Special report - In Britain's cities, the pain begins

LONDON (Reuters) - Inside Birmingham's council chamber, a red-carpeted semi-circular room with Italian walnut-clad walls, the leader of Europe's largest local government authority is preparing his colleagues for pain.

Over the past six years, Birmingham has cut more than 180 million pounds from the 1 billion pounds the council can spend, explains Mike Whitby, City Council Leader. "Now however, we need to find the same again, plus over 100 million pounds more, and all within less than four years."

That will hurt. In September, Birmingham, which like the national government is controlled by Conservatives and Liberal Democrats, wrote to just under 26,000 public sector employees warning them that their jobs are at risk. As in other councils across Britain, the city is examining every service it runs, from street lights to nurseries for children. It has contemplated deals with foreign investors. There is talk it might, some day, return to the bond market.

The council meeting lasts six hours, the discussion dominated by ideas for the city's future and where to find the savings. Finally, the councillors take a break to enjoy a simple two-course meal. "Another service under threat," whispers one diner as she delves into a bowl of sponge pudding and custard.

Britain's second-largest city was the venue for the Conservative Party's annual meeting this week, a conference dominated by discussion of spending cuts. The government plans 83 billion pounds of cuts to eliminate the largest budget deficit in the G20.

As European governments implement austerity measures, cuts are falling in different places. In Germany, welfare benefits and government jobs will bear the brunt of a planned 80 billion euros in savings over the next four years. In places like Ireland and Greece, job losses have been accompanied by pay cuts and a hefty reduction in capital spending. Some Spanish town councils and regional governments have put off payments to suppliers as they struggle to accommodate cuts in central government funding and a fall in tax revenue after the 2007 property bust.

In Britain, where the coalition government will detail its spending cuts on October 20 following a four-month review, the centralised tax system also puts local councils in a precarious situation. Councils raise less than 5 percent of their revenue locally, against 60 percent for their counterparts in Germany.

"That's why there is so much concern at the moment about the comprehensive spending review," says Sarah Longlands, Director of Policy at the Centre for Local Economic Strategies. "The central government holds all the levers when it comes to controlling local government finance."

It's also why council meetings like the one in Birmingham in early September go a long way to deciding who will be hit and who will survive the looming cuts. As the task of slashing budgets gets into full swing, the case of Birmingham shows just how difficult and how personal it will get.

"(The city) could change enormously," says Tony Dolphin, Senior Economist at the Institute of Public Policy Research. "In a sense, the government is taking a gamble on one particular economic theory -- which is if you cut public spending then the private sector will fill the gap. It is a strand of economic theory that has a lot of supporters, but there is an equally powerful voice in economic theory that the private sector is not in a position to do that."

WHISTLES FOR THE TITANIC

Birmingham was once known as the workshop of the world. Powered by local coalfields, it took off in the Industrial Revolution and remained a dynamo of British manufacturing into the 1960s. Over the past few decades, though, as its factories and car plants have closed, the sprawling city has embraced retail, conferences, high tech research, and other service industries. Birmingham's citizens have also come to rely a lot more on the state for work.

"In this region 85 percent of all the jobs created by the government in the last 10 years are public sector jobs. These are not low-paid factory workers, these are middle-class, middle salaried consumers," says Simon Topman, who runs the Acme Whistles factory, whose products were used on the Titanic.

The rate of unemployment among working-age people in the city stood at just over 20 percent in February 2010, according to council figures, seven percentage points higher than the comparable rate in England. Official unemployment in Britain ran at 7.8 percent in May to July.

Large blue-chip British companies such as Cadburys and MG Rover are no longer sure bets for jobs. Cadburys, snapped up by U.S.-based Kraft last year, has already announced 400 jobs at a plant in Bristol will be cut, going back on a promise to keep them. MG Rover, unable to compete with high-tech cars produced overseas, fell into administration in 2005, resulting in the loss of some 6,000 jobs. China's SAIC now owns the MG Rover assets at Longbridge employing a few hundred people.

