Councils trading on a wing and a prayer?

Shop open sign to illustrate business support

Will the wings of local authorities be clipped following the publication of a highly critical National Audit Office (NAO) report on councils' acquisition of commercial property? And what will this mean for local authority trading companies and council's still struggling to bridge the gap in their budgets?

 

Latest figures show a fourteen-fold increase in council spending on commercial property. Between 2016 and 2019 Councils spent an astronomical £6.6 billion to buy commercial property - from solar farms in Suffolk to shopping centres in Bolton. The theory goes that by borrowing at a low rate of interest from the Public Works Loan Board (PWLB) your local council can make a tidy profit from commercial rents. West Suffolk's solar farm, for example has enabled £1.2m of surplus income to be reinvested into local services since it was first plugged into the grid back in August 2016.

 

However, the NAO has real concerns that borrowing on this unprecedented scale could expose councils to severe financial risks (especially if tenants leave). It's claimed that some councils with long term debts don't have an adequate safety net if it all goes wrong. Despite many of these investments being highly successful, criticism is never far away. In 2016, the media poured scorn on Spelthorne's purchase of BP's research centre for an estimate £385m and the Guardian in 2017 accused UK Councils of "taking huge commercial risks in trying to be hedge fund managers".

 

At the time the Treasury Minister Rishi Sunak MP said that something needed to be done. And in October last year the PWLB rate was increased by 1% - sending shock waves through the public sector.

 

Unfortunately, the NAO reviews commercial investments in isolation of the wider social benefits- from reviving town centre retailers to supporting under pressure services. And fundamentally the public don't understand the difference between capital and revenue monies. Consequently, there are howls of protest from the twitter sphere, quickly followed up by ill-informed articles penned by eager journalists ready for an easy headline every time plans to invest in commercial property are put forward. Driving a wider public belief that councils should not dirty their hands with 'crass commercialism.'

 

Small beer

The issue of course, is that councils in the face of massive cuts from the Government and spiralling costs - particularly in social care had no choice but to look at innovative ways to raise money to fund frontline services.  And whilst other schemes from advertising on websites to renting out advertising hoardings raises cash are important - it is still small beer compared to the potential income from commercial property investments.

 

I would argue that rather than being critical the NAO and the Treasury needs to be more supportive. They should be helping councils make the right investment decisions, to undertake due diligence - to guard against potential economic risk/down turn.  These are big decisions - not to be taken lightly.

 

Equally I am not suggesting that the media should not scrutinise these decisions. They should - but in a much more constructive way. Rather than the twitter inspired council bashing that seems to be the norm. Likewise, councils should be more open about their plans and not hide them away in the small print in their mid-term financial and budget plans. Communications teams should also continue to pursue the holy grail of building a greater understanding of the differences between revenue and capital funding - it will be worth it. Especially as many councils at the moment are finalising their budgets for the next year. 

 

Councils also need to review their wider commercial strategies. Decisions should not be made in isolation by the property people but also include senior leaders from the communications teams and marketing experts.  Done well, investing in commercial property is an opportunity to help local businesses, create jobs and wealth.  It is essential to weave marketing and communications into the wider commercial strategies - and move the dialogue away from crass commercialism to social commercialism. Undoubtedly without this extra income a greater burden will fall on the council tax payer.

 

Strange coincidence

The ball is in the Governments court. The NAO report was published on the same day that Rishi Sunak MP became the Chancellor of the Exchequer. Whilst I guess he has a lot more in his in-tray than just local Government borrowing, it is a striking coincidence. We will have to wait and see how the Government reacts.