Austerity and the resulting financial pressures have driven a new level of interest around commercialisation. In some cases councils have gone down this path of thinking of themselves as a business to help secure their future financial sustainability. Others have done so in a desperate attempt to balance the books.
Local authorities have been particularly encouraged by the favourable rates of borrowing, but low interest rates are not in themselves a compelling reason to take out a loan.
These trends have turned commercialisation into a hot topic, but have also brought both new and often large risks.
It is little surprise then that the Public Accounts Committee has already shown an interest in this issue and the National Audit Office (NAO) is currently in the early stages of a formal inquiry on the topic, which will include talking to finance directors across the sector.
The NAO study is expected to look at the Ministry of Housing, Communities and Local Government’s role as a steward of the system, the data the department has available on commercial investment, and the mechanisms it uses to assure itself councils are not being over-exposed to risk.
NAO officials are clear they will not be auditing or evaluating individual local authorities’ decisions, not least because the powers do not exist for them to do so, but council chief executives still had plenty to say on the topic at a round table of top council chiefs organised by the NAO and The MJ.
One chief executive said they had urged their authority to look again at some of its plans shortly after arriving at the council.
They questioned if it was ethically right for councils, as an arm of government, to be ‘undermining the competition,’ adding: ‘Is the local authority only taking risk because it’s got an advantageous rate? I don’t know if we’ve got the right strategy in place.’
Commercialisation is a new area for many councils, and while many local authorities have established council companies, some have done so without necessarily looking at the overall picture.
Another chief executive said a recent corporate peer challenge had found individual projects made sense but their council needed an overarching commercial strategy, which would force the authority to look at its risk appetite.
‘Our approach to commercialisation continues to evolve,’ they said.
Another delegate said their council did not have a separate team, but every single person was encouraged to be commercial.
They described their authority’s strategy as based on doing things that made money and contributed to the regeneration of the area, adding: ‘We have had quite a healthy appetite for risk but also a prudent approach, so we have passed up on things. We’ve done a lot and have the appetite to do more’.
This need for a strategic approach – making commercialisation a way of approaching everything a council does – becomes clearer the more experienced the sector becomes in this field.
A fellow council boss said: ‘We’ve been on the journey a long time. We’re not trying to take over and get involved in a game we don’t understand.
‘There’s been a distinct herd investment – so much so that it’s started to drive down yields because we’re all competing against each other, and that strikes me as perverse and wrong.’
Councils bidding against each other simply drives up the price for everyone.
As one delegate put it: ‘What I’m finding in our region is a lot of councils are doing the same kind of stuff and we’re all competing with one another.’
How the sector can avoid competing with itself, or contributing to a herd mentality, will be considered by the NAO.
However, adding some balance, another delegate said: ‘I don’t think everyone is doing it for the same reason. I don’t think people are just following fashion trends. They’re doing it for a public policy purpose – that’s an important point’.
There are, of course, differences in the approaches of politicians and officers – as always, an interesting dynamic and one the NAO is interested in examining.
One chief executive said: ‘There’s definitely politics at play. Politicians, particularly, are often very gung ho in this agenda and officers are more reticent. The difference between the politics of red and blue is less easy to see.’
Another boss cautioned their colleagues about the danger of the ‘business-minded member’ making pragmatic officers seem ‘unimaginative’ in comparison.
A fellow chief executive warned the personal views of councillors sometimes affected business decisions, and they needed to be educated so they made more considered calls.
‘They need to act as if they are directors of a business – not members,’ the chief executive added.
This is all the more vital when big ventures have the potential to expose councils to massive risks, such as changes to industry and fluctuating currency markets.
It’s a different world from even just a few years ago. Today, lots of councils are looking at commercial ventures in energy, property, parks, crematoria, leisure and much else. Commercialisation is not just about making money, it’s about saving money as well.
‘The principle of operating commercially has been with this council for 10 years,’ said another chief executive.
‘We take the view that income generation is not an objective in itself. It also has to be of benefit to the area. I’m quite strongly resistant to investing outside your borough – though I hope the NAO will not be too prescriptive.’ In response, the NAO was clear to explain that was not its role.
