Vanity projects, speculation and unwise development could lead councils to bankruptcy

“Desperate councils risk being plunged into an Icelandic-style financial crisis after investing £1.5bn in the commercial property market, according to Sir Vince Cable, former business secretary.

Heavy cuts in central government funding have left the authorities having to consider increasingly exotic solutions to ease their financial constraints.

Between 2010 and 2015, there was a 37% cut in real terms in central government funding to local authorities. One option – popular in the last couple of years – has been to borrow from the Treasury-run Public Works Loan Board (PWLB) at very low rates of interest and then use the money to invest in commercial property ventures that offer returns of as much as 8%.

But there are fears that the strategy is creating a bubble that could bankrupt some local authorities. “This is not a wise and sensible thing to do,” said Cable, who was business secretary in the Tory-Lib Dem coalition and is standing as Lib Dem candidate in his former seat in Twickenham, south-west London.

“Local authorities have a long and inglorious history of gambling in financial and property markets,” he said. In the 1980s, Hammersmith and Fulham council was one of several local authorities that got into financial difficulties after becoming involved in complex bets on interest rates.

Cable said he could understand why councils were considering such strategies. “When they are massively constrained in what they can do around council tax – and indeed commercial rates – they are trying to prevent even deeper and more damaging cuts by taking these unorthodox measures. In some cases they may succeed, but there is a very high risk of bankrupting their local authorities. It does suggest a certain degree of desperation.”

Local government sources have defended the councils, saying that much of the money is invested in helping regenerate their local areas. But not in all cases. “What is so bizarre, so shocking, is that they are investing in property in other parts of the country,” Cable said. “It makes no sense whatsoever.”

Matthew Oakeshott, an investment manager at Olim Property, said councils were “playing a gigantic game of Monopoly with taxpayers’ cash”.

But authorities badly need returns at a time when interest rates remain low and demands on councils are rising. It is estimated that, by 2020, England’s councils will face a near £6bn funding gap between what they need to spend and what they receive. Most of this shortfall is due to rising costs linked to social care.

Two years ago, the Local Government Association warned that a dozen councils were on the brink of financial failure. Since then, the councils have had to be inventive in seeking to balance their books. Several – such as Eastleigh, Kettering and Maidstone – have successfully exploited loans from the PWLB to invest in commercial property. This, in turn, has attracted interest from other councils.

But such copycat behaviour is a concern, according to Cable, who drew comparisons with 2008, when many councils were left exposed after depositing millions of pounds in high-interest rate accounts offered by Icelandic banks, which then went bust.

“It did very serious damage to some councils,” Cable said. “It should have been a warning to all corporate treasurers in local government to not go anywhere near this.”

The extent to which councils are exposed to a downturn in the commercial property sector is unclear.

Last month, Lord Myners tabled a parliamentary question asking the government to confirm how much money the PWLB had lent to local authorities to invest in commercial real estate between 2011 and 2016, and what it was doing to monitor the risk from such investments.

Responding for the government, Baroness Neville-Rolfe said it was up to the councils to assess risk. She said: “The Public Works Loan Board is not required to collect information on the specific reasons that local authorities borrow from it, and so it does not hold information about the amount of lending that has been used for acquisition of commercial real estate.”

However, estate agent Savills told the Financial Times that councils had invested £1.2bn in commercial property last year and a further £221m so far this year.

An economic downturn could see commercial property yields drop, leaving councils exposed, say analysts. This fear has led some councils to resist investing, but others have developed considerable appetites. The Financial Times reported that Spelthorne borough council – which has assets of just £88m – bought a business park in Sunbury-on-Thames for £360m, having taken out 50 separate loans from the PWLB.

Local government sources played down fears of a bubble, pointing out that every council investment was made on a case-by-case basis and had to meet strict borrowing criteria.

Under the Prudential Code, councils must show that their investment plans are affordable, prudent and sustainable.

A Treasury spokesman said: “Responsibility for local authority spending and borrowing decisions lies with locally elected councillors, who are democratically accountable to their electorates.”

https://www.theguardian.com/society/2017/apr/29/vince-cable-cash-strapped-councils-at-risk-credit-bubble

Some councils on verge of bankruptcy ?

