In and out of the pool

Steve Bishop is Strategic Director for South Oxfordshire and Vale of White Horse District Councils

A couple of weeks ago we received the latest round of modifications to the ongoing saga that is the business rates retention scheme. Here in Oxfordshire the six councils in the county have been trying to make a pool work to spread risk and generate more return for our taxpayers.

District councils were in the first instance excited by the prospect of being rewarded by rates retention for any economic work they’d done in their area. We perhaps got a bit too optimistic about how much we could make out of it and gave less thought to the return versus risk side of things. That was probably a bit naïve of most of us.

When the new scheme came out for consultation though, it was hugely disappointing in terms of how little return we would actually make. My two Districts decided fairly early on that the amount of economic development activity in terms of investment wouldn’t be cost effective to the amount of business rates we could generate: the average district council would be making five or six pence in the pound in business rates growth because 50% goes straight to the government and the levy applied to what was left was so high for district councils that we ended up passing most of that back to the government as well.

So there was very little return but I must say that there was also little risk too. At District level the safety net was generous: for the councils I work for the net would kick in at about £170,000. The interesting thing about our situation is that one of the two Districts I work for, Vale of White Horse, has Didcot A power station due to close from 2013 onwards. It’s a great example of worst-case scenario under the local retention of business rates because it is the biggest rate payer in the District. As soon as it stops paying rates under the new scheme the loss falls on the District Council, subject to safety net rules. It would be a £2m hit to the council without the safety net, so a loss of £170,000 didn’t seem that bad compared to a scheme that didn’t have a safety net and could see the council going bankrupt due to its major rate payer going.

Because the Vale is almost certainly facing a difficult settlement, and coming up with a sustainable five year plan is always tricky for that council, we were looking at ways to make a better return. So when the possibility of pooling came up we wanted to see if it would offer a more attractive return. Sure enough, the return went up if Oxfordshire’s five district councils and one county council got together. Individually we districts are ‘tariff authorities’, had a high levy rate and would have to pay 80% back to the government in terms of levy on growth. But under the pooling arrangements the district councils’ levy got averaged out with the county council (which invariably in England is a ‘top-up’ authority) under the retention of business rates scheme which means that the government has to make a net extra payment back to it so that it can have enough funding to deliver its services. So you pool and the county drags the levy rate down from 80% to 40-odd percent: we’d retain more of our business rate growth money in Oxfordshire within the pool and the mechanics of divvying it up would be left to us to decide.

Two weeks ago we thought that the pool could retain £1.5m per year more of any growth in rates for Oxfordshire. There are various ifs and buts, with business rate baseline, funding baseline and predicted business rate take being unknowns. There was also greater risk associated with the pool. We winced a little at it but it would be daft of the government to give more return unless it was for more risk. The county council had a safety net of several million pounds and if you pool, the safety net becomes combined for all the authorities, making it £6m. In that scenario with Didcot A closing in the early years of the new scheme, the loss of that ratepayer falls entirely on the pool. We had a firm closure date of March 31 2013 given to us a couple of months ago. That’s the day before the new scheme kicks in, which is a unique anomaly for my authority. We’ve got a request in to the government which says can you not reflect the loss from the power station ceasing to pay rates before the new scheme kicks in from our baseline calculation because it seems inherently unfair that our baseline would be calculated from the average of the last two or five years including the station. We have yet to have a response but I imagine the government will say no to that.

Given all the uncertainties, at each of the milestones where the Government requires you to sign up for a pool the six Oxfordshire councils have sometimes been indecisive on it. For much of the Autumn, one of the Districts was out, then after some clarifications from the government it decided to come back in again but that was prior to the most recent news.

Now over the last two weeks yet more number-crunching has been going on. The reduction in the levy cap for individual authorities from 80p to 40p is obviously welcomed at that individual level, it’s good that individual councils can retain more. The safety net remains at the 7.5% of baseline funding level so again that is good news on an individual district basis but on the pool basis it looks like we’ll be worse off doing things together. I think that will be true of most pools in the country.

We haven’t yet abandoned the idea of our pool because another big uncertainty is the spending baseline, which nobody will know until the settlement is announced. It is just possible that the government will set spending baselines so generously that it will counteract the recent levy change making pooling more attractive again. But I doubt it. In Oxfordshire we’re expecting to abandon the pool but what I don’t see is why the government made such a big deal of pooling to now just make it not worthwhile.

Perhaps in the next few weeks the government will realise that its latest revisions are undoing pooling. Don’t forget that pooling has worthy aims: spreading risk, spreading return, getting a genuine economic region to work together rather than compete with each other at District level. Maybe there will be further clarifications on the pooling regime as part of the Autumn statement or grant settlement that will make it more attractive again. We’ll make a decision probably first week in January after the settlement and I imagine that is what other pools will do.

The question is why has this turned into what it has? It was announced as a great rate retention incentivising scheme and then when it came out it wasn’t that. It was marginal, hardly worth the effort.
Then pooling was the thing. If you had a bigger risk appetite and wanted the opportunity to earn greater retention and reward it was seen as the way forward. The mechanics of it then gave us so many uncertainties that many pools, like the London pool, came and went.

Why did the government try and push this through so quickly? It created a huge amount of work with councils responding to consultation, doing the sums, going in and out of pools and getting those up and running with the governance issues and the time taken to come up with the structures. Then the government changed all the rules and put back into the scheme some of what we all wanted when it was first announced, but scuppered the pools.

Finance teams in every council, with their limited resources, have scrabbled around and wasted time responding to the government. All this at the same time as the Government is announcing major changes to funding, of which rates plays a major part. How is RSG going to be divvied out, we’re left asking?
I would like to know why the Government didn’t just take a couple of years, get some pilot authorities into a scheme and then refined the anomalies and mistakes? A two or three year pilot on business rates retention would have let us have a national launch when uncertainty on RSG had been resolved and we’d have less uncertain baselines and have wasted less time working on models.

What we are left with is a basic business rates retention scheme that is better than it was two weeks ago. It’s just a shame we have had to do so much running around for it.