Local council investments turn sour in Nottingham and Merton
6 January 2021: A review has severely criticised Nottingham City Council over the failure of Robin Hood Energy, while Merton Council wound up its affordable housing subsidiary before building even started to cut short its losses.
Many councils have sought to set up commercial businesses over the last decade but as Nottingham City Council and the London Borough of Merton have discovered, investing is not risk-free.
Nottingham was forced to sell off its failed energy supply business at a loss, while Merton decided just before Christmas to close down its wholly-owned affordable housing company following a deterioration in the financial projections.
Nottingham City Council and Robin Hood Energy
In 2015, Nottingham City Council set up Robin Hood Energy, a green energy company for local residents. The intention was to provide low-cost energy to local residents and customers more widely, at the same time as decarbonising the energy supply. Robin Hood grew rapidly, but it lost money and ran into financial difficulties when it could not pay its bills, with the council forced to bail it out in 2019.
The external auditors of Nottingham City Council made a report in the public interest in August 2020 relating to the council’s governance arrangements, listing 13 recommendations for the council to implement. Nottingham swiftly implemented an action plan that led to the disposal of the Robin Hood Energy business in addition to actions to strengthen financial management by the council.
The auditors highlighted significant failures in governance, with the council being so determined that the company should be a success that there was institutional blindness to the escalating risks to which the council was being exposed. This ultimately resulted in losses of more than £30m of public money following the impairment of the council’s investment.
As a result of this public interest report, the government initiated a rapid non-statutory review, which was published in late December 2020. Secretary of State Robert Jenrick announced additional measures in response to the serious failures at Nottingham City Council and an Improvement and Assurance Board, made up of experts in governance and finance appointed by the department, is being set up to help the council deliver the review’s recommendations on governance and company ownership.
Nottingham has until the end of January 2021 to put forward a three-year recovery plan that sets out how they will improve their financial position, strengthen governance and financial management and review their investments. They must submit progress reports to the department on a quarterly basis.
Merton Council and Merantun Development
In December 2020, Merton Council announced its plan to wind up its wholly-owned housing company Merantun Development Ltd after the company’s business case was deemed “no longer viable”. Merantun was set up in 2017 to deliver affordable housing and had been working on a number of proposed housing developments in the borough.
Before transferring land to the company to commence building works, the council re-appraised the investment case at a special meeting held on 21 December 2020. It concluded that the planned return on investment had deteriorated and was now too low to justify proceeding, with increased construction costs not being matched by sufficiently higher returns. The council noted that its ‘risk appetite’ has changed following the pandemic and in the light of the financial failures in the neighbouring borough of Croydon. There were also concerns about how changing government regulation might affect the viability of the project if it proceeded, as well as whether exiting from the EU might lead to lower demands for housing.
It is unclear how much, if any, of the council’s £2.2m investment in the company to date will be recovered.
Alison Ring, director for public sector at ICAEW, commented: “Nottingham’s experience of investing in a commercial venture is a textbook example of how disaster can result from failing to ensure adequate governance processes and financial expertise are in place. While well-intentioned, it is clear that the council did not fully appreciate the risks involved in launching Robin Hood Energy, nor did it properly monitor the additional financial exposures being taken on as the company expanded.
“Merton is perhaps a better example, with a re-appraisal of the risks associated with its housing development business leading it to cut its losses short. Many other councils across the country with similar housing development companies would be well advised to re-appraise their own investment plans to ensure they remain viable and the risks involved are manageable.
“Local authority finances have been battered by the coronavirus pandemic following a decade of austerity that has eaten away at their reserves and during which many of them have increased their exposure to financial risk. Strong financial management and high-quality financial expertise will be critical to protecting local taxpayers from bad investment decisions.”