And still our council wants £10 million from us for a new HQ …

” … Nothing can disguise the real crisis in local government. With councils facing a £5.8bn funding gap by 2020 – when, ominously, they are all supposed to move towards self-financing, without direct government grants – the Local Government Association has warned that even if councils abandoned road repairs, stopped maintaining parks and open spaces, closed all libraries, museums and children’s centres, and stopped funding bus services, they might still not plug the hole.

Recently, the National Audit Office warned that the government was not on track to make councils self-sufficient, with the “financial sustainability” of English local government at risk through poor (central) planning. With councils due to retain income generated from all business rates – currently raised locally and redistributed nationally – there’s little forthcoming from ministers on how the councils with low tax bases can be expected to survive. …”

https://www.theguardian.com/society/2017/apr/25/metro-mayors-local-government-cuts

Knowle: magic bean or white elephant?

The big question is ‘what is the chance of Pegasus winning an appeal?’

Probably not that great:

The application is for more than a hundred units when the Local Plan allocation is for fifty.

The application does not include any affordable.

The application is opposed by Sidmouth Town Council and a large and vociferous group of local residents.

Most importantly, the Planning Consultants at the time of the provisional sale to Pegasus foresaw that the application would be refused. So did the Planning Team, who miraculously changed their minds when the application came forward. Both EDDC and Pegasus were warned in advance that the Development Management Committee could not approve the application. Remember: this information came into the public domain as a result of the successful Freedom of Information request.

If the application goes to inquiry, as seems likely, then we, and EDDC, will have to wait for 24 months with little confidence that the appeal will be successful.

Then comes the situation of ‘what happens next?’ Well, we know the answer because Grant Thornton have helpfully predicted four scenarios, all of which will lead to receipts well below the price currently agreed with Pegasus.

The whole process would have to begin again, against a backdrop of a planning appeal refusal. New tender, new negotiation, new design, new application, and perhaps even another refusal.

Eventually an application will succeed, and a sale result, but we could easily be four years down the road, and at a substantially reduced price in possibly a very different property market.

Knowle site value plummets to £3.22 – £6.8 million depending on affordable housing requirement

It is interesting that all scenarios put to the Scrutiny, Audit and Governance and Overview Committee take no account of depreciation on the Honiton HQ.

The committees might want to request the attendance of internal and current external auditors KPMG at their joint meeting, as the relocation finance paper was, for some reason, compiled by former external auditors Grant Thornton.

http://eastdevon.gov.uk/media/2074193/180417-a-and-g-and-s-and-overview-agenda-combined.pdf
page 10

“Revolution in council lending could tackle irresponsible borrowing”

“Most coverage of local government finances falls into two categories of story. The first concerns the egregious rewards paid to “town hall fat cats” for often mediocre performance. The other concerns “savage cuts” being made to this or that service due to a reduction in central government grants.
There is truth in both of these. What has not gone reported so much is that a genuine revolution in local government finance is under way.

The traditional model of financing, in which grants are doled out by central government, is gradually being replaced by a system in which councils, collectively, are self-funding and individual councils bear more risk as a result of their own spending and revenue-raising decisions.

Some of these reforms have already attracted attention, chiefly the changes to business rates, over which individual councils will have greater, but still limited, autonomy in future.

Another big change coming has attracted surprisingly little attention. The UK Municipal Bonds Agency (UKMBA) was launched in 2014 with the aim of helping councils to finance their spending. The agency, a public limited company owned by 57 local authorities and the Local Government Association, aims to issue bonds with maturities of between ten and twenty years. Because it is backed by a number of councils who have pooled their borrowing requirements, the theory is that it should be able to create “benchmark” size issues for which there should be greater demand from institutional investors. And because more than one party is responsible for repayment of the bond and servicing the interest payable on it, a “joint and several guarantee” in the jargon, in theory the bonds should be less risky to investors. That should also, in theory, lower borrowing costs for councils.

The idea is common elsewhere. Kommune Kredit has been operating in Denmark for more than a century, while BNG in the Netherlands has been going since 1914. Kommunalbanken has been funding local authorities in Norway for 90 years; other such funding agencies exist in Canada, New Zealand and Switzerland, among others.

