LAI0035

 

Written evidence submitted by The Bureau of Investigative Journalism

 

 

Introduction

 

Since 2017, The Bureau of Investigative Journalism has been investigating local authority finances. We believe our work is relevant to the Public Accounts Committee inquiry into local authority commercial investment because our findings have revealed the scale of the practice, a lack of oversight, the barriers to public understanding of what councils are investing in, how the deals are being financed and why they are being undertaken. The key findings of this work are:

 

  1. Context

 

    1. The Bureau of Investigative Journalism is an independent, not-for-profit organisation which collaborates with other media to hold power to account at a local, regional and international level. The Bureau Local team within the Bureau focuses on data-led reporting and collaborates with a network of more than 1,000 people across the UK – reporters and citizens – to shine a light on local and national issues. 

 

    1.               Since March 2017, one of Bureau Local’s primary areas of focus has been the financial sustainability of local authorities and the impact of the reduction in central government funding. During this project we found it particularly difficult to place the financial figures and spending decisions of a single council into a local, regional and national context due to issues around the accessibility, transparency and quality of information published by and about local government. As a result, the public’s knowledge and understanding of decisions which affect their day-to-day lives is diminished. 

 

    1.               We have so far submitted our findings to two formal investigations into local authority finances. In April 2019, the Bureau submitted written evidence to the Housing, Communities and Local Government Committee (HCLGC) inquiry into council finances and the 2019 spending review. Our findings were cited prominently in the report and prompted a number of recommendations, including the need to improve the quality of data published by local authorities. In December 2019 we participated in the Redmond Review of local authority financial reporting and external audit, the findings of which have yet to be published. Information we filed as part of these processes has been included below where relevant. 

 

  1.              The context - Councils turn to investments to replace lost funding 

 

    1. In December 2018 we reported on the growing practice of local authority commercial investments, the aim of which is to replace government funding lost during austerity with rental income. We found in the previous two years the number of councils investing in commercial property had doubled. In 2017/18 alone, authorities spent £1.8 billion on investment properties, a six-fold increase from 2013/14. Of most concern was the scale of debts accrued by some of the smallest councils in England - including Spelthorne Borough Council in Surrey, which said it had become “heavily reliant on investment income” to fund its services. 

 

    1.               Our investigation found Spelthorne had borrowed £1 billion despite having a net annual budget of just £22 million. This equates to 46 times its spending power. Three other councils - Woking, Runnymede and Eastleigh - had borrowed ten times their budgets. 

 

    1.               “If you look at the most extreme examples, there are public services used by vulnerable people which are dependent on how well rental income in the property market is doing,” Don Peebles, CIPFA’s head of policy, told the Bureau. “This is a risk that local authorities have never been exposed to before and you have to ask whether they are equipped to handle that risk.”

 

    1.               Following our report, Secretary of State James Brokenshire said he “shared the concerns” about councils becoming overexposed to commercial investments and that he would discuss with the Treasury “whether further intervention might be required” on the issue. The following month senior civil servant Dr Jo Farrar admitted the government was worried “two or three” councils had borrowed too much to finance the purchases. 

 

    1.               In March 2019 the Bureau revealed that auditors had delivered a damning assessment of Spelthorne’s biggest property purchase, the £385 million acquisition of the BP research centre in Sunbury. KPMG found “significant weaknesses” in financial processes surrounding the deal, raising further questions about the property investments councils have made. 

 

    1.               The acquisition of the site, through £405 million borrowed from the Public Works Loan Board (PWLB), was decided by council officers without any public scrutiny using what is known as delegated authority - a practice covered in more detail later in this submission. KPMG also found little evidence the council had considered legal advice that the purchase, the largest of its kind by a local authority in England, might have been “disproportionate” in comparison to its other spending. 

 

    1.               Perhaps of greatest relevance in the current climate (given the massive economic downturn that is likely to result from the Covid-19 crisis) is that the auditor was unable to determine whether the council had considered the potential financial impact if BP decided not to renew, or to change the terms of, its 20-year lease. “As significant loan costs still need to be met for up to 50 years, we would have expected to see projections analysing the position under different scenarios” read a section added to the bottom of Spelthorne’s 2016-17 accounts, which KPMG had refused to sign off for almost two years.

 

  1.              Commercial investments, councils and the coronavirus 

 

    1. In recent weeks the Bureau has been assessing the potential impact the Covid-19 crisis could have on local authorities, particularly those which have become reliant on rental income to pay for the vital services they are responsible for. 

 

    1.               Traditional sources of local government funding - council tax and business rates - have been depleted by the epidemic, with relief or deferral schemes offered to people struggling to pay their bills.

 

    1.               While the government has provided an additional £3.2 billion of emergency aid to local authorities, those which are dependent on commercial income to balance their books face a critical problem, as a potentially unparalleled economic downturn threatens the foundations of their new business model. Their tenants may go out of business. The value of their properties could plummet. Services, which are already teetering on the brink, could topple over. 

