Like many in local government, we have been left deeply worried and frustrated in equal measure at the recent attention-grabbing headlines alleging that ‘rotten boroughs' are ‘betting billions on property purchases'. The coverage provides little insight and does little to help answer the underlying question: is council commercialisation a good or bad thing? Our latest research aims to inform this debate.
A prolonged period of austerity and uncertainty surrounding Brexit negotiations has left councils with the daunting task of protecting vital public services while dealing with severe budget cuts. This tipping point has led to a change in risk appetite at many councils, encouraging them to become more commercial. However, many councils face a dilemma: often criticised for not being commercial enough on the one hand, and being overly commercial on the other.
Investing in commercial assets is nothing new for local government. It has a proud history of commercialisation with a social purpose dating back nearly 200 hundred years. While recent research has found that investment in property is a growing trend, our findings reveal there are a wide range of other local government investment and treasury strategies across the UK. For example, in the past year alone, sector borrowing included £4.8bn on bonds and commercial paper, and investment included £7bn in inter-authority lending.
More commercial councils are now also adopting increasingly innovative approaches to commercialisation, such as place-based marketing offerings, working together locally to add social value and cross-boundary franchising. For many, investing in commercial assets is key to developing anchor institutions and strategic assets that contribute to place, such as airports and GP surgeries.
Ensuring additional investment outside of their area also helps councils to diversify their risk. This approach can help to mitigate the risk of a downturn in the local property market, insulate councils against low domestic savings rates and allow them to pool budgets and share costs to scale-up developments. It is not always about securing the highest yield.
Councils have both a legal and moral duty to manage scarce resources responsibly and the continued rise of commercialisation has led to intense scrutiny of their borrowing and investment activities over the past twelve months. This, along with the need to ensure a balanced approach, has culminated in new rules – set to be released this month – on the way local government is able to trade, borrow and invest. This will be set out in the Chartered Institute for Public Finance and Accountancy Prudential Code and the DCLG consultation on proposed changes to the Local Authorities Investment Code and Minimum Revenue Provision (MRP) Guide.
While well intended and necessary, these new rules may not reflect all the latest commercial innovations in local government and may be at odds with other government policy. For example, an over emphasis on commercial property may be out of kilter with the full range of other asset classes that councils are trading in.
Councils should also be undertaking scenario planning to help plan for the direction of wider national policy and global mega trends. These will greatly affect how successful their commercial activities will be in helping to achieve financial self-sustainability over the next decade. Local authority leaders must ensure their medium- and long-term planning reflects these factors in order to deliver sustainable outcomes.
So is council commercialism a good thing? Our research shows it can be a force for good. However, councils need to take a place-based approach to choosing the most prudent options and adopt a ‘beyond compliance' attitude to the governance of these activities. They should commit to doing more than simply complying with the new rules by ensuring their commercialisation robustly balances outcomes and risks.
Philip Monaghan is commercial lead for the local government advisory at Grant Thornton UK LLP
You can download a full copy of our Commercial Healthcheck report here.