Even among those who have jobs, you can sense a loss of hope. In the leafy, well-heeled suburb of Edgbaston, home to one of England's most famous cricket grounds, 29-year old Matthew Plant works as a grounds keeper and gardener, mowing the well-fed lawns outside Birmingham University's imposing Victorian buildings.

Plant is worried: his job is funded by the university. With three children and a partner to support, he says he would rather emigrate than stay.

"Birmingham is not a nice place to be right now," he says. "My brother's starting his own business soon in Australia and I'm planning to move out there too and work for him."

"SECTION 188"

Across town, in a less opulent building in the rundown Southside area, trade union members gather to plan action against the threatened job losses. On the sidelines of the meeting, in a pokey storage room on the third floor of trade union Unison's office, 19-year-old Sheridan Green bounces her 8-month old daughter on her knee.

Green is a single mother and depends on financial support from the state. Like thousands of people brought up in the pockets of deprivation that ring Birmingham, she has few qualifications and has benefited from a government-run careers service for young people called Connexions to find and fund childcare while she attends night school.

"It's the most helpful place I've been to," she says, cradling her baby, Freya. "If I hadn't gone there, I'd probably be doing nothing now."

But organisations like Connexions are squarely in the firing line. The 279 staff at the service have been issued "Section 188" letters, which are named after part of Britain's 1992 Trade Union and Labour Relations Act and essentially forewarn individuals that they could lose their jobs.

Green's adviser, Wendy Connop, has worked in the careers sector for 27 years. Until now, she never thought she would be on the frontline of a redundancy drive. "This has got to be the fourth restructuring in my time. But this has to be the severest ever," says Connop, a steward for Unison representing public sector workers.

The young and poorly qualified are at the tip of a much deeper regional skills deficit. It's a problem, warn businesses and economists, that means Birmingham is ill-placed to weather more jobs cuts.

In the council meeting inside the domed hall, its smooth walls punctuated by pilasters, Labour councillor Tim Evans fears just that. "There is no logic to cutting the Connexions service," he argues. "We will pay a high cost if we leave a generation of people behind."

BIG SOCIETY

The coalition government says the country will pay an even higher cost unless it acts decisively. Borrowing must be scythed back to 1.1 percent of GDP in 2015/16 from 10 percent now, if Britain is to avoid what Chancellor George Osborne calls "daily dread for the bond market."

The austerity drive also fits the Conservatives' push for what Prime Minister David Cameron has dubbed "the Big Society", which he says will emphasise community-based help and self reliance. Critics say it will be a return to smaller government as championed by former Conservative prime minister Margaret Thatcher.

But in the poorer parts of Birmingham, few see society flourishing with more cuts.

This is a world that was ripped apart by riots five years ago, a place where social workers worry that cutting government support will make it harder for young people to find work because gang members are afraid to set foot outside their patch. "We've had kids come into our centre and we've had to hide them, hide them in the back of a car and cover a blanket over them because they are scared that someone will see them in this area," says Ivora Ferreira-Bean, a former psychiatric social worker who runs the Connexions office in Aston, one deprived suburb on the outskirts of the city centre.

A concave security mirror straddles the corner above the front door of her Connexions office, which is scheduled for closure. The door itself is reinforced with Georgian-wired windows and has an electronic-passcoded door handle. Metal grilles cover the windows, blanketing the modest concrete block in a cage of security.

In Britain's 2001 census, 100 percent of Aston's population was classified as "most-deprived". The council says 26 percent of Aston's population is jobless, as are one in three of its young people. "I worked here as a social worker 20 years ago and I think it will go back to rioting," says Ferreira-Bean, a union member.

Residents in some deprived areas argue that they've long embraced the idea of self-help, but need government support to make a start.

In neighbouring Lozells, a 15-minute bus ride from Birmingham city centre, Subhan Tuyyab recalls the help he was given by a government-funded youth leader. A fast-rising local cricketer at 14, Tuyyab played for a county club before adolescence hit and he turned aggressive and violent. He knocked out a cricket umpire, threw a chair at a teacher and eventually, suspended from school, turned to alcohol and drugs.

