Local authorities across the UK are facing a grave threat to finances. Sanjiv Kohli, the Director of Resources and Deputy Chief Executive at Newark and Sherwood Council, tells Rachel Willcox how his council is combining robust financial management with an innovative investment approach to beat the budget black hole
The term ‘enterprising councils’ may once have been a concept met with some derision. But following a decade of austerity, and against a backdrop of dwindling central government funding and soaring demand for services accelerated by the global pandemic, the need for commercial approaches to plug local authority funding black holes has never been greater.
At Newark and Sherwood Council, Sanjiv Kohli is more than rising to that challenge. As Director of Resources and Deputy Chief Executive, Kohli’s innovative financial management strategy has not only helped to shore up the council’s balance sheet and generate much-needed income for the local authority, but is also helping to address a pressing shortage of housing with a groundbreaking joint venture that is blazing a trail for other local authorities.
Chartered accountant Kohli is upbeat despite the turmoil of the past few months that has left his council, like so many others, facing a significant deficit. Additional expenses and dwindling income due to COVID-19 are costing Newark and Sherwood £350,000 a month. Despite receiving £1.2m in additional funding from government, factoring in the council’s own support for businesses and individuals in the area means it will be out of pocket to the tune of £800,000 over the three-month period to the end of June 2020.
It is not alone. The overall picture for local authorities is sobering. Analysis by the Local Government Association published in June puts the estimated financial challenge faced by councils as a result of the pandemic at £10.9bn, with a funding gap of £7.4bn.
Fortunately for Kohli, his strategy since joining the council in 2017 has enabled the build-up of reserves for a rainy day and, he says, “it’s absolutely pouring now”. He adds: “We’re doing whatever we need to do to support businesses and individuals to get through this, and we’ll deal with our own finances afterwards. We’re lucky that we can do that. But a lot of councils are on the brink of issuing a section 114 report.”
Since 2004, when Kohli moved into local government, he has seen commercialisation become firmly entrenched in the lexicon. Most notable is the trend towards councils buying commercial property such as shopping centres and office buildings, often outside their region, as a way to bolster balance sheets and offset the impact of government austerity measures introduced in 2010.
A case in point is Spelthorne Borough Council in the north-west corner of Surrey, with a population of 95,000. It has, to date, borrowed close to £1bn in loans from the Public Works Loan Board (PWLB) – a statutory body that provides loans to public bodies from the National Loans Fund – to fund its property investment strategy. In June, the council said it anticipated that in 2020/21 its investments will generate a surplus return over costs of £9.8m a year.
Despite the potential payback or preferential interest rates on offer, it’s not a strategy that Kohli has felt inclined to follow. “I don’t support that approach. Investments should be focused on the regeneration of our local areas.” Kohli is not alone in his reservations. Concerns have been expressed – and ministerial eyebrows raised – that in their eagerness for a slice of the commercial property ownership pie, some councils have been taking on too much risk.
The step change in the scale of this kind of investment – from an estimated £460m in 2013/14 to 2015/16 to an estimated £6.6bn for 2016/17 to 2018/19 – prompted the influential Public Accounts Committee to launch an inquiry in April into purchases of commercial property by local authorities. This came amid fears that the coronavirus pandemic will expose councils to a drop in income from their investments.
A focus of the spending watchdog’s review will be whether local government officials have the commercial skills required to carry out such transactions.
Kohli, who trained with Grant Thornton and qualified in 1990 with a local Leicestershire firm, spent 13 years in practice before moving into business for nine years, some of which were spent as a finance director with a tech start-up looking to use his skills to secure funding and prepare it for a successful listing on the Alternative Investment Market in 2000.
The cornerstone of Kohli’s plan has been the creation of a wholly-owned development company – Arkwood Ltd – to build residential properties on existing, council-owned land holdings. The arrangement contributes to addressing the shortage of housing in the area while also increasing the council tax base and adding to its substantial new homes bonus, a grant paid by central government to incentivise housing growth.
‘Unlike many councils who used that bonus to subsidise council tax increases, we took the view that the bonus would be held in a reserve and a proportion of that would be spent on bringing forward capital projects that could bring income back to the council,” Kohli explains.
Through Arkwood, the council has set a target to build 500 new homes over the next five years, fully funded by the council.
‘It will cost £16m to develop around 100 homes. The council has adopted the model of investing 25% of the funding requirement in equity and lending the remaining 75% to Arkwood at an arms-length borrowing rate. Arkwood will purchase the land from the council on a deferred payment basis and won’t pay for it until it has completed its 70 homes,” he says.
The arrangement means that the council will earn interest on the loan at 6%, compared to around 0.9% in the investment market. Kohli anticipates that Arkwood will make a development profit of around 15% on a £16m development, which will either be invested in its next development site or, depending on the council’s budget, could be paid to the council in the form of a dividend to fund frontline services.
The strategy works largely thanks to the significant investments the company has made in specialist talent. “Where a lot of councils have failed is where they’ve not employed expertise from the private sector. The company employs a very experienced non-executive director who understands the commercial property sector, and the MD of Arkwood is paid the going market rate.”
Kohli’s financial strategy hinges on a thorough understanding of the council’s cost base, which since 2017 has identified a further £2m of cost savings without having a negative impact on frontline services. At the same time, a commercial team he set up also focuses on income opportunities.
“Waste is our biggest expenditure and by disaggregating refuse and recycling costs we were able to identify cost savings and review charges.” Despite charging households a monthly fee for green waste collections, outsourcing meant it was costing 25% more to deliver the service. The council has brought the administration of waste collections back in-house.
Commercialisation has clearly paid dividends for Newark but Kohli admits new approaches to income generation are out of synch with the local authority audit regime. He welcomes Sir Tony Redmond’s review into the quality of local authority audits.
“The accounts of local authorities have become more complex,” he says. “The fees paid to external auditors of local authority accounts don’t reflect their increased obligations and that clearly has an impact on appointment. So we have auditors come in who simply don’t fully understand public sector accounts.”
The council is also gearing up to receive up to £25m from the Town Deal fund, a £3.6bn scheme to help 101 UK towns that is part of the government’s plan to level up the regions. Kohli’s focus is to use this to leverage multiple amounts of funding from the private sector for a programme of regeneration and development, costing around £165m. It will encompass developments such as a new livestock market and an Agricultural College, creation of a Smart Innovation Supply Chain and Logistics Hub and the International Air and Space Training Institute, both in partnership with educational providers, and the establishment of a new Newark Construction College, among other educational and cultural developments.
Kohli emphasises the importance, in a local government setting, of clear political and officer leadership. He says, “working in a political setting has its challenges, but I am fortunate to be part of an excellent, innovative, forward thinking management team who work closely with the Leader of the Council and elected members to deliver the ambitious vision for Newark and Sherwood”.
Kohli also wants to use the package to stimulate Newark’s night-time economy, which he is confident will give the council £8 payback for every £1 spent. And the council is in conversation with local universities about developing an innovation hub.
“In order to meet the challenges we face, we need collaboration between the private sector and public partners. The future of local government is intrinsically linked to the success of our community,” he says.
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