FDs’ Summit experts defend councils as MPs label property investment ‘risky’

As Room151’s FDs’ Summit conference explores local government’s investment in commercial property MPs once again lable it a “significant risk to government”.

Once again MPs have taken aim at local government with claims the “precarious” nature of the sector’s finances could pose a risk to central government.

As experts at Room151’s FDs’ Summit conference explored local government’s approach to commercial investment, the public accounts committee (PAC) of the House of Commons dropped its report on the whole of government accounts, claiming: “The financial sustainability of some local authorities presents a significant risk to government.” And among the reasons worrying MPs? Commercial property investments.

While the PAC’s report highlights other financial risks, among them Covid-19, the spotlight once again falls on worries that councils have invested too heavily in becoming landlords and that some of the transactions are “risky”. It also predicts local government will see more section 114 notices.

According to committee chair, Meg Hillier, “some local authorities have taken on extremely risky levels of debt in recent years in an effort to shore up dwindling finances, much of it investments in commercial property.

“The pandemic has doubly exposed that risk—in the huge extra demands and duties it is placing on local authorities, and in the hit to returns on commercial investments.”

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She goes on to accuse the Treasury of a “worryingly laissez faire attitude to what now presents a significant risk to the whole of government.” Hillier calls on the Treasury to “demonstrate” it is managing these “significant risks”.

The PAC has offered warnings before about commercial investments with a report out last year https://committees.parliament.uk/publications/1845/documents/19224/default/ . The Treasury has its own worries and has, in fact, taken action by hiking Public Works Loan Board lending rates for a year before issuing new borrowing rules.

The sector reacted strongly to the PWLB rules and has argued that only a small number of councils were involved in “risky” loans. They also argue that given the state of local government funding, councils have few options but to seek capital investments to raise revenues.

“Eclipsed”

Reaction to the latest report among experts at the FDs’ Summit conference revealed some concern that opinion in Westminster of local government was formed based on the policy decisions of just a few councils.

In a panel discussion looking at commercial investment and funding issues, Tony Travers, a professor of local government at the London School of Economics, said the media coverage of a small number of authorities “absolutely eclipses the 99% who go about their business in a rational, normal way.”

Others agreed. June Matte, managing director of PFM Financial Advisors, said a focus on a few councils gives the impression that the “sector is shakier than it is”.

According to Matte, opinion of local government may have suffered from a funding debate in which many have claimed the sector is out of money. “We recognise that there’s a political discussion going on there, but it’s not necessarily a financial one.”
She added: “I think we have to focus on the sector for the quality that it is, not focus on the handful who are stressed; and try have a better discussion publicly about the strength of local government.”

Some see the new PWLB borrowing rules in the same light. Martin Reeves, chief executive of Coventry City Council, said the new rules were “ideological” and “nothing to do with finance, nothing to do with fiscal or economic parameters”.

“It was an attempt to clip some of the excesses that we have allegedly seen,” he said.

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Prior to Covid there was much speculation England would see a number of section 114 notices—a statement that a council cannot balance its budget—due to the strains of austerity.

Northamptonshire issued a notice in February 2018. Croydon issued one in November last year, then another in December. Speculation recently centred on whether the pandemic could drive more councils over the edge. So far, it hasn’t, though government has made a concerted effort tp eprsuade councils to approach MHCLG with concerns about their finances. Some have applied for “capital determinations”—permission to capitalise revenue spending.

Experts are keen to point out that despite the notices, no council has ever defaulted on its debt and the number of 114s remains small.

Taking part in the FDs’ Summit, Sir Merrick Cockell, a former chair of the Local Government Association and currently chair of the Municipal Bonds Agency, said: “We can all quote the councils that have got into difficulties and then come out of difficulties, because of their own actions and also support from the sector and, when necessary, support from national government.

“But they all come out. None of them have defaulted on their debts. And that’s going to be the case with all the current [114 councils]. And, indeed, it will be the case with all future 114s.”

When the PAC reported on council investment in property last year it estimated the total at £7.6bn and labelled it all “risky”. Local government’s contention is that not all investments are the same. Even new borrowing rules, though more complex than they were, fell far short of calling a halt to borrowing in property. But as councils continue to grapple with budget stresses, the debate is likely to run and run.