Councils who invest commercially should be supported, not punished

Delivering more with less

Since 2010, local government has seen funding for core services reduced by as much as 40%. Under these challenging circumstances, it is perhaps no surprise that councils have sought alternative finance to maintain services.

One way that many local authorities are making up some of the shortfall is investment in commercial property. Local authorities are making use of their right to borrow cheaply from the Public Loans Board to invest in assets around the country, allowing them to benefit from long-term yields that are higher than the cost of borrowing.

In recent weeks, however, there has been increasing scrutiny of these investments, and the Treasury is now looking to curtail the power of councils to borrow to invest in this way. Much of the concern is routed in an unfair perception that local authorities are either ‘unqualified’ to make such investments or do not understand the associated risks.

This is simply not the case.

The power of portfolios

Although a council’s priority is always to provide local public services, local authorities increasingly need to be commercial in their approach to strategic asset management in order to deliver much needed capital and ongoing revenue receipts.

As well as their own buildings from which they deliver public services, many local authorities have built up very significant portfolios of commercial property over many decades. This in part has been through the compulsory purchase and acquisition of land to undertake major mixed-use development. Investment in income-generating commercial assets is, therefore, a natural extension of what many councils are already very well equipped to do. Indeed, these investments are making efficient use of the talents and skills that many councils have in-house to generate additional income.

Every local authority must, of course, be open and accountable for individual investments, and it is right that they are scrutinised. It is true that some are less sophisticated than others and need to take a more cautious approach accordingly. Commercial activities come with risks but, with good risk management, these can be significantly mitigated.

Policy implementation

With this in mind, a policy that restricts councils from making investments in commercial property, purely borne from a misconception that public sector organisations are not equipped to do so, ignores their ability to make important decisions and deliver worthy outcomes. Government rightly expects local councils to be the driving force behind highly ambitious regeneration schemes in their areas, and local authorities have spent decades exploring ways to make best use of taxpayers' money. So why can’t they be trusted to act commercially, and how else can they regenerate whole areas or negotiate with private landowners and investors?

We know that many local authorities have a well-established asset management capability. Led by the Government Property Unit and the LGA in partnership with local authorities across the country, the One Public Estate programme has demonstrated how a truly collaborative and positive approach to the management of local assets between public organisations can benefit both communities and the public purse. The LGA estimates that by 2020, the programme will have generated 44,000 jobs, released land for 25,000 homes, raised £615 million in capital receipts from sales, and cut running costs by £158 million. The potential to do much more is enormous.

The relative risks versus the potential long-term reward of commercial investments are a genuine dilemma for local authorities, but with the right resources, good advice and, where appropriate, through strategic partnership with the private sector, local authorities can generate long-term sustainable revenue and manage those risks. They must, of course, be supported by the right policies to enable them to do so. Local authorities continue to demonstrate not only the capacity of local government to innovate, but also to use their expertise creatively to deliver more for their local communities.

This piece was originally published in the MJ.