Q&A with Paul Naylor

Ashford Borough Council is using the town’s significant growth as a tool to help it cope with cuts in government funding. Paul Naylor, deputy chief executive at the authority, spoke to Room151 about the strategy.

Room151:Tell us a little about Ashford’s growth

Paul Naylor:  Since the 1960s successive governments have earmarked Ashford for expansion and the town is still growing and will continue to grow for a good few years. I have been here 20 odd years now and it has been growing throughout that time. Under regional planning guidance in 2004 the town was designated as a growth area. At that time we had about 40,000 homes, with long-term targets of building an extra 32,000 and creating 28,000 new jobs. We are now on 50,000 homes, and although the coalition government has removed targets, we have thousands more homes in the planning pipeline as a legacy of that period.

R151: The council is about to decide on an interesting planning application – what marks it out?

PN: The project, Chilmington Green, is in our core strategy and will come up for outline determination in mid-October. It is the single largest planning application in the borough’s history, involving 5,750 homes. We and the developers of course have been working very hard on scheme viability with a particular emphasis on achieving improved quality and long-term sustainability aims. One concern we have tackled relates to long-term maintenance and community development, post-completion. The traditional route of funding and maintaining a new development via time-limited developer contributions means when these funds expire and responsibility falls on councils,  estate management and community infrastructure can deteriorate, sadly.

As a solution, we have looked closely at the ‘garden city’ principles and the experience from other developments up and down the country where different management and funding models apply. Our planning policies now prefer a ‘‘community management organisation’ model. There are other examples around the country, though many are on a smaller scale, or involve developer-led private management company arrangements.  For Chilmington, as development is completed, a proportion of  built commercial property  and community  buildings, excluding schools and highways, and possibly a small amount of residential property, will be endowed to a new local trust. There will be no public sector funding involved.

Other funding to the trust will come from a variable deficit grant provided by the developers. The lifetime of the build-out is 20 years. Until the full development is substantially complete, income flows don’t quite match expenditure – particularly during the first 10 years. So the developer is underwriting that gap.

A small levy on all commercial property will apply, with the trust also benefiting from the commercial leaseholds it will market for the commercial estate. All residential property will be covenanted to pay an annual  levy as a contribution to the management trust.

R151: Who will run the organisation?

PN: There will be a management board and the public sector, third sector, residents and developers will all have a seat. They will have control over funding and ownership of the assets and take strategic decisions on how to proceed.

R151: What are the financial advantages to the council of the model?

PN: The trust will have an eventual operating turnover of over  £3m annually, including sinking fund provisions.It builds up to that over 20 years. If the public sector were going to do this using traditional means then it is most likely we couldn’t sustain the quality aims using traditional council tax. Our modelling shows the level of council tax expected from this development  would be absorbed to meet other service costs, including inflationary pressures on the council’s budget.

The developers and our own modelling shows that by setting up Chilmington in this way, we can have confidence that the quality aims we have today can be secured long into the future.

R151: What are the financial challenges facing your council and how is growth helping to overcome them?

PN: Like everywhere else, we have seen significant reductions in funding over many years. That is planned to continue. We have had a grant cut of 50 % and our modelling now assumes that the RSG element of formula grant will disappear completely. Self sufficiency is our aim. We have a medium-term financial plan up to 2018/19. If we weren’t growing we presume that achieving this would be more difficult. Our expansion is generating  new homes bonus and business rates retention will increasingly become more significant for us.

R151: Have you created any standalone companies?

PN: Our strategy does not completely rely on building new homes and more businesses.  We have created a property company which is in small scale at present, but could grow. The council has approved £10m of lending to the company which can be drawn down in £2m tranches. Initially the company will buy street properties and provide them at affordable rents. In time the company will expand its activities into the private rented sector, and commercial land and property.

This way the council not only can help improve the stock of affordable homes, but it will get decent returns on its loans after covering the cost of lending.  One of the reasons we are doing it is to provide an alternative source of income for the council.

We have also created a building consultancy company. At the moment this  is acting in the building control market, with statutory work retained by the council.

R151: Is your treasury management strategy evolving?

PN: It is beginning to change. During the recession we retrenched, like everyone else. We exited our investments in euro sterling bonds, which had been producing very good returns, because  they were considered too much of a risk in the light of the Eurozone crisis. We have switched to property investments through the Local Authorities’ Mutual Investment Trust. That is giving us a rate of around 5% which is considerably better than our deposits with banks, building societies, MMFs and the DMO – which gives a horrendous rate.

Over the next few months we will be undertaking more diversification with a possible move into high security covered bonds.

R151: What is the state of your borrowing?

PN: We were obliged to buy out the housing revenue account debt, which overshadows everything else. We have about £120m of long-term borrowing, pretty much all of which is down to the HRA debt. We were one of the councils which were successful in applying to raise our HRA cap. That has gone up by a modest £1.3m and with this we are undertaking to help fund the building of affordable homes on a rural site.

R151: What other investments are you making?

PN: We are doing quite a bit of direct property investment. Looking out of the window, I can see an 11 storey office block outside the Ashford International Station (on the HS1 line) . We acquired that in April for under £10m. It was fully let and provides us with a 6% yield. We have also bought a small shopping precinct for more than a million pounds which is providing a similar yield.

R151: Are business rate appeals causing you problems?

PN: When we were collecting business rate income and just handing it over to central government we concentrated on ensuring collection performance was good. But now that we have more control, opportunity and risk, we are more focused. I have reorganised the finance and revenues teams as a result. I think the appeals issue is exaggerated in terms of its impact. Theoretically, half of our liability is under appeal. However, we are not assuming that all of that is going to disappear; we are taking a more realistic position in our estimates, no more than 10% may be at risk of some form of change.  I would like to give credit to the Valuation Office Agency as it is doing a grand job of informing us what the position