In desperation, his father turned to his former mentor Waseem Zaffar to get him back on the straight and narrow.

"It was someone to look up to because round here there is no one to look up to. The support and the mentoring keeps you focussed. Around the area, there are lots of examples of people who have gone off the tracks. The police involvement in the area helped a lot, the attitude of the police changed," says Tuyyab, now a father in his twenties, smiling to reveal a gold front tooth.

Millions in government spending since the 2005 riots has helped cut crime by a third. Funding cuts will hit community work and destabilise the fragile peace, say social workers.

"You talk about Big Society," says Zaffar. "The only way you can implement Big Society and rehabilitate in Lozells is if there are financial resources to back up the needs of the community."

The voluntary sector, despite forming a core part of coalition ideology, is not ring-fenced. Organisations in the city have been asked to suggest ways in which they can make up to 42 percent savings within the next six months, according to the chief executive of Birmingham Voluntary Services Centre (BVSC), which provides advice to local volunteer groups.

"The Big Society agenda has to tap into what already exists. We need to pool our resources around the bits that are working really well. If we can get those services right, not only are we doing the right thing, we're also going to save a lot of money," says BVSC's CEO, Brian Carr.

COUNCILS AS UBER CONTRACTORS

One way the government hopes to save money is by cutting back on how councils deliver services. The Conservative party hopes to encourage the use of private companies -- a model begun under Thatcher and continued under Labour.

In Thatcher's time, Minister Nicholas Ridley described a local government as one which "met once a year to award all the council service contracts to private firms". Twenty years on, such ideas are being reborn.

Suffolk recently voted to outsource all public services to private companies and the voluntary sector. That follows London borough Barnet's proposal for an "Easy Council", based on the pay-as-you-go concept pioneered by budget airlines.

"We need to be bold and imaginative and rethink how we do business," says Birmingham's Whitby.

In a 2.7 billion pound deal, Birmingham recently awarded the maintenance of its 2,500 km (1,550 miles) of roadways to Amey, a support services company that is part of Grupo Ferrovial. Randal Brew, a locally elected lawmaker responsible for finance, says council departments such as revenue, which administers local taxes, and leisure services are also under review.

What we're being told here is that public services equals bad," says Roger McKenzie, West Midlands secretary for the Unison union. "Private delivery of what we now understand as public service is the best. That's the parameter of the debate. That's just plain wrong. That's not a genuine debate about public services."

OUTSOURCING RISK?

Of course, companies that provide outsourcing and support services could gain, which would mean more jobs in the private sector. But some councils remain wary of following that path. Manchester council plans to crop spending, but council leader and Labour Party member Sir Richard Leese argues that outsourcing contracts offers too little flexibility.

"Outsourcing seems like an easy solution. A lot of experience suggests that it's pretty inefficient," Leese says, arguing local authorities and others have been stung by contracts which were rapidly outdated in areas such as information technology. "We haven't gone for outsourcing to a great extent, in general. We can make more savings, more efficiently, with more flexibility, without doing that."

Local governments lack the political and financial clout to renegotiate contracts with large outsourcing companies, unlike central government which has already put pressure on the private sector to help shoulder the burden of cuts.

And there may be business as well as political reasons against going private. For one thing, councils can never completely outsource the risks entailed in providing public services. "Just because you've outsourced the service, doesn't mean that you've outsourced the risk and the problem," says Andrew Jepp, head of local government at Zurich Municipal, which provides risk and insurance solutions to Britain's public services.

EASTERN PROMISES

Birmingham has hinted it may try to cushion the blow by winning investment from foreign investors. Since January 2009, council leaders have been in talks with Middle East investors such as Kuwait and the United Arab Emirates. Those talks have led to approaches from sovereign wealth funds.

Whitby says the sale of stakes in key assets, such as the UK's largest exhibition centre, the NEC, could not be ruled out. "We would allow them to be in partnership with our assets including the National Indoor Arena (NIA), the Symphony Hall, the ICC (International Convention Centre) and the National Exhibition Centre (NEC)," he told Reuters, before later denying talk of selling off "the family silver".

