Industry Intel

Has Central Government Gone too far in Mitigating the Risk?

Finlay Keith

Senior Consultant | Finance

May 16, 2023

Since the 2008 financial crisis limited Central Government grant funding has meant that Local Authorities have been forced to seek other revenue streams to bolster often under pressure public services.

These have often come in the form of commercial investments completely foreign to the usual operational functions that Local Government is traditionally concerned with. With the pandemic ending the era of low interest rates and high commercial property demand, whilst decimating leisure and entertainment investments that are popular with authorities, questions have been raised. Is this approach, which often exposes Local Authorities to high levels of debt, an acceptable way to raise funds or reckless gambling?

The most infamous example of dysfunctional investment is without a doubt the case of Thurrock Council; a Unitary Authority based in Essex. Thurrock were forced to appeal to central government to plug £500m hole in their budget for the 23/24 financial year deriving from imprudent investments.

They made four commercial investments resulting in a total loss of £275 million, the initial investment being three times the council’s annual budget, these included £665 million in businesses owned by businessman Liam Kavanaugh, for amongst other things the purchase of 50 solar wind farms across the country.

In November 2022 the firm lent the money by the authority went into administration, losing the council £155 million. Another example of Thurrocks recklessness was a £94 million investment in Just Loans Group, a payday loan company that went bust in June last year, with the council its’ main creditor. £64million was lost in this instance.

Another, arguably less egregious example of untoward investment, materialised when the London Borough of Croydon borrowed £545 million between 2017 and 2020. £200million of this was invested in its’ own development company, which did not turn a profit for the council and was abandoned early in 2022. They also invested £30 million in a hotel in 2018, which subsequently went into administration two years later with auditors commenting that these investments were fatally flawed, given the councillors lack of understanding of the leisure market.

'There are cases of investments providing much needed extra funding to otherwise underfunded local services'

Whilst these are extreme cases of careless investments going wrong, it must be said that there are cases of investments providing much needed extra funding to otherwise underfunded local services.

For example, having received criticism for being £1.7billion in debt and borrowing to make commercial investments, Warrington Borough Council responded by pointing out that the council made a surplus of £25.3 million from its investment portfolio in the 2020/2021 financial year, a move claimed necessary, given the council had suffered £170million real term cuts since 2010.

Another situation hailed as a success was South Somerset District Council’s investment in 3 energy storage sites across Southern England. These sites store power generated by and to be sold back to the national grid. Although the original loans have not been fully paid back to the council, a promising £10.1 million has been generated in revenue from the National Grid, exceeding the council’s initial predictions for the investment.

In late 2020 the Treasury stepped in and banned councils from investing in any new commercial property putting an end to the £7 billion spending spree that had taken place in the three years prior however some see this as a heavy handed and blunt response to the issue.

The question has been asked whether banning these investments has been a step too far by central government? Can authorities be effectively regulated as to make responsible commercial investments that supplement central government income providing much needed support to public services?

What are your thoughts?

Feel free to reach out to me to discuss this further, any insights are useful -

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Senior Consultant | Finance

Finlay Keith

Finlay started his recruitment journey at Oyster in 2022 and is the perfect fit for the finance team with his dry, reserved sense of humour and quiet manner. Finlay is resolute in his ambition to grow his network and works diligently to get results.

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