3 May 2023

How ‘casino councils’ became the new Wall Street


Who isn’t a fan of the film Wall Street? The Oscar-winning cautionary tale of the pitfalls of unchecked ambition, power and greed against a backdrop of cronyism, corruption and treating the public sector with contempt.

Well grab your popcorn, because the era of greed is back. This is a story about big spenders with big egos who earn big salaries and bet eye-watering amounts of money. These are not, however, rapacious plutocrats motivated solely by profits, but public sector mandarins at ‘casino councils’ who are gambling with your money.

Their high-stake, billion-pound wagers include hotel acquisitions, shopping malls, retail parks and the odd dabble in renewable energy companies, all aimed at creating revenue streams to fund public services. Unfortunately, in many cases local authorities’ amateurish efforts to get involved in commercial activity have led to financial disaster.

As the local elections approach on May 4, it is important to look back at how this story began, appropriately enough on April Fool’s Day in 2004. It was then that Tony Blair cheerfully introduced new freedoms for local authorities to borrow for capital investment, meaning councils no longer needed to seek permission from central government to borrow for capital purposes.

Essentially, all borrowing decisions were devolved to local authorities under the Prudential Code, a system set up to enable them, for the first time in over a decade, to determine their own levels of affordable borrowing for capital expenditure. Under the code, authorities were left with the autonomy to decide how much they could afford to borrow based on a prudent assessment of their capital expenditure requirements.

Money could be borrowed cheaply from the Public Works Loans Board (PWLB), a statutory body established in 1793 that provides loans to councils. Its initial aim was to aid Britain’s recovery after the Napoleonic Wars, but it later transformed into supporting local authorities in the construction and maintenance of essential infrastructure projects.

With the 2004 change, local authorities reinvented themselves into amateur fund managers, using their newly established power to innovate and invent ways to generate revenue to retain services, such as adult social care, children’s education and local libraries.

Property development appeared the most straightforward business model and a route to lucrative and swift returns on investment. So the local authorities speculated, with no admission that they actually lacked the knowledge and expertise to know quite what they were doing.

This was made clear in a parliamentary committee report in 2017, which warned ‘that the commercial skills required in the property market were not a good fit with local authority pay scales’. Journalist turned crossbench peer Baroness Wheatcroft echoed those sentiments, in a Lords debate, saying: ‘I am prepared to believe that local authorities know a lot about social housing, but I am not convinced of their knowledge about Mercedes showrooms or ferry terminals’.

Unfortunately, this wasn’t enough to stop spendthrift council officials, whose hubris seemingly overrode actual expert advice.

A ‘carry trade‘ style property shopping spree ensued, with councils buying up swathes of land and property at any inflated price, squeezing out commercial behemoths.

Big betters included Babergh and Mid Suffolk Council, who set up an investment company called CIFCO – Capital Investment Fund Company – to borrow cheaply from the Treasury and invest in commercial property. Some 178 other authorities followed suit, with some £7.6bn invested by councils between 2016 and 2020. Some of these have done reasonably well, but not all councils are created equal.

Spelthorne in Surrey, sunk a cool £1bn into property investing. Croydon Council splashed the cash on a shopping centre, a hotel and a number of housing developments. Labour-run Slough Borough Council purchased the multi-million-pound former Akzo Nobel site, with the council leader saying it was ‘not a bad decision’ despite it pushing the authority’s debt to over £1bn. That led in 2021 to Slough issuing a Section 114 notice, the local government equivalent of a bankruptcy notice, meaning they could only spend on ‘essential’ services. Elsewhere, Thurrock Council went on a £1bn borrowing spree, largely to finance a £702m investment in renewable energy.

In 2017, Lord Oakeshott, chairman of commercial real estate firm Olim Property, had had enough, complaining that ‘English councils punting on property is an accident waiting to happen’.

He was right. English councils’ bull market ended as the optimism, investor confidence and expectations from the investments, vanished into the quagmire of the pandemic. Despite the Government providing grants to substitute for their loss in income to the tune of £3.2bn, this has not filled the gaping hole left in some councils’ budgets, with many now apparently teetering on the edge of bankruptcy.

One that has already done so is Croydon Council, which last November issued its third Section 114 notice in three years, with its debt at a jaw-dropping £1.6bn – some £320m of which arose from negative equity on misguided investments. Galling though this was for Croydon residents, it was even more of a surprise to the residents of Midlothian Council in Scotland, who discovered that their own council had sunk £13m into Croydon Council’s opaque investments. Croydon Council was eventually bailed out with a £120m loan from the Government joining five others – Luton, Eastbourne, Wirral, Bexley and Peterborough – who received a combined total of £109m to keep them afloat.

Nottingham Council saw its energy investment run out of steam with a £38m loss after the collapse of its Robin Hood Energy company. They too sought a loan from the Government to the tune of £30m. Bath and Somerset Council, whose portfolio of over 1,000 properties is worth around £500m, took a heavy financial hit as the pandemic left shop units empty and council tenants in arrears. Leeds Council slashed 800 local authority jobs and cut core services, as it faced a £118.8m deficit after spending £75m on property investments. Manchester and Luton Councils, both significant shareholders in their namesake airports, lost millions as flights were grounded due to the pandemic.

Perhaps understandably, many councils blame their financial problems on a combination of the pandemic and years of central government cuts. Those claims are somewhat justified, as councils’ main source of revenue, Central Government Grants, was cut by nearly 50% between 2010 and 2017/18. The shortfall has largely been offset by increases in Council Tax – which brought in 32% of revenue for councils in 2019 – and locally retained Business Rates, which makes up the large majority of the remainder.

This makes it all the more important for that money to be used wisely. Yet with turnout at local elections still pitifully low, only a minority of people vote for the councillors responsible for spending – or in many cases mis-spending – vast sums of taxpayer cash. Local politics may not get voters excited, but it’s how decisions about many of things that ordinary people care a great deal about – getting the bins collected, the potholes filled and the local high street thriving – get made.

And all too often, poor decision-making, hubris and the dismissal of expert advice combine to create perilous council finances, with taxpayers ultimately forced to pick up the tab.

Margaret Thatcher famously said, ‘the problem with socialism is that you eventually run out of other people’s money’. Replace the word socialism with councils and it rings just as true. Voters should bear this in mind as they head to the polls this week.

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Oni Oviri is a procurement, supply chain and logistics expert and former Conservative councillor.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.