for this project is based on the supply ( i.e. quantity) of basic services in some remote areas, the notion of co-location has to be mindful that there are basic quality criteria that should be part of any trade off that users might consider in their decision to access services. There is an extensive literature on the definition of quality in public services, much of it focussed on health services, with emphasis on the need to distinguish between the provider and customer perspectives on what constitutes quality. Overall, the definitions appear to relate to three themes:

Technical definitions: Here quality is seen as being to do with 'conformance to specification' or 'fitness for purpose', and there is some implication that the objective measurement of quality is possible.

User definitions: A number of writers ¹⁷ have stressed the importance of taking into account user or customer-based quality criteria, especially when delivering services. There is considerable agreement on what constitute the key dimensions of quality in public services. This includes accessibility, effectiveness, acceptability, equity, responsiveness, reliability and openness (Donabedian, 1988) ¹⁸. Hope et al (2000) ¹⁹ adopted a definition of service quality as being 'a level and standard of service which meets the needs, expectations or aspirations of service users'.

Value definitions: Quality is also defined in relation to value. In the public sector cheapness for a given standard is sometimes taken as an indicator of quality (as in 'value for money'), while conversely in business transactions quality can be associated with expense ( e.g. a 'Rolls Royce' service).

The definition of quality thus needs to be related to the type of public activity being undertaken. Technical and value definitions will tend to be more important in infrastructure projects, while user definitions will have primacy in face-to-face services.

Much of this debate has in fact influenced the Customer First initiative developed by The Scottish Executive, and which aims to specify which user-related definitions are the best indicators of service quality. A key concept here is the definition of 'benefits realisation'. That is, a quality service is one which actually delivers the benefit sought by the user.

Economic characteristics of services

The services literature has been less clear in defining the public good characteristics of services and by extension rationalising the extent to which government is obliged to fulfil service obligations that cannot be privately supplied. In essence, many services can only be provided collectively. Once a provision level is reached they can be consumed collectively without feasible exclusion. It is this characteristic that can mitigate against wholesale private provision and involvement. Even if, private providers can supply exclusively private consumable goods ( e.g., a grocery shop), the benefits of their presence of such a supplier ²⁰ confers public good benefits that are largely unremunerated. Some people may value the mere existence of an outlet irrespective of use. Others may value the option to use it at some future date, or that fact that others will have an option.

By extension, the public good nature of benefits can be tangible or intangible in the sense that some are easier observe being used and valued. Intangible benefits are also those that the user may be unaware of, for example changes in delivery processes. An alternative definition of benefits is that they can be direct, indirect or non-market benefits (also known as intangible benefits).

The tangibility of a benefit depends on whether one can measure it, and whether it can be valued using some observed market price characteristic. Thus some services can be purchased directly and the purchase decision reveals something about their value. Other values for services can be inferred from the extent to which people will make sacrifices of time or money to access them ( e.g. time spent and travel behaviour). Thus if the quantity or quality of a service changes, the change in transactions reveals something about the value of the altered provision. Intangible benefits are more complex to value, yet elements such as social contact are commonly referred to in several studies on access to services. It is likely that there are some circumstances where these benefits actually outweigh the tangible benefits.

An alternative benefits categorisation identifies direct, indirect and non-market benefits. Direct benefits are those that accrue to the user. Thus health services provide direct health benefits to individuals or households. Similarly information points and post offices serve community members directly. The user benefits at point of access, the benefits are a mix of tangible and intangible. Indirect benefits are those benefits that can be attributed to the presence of a service at a specific location. In economic terms these benefits are best described as multipliers or knock-on impacts that arise because other services and activities locate in the vicinity of the service in question. The service serves as a honey pot, around which other economic activities may congregate. The overall impact is a level of economic activity that is higher than would otherwise prevail in the absence sof the service. The related benefits may include, employment opportunities, increased inward investment and local business transactions. The final category of non-market benefits is essentially the same intangible benefits previously mentioned. These include social cohesion, sense of community and vibrancy and security. Benefit categories are summarised in table 1.

Table 1 1: Service benefit categorisation

1.6 Approaches to Measuring benefits

A range of approaches can be adopted to quantify benefits of service provision.

In terms of direct user benefits, a fairly good lower bound estimate can be determined from the number of transactions that are made over a period of time. Defra (2002) ²¹ provides a range of methods and basic calculations for estimating these benefits as part of locating or closing rural services. It is also possible to qualify these with information on the value of each transaction. Volume of successful transactions (or benefits realised) is a standard performance indicator as part of The Executive's Customer First program ²² for public service delivery. But calculation of the direct benefits is a lower bound because it understates the wider external benefits that users derive.