Others who have been urged to be more courageous and have been increasingly thinking about commercial property also remain keen for any investments to be of benefit to the wellbeing of their residents, instead of simply generating a return.
Favoured ventures included a building company to intervene in a market where land values were low, and an investment in broadband to increase internet connectivity in the area.
The retail market was viewed less favourably by delegates, with one chief executive with a finance background comparing it to investing in coal mines 40 years ago.
Another delegate said: ‘Like many in the room we haven’t ventured into buying commercial property. I don’t think there’s anything wrong with that, but the retail market is changing at such a pace that there needs to be a really careful analysis. I’m not saying we won’t do it but it’s an incredibly risky area’.
One chief executive was more blunt: ‘Retail is not going to be the future,’ they said.
The NAO will also be looking at how councils can avoid bad decision-making and speculative bubbles, particularly important when the public is largely unaware of council activity in this area and its own recent study reported on the deficiencies of the current governance and accountability framework for the sector.
A council investment failing spectacularly may have to happen before this appears on the radar of most of the public.
Before this happens, councils need to consider the important issue of whether they are prepared to fail.
Speaking for many in the room, one chief executive said: ‘What’s going to be fascinating is how readily we forgive the first failure.’
NAO comment
Following our work on local government financial sustainability last year, we are conscious of the significant financial pressures facing many local authorities. We have documented how authorities have responded to austerity since 2010, in a first phase that involved reducing service spend allowing authorities to grow their reserves; and then in a second phase characterised by a much greater use of reserves and the beginning of a growth in alternative income. These new income streams were fuelled, in part, by a steep increase in borrowing from the Public Works Loan Board and other sources to invest in the acquisition of land and existing buildings, likely for commercial purposes. Alongside this, as our recent reports on governance and accountability have shown, we have seen a weakening of the governance framework within which local authorities operate.
The combination of increased borrowing and weaker governance present substantial risks to the sector. Some high-profile examples of significant levels of borrowing relative to council turnover; of investment in shopping centres at a time of a challenging environment for retail; of commercial companies and joint ventures with the private sector failing; and of councils investing in ventures many miles outside of their borough boundaries, have generated significant interest in Parliament.
A study looking at commercialisation in local government, in particular commercial investment, will help to establish the facts and enlighten public debate. While the NAO does not set any of the relevant codes that circumscribe such financial activities (those are owned by the Ministry of Housing, Communities and Local Government and the Chartered Institute of Public Finance and Accountancy), we anticipate that our work and the resulting views of Parliament will inform any revisions that may be implemented in response.
The round table was a good opportunity for us to talk to a senior audience and shape our thinking ahead of the fieldwork. We look forward to working with the sector on this project as it develops. If you have any thoughts on this agenda, contact Alex Burfitt at Alex.Burfitt@nao.org.uk to share your views.
Abdool Kara is executive leader for local services at the NAO
Round table attendees
Allen Graham, Chief executive, Rushcliffe BC
Donald Graham, Chief executive, Hertsmere BC
Paul O’Brien, Chief executive, Association for Public Service Excellence
Aidan Rave, Chief executive, South Kesteven DC
Owen Mapley, Chief executive officer, Hertfordshire CC
Robert Thomas, Managing director, Vale of Glamorgan Council
Graham Farrant, Chief executive, Bournemouth, Christchurch and Poole Council
David Armiger, Director of regeneration and neighbourhoods, Bassetlaw BC
Michael Coughlin, Executive director, Surrey CC
Will Tuckley, Chief executive, Tower Hamlets LBC
Andrew Lewis, Chief executive, Cheshire West & Chester Council
Laura Taylor, Chief executive, Winchester CC
Tim Johnson, Managing director, Wolverhampton CC
Andrew Carter, Chief executive, Centre for Cities
Abdool Kara, Executive leader for local services, NAO
Alex Burfitt, Audit manager, NAO
Heather Jameson, Editor, The MJ