Q&A with Lancashire’s George Graham

George Graham, deputy treasurer at Lancashire County Council, explains the financial details of the City Deal signed last week between local delivery agencies and central government.

Room 151: Why sign a City Deal with central Government?

George Graham: We have a lot of planning applications for development coming in around Preston, and the highways authority are always saying: “You can’t do that because the roads can’t take it.” We need to get the roads right to facilitate this development. The issue arose again during the inspection of the Central Lancashire joint development plan drawn up by Preston City Council, South Ribble Borough Council and Chorley Borough Council. The planning inspector raised concerns about the roads and said if you want to start developing, the county council will have to put the roads in. We also have two enterprise zones which bracket Preston and we need to improve access between the two.

R151: Who are the local partners involved in the City Deal?

GG: As well as ourselves and the three lower tier authorities, we got together with the Homes and Communities Agency. As a legacy of a 1970s plan to build a central Lancashire new town, the HCA owns a lot of land where the developers want to build. The county council convened the local players to look at what needed to be done and what resources each could put into the pot.

R151: What is the infrastructure delivery fund?

GG: Essentially this is a big pooled budget. Local authorities have put in some of their own capital resources, including property. They have also agreed to put in their receipts from New Homes Bonus and any uplift in business rates. In addition, the fund will receive any uplift in value from the book value of HCA sites when they are sold. It can borrow the rest of the value of these sales for a one year period. We would have liked to have had the full value as a grant, but the Treasury weren’t keen on that. All the partner contributions give the fund a total of £345.8m over the ten years of the deal, with a requirement for infrastructure spending of £342.8m. Since the figures were worked out in September, we have received £30m of funding from the Department for Transport for transport schemes, which improves the position further.

R151: What are the risks?

GG: Any new government might decide to abolish New Homes Bonus, but we have as strong a commitment as we could get that this won’t hurt the fund. We think we can cope with any reset of business rate baselines imposed by central government up to a certain point. The business rates uplift is only £9.5m of the total. It is not overly significant.

R151: How will you pay for developments up front if receipts won’t materialise until the development is built out?

GG: We have worked out the build rates for each of the developments and what they will generate in community infrastructure levy and uplift in business rates. This gave us a profile of when the money will be available. However, we need to deliver the roads as quickly as we can to facilitate the development. We were in a position where we had enough money overall to pay for this stuff but not at the right times. It was too important to allow it to fail because of that. Our offer to government was to manage the cashflow. We will run down our investment balances and stand behind the deal. The difference between income and expenditure is at its greatest in 2018-19, when the “deficit” will stand at £107m. This is notional borrowing against the expected future income – it is as close we could get to a tax increment finance deal without going through the formal process that would have entailed. We have cleared this policy position with the district auditor and will conduct a review of income streams each year. This may enable us to charge minimum revenue provision to the revenue account down the line.

R151: How will the roads development work?

GG: The traditional way of a spine road on a new development is to sign a section 278 agreement with developers, which would let us build their little bit of the road or allow them to do it. What we want to do on a number of the development sites is let a single contract for the spine roads. If you do them together you get a better price. The developers are keen and are talking positively to us about this arrangement. In addition, the city deal allows us to finish one road one side of the River Ribble and one the other side. We need a new bridge over the river to connect them but we couldn’t get the £70m required through this deal. However, we have included the cost of the design and securing the route. Building the new roads will create space for further development than is included in the plan, which will provide extra income and we have agreed among the partners that any money left over will go towards the bridge.

R151: How is Lancashire Pension Fund contributing to the City Deal?

GG: The fund has agreed to allocate up to £150m for local property investment. Notionally we have said that this will be roughly £100m in the city deal area and £50m elsewhere in the county. The first scheme will be in Preston city centre to provide student accommodation, where a developer had worked up plans but needed funding to get it off the ground. The pension fund is also looking at one of the major industrial commercial sites. I suspect that all the money will be got away before 10 years. Some will be where a developer has a site and is looking for finance, and some will be where the pension fund identifies an opportunity and tries to find a development partner. The hurdle rate for investment is an 8% return – anything lower than that and it will be kicked out.

R151: It sounds like you have got a good deal from central government. Are you happy?

GG: We would have liked even more but it was an interesting negotiation with central government. You thought you had a deal with Cabinet Office and the Department for Communities and Local Government only for the Treasury to veto one aspect or another. However, we went in with a very clear idea of some concrete things we wanted. If we got them we had a strong proposition to put to government. We said we would do 13 years of house building in 10 years, all this commercial development and other sorts of goodies. We were saying we wanted to build roads and communities, making it easier for Whitehall to grasp than some of the more nebulous City Deal proposals I have seen.