One of the key aims of UKMBA is to allow local authorities to borrow more cheaply than the existing lender of choice, the Public Works Loan Board (PWLB), a 224-year-old body that currently accounts for about three quarters of local authority borrowing. Traditionally, the board has charged 20 basis points above the prevailing gilt rate but in October 2010, in an attempt to discourage borrowing by local authorities, the coalition government raised this to a 100 basis points premium.

The board now, in most cases, lends to local authorities at 80 basis points over the gilt rate. It was when the cost of borrowing from the board was increased that leading figures in the local government world began to talk about an alternative finance provider.

Aidan Brady, the former Deutsche Bank chief operating officer who is chief executive of the UKMBA, is on record as saying: “Clearly, we have to beat the Public Works Loan Board [in terms of offering a cheaper rate], that’s as simple as it gets.”

The irony is that just as the new agency is about to offer some proper competition to the board disquiet is growing about the extent to which local authorities have been borrowing from the latter.

The Sunday Times reported last weekend that a number of local authorities had gone on a “£1.3 billion binge” of buying commercial property with the aim of using rental incomes from those assets to supplement spending or reduce the extent of budget cuts they would otherwise be making. The danger is that these authorities have exposed themselves and future generations of council tax payers to swings in the commercial property market. Traditional property market buyers have been astonished at the prices paid for assets such as some sub-prime shopping centres, grumbling that local authorities are distorting the market.

This has been made possible over recent years because by linking the PWLB loan rate to the gilt rate and allowing the latter to be depressed by the Bank of England’s asset purchase scheme the government has created a “carry trade” opportunity for local authorities in which they can borrow at about 2 per cent and invest the proceeds in an asset yielding between 6 per cent and 8 per cent.

None of this has made the job of the fledgling UKMBA any easier. The agency was reported as long ago as June last year to have signed up nine local authorities to participate in the first debt issue, which was expected by the end of 2016, with a panel of eight banks, including three to act as “lead runners”, in place to run it. But no issues have yet taken place. Market sources suggest that this is because the agency is still waiting on one more council to sign off on its participation.

This ramp-up in local authority activity could be because the PWLB, which is currently an arm of the Debt Management Office — the Treasury agency that issues gilts and manages the national debt, is about to be absorbed into the Treasury, which may lead to more control being exerted on its future lending. That was certainly suggested in a government statement last year noting that transferring the PWLB back into the Treasury would “secure greater accountability to ministers and enhance the efficiency and effectiveness of central government lending to local authorities”.

In other words, local authorities are borrowing now, while they can. The sooner they are subjected to either greater Treasury scrutiny on the one hand or the superior credit checks being promised by the UKMBA on the other, the better.

The Times Comment (paywall)

Relocation: the sums just don’t add up

So Mark Williams says that ‘We have an asset that will appreciate in value’.

First of all, it may not, but more importantly, the increasing value of the Knowle as an asset has always been excluded from EDDC’s calculations.

Finally, after seven or eight years, EDDC have recognised that the Knowle is a capital asset that is likely to increase in value.

Even when the figures were manipulated to show the move as ‘cost neutral’, that façade was only maintained because the value of the Knowle (at least £7.5 million) was equated to the value of the new HQ at Honiton (valued by JLL at £2-3 million). Since then, of course, ‘cost neutral’ has gone out of the window.

So we now have the proceeds of sale = £7.5 million – possibly, assuming in these trying times a sale is even possible.

Cost of replacement buildings = £10 million (Honiton) + Exmouth £1.7 million + Manstone £1 million = £12.7 million.

Net loss £5.2 million.

Plus new road at Honiton = £225,000.

Plus admin costs to date = £2 million.

Plus costs of moving = say £3 million. (New equipment, staff compensation, etc.

Plus loss of asset value = £7.5 million – £2.5 million = £5 million.

Total loss is now in this scenario about £15.5 million.

This is all to achieve gains in running costs. However, estimates for Manstone were never included. The cost of running three HQs rather than one will be higher because of increased travelling, and commuting between sites.

