Local government has stumbled on a rare silver lining from the economic downturn. The gloomier the financial prognosis, the bolder councils are becoming in supporting their hard-hit local economies: good news not just for those communities, but the reputation of the sector as a whole.
One of the most significant developments is the renaissance in municipal banking. The notion of councils providing financial services to residents and businesses all but disappeared in the 1970s with the demise of the Birmingham Municipal Bank. But the financial crisis has put a revival firmly on the cards.
The new home of local government banking could, appropriately enough, be Birmingham. There, as exclusively revealed in LGC (“Local banking role mooted”, LGC - 20/11/08) , proposals are being drawn up to help individuals and businesses denied credit because of the lending squeeze.
The city council may take advantage of the imminent retendering of its banking contract to set up a Bank of Birmingham which would draw on wellbeing powers and existing access to the financial markets to provide asset-based finance to businesses and potential investors.
Another option would see Birmingham buy physical assets to lease back to local firms. Intervention in the local mortgage market is also under consideration.
Similar discussions are underway in Essex, where the council is considering ways of turning its financial clout into a credit lifeline for small and medium-sized businesses. The county, because of its proximity to the City, is at risk of taking the force of the downturn head-on and is determined to limit the damage to its economy.
Leader Lord Hanningfield (Con) wants to see a£50m fund - drawn principally from the reserves of the council and its public sector partners - set up to rescue firms that have been starved of credit but are otherwise viable. The proposed bank could also channel emergency funding from the European Investment Bank directly to struggling local businesses.
In a neat twist and a pleasing boost for financial inclusion, services may be provided through the county’s post offices, including those saved by the council from closure last year in a pioneering scheme.
“The size of the downturn will hit our community quite badly, and that’s given us the impetus to get on with it,” says Giles Roca, head of media and marketing at Essex County Council .
He recognises there is a lot at stake - not least the reputation of local government. “If we get it right it could change the playing field on how local authorities are perceived nationally and by the financial sector,” he says. “The recession gives us the opportunity to raise our game as a sector.”
Initially, the fund is likely to be administered by an existing bank or credit union on the council’s behalf with a view to get it up and running later this month. However, it is expected to develop into an independent entity over the coming year. Ceredigion County Council is also looking at setting up its own bank.
Taking the notion of municipal banking a step further, what would prevent local government from collectively investing a proportion of its reserves in a local authority owned fund, which could then be drawn upon by councils to fund vital public infrastructure?
Nothing, according to the New Local Government Network , whose ambitious proposal for a local authority mutual fund is gaining widespread support across local government. As well as providing a tempting haven for councils anxious to protect their revenues post-Iceland, the fund would prove a handy source of borrowing in these days of diminishing private capital.
“It’s killing two birds with one stone,” says NLGN director Chris Leslie. “Rather than investing randomly across the board in Asian futures and so on, at least councils would be seen by the public as dedicating money to domestic public facilities.”
If even a modest portion of local government’s£13bn worth of reserves were invested in the fund, the network believes deposits of£1-2bn would be feasible. Viewed next to the£1bn currently raised each year by councils through prudential borrowing, this would amount to a substantial boost to infrastructure investment.
So far, the idea is soliciting a positive response from councils. An NLGN survey of finance directors showed 81% in favour of the scheme in principle and 83% expressing an interest in depositing reserves in the fund once it was up and running. Just over two-thirds saw the fund as a potential source of capital for investment.
Kent County Council has already indicated its support for the concept and more are expected to follow. Interested councils are expected to come together over the next few months to explore the feasibility of the scheme, including working through legal and regulatory issues and ensuring the right skills are in place.
All being well, the mutual fund could be launched this summer. “It’s not a small endeavour to start up a banking operation, and we want to consult as widely as possible, but we shouldn’t hang around,” says Mr Leslie.
He is a strong believer in councils grasping the initiative rather than waiting to get permission from government.
“A lot of local authorities want to get the green light from government or Treasury before acting, but there comes a point when the collective local government family needs to take the initiative in solving their own issues,” he says. “Often councils are in a position to be administratively smarter.”
So could the ongoing financial turmoil herald a brave new world in local government finance?
Unlikely, says Tony Travers, director of the Greater London Group at the London School of Economics. “These kinds of initiatives allowing more flexibility and innovation do help, but they rely on government lightening up and local authorities being willing to experiment and take risks, which is quite a lot to ask,” he says.
According to Prof Travers, years of enforced caution have created a hoarding instinct within councils which makes them likelier to shed staff and cut services than to dip into reserves when times get tough. “Senior finance officers have a squirrel gene, and when they espy a few more berries on the hedgerows in the autumn they start hiding them away for the long winter ahead,” he says.
There is no doubt, though, that the economic squeeze has forced every council to look at what it can do to ease the pain for communities and the local economy. If the path beaten by a handful of pioneers is shown to be sound, other councils are sure to follow.