 

    1.               The British Property Federation told the Bureau that only two thirds of all office rents and one third of all retail rents were paid in the first quarter of the year. The federation expects those figures to halve again in June. Property groups are finding it difficult to sell retail parks and analysts are projecting lower office rents for years to come. 

 

    1.               Nick Dunbar, a senior consultant for Vedanta Hedging, which provides financial advice for local authorities, told the Bureau the Covid-19 crisis had caused a “massive plunge” in the value of the sort of commercial property councils had invested in. “Anything to do with bringing in rents is getting hammered, because people can’t go into offices and shops,” he said. 

 

    1.               Mr Dunbar added that closures, cutbacks and a likely shift towards home-working as the lockdown eases could see businesses vacate offices. As previously mentioned, Spelthorne has invested £1 billion in office buildings. Dunbar said: “It’s early days as we are still in the middle of the epidemic, but the question is: what is the new normal going to be? The business model of the Spelthornes - where they are looking for a stream of revenue from offices for a very long period of time, to repay loans which are 20, 30, 40 years in the future - could see a scary outcome for residents in those areas.”

 

    1.               Some councils are heavily dependent on income from property to provide services. Woking Borough Council in Surrey reported a month before lockdown that its investment and rental income was the equivalent of 88% of its spend on services. Next year that figure is predicted to rise to 98%. 

 

    1.               Since the end of March 2016 Woking has spent £206m on 12 commercial properties. It also has pre-existing interests in two shopping centres. The purchases were financed through borrowing. While the council has been making a reasonably healthy net profit, it predicted this would narrow significantly in the coming years – and that was before the effects of coronavirus were known.

 

    1.               The council says it has reserves in place to cope with temporary falls in rental income but “should there be a significant permanent reduction in income, service provision would need to be reviewed”.

 

    1.          The outlook looks particularly bleak for councils that have invested in retail. The sector was already struggling before the lockdown led to the closure of all but essential shops. Despite government support schemes, a recent study suggests a prolonged lockdown could wipe out half of the market. The NAO found more than a third of councils’ spending on property in the past three years, up to £2.3bn, had been in the retail sector.

 

    1.          Gloucester City Council used all of the £862,000 it raised from investments in 2019-20 – half of which relates to the retail sector – to fund services. It has so far only collected a quarter of the rent owed for April to June.

 

    1.          Spelthorne Borough Council invested in retail property only weeks before lockdown. In February it announced the purchase of the Elmsleigh shopping centre in Staines-upon-Thames for a reported £40m. Now more than 90% of its stores are closed. The scale of the Spelthorne’s investments means it has become “heavily reliant on investment income” to fund services. Its portfolio was predicted to bring in £9.9m this year – more than council tax and dwarfing business rates and government grants.

 

    1.          Other councils that depend on commercial rents to fund services said they were confident they could withstand the crisis. East Hampshire District Council said that while it expected a serious impact from the pandemic, its portfolio would withstand “the pressures and unique challenges” presented by the virus.

 

    1.          Some 40 per cent of Eastleigh Borough Council’s £10m budget comes from income generated by property. “Any change to commercial income will not impact our service delivery,” a spokesperson told the Bureau, adding that “significant reserves are put in place to protect against future rental losses”.

       
  1.              Lack of oversight and barriers to public understanding 

 

    1. Public knowledge of details surrounding local authority commercial investments councils - including what councils own, how much they paid and where the money came from - is restricted both during the decision-making process and even long after purchases have been completed.

 

    1.               This is vital because there is little to no regulation or policing of the key processes and institutions via which local authorities undertake these acquisitions. Instead, the responsibility for holding local authorities to account falls on the local electorate - who have been denied the information which would allow them to make an informed decision. 

 

    1.               For example, the rapid increase in commercial investments has been made possible by councils’ easy access to low interest loans from the PWLB, which is overseen by the Treasury. In answer to written questions submitted by Lord Hollick (who is a member of the board of The Bureau), the Treasury confirmed: 

  

    1.               Councils are only required to “have regard” for the Prudential Code set out by CIPFA when they borrow from the PWLB or any other lender. The Treasury’s response to our questions added that “responsibility for local authority spending and borrowing decisions lies with locally elected council members, who are democratically accountable to their electorates”. In short, councils police themselves. But how can the public determine where they stand on these investments when access to details about them, and other financial information, is restricted? 

 

    1.               A YouGov survey - done in collaboration with the Bureau - found public opinion split on whether commercial investments are a concern, but there was a clear desire for greater transparency. Some 80% of the 1,737 polled said the properties or land being bought should be made public, 82% believe councils should be transparent about how the purchases are being funded and 78% thought councils should reveal external consultants advising on the deals.  

 

    1.               In the course of our reporting, the Bureau found these crucial pieces of information are almost always discussed in Part B of council proceedings, from which the press and public are excluded on grounds of commercial confidentiality - a decision which there is no opportunity to challenge.

