Council’s commercial gamble

Is it right for local councils to turn to commercialisation to fill holes in their finances?

Local councils are facing the biggest cuts to government funding since 2010, with the Local Government Association (LGA) revealing that, overall, councils will have suffered a 77 per cent decrease in government funding between 2015/16 and 2019/20. This represents a drop from £9,927m in 2015/16 to £2,284m in 2019/20.

This has forced many local authorities to think up imaginative solutions to their funding deficit. Cuts to services are usually the go-to method for balancing the books. However, with the strain on the public sector already at near breaking point, this no longer feels like an acceptable method.

South Somerset District Council (SSDC) has come up with a proactive way to plug the gap in its funding. It has published a commercial strategy which sets out how it intends on monetising assets through commercial ventures.

SSDC has been busy buying up assets all over the south of England and Wales. It has attempted to mitigate risk by utilising its Commercial Property Team, which scrutinises every aspect of a suggested purchase. The team has rejected purchases on grounds of cost versus valuation, risk, not fitting with the council’s aims and over exposure to any one particular market.

SSDC has amassed a portfolio of industrial, office, retail and energy investments. These include:

  • Alchemy, Welwyn Garden City – 38,880 square feet of contemporary office accommodation: £9.73m, reflecting a net initial yield of 7 per cent;
  • Centurion Mill, Sowton Industrial Estate, Exeter – a multi-let warehouse and trade-counter accommodation: £4.2m investment, with a net initial yield of 7 per cent;
  • ‘The Ralph’ veterinary referral hospital, Marlow – an innovative provider of veterinary services: £5.95m, with a net initial yield of 7.09 per cent;
  • Business Park, Christchurch: £7.05m, reflecting a net initial yield of 7.07 per cent;
  • Imperial House, Newport – headquarters of comparison giant Go Compare: £4.66m, with a net initial yield of 8.06 per cent;
  • Energy storage facility, Taunton – a ground breaking energy storage site: £9.8m, with a projected yield of 7.5 per cent.

The council has also bought: Sherwood Road, Bromsgrove for £3.7m; King William House, Bristol for £5.4m; B&Q, Glastonbury for £4.405m; Reevesland Industrial Estate, Newport for £2.78m; Bell House, Milton Keynes for £2.925m; and Linden House, Bristol for £2.75m. All of these assets yield a return of around 7 per cent.

It is clear that SSDC has put into place an in-depth contingency plan to commercialise assets in order to safeguard its services. It has to be noted that it has been very successful and impressively forward thinking, especially in regard to the energy storage facility. However, we must ask the question, should local councils be forced into this type of activity?

Should our councils just concentrate on running our services and deciding how our revenue is spent? Would it be better for council assets to remain in their own districts? Are SSDC and other councils overreaching their remit by commercialising?

Although SSDC has done much to mitigate its risk by holding a fairly wide portfolio, there is always a chance of investments tanking. It would not be the first time investments made by councils have gone bad.

In 2008 three major investment banks based in Iceland  – Kaupthing, Landsbanki and Glitnir  – defaulted, causing a banking collapse in the country. Diplomacy between Britain and Iceland became strained as many local authorities and charities in Britain had invested in these banks. Amongst the local authorities there were many from the south west:

Dorset County Council                   £28.1m

Somerset County Council              £25m

Plymouth City Council                     £13m

Exeter City Council                           £5m

Cornwall County Council               £5m

North Somerset Council                 £3m

Dorset Police Authority                  £7m

Although around 90 per cent of the investments were eventually recovered, in most cases it took until 2014 to do so, with competitive auctions recovering the bulk of the investments.

It would be fair to say that, due to the chronic underfunding from central government, all local authorities will have to think up inventive ways to raise extra funds or be forced to cut services – in all probability, a bit of both. SSDC has been aggressively proactive in its attempts to plug the funding gap, but it does at least appear to have been thorough with its due diligence. Let’s hope these investments become a real boon for the council, and the constituency really profits from them.