Written evidence submitted by the Saffron Walden Constituency Labour Party [FSS 011]

We make this submission on behalf of the Executive Committee members of the Saffron Walden Constituency labour Party. We wish to bring to the committee’s attention to the concerns of local residents about the way that our council taxes are being used to underwrite speculative property investment, and also about the worrying lack of transparency regarding these arrangements.

Uttlesford District Council’s financial and investment strategy bears a worrying resemblance to the strategy of Croydon Borough Council, andweI hope that the committee can benefit from a further case study in the use of commercial investment strategies by local authorities.

Uttlesford Commercial Strategy

Uttlesford has, similarly to Croydon and some other authorities, chosen to make provision for future funding by making commercial property investments, with the hope that future investment returns will help to fund council services[i]. The authority’s recent statement of accounts refers to a £300 million investment programme, with £107 million worth of deals approved in the current financial year alone [ii]. For a council with current reserves of £20 million this appears to be an unacceptable amount of leverage for a public authority. 

It would be a somewhat different matter if local authorities were seeking to invest money that the council had accumulated in its reserves. However, the fact that these investments are being funded by loans[iii], 80% of which are intended to be interest only[iv], is even more troubling. This seems to be an unduly high-risk activity for a local authority that ultimately underwrites these activities with taxpayer money.

Unacceptable Risk

We would firstly question the wisdom of having councillors and local civil servants enter into such deals, when they are likely not have a great deal of experience in large-scale property investment schemes for profit. Whilst it is true that local authorities frequently borrow money or enter into property contracts, this is usually done with a view to achieving the legitimate policy aims such as local development or provision of needed infrastructure. Doing so with a view to generating profits and revenue streams is an entirely different matter.

Whilst the local authority claims to be following best practice and taking professional advice[v], such advice cannot eliminate the reality that investments such as these carry great risk. No doubt NHS Trusts took plenty of professional advice when they entered into long-term PFI contracts – and yet many trusts entered into expensive deals that turned out to be poor value for money for taxpayers. Indeed, many of the same advisors were (unsurprisingly) heavily involved in PFI.

The current coronavirus pandemic has shown, as the financial crisis did before it, that property investments believed to be a low-risk investment may nonetheless still incur large losses. Shareholders and investors should of course be prepared for this – but taxpayers did not sign up to shoulder losses for investment decisions over which they have had little control.

Local authorities, like central government, need to have the leeway to spend in a counter-cyclical manner, stepping in during downturns to provide aid to local communities. Unfortunately, these risky investments will likely exacerbate the already pro-cyclical nature of local government revenues, as the business parks and commercial properties they have purchased suffer from downturns in the commercial rental market.

Transparency Concerns

Secondly, these deals rarely allow for the level of transparency and public scrutiny that we expect from our public authorities. The public are routinely excluded from the meetings of Uttlesford’s investment board, and reports presented to the authority are restricted on the basis that they refer to “financial or business” affairs. Again, commercial secrecy is understandable in a private context, but these restrictions demonstrate how inappropriate it is for the public authorities to engage in such extensive investment strategies. How can it be right that the public are excluded from meetings where millions of pounds of the council’s money are being spent?

The use of special investment companies by Uttlesford and other local authorities, which take special loans from the authority, again shift decision-making power from bodies with democratic accountability towards private corporate bodies not subject to the rigour of public accounts and procurement rules. How can taxpayers be sure that the long-term loans being granted to the council’s investment company will be paid back? How can control be exercised over the spending decisions of private limited companies?

It is notable that this year, Uttlesford’s auditors have felt unable to fully sign off the local authority’s accounts because they have received information relating to the council’s “Use of resources” which requires investigation, and as such cannot issue the required Annual Governance Statement[vi]. The local press has reported that the police are also assessing the information to determine if criminal offences have been committed[vii]. It is unclear whether this possible mismanagement relates to the authority’s commercial investment programme, but it again demonstrates that despite numerous processes intended to create transparency, residents are still kept in the dark.

The Funding Crisis in Local Government

Whilst local councillors must take much of the blame for entering into inappropriate investment schemes, they cannot shoulder all of it.

Local authorities are between a rock and a hard place. Legislation mandates that they provide numerous important local services, yet the central government has decimated grant funding and restricted the ability of local authorities to make up lost income with new tax revenues. Financial “innovation” is the near-inevitable result when numbers don’t add up, and that is what we see in places like Croydon and Uttlesford.

Actions to be taken

The government must take urgent action to plug the hole in local government finances, and impose restrictions on the ability of councils to make investments for profit-making purposes. Clear legal limits need to be set on the investment powers of local authorities in order to protect present and future taxpayers.

“Nudges” and guidance are not enough. The recent restrictions on loans issued by the Public Works Loan Board are welcome but wholly insufficient. Local authorities that have tied themselves to commercial investment strategies appear unwilling or unable to change course; authorities such as Uttlesford appear perfectly able to simply take out loans from commercial lenders. They have continued to enter into deals despite the pandemic.

Parliament should also review the legal mechanisms contained in the Local Audit and Accountability Act 2014, and consider whether the Act does provide enough tools to hold local authorities accountable. It appears that there is no real detriment to Uttlesford or its councillors for failing to obtain sign-off of their accounts, and there appears to be no obligation to provide further information to residents on the ongoing internal investigations triggered by the auditors.

We thank the committee for considering this evidence, and we hope they will be able to enquire further into the situation at Uttlesford District Council and other similar authorities.

 

January 2021

 

 


[i] See Uttlesford District Council (2020), Unaudited Statement of Accounts 2019/20, p vi. Available at: https://www.uttlesford.gov.uk/media/10328/2019-20-Unaudited-Final-Accounts/pdf/SoA-FINAL-2019-20-la).pdf?m=637414027006200000 (Accessed 22 January 2021)

[ii] Ibid.

[iii] Ibid., p xv.

[iv] See Uttlesford District Council (2020), Strategy 2020-2024, para 31. Available at: https://uttlesford.moderngov.co.uk/documents/s16470/Appendix%20B%20-%20Commercial%20Strategy%202020-2024.pdf (Accessed 22 January 2021)

[v] Ibid. p7 para. 35

[vi] Uttlesford District Council (2020), Report to Governance, Audit and Performance Committee dated 30 November 2020, pp 1-2/ Available at: https://uttlesford.moderngov.co.uk/documents/s21423/UDC%20201920%20Accounts%20-%20changes%20from%20draft%201%20to%20draft%202.pdf (Accessed 22 January 2021)

[vii] Bishops Stortford Independent (2020), ‘Police investigating possible criminal offences at Uttlesford District Council’, 11 December 2020. Available at: https://www.bishopsstortfordindependent.co.uk/news/police-investigating-possible-criminal-offences-at-uttlesford-district-council-9144824/