Local governance arrangements “not robust enough”, MPs claim in critical report into commercial property spending sprees

Local governance arrangements are not robust enough with some authorities’ commercial property investments not being properly transparent or subject to adequate scrutiny and challenge, an influential committee of MPs has warned.

In a report published today (14 July), Local authority investment in commercial property, the Public Accounts Committee said the Ministry for Housing, Communities and Local Government should:

• work with the Local Government Association (LGA) to disseminate good practice about transparent and inclusive decision making;
• following discussion with the sector, set clear expectations about the details required in capital strategies not only about planned investments but also previous investments including their performance against expectations, financing costs, the scale of contingency reserves, and their contribution to service budgets; and
• work with relevant partners to support local arrangements for scrutiny and challenge of council investments.

The report concluded overall that the MHCLG had been “complacent while £7.6bn of taxpayers’ money….has been poured into risky commercial property investments”.

It called on the Department to be more active in its oversight of the prudential framework and strike a better balance between supporting localism and ensuring that local authorities act within the frameworks that underpin local freedoms.

To do this, the MPs said, the Department should:

• communicate publicly the types and scale of commercial activity, including new innovative types of commercial investment, where it has concerns that behaviour is not consistent with the spirit of the prudential framework;
• publicly challenge behaviour where it has concerns; and
• work with the LGA and other sector bodies to ensure that the Department’s concerns are understood and communicated consistently across the sector.

The report’s other conclusions and recommendations were:

1. The Department’s failure to ensure that authorities adhere to the spirit of the framework has led to some authorities taking on extreme levels of debt which is both risky and sends a mixed message to the sector.

2. Where a local authority uses prudential borrowing, it must set aside money each year to repay the debt.

Recommendation: For its future oversight of the prudential framework the Department needs to develop, and rapidly deploy, interventions that target extreme risk taking. These should be used as part of a wider package of measures to limit non-compliance with the framework, regardless of scale.

Recommendation: The Department should undertake a review of the MRP guidance and consider whether its statutory basis should be strengthened and how to require local authorities to improve the clarity and transparency in relation to commercial property purchases.

3. The actions taken by the Department to address risky and non-compliant behaviour have been too little and too late.

4. Taken together these changes represent a significant ‘hard’ intervention and demonstrate that the ‘soft’ approach of guidance changes has failed.

Recommendation: The Department should take steps to ensure that future interventions are more timely and effective, and subject to rigorous post-implementation review to ensure lessons are learnt.

5. The prudential framework has been impaired by the emergence of new forms of behaviour in the sector, and now requires fundamental review.

Recommendation: Working with CIPFA and sector stakeholder bodies, the Department should undertake a thorough review of the prudential framework, that addresses the issues we have identified. The Department should publicly report within the next 12 months. This review should incorporate the recommendations relating to challenging behaviour in the sector, designing effective interventions and improving the data held by the Department set out elsewhere in this report.

6. The Department does not have access to the data it needs to carry out its oversight responsibilities properly.

7. The PAC welcomes the Department’s statement that it will undertake a ‘serious’ data review in relation to local authority commercial investment.

Recommendation: The Department should write to the Committee by September 2020 setting out its approach and timescale for improving its data on council commercial activity, and how this relates to its broader review of the prudential framework. The Department should also set out how it intends to use its improved data following the data reviews to strengthen framework compliance. The data review should address the concerns we have raised relating to data on new forms of commercial activity, and on the use of data to assess framework compliance.

8. Changes to external audit might improve its ability to provide assurance related to local authority commercial investment activity but it will not be a silver bullet.

Recommendation: As part of its review of the prudential framework, the Department should consider a wider package of changes, rather than relying primarily on (post-Redmond) external audit to address failings in the local governance of commercial investment activities.

Recommendation: The Department should write to the Committee within three months of the publication of the Redmond Review setting out its response to the review, including not only how the Department intends to strengthen local audit but also how this will support improved governance of commercial investment activity.

The PAC claimed that the Ministry had been “blind” to the overexposure of local councils to certain sectors, risking a repeat of the impact of the overexposure of local authorities to loans from Icelandic banks in 2008.

Meg Hillier MP, Chair of the Committee, said: “In just three years some councils’ external borrowing has exploded – and all on MHCLG’s sleepy watch.

“Councils are locally led and must make their own decisions. But it is hugely disappointing that the Department does not have a clear view of potential risk of over exposure despite the Committee warning about this four years ago.

“If local authorities were counting on rents to repay that debt they are now, with the hit from COVID-19, in a very risky position – which means taxpayers and local services are in a very risky position. Add to this recent reports that large numbers of English councils are now at risk of technical insolvency because of COVID pressures and the picture is serious.

“The Department did not even bother to keep track of the underlying numbers or likely risk but at the end of the day, central Government will have to step in if a council fails. Taxpayers and service users need to know that the Government has their back and can see and help prevent serious problems with risky commercial investments.”

Responding to the report, Cllr Richard Watts, Chair of the Local Government Association’s Resources Board, said: “Councils have faced a choice of either accepting funding reductions and cutting services or making investments to try and protect them. As the Committee rightly highlights, this was an approach that was encouraged by government. Investments are not only made to try and plug funding shortfalls but also to help contribute to local economies.

“Councils continue to face significant extra cost pressures and huge income losses as a result of the pandemic. The Government’s commitment to fund a portion of lost income from fees and charges is a step in the right direction but does not cover full losses, nor does it extend to commercial income losses.”

Cllr Watts added: “We reiterate our call to Government to meet all extra cost pressures and income losses from fees and charges and other sources, including commercial activity, if councils are to avoid having to make tough decisions on in-year cuts to services to meet their legal duty to set a balanced budget this year. 

“Access to cheaper short-term loans with delayed repayments on all new and existing debt would also help them tackle the significant cash flow problems that are threatening their efforts to lead communities through the immediate COVID-19 crisis and beyond.”