Talking Point: Economic regeneration and council risk

How can councils create economic regeneration without taking on too much risk?
With local authorities moving away from a traditional grant funding model towards greater self-sufficiency, we asked four S151s how they view the risk/reward trade off when investing public money in their local communities.

Chris Buss, Director of finance & deputy chief executive for the London Borough of Wandsworth
“Do you feel lucky, punk?” That great misquote from Dirty Harry may seem a long way removed from the work of a local authority. When I first started in local government in the 1970s, the borough I was working in had a whole department dedicated – it seemed – to rebuilding the borough with the provision of new housing and other social, welfare and community buildings plus employment workspace. The idea of this being a risky business sounded absurd as, at the end of the day, it was all covered by public money either as government subsidy or the ratepayer footing the bill. Since then attitudes have changed, with development risk and also reward largely transferring to the market. But in these austere times is there now the opportunity for councils to gain by taking some of the risk in exchange for the reward? At present, in Wandsworth, we are consulting on options for two major estate regeneration schemes that may involve substantial investment both in public and private facilities. The sums involved are in the hundreds of millions of pounds. If the risk is transferred wholly to the market, our reward is limited to the physical improvements to the area and the extra additional income in local taxation. If, though, we work on some elements including estate refurbishment and new-build social housing using lower cost borrowing or balances, more of the reward comes back to the council. However in recent times it is central government that has changed the risk profile of projects at a stroke of a pen by changing the rules: the rent formula and convergence data on HRA rents and 35% top slice on New Homes Bonus are just two examples. It is almost perverse that the markets are less risky than government. It really is a case of: “Do you feel lucky? – Yes, but only if the government doesn’t change the rules.”

Matt Bowmer, Director of finance for LGSS and S151 for Northamptonshire County Council
In the face of continued austerity, there is an acceptance in Northamptonshire County Council that our appetite for risk has to change. This hasn’t been an overnight moment of enlightenment but a gradual process over recent years. Accepting greater risk means greater management and understanding of risks and ensuring that appropriate arrangements are well embedded in the organisation. There has been a positive change in mindset with the focus now on a ‘can do’ approach. This has been demonstrated through the support that the council has given the prosperity agenda which is at the heart of our core priorities. One of the most prominent examples of this approach locally is the support provided to Silverstone Holdings through a radical change in direction in our Treasury Management Strategy. In October 2010, the council provided a loan of £10m to Silverstone Holdings to develop the circuit and ensure that the British F1 Grand Prix remained in Northamptonshire. It also ensured the continued success and growth of the world-leading High Performance Technology sector which had built up around Silverstone and the wider Motorsport Valley. Within the county there are more than 1000 high performance technology  companies, employing more than 20,000 people with an annual turnover of £1bn. The council also supported the implementation of the Masterplan through a further £1.5m joint venture, invested over five years. This was enabled in part by use of new wellbeing powers at the time. The loans had gross profit triggers to give stability and the headline loan was repayable in full by December 2014. The plan was that by this time, the work undertaken, including planning permission for significant redevelopment of the site, would have attracted external investment to complete the project. The development of the circuit has not been without its fraught moments with cash flow being very tight as the initial development works were completed. In September 2013, however, a major property investor/developer stepped in, buying up the Estates part of the business ensuring the long term investment and at the same time enabling the return of the council’s investment. The investment by property developer MEPC in Silverstone Park will unlock the delivery of more than 2,500 new jobs.

Margaret Lee, Executive director of corporate services for Essex County Council
I’m not sure what ‘too much risk’ means – it is for each council to work that out for itself, depending on its finances, the specific project, partners involvement, and local economic environment. However, it is clear that things can’t be done without risk, and central government has been clear that it expects us to take risks, be entrepreneurial, but balance the risk with the need to ensure we can still provide the essential public services our most vulnerable people rely on. Regeneration is not a short term project to be delivered within the space of a one year capital programme. If it was, it would have been done before. So the role we play in the success or otherwise of a regeneration project is about providing local plans, democratic leadership and vision, and co-ordination. It’s also about providing some finance – we need to recognise that the cost of our capital is less than the private sector and we can generally accept a lower rate of return and over a longer period. Central government has recognised this to a degree – the establishment of Enterprise Zones, LEPs and City Deals all point to an understanding of the role of local government in healthy communities, but I would like to see more. As a DoF of a shire county, I believe that the ‘asks’ given to cities in particular can apply to wide areas – our City Limits document sets this out clearly. Key for all of us is that the projects we facilitate are sustainable over the longer term. So what constitutes success? The basic ingredients must be there – involvement of the local community and businesses and partners, capital investment and a clear idea of what will sustain the developed area going forward. And the means to support that sustainability which will generally include local access to good education facilities. Local government has a clear role to play – and finance professionals must do their part to facilitate this.

Vic Allison, Deputy managing director and S151 officer for Wychavon District Council
At Wychavon, we like investing in property. Not only does this often provide a better financial return for the taxpayers, it often provides a community benefit too. And where that community benefit is a boost to the economy, then that’s a real win-win. The council enabled the development of a superstore in Droitwich Spa about 10 years ago. It assembled the land, most of which it already owned, and then the retailer built the store on the council’s land. Once it was up, the council bought the building from the retailer for a pre-agreed price and entered into a long-term lease with the retailer. The lease represented a better return for the council than it was able to achieve from its surplus capital cash on the money markets. The store is a huge success, bringing additional footfall to Droitwich Spa. While the economy is very different in 2013, there are still opportunities such as this for councils to invest. We have recently lent money to local companies where banks were more reluctant so that they could invest in property. In one case, this was to help to refurbish and re-open an old cinema, and in another it was to turn a former leisure centre into a training academy. Our economic development team is very excited about both projects. We are about to invest in another town centre superstore which will bring massive economic benefits to Evesham. Investing in property is more risky than investing in the Bank of England. But the returns are so much higher. And the risks can be reduced by doing the normal due diligence such as picking the right partners and taking the right level of security.

This article was first published in Room151 Quarterly magazine. Didn’t receive a copy? Local authority heads of finance, resources, procurement and chief execs can email subscriptions@room151.co.uk for a complimentary subscription.