 

    1.               Deals worth tens of millions of pounds are being signed off without scrutiny even from elected officials. In 2017/18 Newham Council in London spent £90 million on five investment properties, all of which were outside the borough. The decision to buy the offices and warehouses in Surrey, Lincolnshire, Yorkshire, Warwickshire and the West Midlands were all made by council officers under “delegated authority” - meaning they were not reviewed by councillors or at public meetings before being approved. 

 

    1.               A report by the council’s auditor, Ernst & Young, said: “Whilst we have not identified any significant issues with the governance arrangements in place for these acquisitions, the council should consider whether delegated authority for such decisions is appropriate.”

 

    1.               Councils have made use of other measures which have led to purchases not being subject to the usual level of scrutiny. Leeds City Council, which has also moved to a delegated authority model, took away the power councillors had to “call in” potential purchases for in-depth scrutiny, arguing the delay the additional meeting would cause could lead the council to lose out to a competitor. 

 

    1.          Furthermore, important details such as which consultants councils are using as part of their commercial property investments are not make public. The Bureau had to combine and analyse more than 30 individual spreadsheets containing nearly 6,000 rows of spending data, published under transparency rules, to discover that US property consultants Cushman & Wakefield had been paid £2.3 million by Spelthorne Borough Council since 2017, more than any of the council’s other suppliers during the same period. It would be unreasonable and unrealistic to expect a member of the public to do the same. 

 

    1.          In June 2019 the Bureau attempted to use the Local Audit and Accountability Act, which gives the public the right to inspect local authority accounts and other financial documents, to learn more about consultants being used by councils during commercial property deals. The Act could provide a powerful tool for communities to hold local government to account but is falling well short of that potential due to weaknesses with the legislation and how it is being applied by local authorities. This provides a further barrier to public understanding of the issues being considered by this inquiry. 

 

    1.          Volunteers working with the Bureau submitted requests to about 50 local authorities in England asking to inspect their accounts and related documents. Our study found:

 

    1.          Even after acquisitions have been made it can be difficult for the public to access information about them. 

 

    1.          Under the Local Government Transparency Code 2015, local authorities in England and Wales are obliged to publish annual lists of the property they own, in order to ensure “local people are able to scrutinise how well their local authority manages its assets.” However, the Bureau found 223 councils (63%) were updating the same spreadsheet each year instead of publishing a new one, meaning changes over time are lost because it’s not possible to compare one year to another. These datasets are difficult enough for the public to access and understand without this major obstacle in the way.

 

    1.          A key part of the issue surrounding local authority property investments - especially in the wake of the Covid-19 crisis - is the extent to which some councils have become reliant on this income to pay for the services they provide. But vital information such as how much rental income has been put towards a council’s budget is often difficult to find within the financial reports they publish and even their annual accounts. Each year local authorities are required to file their financial information to the government, data which is later published online by the Ministry for Housing, Communities and Local Government. Yet these spreadsheets - which are hardly public-friendly anyway - do not include exact information about how investment returns have been used.

 

  1.              Council investments extend beyond property deals

 

    1. The Bureau’s latest investigation also concerns local authority investments, specifically in solar energy farms. While not strictly relating to commercial property, we believe our findings would be of significant interest to this inquiry because they focus on:

 

    1.               We are unable to share the full details of this investigation because the story had not been published before the committee’s call for evidence had closed. 

 

  1.              Conclusion

 

    1. Local authorities have been forced to look for alternative methods of raising money following a decade of austerity. The main way they have done this is to invest in commercial property, paid for largely by long-term borrowing. 

 

    1.               The investment made by some councils has been proportionate to their means. Others have spent hundreds of millions of pounds of public money on commercial and retail property in an attempt to become self-sufficient.  

 

    1.               This spending has been enabled by easy access to low interest loans from the Public Works Loan Board (PWLB), which undertakes no checks and balances of a council or its request for money before lending.

 

    1.               There is little appetite for greater regulation within the sector nor any indication the Ministry of Housing, Communities and Local Government or other institutions are willing to take action against those councils thought to be borrowing far in excess of their resources.

 

    1.               As a result, responsibility for holding local authorities to account over their spending decisions falls on the electorate, who are denied the facts about commercial investments at every stage of the process. 

 

    1.               In fact, investments involving tens of millions of pounds of public funds are even being made without the knowledge of elected councillors, under a process called delegated authority. This adds another layer of secrecy to an already opaque practice. 

 

    1.               A combination of the erosion of traditional sources of funding, easy access to loans from the PWLB, a shortage of checks and regulation, and a chronic lack of accountability and transparency, has resulted in a situation in some local authorities where vital public services are tied to the fortunes of the property market. 

 

    1.               The Covid-19 crisis makes this a hugely important issue. A sharp and prolonged economic crisis would undercut the assumptions at the heart of this business model and call the future of services - many of which are at the forefront of the response to the epidemic - into question.     

 

  1.              Appendix

 

    1. The dataset we built as part of this project, which shows all property acquisitions by local authorities between 2014-2018 can be viewed here. 

 

    1.              A reporting recipe which explains our findings and methodology, and how to read and explore the dataset above, can be found here. 

 

May 2020