Local authorities have been under pressure for the better part of the past decade. Efficiencies have been made, large-scale transformation has been achieved across the sector, and non-statutory services have been reshaped, outsourced or, in some instances, cut entirely.
The low-hanging fruits of the age of austerity have, without doubt, been consumed, but still councils are called upon to do more with less.
It is therefore understandable that they are looking for new and innovative ways to raise the funds needed to support local services. One such means of achieving this is the recent move towards investment in commercial properties, often funded by borrowing, pitting public funds against high levels of potential financial risk.
Yet, both the statutory investment guidance issued this year by the Ministry of Housing, Communities & Local Government and CIPFA’s Prudential Code cast doubt on whether such commercial activity is an appropriate response from local government.
Local authorities must consider the long-term sustainability risk implicit in becoming too dependent on commercial income, or in taking out too much debt. CIPFA’s Prudential Code aligns with statutory guidance, and is clear that authorities must not borrow more than or in advance of their needs purely in the interests of profit.
Prudence also requires local authorities to take into account their arrangements for the repayment of debt (including through its minimum revenue provision) and consider the risk, the impact and potential impact on the authority’s overall fiscal sustainability.
In short, local authorities must be able to demonstrate value for money and the security of the investment.
However, when investing in properties such as department stores, shopping centres and retail parks, such guarantees of prudence and affordability are difficult to come by. The profitability of such assets is a moveable feast, subject to the peaks and troughs of macro-economic trends.
The simple reality is that commercial investments often do not sit well with the primary purpose of local authorities, which is the delivery of quality services to local residents.
It is not just retail space that is prone to problems. A leading auditor identified several issues with a substantial asset purchase in 2016. These included significant weaknesses in the financial process during the purchase and little evidence that legal advice was properly considered, not to mention departures from the financial guidance provided by CIPFA. Furthermore, the auditor was unable to determine whether the council had considered the financial impact if the primary tenant decided not to renew or change the terms of its lease.
The simple reality is that commercial investments often do not sit well with the primary purpose of local authorities, which is the delivery of quality services to local residents.
Nonetheless, despite the existence of statutory guidance and the Prudential Code, the practice of borrowing to invest in commercial properties looks set to continue as authorities experience ongoing cuts to their budgets and increasing service demand in their communities.
Ultimately, the avoidance of all risk is neither appropriate nor possible. So how can we support councils to ensure they do not take on an inappropriate amount of risk when exercising their investment powers? This requires a new approach relevant to the problems councils are facing.
Decisions around commercialisation can be difficult, balancing action versus inaction, and risk versus reward. Each requires the careful consideration of both local and national conditions.
While commercialisation should not necessarily be abandoned, it must be focused and the risks robustly managed to ensure prudent use of the public pound. Taking an inappropriate approach to risk could lead to devastating outcomes for vital services.