It helps that wealthy Gulf investors seem keen to play a role in debt-laden European countries. Last month, Qatar promised to pump $5 billion (3 billion pounds) into Greece's energy and banking sectors among others.

It also helps that some Birmingham businesses are more than happy to embrace their Gulf suitors. On Birmingham's Temple Row, imposing Georgian buildings stand alongside glass office blocks. The square is a financial and legal hub where entrepreneurs rub shoulders with some of the city's oldest firms. Inside one modern office block, lawyer Noor Siddiqi provides general solicitor services -- from debt collection to divorce. He also boasts a client base that includes many foreign businessmen with assets both in Britain and in the Gulf.

Siddiqi says he wants to exploit his far-reaching contacts to fill what he sees as a vacuum created by a lack of investment in the city and the demise of government funding for small to medium-sized businesses. "My objective is to bring to the attention of the Middle East, Midlands-based companies," says Siddiqi, dressed in a tailored suit and waistcoat.

Last month he hosted a visit by an Emirati official, a contact he made through regular visits to the United Arab Emirates and Saudi Arabia, where he says he has contacts in the royal family. "We've got to engineer a situation where some of these people can start up projects."

Siddiqi says there is no shortage of interested investors in the Middle East looking for opportunities overseas. He also says he is tapping private equity contacts who could be interested in buying Birmingham-based businesses.

TAPPING THE MARKETS

Katie Teasdale, head of policy at the Birmingham Chamber of Commerce Group, believes Birmingham should shift its emphasis to skills training -- as long as unemployed workers are trained in fields that are growing. Companies like India's Tata Motors, which owns the Jaguar factory in Longbridge, present Birmingham and the region with an opportunity, she argues.

"Tata are now investing in low-carbon vehicles, if we play our cards right I genuinely think we could be the leader in low-carbon vehicles," she says. "We need to future-proof our economies."

Potentially, Birmingham might also issue bonds. This is something the city successfully did in 2005 with an infrastructure refinancing, and it's an idea that Deputy Prime Minister Nick Clegg has suggested could be revived. Municipal bonds are a very active market in the United States and Europe, but under Margaret Thatcher's centralising drive, councils in Britain stopped tapping markets in the 1980s and today wouldn't dream of borrowing on their own account.

Now, in a climate where investors are hungry for yield -- and worried about the falling credit ratings of countries such as Greece and Ireland -- some proponents say municipal issues could arouse investor interest. Stuart McKinnon, a partner at consultancy Lane Clark and Peacock in London, says he has not seen any signs of demand yet.

"This is a market which has not existed for many, many years," says McKinnon. "What investors are screaming for -- for want of a better word -- is yields. With gilts yielding less than 4 percent even on a 50-year-gilt, they are looking for ways to generate returns, and if this market reopened then they may invest, but I would not recommend clients going into it blindly. I would not see municipal bonds as the panacea for their problems."

'BEST-RUN CITY IN THE WORLD'

Back in the council meeting, representatives gather in a small room to scrutinise funding for leisure facilities. Could savings come from training school-age cricket teams to maintain the fields? Can a swimming pool revamp be scaled back? The chairman urges them to help themselves to tea and coffee and goes on to joke that the council's budget will soon no longer afford them such niceties.

Talk afterwards turns to bygone glories and Joseph Chamberlain, a prominent 19th-century businessman and Liberal Party politician who was mayor of the city in the late 1800s. Chamberlain, who brought Birmingham's water and gas works under the ownership of the council, is widely credited with alleviating much of the city's poverty at a time when commerce was booming.

"When Joseph Chamberlain led Birmingham city council, he made it the best-run city in the world," says one councillor, declining to be named. "My forefathers here had the courage to invest in schemes for the benefit of Birmingham, but in the current circumstances, we can't afford to borrow anymore - I am really concerned about the finances."

What is the most effective way Birmingham can save money now? "I jokingly say what I'd like to do is sink a coal shaft into Sutton Coldfield," he says, "and start running that again."

(With additional reporting by Cecilia Valente in London; editing by Sara Ledwith and Simon Robinson)