Indirect benefits can be counted in terms of related job creation and a range of economic and social multipliers that derive from the presence of the service. While many statutory services are in the first instance of a social function, their strategic location could also be a factor in bringing about economic activity and growth in specific areas. There appears to be no research that has explicitly quantified the different multiplier effects of service interventions. But one can infer from the multipliers used in other studies on business location to estimate job creation, income and supply impacts. The analysis could go as far as as to consider the quality (longevity) of jobs created. While indirect benefits are undeniably important, care must be taken to avoid over estimation of the net effects of any intervention. Specifically, issues of deadweight and displacement are important in that these jobs or impacts may have occurred anyway, and/or they may simply be displacing growth and employment from somewhere else in the economy ( i.e. they are not additional) ²³. Above all, it is important to try to separate this outcome (as an objective) from the primary function of services provision, which is more about overcoming social exclusion and providing equity of access.

The valuation of the non-market benefits of service provision (or deprivation) is more complex, though arguably the most significant element of the benefits deriving from service provision. The challenging element to the measurement of these benefits is that they are non-market in nature. In other words, we do not routinely see how people transact or behave to attain these benefits. In consequence we have to find alternative methods to value them.

Existing guidance ( i.e. Defra 2002) does implicitly consider intangible benefits associated with service location as a means for assessing cost savings from preventing closures. The guidance provides a checklist of calculations to determine the additional travel costs for users. The existence of rural services also provides both option and existence values to rural communities. These values are not readily identified in individual actions. One way to derive estimates is to use stated preference methods that have been widely developed to value non market and other public goods, particularly in the fields of environmental and health economics.

In the context of rural services the same methods could be adapted to ask users in the community their willingness to pay ( WTP) to have or maintain services, or to have different combinations of services co-located in their community. This can be undertaken using a contingent valuation or a choice experiment approach. Both approaches are survey-based methods that ask users about their preference ( WTP or demand) for different scenarios of provision or service availability (see below). While different respondents will have different motives for responding to such WTP questions, we expect responses to reflect the security, communitarian and optional motives.

There are few applications of stated preferences to rural services beyond the demand for agricultural extension. However, research conducted for the Post Office regulator has recently attempted to use stated preference methods ²⁴ to consider the impacts of rural post office closures. That study is similar in spirit to the method we have proposed for quantifying the tradeoffs in service quantity and quality, and its design is common in terms of the use of non-market valuation methods. Elsewhere, different procedural and technological advances for service delivery in health care have provoked interest in robust evaluation methodologies ²⁵ including non-market valuation. Several studies have considered the choices or trade offs that patients will make in the case of travelling distance to undergo elective surgery ²⁶. Other studies consider the role of remote service delivery through tele-video facilities, which are also emerging as a viable co- location prospect for health delivery in remote areas of Scotland. In terms of determining optimal coverage of patient care and access to treatments, there is a clear parallel to the objectives of the current study. Indeed this is also a topic that the National Health Service is keen to consult on ²⁷. The Highland's Community Planning partnership - the Well-being Alliance - undertook similar work ²⁸, targeting a mail survey at 1000 residents of Ross and Cromarty. The choice experiment considered general service provision by the Alliance members but specifically arts and sports services, elderly and mental health services.

For this study economic 'choice experiments' are used to investigate trade-offs in the quality and quantity of rural services. An alternative approach would have been to use contingent valuation to assess the benefits of co-location, however that approach would not be able to disaggregate the resulting values between the different attributes of co-located services and thus explore the trade-offs that are made between them. The format of the actual choice experiments involves a range of participatory stages to determine key elements of the exercise, namely service options, co-location feasibility and a short list of real options.

1.7 Measuring costs

Compared to benefits assessment, the measurement of costs is relatively unambiguous in terms of financial accounting convention for determining and recording capital and recurrent operating expenditures. But beyond the difficulty of defining co-located service models, the problem of rigorous cost accounting arises when premises are shared on an informal basis and where voluntary staff time and resources are committed to delivery. Costs will also vary according to the scale of an outlet and this raises the issue of how efficiency of delivery should in fact measured; i.e. in terms of cost per contact or in terms of a comparison between measured costs and benefits derived from the service.

1.8 Project approach and report structure

The research detailed in this report was structured as a series of inter-related stages as illustrated in Figure 1, which also constitute the main chapters of this report. These stages are summarised as follows:

Stage 1 Review of recent research and secondary data collection in relation to service priorities and co-location

Stage 2 A process of stakeholder consultation to define service priorities, identify exisitng and hypothetical models of co-location and select case study areas for the research

Stage 3 Stakeholder workshops to investigate service provision and important issues relating to service use and availability in three case study areas

Stage 4 Benefit estimation

Stage 5 Cost estimation

Stage 6 Conclusions on cost and benefits of co-location

Figure 1: Stages of the methodology

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