Local Authorities (Borrowing and Investment) Bill, House of Commons, 23 October 2020

The LGA has significant concerns with the Local Authorities (Borrowing and Investment) Bill which seeks to restrict the acquisition of land and property by councils outside their own boundaries. The Bill also seeks to limit local authorities’ investment in “commercial risk-taking enterprises” and limit council borrowing for non-core activities.


Key messages

  • The LGA has significant concerns with the Local Authorities (Borrowing and Investment) Bill which seeks to restrict the acquisition of land and property by councils outside their own boundaries. The Bill also seeks to limit local authorities’ investment in “commercial risk-taking enterprises” and limit council borrowing for non-core activities.
  • Councils have a long history of holding and investing in property, including commercial property, dating back to when local authorities were first established and previous Governments encouraged councils to be “more commercial”.
  • Increases in councils’ investment in “commercial” property recently has been partly due to the need to generate additional income to help replace a loss of nearly £15 billion in core government funding to local authorities over the past decade, and as an alternative to cutting services such as care for older and disabled people, protecting children, reducing homelessness, fixing roads and collecting bins.
  • Council commercial activity is often an integral part of service activity. In many cases, such activity is not carried out for commercial gain but for place shaping or for economic regeneration, such as plans to regenerate high streets.
  • When making investments, councils follow strict rules and assessments to ensure they invest wisely and manage the risk of their investments appropriately.
  • The main source of borrowing for councils is the Public Works Loans Board (PWLB). This has largely worked well, although the decision by the Treasury to raise interest rates by 1 per cent across the board in October 2019 has had a major impact on councils. We are calling on the Government to reverse the interest rate rise announced last October and amend the new lending terms to the PWLB.
  • The COVID-19 pandemic has had a profound impact on the economy and on councils and the communities they serve. Our Re-thinking public finances submission makes clear that the Comprehensive Spending Review is a once in a generation opportunity to shape the direction of this country.

Commercial investment

An unprecedented period of funding and demand pressures have stretched local services to the limit with councils losing almost £15 billion in central government funding in the past decade. Councils have faced a choice of either accepting funding reductions and cutting services – such as care for older and disabled people, protecting children, reducing homelessness, fixing roads and collecting bins – or making investments to try and secure services in the long term.

Council commercial activity is often an integral part of its service activity. For example, property that is held for service reasons – such as for place shaping or for economic regeneration, may also generate a commercial rental income.

In February 2020, the National Audit Office (NAO) published a report on local authority investment in commercial property. The NAO rightly recognised that in many cases councils are not only making investment decisions that can help them replace funding shortfalls, but also contribute to their local economy and environment.

According to the NAO, the instances where councils have made purchases solely for yield, particularly those out of council areas, have been mainly of industrial and office premises rather than retail. The instances where councils made investments in retail acquisitions, were to promote local regeneration and the retaining of local high streets and local shopping amenities.

Most council investment in property is and has been within councils’ own boundaries. The NAO report found that 38 per cent of property purchases in 2018/19 were out of a council’s own area (about £2.5 billion). This was carried out by a relatively small number of councils – 64 according to the report. We would however, question the definition of out of area and highlight that many councils’ local economic areas extend beyond their own boundaries. Of these approximately £600 million were in retail and the rest were in industrial or office acquisitions and the report found that out of area acquisitions were generally seen as important in mitigating risk, “such as the possibility of a downturn in the local economy or general decline in a locally dominant sector.”

Prudential framework

When making investments, councils follow the strict rules and assessments to ensure they invest wisely and manage the risk of their investments appropriately.

Under the prudential framework for local authority capital investment, all councils approve and publish Annual Strategies for Capital, Treasury Management, and Investments. As well as outlining local plans, these also make the appetite for risk clear.

Many councils employ specialist investment and treasury management staff, recruiting people with the specialist skills. Councils also use specialist external advisers for skills and market advice that they do not have in-house.

Councils are required through statutory guidance to ensure that they consider liquidity and security ahead of yield in their investment decisions.

Borrowing framework

The prudential borrowing framework enables councils to source capital funding based on what is affordable and prudent, but otherwise free from external restrictions. A major part of that prudential assessment is having sufficient ongoing revenue funds to service the cost of borrowing undertaken.

The main source of borrowing for councils is the Public Works Loans Board (PWLB). This has largely worked well, although the decision to raise interest rates by 1 per cent across the board in October 2019 has had a major impact on councils. At a stroke this increased significantly the revenue costs of any new borrowing and therefore, of any new capital programmes being planned. In response councils were forced to reconsider the viability of several vital projects, including projects to build new housing, investing in infrastructure to enable new housing developments to take place, and regenerating town centres.

Councils have either delayed investment or, where borrowing has still been undertaken, this has meant increased costs to councils which they have had to pay either to HM Treasury or to private loan providers if they have been used instead. Our submission to HM Treasury’s consultation on the future lending terms of the PWLB noted that the specific discounted loans schemes announced in the spring budget are helpful, but the overall rate rise needs to be reversed.

We are concerned that Government plans to change the lending terms for the PWLB by linking restrictions to all borrowing in any one year to individual investment activity undertaken by councils (even if not funded by borrowing) will make it harder for councils to borrow from it to fund priority capital schemes. It will also place PWLB officials in the position of adjudicating decisions that are a matter for elected councillors.

The problem caused by these practical issues was confirmed in a series of workshops run by HM Treasury over the summer for experts from local government. The outcome of the consultation is likely to be published alongside the spending review and we call on the Government to address this practical problem when framing the new lending terms as well as reversing the interest rate rise announced last October

Impact of COVID-19 on local government

The COVID-19 pandemic is already having a profound impact on the economy. The best possible efforts of councils to spark local recovery will not bear fruit without sufficient funding and a sustainable local government finance system to underpin them all.  Councils need confidence in the financial system to be able to act, and this is particularly important if councils are expected to be innovative and invest in local solutions.

Prior to the pandemic, councils had already dealt with a £15 billion reduction to core government funding between 2010 and 2020. While a significant part of this challenge has been met through efficiencies and transforming services. In addition, councils were facing a funding gap of £6.5 billion by 2024/25, even under assumptions of sustained council tax increases of 2 per cent each year, fees and charges rising and continuing business rates growth.

Councils are also dealing with the sharp end of the immediate financial impact caused by the extra costs, loss of income and cash flow pressures arising from COVID-19. Savings plans and transformation efforts have been put on hold, further exacerbating this unprecedented impact. Work by the IFS has indicated that at least £2 billion is still needed to meet the full financial impact of the pandemic in 2020/21 – with the potential for this to grow to as much as £3.1 billion, before even considering the impact of lost local taxes on 2021/22 and beyond.

Comprehensive Spending Review

The LGA’s Re-thinking public finances submission makes clear that the Comprehensive Spending Review is a once in a generation opportunity to shape the direction of this country for years to come. We are clear that responding to the significant economic challenges ahead requires renewed joint endeavour between local and national government as equal partners and with the right powers, sustainable funding, and enhanced flexibilities local government can build on the positives we have achieved in the past few months and ensure our communities prosper for the future.

The Spending Review must properly resource councils and reverse recent changes to the borrowing framework to enable councils’ continued investment in universal services for our local communities.

Contact

Iredia Oboh, Public Affairs and Campaigns Adviser

iredia.oboh@local.gov.uk