by Rob Whiteman, CIPFA Chief Executive
Councils should be leveraging all their commercial municipal muscle for their local areas but with sound knowledge about and effective management of the risks involved.
Just as pension funds investing in property is not ‘speculative investment’, councils investing in commercial property to earn alternative sources of income, to help soften the impact of government cuts in funding, is not ‘speculative’ either – but it does carry risk.
To imply that the level of general competency and quality of statutory financial reporting is relatively low across local government, as has been suggested by some mainstream commentators over recent months, is just plain wrong. However, we do have to make sure that best practice is common practice across all councils, and that the proper advice is always sought and taken in all cases and that finally all councils act proportionately with the powers they have.
When it comes financial reporting, councils have to comply with International Financial Reporting Standards just like the private sector, have to put in place a named chief financial officer with a statutory responsibility to the council tax payer for proper financial management and are subject to specific external audit every year, just like the private sector and using the same firms of auditors used by the private sector.
Being more commercial
Councils being more ‘commercial’ is seen as a key strategy in responding to the challenges of austerity whether through generating more income to help mitigate damaging service cuts or making better use of the council’s balance sheet to help promote local economic regeneration. Indeed being commercial is not new in local government. Many councils have long established and large commercial property portfolios especially in our town centres and high streets. And more recently, it has often been councils’ vision and energy that has been at the core of economic regeneration in our towns and cities.
So yes, councils should be more commercial but the more commercial the venture, the more 'savvy' the due diligence needs to be. That means having or importing the right skills to evaluate, communicate and manage the commercial risk involved; judging affordability on the basis of what could go wrong and not just the cost of borrowing, it means putting in place the level and type of governance appropriate to the risk and it means the councils acting proportionately.
The lower interest rate that councils are able to borrow at, and from whatever source, is due to their high credit score which means less financing cost falling on the council tax payer and hopefully some positive net commercial yield to bolster their resources.
Nearly all councils already draw on specialist external property advice and indeed an increasing number employ their own property experts with direct private sector experience but by definition being more commercial means taking commercial risk. So we cannot be complacent. The threat to council powers in this area comes from any perception that some councils are not carrying out an appropriate level of due diligence or not properly understanding the risks or appearing to be acting disproportionately relative to their size or location. In reality such perceptions can often be fuelled by the actions of a small minority of councils rather than the majority but the perception can attach to all.
Ensuring all councils follow the best practice already followed by the majority, but also acting proportionally, will help allay any genuine concerns.
- CIPFA Property are launching from 1 September a new professional support network to help local authorities leverage the full value from their assets. The Strategic Assets Network will help you align your property management with the wider governmental and strategic policies and developments. Find out more