MPs warn councils’ lack of commercial skills puts finances at risk

18 Nov 16

The increasing scale of commercial activity carried out by local authorities could put council finances at risk, and town halls might lack the necessary skills for such projects, the Public Accounts Committee has warned.

In a report examining the financial sustainability of local government, published today, MPs accused Whitehall of being complacent about the risk to local authority finances.

Today’s Financial sustainability of local authorities review highlighted that councils were increasingly undertaking commercial activity intended to generate revenue income from capital investment in properties and businesses in an effort to offset government cuts. This includes projects such as developing houses and commercial units for rent or sale.

But the MPs warned councils may lack experience of such schemes, and council tax bills or other services could be hit if they go wrong. They called on the Department for Communities & Local Government to review the commercial skills in different types of authorities, and provide an update by next summer on the scale and nature of these activities in order to better anticipate risks.

“We do not share the department’s confidence that the increased commercial activity in the sector adds no particular risk to the department’s own work,” the report stated. The department should also work with CIPFA to ensure the local government capital finance framework “remains current and continues to reflect developments”.

Committee chair Meg Hillier said funding cuts had led councils to rethink the way they use public money, and the government wanted councils to become largely self-financing, including through business rates retention. However, she warned that poor investment decisions could cost money that might otherwise be spent on public services.

“Our committee has previously highlighted gaps in the commercial skills of the civil service as a factor in the failure of some projects and we have similar concerns about local government,” she stated.

“Local authorities need the skill-set to invest wisely and the department must bear its share of responsibility for ensuring these skills are in place. But more fundamentally, the information central government uses is inadequate for understanding trends and associated risks in local government finance.”

This represented a serious flaw in DCLG’s ability to plan properly for the future and ensure councils are following a sustainable path, she concluded, but the department was complacent about the risk.

Ministers should also set out how they intend to respond to increasing local government commercialisation in future spending reviews by considering the interaction between revenue spending, capital spending and borrowing.

The review highlighted that “neither the department nor the Treasury understand why local authority investments on deposit are now at record levels”. It stated that local authority deposits grew from £18.5bn in 2010-11 to £26.1bn in 2015-16.

Money deposited with commercial banks and most other institutions are not risk-free, the committee stated, but it was not clear why these had grown.

Responding to the report, Sean Nolan, the director of local government at CIPFA said: “Increasingly, councils are looking for entrepreneurial ways to boost revenue. There are numerous examples of partnerships established between councils and commercial organisations, and a growing number where councils have set up independent, autonomous companies themselves.

“Seeking new commercial activities introduces new challenges and risks for councils and requires new skillsets to manage these challenges and risks. Today council finance teams must possess the ability to undertake a range of roles, depending upon the context and demands of each situation. Whilst understanding all the associated risks, they must be fully instrumental in delivering growth and enabling changing.”

He highlighted that CIPFA is working to support senior finance colleagues to access the right skills to identify commercial opportunities and ensure proper and sound due diligence over how they are considered, including at the forthcoming CIPFA local government finance conference.

The Local Government Association stated that, following a 40% funding cut in the last parliament, councils had to look for new ways to generate revenue.

Claire Kober, chair of the LGA’s resources board, said council officers and members are developing the skills and expertise to take a more commercial approach to investment decisions, and more self-sufficiency cannot be accompanied by central government reviews and monitoring.

“All commercial activity involves risk and potential losses as well as the potential to make profits,” she added.

“Local authorities have to adhere to strict rules and assessments before making a decision to ensure it is affordable and provides value for money.”

A DCLG spokesman said local authorities are required to ensure they have the right skills and commercial expertise to make investment decisions.

“It is right that local authorities take a key role in promoting economic growth. They understand their local areas and are best-placed to make decisions that deliver value for money and better services for residents,” he added.

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