Were Option 3 to be pursued, and the modern buildings improved at a cost of £1 million to £1.5 million, then the ‘new’ Knowle would be a very cheaply run building.

The £2 million already spent on admin cannot be recovered, so that is a sunk cost.

So pursuing Option 3 would cost £12 million less, and almost certainly reduce running costs. And leave EDDC with a far nicer building than a cheap and uninspiring shed of offices on an industrial estate at Honiton.

The above assumes that EDDC’s numbers are correct, but we all know that the cost of relocating will rise as the scheme is pursued, and we no longer have the guarantee of Pegasus money coming through. Plus, of course, EDDC may feel the need to employ even more consultants!

So, we will not see any change out of £20 million. And there will be no savings as to running costs compared to Option 3.

All this at a time of local government reorganisation.

Real numbers: not EDDC’s strongest point …

“Sale of Knowle set to be ‘uncoupled’ from EDDC’s £10million relocation”

DANGEROUS! DANGEROUS! DANGEROUS!

If/when it all goes pear-shaped, WE the council tax payers will not only foot the bill but see services cut – as interest payments on a loan will take precedence over services.

AND what happens when (as seems almost certain) “Greater Exeter” or Devon becomes a unitary authority? There will be no need for vanity project buildings which will be expensive white elephants as a glut of un-needed council properties hit the market.

Basically, EDDC is squandering OUR money. Disgraceful.

AND WHERE ARE THE INTERNAL AND EXTERNAL AUDITORS REPORTS ON THIS HIGH-RISK STRATEGY? Is EDDC ploughing ahead yet again with incomplete legal and financial information?

“Sidmouth representatives slammed the ‘cavalier’ decision to borrow money to fund the move to Honiton and Exmouth – but East Devon District Council’s (EDDC) top officers said there is greater risk in standing still.

Cabinet members were given the options of borrowing cash to ‘go now’, waiting for the outcome of developer PegasusLife’s planning appeal after it offered £7.5million for Knowle, or staying put and modernising the former hotel or its offices, together with a refurbished Exmouth Town Hall.

Speaking at Wednesday’s meeting, Sidmouth councillor Cathy Gardner said: “If you commit to borrowing a large amount of money at taxpayers’ expense, you aren’t in control. You are in more control when you know the outcome of the planning appeal.

“These figures aren’t certain. These are just estimates based on assumptions.”

She questioned if the officers had costed staying at Knowle, selling off part of the site and marketing its Heathpark plot in Honiton to another developer.

Councillor Marianne Rixson, who also represents Sidmouth, said EDDC was taking a ‘cavalier approach’ to spending taxpayers’ money, adding: “Any future developer will know you are desperate and will not match the price offered by PegasusLife.”

EDDC originally promised the relocation would be ‘cost neutral’, it would not borrow money and the project would not progress before Knowle was sold.

But chief executive Mark Williams disagreed, saying the ‘go now’ option ‘derisks planning’, while delaying ‘increases risk’. He added “We have an asset [Knowle] that will appreciate in value.”

Officers said pressing ahead with the relocation to Honiton’s Heathpark and Exmouth Town Hall is the most cost-effective option and could make EDDC £1.4million better off over 20 years.

If it chooses to delay the project so planning permission for Knowle can be secured, it could be £400,000 better off than it is now.

In contrast, members were told if they chose the ‘go minimum’ option – giving up on the new-build Honiton HQ, completing the refurbishment of Exmouth Town Hall and modernising a section of Knowle for £11.3million or £5.9million – they would be £4.5million worse off. There is no capital receipt to fund the modernisation.

Cllr Tom Wright said: “There has been a lot of talk about uncertainty. This building is unfit for purpose. Moving is not a vanity project. It’s to improve what we can do. If we stay here, it’s money down the drain. This building is useless for the 21st Century. This land isn’t going to lose value.”

The ‘go now’ option won the support of cabinet members but is now set to be considered by a joint meeting of the overview, scrutiny and audit and governance committees on April 18.

It will then go before the full council.”

http://www.sidmouthherald.co.uk/news/sale-of-knowle-set-to-be-uncoupled-from-eddc-s-10million-relocation-1-4966674