The National Audit Office has published a report on local authority governance, which raises concerns around councils’ surge in spending on commercial real estate.
Parliament’s official spending watchdog highlights a £2.5bn jump in council spend on land and property between 2015-16 and 2017-18, much of which is for commercial investment purposes.
For example, last week EG reported that Spelthorne Council was in discussions to buy 100 Cheapside, EC2, from Aberdeen Standard Investments for around £140m.
In addition, the council is in talks to acquire One Embassy Gardens, SW8, from Ballymore.
The Surrey council is the top local authority investor in UK commercial real estate, investing close to £950m over the past five years – and these two London deals could see Spelthorne breach £1.2bn by the end of this quarter.
Meanwhile, the same week, Woking council purchased Aviva Investors’ Victoria Gate building in Woking, which is fully let to McLaren Group, for around £40m.
Overall, total public sector spend on property peaked at £1.9bn last year, according to Radius Data Exchange, beating the 2017 record of £1.8bn.
The NAO notes that this trend has increased against a backdrop of reduced funding available to local authorities. In total, councils’ spending power (government funding plus council tax) dropped by 29% between 2010-11 and 2017-18, it says.
Councils have been buying property since the Localism Act came into force in 2011, which encouraged local authorities to find alternative sources of income.
These efforts have increased in recent years as central government funding has fallen. Almost half of all councils (168) will no longer receive any core central government funding in the 2019/20 budgetary year, according to the Local Government Association.
But while grants have been cut as part of the government’s drive to eradicate the deficit since 2010, the NAO says demand for councils’ services, has continued to rise, putting councils under extreme pressure.
‘There is no substitute for boring’
The report also highlights the importance of governance, given the financial strains that councils are dealing with.
“Governance arrangements have to be robust in this challenging context or this creates a risk that authorities will not be able to deliver their objectives.”
It points to the example of Northamptonshire County Council, which was forced to put itself in what amounts to special financial measures in February last year, indicating to central government that it was at risk of breaking the law by spending more than its income.
The report says: “A governance inspection of this authority commissioned by the secretary of state indicated that Northamptonshire County Council had lost tight budgetary control and abandoned effective budget-setting scrutiny.” The report concluded that in local government, “…there is no substitute for doing boring really well. Only when you have a solid foundation can you innovate”.
In addition, the report adds that governance has become more complex, partly because councils have sought new sources of income, such as commercial real estate, to offset the declining income from central government.
It urges councils to ensure they have robust risk management procedures in place when making commercial investments.
As a result of reduced spending and new sources of income, the report says, councils’ risk profiles have increased.
The NAO’s survey for the report found that almost one fifth (18%) of external auditors did not agree that the internal audit was effective.
“Risk profiles have increased in many local authorities as they have reduced spending and sought to generate new income in response to funding and demand pressures… Furthermore, to mitigate these fundamental risks, many authorities have pursued strategies such as large-scale transformations or commercial investments that in themselves carry a risk of failure or under-performance.”
The watchdog adds that local checks and balances need to be more effective. In particular, it says that key challenges “include elected members in some authorities having to take more locally contentious decisions to deliver savings, sometimes weighing statutory service requirements against local priorities”.
It adds: “New delivery arrangements adopted by authorities to secure savings or generate income such as shared services, outsourcing and commercial activities can also add greater complexity to governance arrangements.”
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