By Chris Hossack, Associate Director
Following the spending review on 26th November, the chancellor made it clear that the ‘debt for yield’ use of the Loan Board was to end.
This move had been in the making for some time as the government had become increasingly concerned at the levels of borrowing for commercial property investment, with some £7 billion of borrowed money spent by larger councils on such risk laden activity in recent times.
The possibilities of non-materialisation of anticipated income on such investments has grown over the last year owing to the Pandemic downturn, notably its impact on retail and commercial office space.
Let’s not lose sight of how this relatively recent trend came about. Local Authorities hold core purposes that sit outside of commercial property investment. We are more comfortable delivering public services, housing growth, planning functions and regeneration, than this newfound activity born out of necessity.
Growth in commercialisation is intrinsically linked to the reduction in government funding for councils, most notably the scrapping of the Revenue Support Grant (RSG). Councils had to find new ways to fund their capital programmes and bridge their funding gaps to keep the show on the road. Especially at a time when local government has seen a growth in demand for key services.
I believe that some positives have come out of this weaning off the RSG, we have seen an increase in innovation and collaboration between authorities like never before.
But will these new changes drive innovation further or constrain councils? Will we see a new range of ‘risky behaviors’ as councils continue to grapple with the need for supplementary income? Perhaps we could see an increase in wealthier councils with larger reserves becoming bankers to those authorities that need access to borrowing? Another innovative form of commercial risk that only the very wealthiest authorities can exploit.
Our 151’s must now give assurances that any borrowing from the PWLB is for appropriate use under the new rules, supported by an investment schedule for 3 years hence. Failure to do so will preclude councils from accessing PWLB borrowing for 3 years and potentially loans being called in early in the worst cases. The government will continue to respect the prudential regime for PWLB borrowing but the onus is on the council to get it right. In many cases finance plans and business cases will need to be rewritten and potentially new partnerships sought to bring in commercial expertise.
On the positive side, these changes will refocus the drive for local regeneration, stimulate local markets and create local jobs. Investment of local money within the Local Authority Area feels so much more preferable as an approach to the Hampshire council that invests in a retail park somewhere in South Yorkshire for a return!
I suspect however, this could be a tale of two halves. It’s fine for those councils that have the opportunity for sustainable investments in their areas but what about those who find that more challenging? Doing nothing is not an option for them, they likely still have funding gaps to bridge and services to maintain, all ready to soak up the cash. The problem hasn’t gone away and with a key solution removed, I envisage interesting times ahead for cash strapped councils.