Leveraging a council’s assets and borrowing power for the wider good

The huge financial pressures faced by local authorities over the past decade have led councils to seek creative ways of plugging potential budget deficits.

Cutting costs can only go so far and councils have been exploring the alternative way of balancing the books – revenue generation, and particularly through the investment in property.

The challenges of the past few years have led to the emergence of a range of income creating solutions, many highly imaginative and with the potential to have an impact beyond the budget book. In particular, councils have looked at how they could tap into their existing property assets or acquire new ones to develop new income streams. This remains a relatively new space for most councils and there are many questions and considerations to navigate.

What is the right level of risk for a council? Is it appropriate to borrow using public sector borrowing arrangements? What is the best type of property to invest in? In short, what principles should be followed in setting a revenue generation strategy?

Borrowing to invest in commercial property

Although a range of approaches have been adopted in recent years, the most publicised have been highly leveraged large-scale acquisitions of commercial property, often entirely funded from public sector lending bodies. Many councils have taken advantage of low borrowing rates offered by the Public Works Loan Board (PWLB) to fund these acquisitions, benefitting from the difference between the below market rate interest they pay and the market rates they can charge for the property assets. The most striking example was the £360 million acquisition by Spelthorne Borough Council of a business centre owned by BP. The practice has attracted criticism, partly because of the nature of the acquisition but also because many councils have chosen to acquire assets outside of their own areas. Aside from the financial returns of such ventures for the council, it is difficult to argue that these investments benefit the local community.

The government responded in early 2018 by amending the guidelines of the Local Authority Investment code to try to curb the practice of taking PWLB loans to finance out-of-area investment. In what appears to be a reaction to the trend, a private member’s bill is also making its way through the Commons with the aim of restricting local authorities’ asset acquisition options further still. It proposes that “no local authority in England may borrow from the PWLB for the purposes of commercial property acquisition or other purposes beyond the scope of the statutory duties of that local authority”. However, as yet government intervention has been light touch and the volume of borrowing has continued its upward trajectory.

Maximising community impact

We believe that it is possible for councils to reconcile their growing desire to generate supplementary financial returns with their core duties. In fact, adopting a more commercial mindset can do more than simply support a council’s statutory obligations by plugging a budget gap – important as that is. Investing in certain types of income streams could also contribute to the delivery of a council’s strategic objectives.

Take for instance Basildon Council, which invested in the development of a new state-of-the-art GP surgery in Wickford (opened in 2017). The investment will deliver a steady revenue stream through rental income whilst also plugging an important gap in local care services.

Another innovative approach is the agreement between Hull City Council and the Goodwin Development Trust – a locally run organisation committed to improving quality of life by providing a range of much-needed services (including single-parent support, children’s centres, career advice, etc.). The Trust will undertake the development of social eco-housing (40 new homes) with financing from the Council, which was able to acquire cheap credit through the PWLB. The deal provides the Council with a steady additional revenue stream as well as supporting core strategic objectives. Hull Council is of course well-known for its ambitious regeneration investment programme centred around getting a huge boost from its City of Culture status. Returns on such investments are difficult to track, though recent data showing an increase in tourist revenue is encouraging for the city. The boost in self-confidence around the city is also very tangible.

Other forms of indirect local authority involvement can lead to increased revenue and wider impact as illustrated by Rotherham and Sheffield’s joint efforts to create the Advanced Manufacturing Park in Waverley. This project seeks to build on the area’s existing status and expertise as a modern production hub to attract more high-value added businesses. The project will contribute increased tax revenue, and hopefully have further positive knock-on effects for the local economy.

In short, the options available are broad and when coupled with ready access to credit (the PWLB being only one of a range of borrowing options), local authorities are in a position to maximise the financial and social impact of their investments.
There is no sense that the financial pressures will go away any time soon. Leveraging a council’s assets and borrowing powers for a wider good must surely be one of the core roles of an authority over the next decade.