Revised council investment rules are an opportunity to be seized

3 Jan 18

Changes to the statutory guidance on local authority investments offer an opportunity for the social economy to make a strong case for local capital accumulation and active community governance, says Gen Maitland Hudson of Power to Change.

It’s an interesting time for the social economy, understood in its broad sense as the range of activities that prioritises social wellbeing over private gain, from mutuals and co-operatives to community businesses.

A coherent set of arguments are being made in its favour, and active policy change is being advocated to expand it in ways that would not have been foreseeable a few years ago. 2018 may well be the year in which two or three significant tussles work themselves out in the UK, with long-term implications for how we understand, extend and advocate for an alternative economics that is not dependent on the rich getting richer at an ever-faster rate.

One of these tussles is set for early in the New Year. This will pit local authorities against central government in the application of the statutory guidance on local authority investments.

What is at stake is the way in which local authorities balance their books and deliver public services as cuts continue, needs grow in expensive ways and the forecast effects of Brexit remain bleak. The review of the guidance offers an important opportunity for local councils to embrace an active investment strategy that favours local economic development, particularly a social economy that works to retain capital and put it to work for local people.

The investment guidance is under review following high profile investigations in the Financial Times and The Times on local authorities’ speculation in the property market.

The Times investigation drew on FOI requests to show that councils had invested £2.7bn since 2015 in property acquisition and development fuelled by below-market rate loans from the Public Works Loan Board.

That £2.7bn covers very different kinds of investment.

The biggest, and the most startling, is the purchase for £360m by Spelthorne Borough Council of BP’s office complex. Under the leaseback deal, BP is locked into a tenancy for the next 20 years. Spelthorne has not revealed its exact return on the investment, although it has indicated it is in the region of £3m a year. The council’s statement underlines the withdrawal of central government funding and the need for ‘innovation’ in developing revenues to replace it. The FT’s coverage noted, laconically, that the deal is so much larger than the council’s assets and income that Spelthorne has become “a property company with a sideline in providing local government services”.

That is one extreme. A local council has mitigated funding cuts by transforming its core functions so powerfully that it must have blown the minds of local government innovation labs up and down the land.

At the other end of the spectrum are the humdrum local government investments that support social enterprise and community business.

Hull City Council has made a 3.5% loan to the Goodwin Development Trust for a housing project to create 40 affordable homes, for example.

That, by contrast, looks much less like a radical pivot towards commercial property management, and much more like the core local government function of patiently supporting the local economy. That is both a point about the value – in both monetary, and social, capital terms – of a local authority loan, but also one about the regulatory framework for local authority investment. Section 4 of the Localism Act requires all purely commercial activity to be done via a limited company. If a return is ‘incidental’ to broader social and economic aims, then the clause doesn’t apply. This means that investment in the local economy is – already – explicitly understood as a core part of a local authority’s stewardship of public funds.

The technical issue of changes to investment guidance is important for the social economy because it touches on the nature of a council’s role, and the kinds of entities that local councils can and should be as they become increasingly entrepreneurial in their resourcing of local services.

One outcome of the rise in commercialised activity by local councils would be a new kind of borough fund with a portfolio of speculative property assets, often outside the local area, providing a sufficient yield to pay for local government services. In essence a purely commercial entity that put its profits into outsourced bin collection and park maintenance. The example of Spelthorne shows that this is not a wholly far-fetched idea.

There are good reasons for thinking this would be A Bad Thing.

Some of this is a matter of financial risk. The FT reporting noted the risk that assets might turn out to be ‘dud and illiquid’. That could mean significant losses, devastating cuts to services and a taxpayer bailout.

Some is a matter of accountability. Eastleigh Borough Council, for instance, has refused to disclose the terms of its loan to Marks & Spencer on the grounds that they are ‘commercially sensitive’. If safeguarding a commercial return comes at the expense of public trust, that is an intangible cost that ought to be noted on the democratic balance sheet.

For the social economy, the risk and the democratic deficit are not only unfortunate, they are disastrous.

Investments outside the local area, even yielding a return that helps to cover service costs, do nothing for local economic development. Local economic development itself is crucial for local authorities looking to their future revenue given the upcoming 100% retention of business rates.

On a practical level the history of the social economy has shown just how important local authorities are as commissioners, investors and guarantors. A detached, primarily commercial, local authority, focused on its portfolio of assets, will do little to support the ‘active participation of citizens in the social and economic wellbeing of local communities’, and will be incentivised to outsource services as cheaply as possible, taking little account of the social sector’s role in delivering them.

The Local Government Association has already indicated that it considers changes to the guidance ‘unnecessary and unwelcome’. That is understandable from their point of view, with 40% budget cuts since 2010. There is a definite positive here, however, that council budget holders can seize and develop in partnership with the social sector. 

Social economy actors must accentuate that positive and demonstrate why the guidance matters to them. They should highlight where opportunities lie to accumulate local, community-owned capital that supports greater financial independence and forward planning, alongside active and engaged local governance. There are already some interesting examples of this kind of joint working. Now is the moment to develop them quickly, efficiently and in partnership, to demonstrate the power and reach of local capital markets.

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