Richard Harbord: Commercialisation brings its own risks
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Richard Harbord
There have been considerable difficulties running local authorities for as long can be remembered. Local government is resilient and innovative, and whenever things turn against it it moves forward in a steady and interesting fashion.
Fifty years ago, with grant from central government stable and growing, the incentive to find new opportunities for additional income did not exist.
In recent years, with appallingly low returns on invested cash and ever-decreasing support from the centre, there has been every incentive to seek alternative sources of return.
A leader column in the business section of The Times recently seemed to think that commercialization in local authorities was confined solely to investment in commercial property. The paper’s feeling was that many local authorities were investing in commercial property of all sorts, and it questioned whether or not those authorities had sufficient expertise to minimise the risks to their council tax payers.
Without doubt a number of local authorities are entering the property market with a view to managing commercial assets to ensure a sound return. Some of the examples given indicate a considerable sums of money being involved in some of these deals.
There is no question of the legality of these sorts of investments, but local authorities need to be sure that they understand the risks that go hand in hand with the rewards that come from them.
In the commercial world, there are many examples of instances were companies have diversified into what appear to be remunerative areas outside their core competencies, with disastrous results.
BP Campus, Sunbury bought by Spelthorne District Council. Photo: BP.
Success & change
Local authorities currently developing commercial initiatives are doing so not only through investment in capital assets but also by setting up trading companies to extend their reach into new areas. In many ways, there have always been examples of such things from Birmingham and its banks, to Hull and telephones. Many of these have been very successful.
To be successful in these sorts of initiatives requires a considerable change of culture which not all authorities will find easy to manage. Running traditional public sector ethos services and fiercely commercial operations within the same organisation is not easy and requires the acquisition of new skill sets. A considerable amount of information and new diligence needs to be carried out before competing in existing markets.
There is currently some concern in central government about the risks that local authorities are taking. In the past, when councils did not have powers of general competence, there were legal safeguards which constrained the opportunities and risks that could be taken. Those controls no longer exist and it is down to individual authorities to ensure that commercial activities can be sustained and that the risks taken are carefully managed.
Looking back there are few examples to help. Local authorities have always been attracted by higher returns in treasury management and that has led to a variety of difficulties, most recently in Iceland but further back though investments in banks that folded and, of course, in derivatives such as interest rate swaps. In the case of the latter, and in BCCI, large losses were sustained by authorities operating outside their normal comfort area.
In retrospect, why did local authorities not question the reason why they were offered higher returns by one organisation and not by others. In the case of interest rate swaps where almost 100 authorities acted unlawfully, they did so by believing that what they were doing was a part of their normal day-to-day business and not realising they had strayed into an area in which they had no legal right to be.
The point worth noting from a number of historical examples is that central government has steadfastly refused to bail out local authorities embroiled in difficulty. They have expected authorities to take their own legal and commercial advice and to manage their risks.
In the case of interest rate swaps, central government made it clear that authorities had to resolve their own difficulties. Many did so successfully, but it cost a small number of authorities dearly. In the case of BCCI, central government extended a loan to one authority which had invested all their reserves and lost them. But it is worth remembering, the central government response was a loan and residents paid over a number of years for that.
Commercialisation has always been there and is to be welcomed, but local authorities must take care that they are comfortable and act within their own competencies and capacity. Having the right staff, with the right competencies, is a problem and that problem is exacerbated when moving into new areas. It is inevitable that there will be difficulties ahead but we have a duty to minimise those as much as we can.
Richard Harbord is the former chief executive of Boston Borough Council.
