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Local government commercial activities in the headlines again

Author: ICAEW Insights

Published: 21 Oct 2020

Recent reports on the commercial activities of local councils in Wales and Spelthorne Borough Council’s £1bn commercial property bet highlight the pressures local authority finances are under.

Audit Wales recently examined the ongoing challenges to the financial sustainability of local government in Wales, reporting that the pandemic will continue to have a financial impact beyond this current financial year. The financial strength of each individual local council to weather such a massive financial challenge varies significantly, with the level of usable or ‘rainy-day’ reserves before the pandemic struck ranging from 5% to 33% of a year’s net cost of services.

Extra funding to councils in the first half of the financial year has mitigated the massive increase in local council expenditure to a certain extent, especially the severe cost pressures on social services and education. However, as Adrian Crompton, Auditor General for Wales, says, Given the breadth and depth of the impact of the pandemic to date … local authorities are likely to face difficult choices over the short and medium-term.”

In a separate report, Audit Wales looked at commercial activities in local government, commenting that councils need the right culture, skills and systems to unlock the benefits and mitigate the risks of commercialisation. The challenge for councils is to balance being more commercially focused whilst at the same time being the safety net for their local residents and communities.

There is a degree of risk associated with commercial activity, especially where it requires large sums of money to be invested. The report provides advice for elected councillors and senior officers on the need to have regard to the potential exposures to their organisations when deciding to engage in commercial activities and in particular whether they have the capabilities in place to initiate, implement and manage commercial ventures successfully.

The impact of austerity on local council funding over the last decade has been a catalyst for councils choosing to pursue commercial activities, at the same time as a capability gap has opened up as cuts to finance and commercial teams have reduced their ability to manage such ventures effectively. Recruiting into local councils is always a challenge because of the difficulty in matching private-sector salaries.

Many of these concerns apply more widely, with reports [link paywalled] that Spelthorne Borough Council’s external auditor KPMG has raised concerns over the legality of its £1bn of investments in commercial property, highlighting how many councils have borrowed to finance commercial ventures. Spelthorne has defended itself vigorously, saying it has complied with all relevant guidance and has always taken expert advice. It also points out that it has collected 96% of commercial rents due for the first half of the current financial year, and that it is not considering issuing a section 114 ‘bankruptcy’, unlike other councils.

Alison Ring, director for public sector at ICAEW, commented: “Local councils continue to be caught between a rock and a hard place with their finances, facing a difficult choice between cutting essential public services that residents rely on and looking for alternative ways of raising revenue, including entering into commercial activities. At the same time, councils find it difficult to retain or recruit staff with the specialist skills necessary to effectively manage commercial ventures and to minimise their exposure to risk should they go wrong.

“Many of these issues existed before the coronavirus appeared, but the pandemic is providing a live stress test to the resilience of council finances in a way that was not expected only a few months ago. Greater attention to building a more sustainable funding model for local authorities and how balance sheets can be strengthened should follow.”

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