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Investment, joint venture and trading: How councils seek income

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From hotels and shopping malls to leisure and commercial waste management, councils are adopting varying strategies in the search for income.

Champions of outsourcing and privatisation might sleep uneasily in hotel beds if they knew they were owned by local authorities. Some councils have had stakes in the hospitality business and other surprising sectors for decades, and austerity has given fresh impetus to the search for new income sources.

More mundane – and safer – trading in legal, town planning and back office services is frequently overshadowed by councils borrowing to invest in shopping centres and retail property. The range in commercial activity prompts inevitable questions about what structures and strategies councils are using to make a return.

“It is well documented that some local authorities – largely but not entirely districts – have increased their leverage and exposure to high levels,” says Martin Reeves, chief executive, Coventry City Council, and finance spokesperson, Society of Local Authority Chief Executives and Senior Managers.

“It’s a mixed picture. Some councils have a history of income generation and working in joint ventures. They have a very strong commercial strategy linked to their medium-term financial plan. They have parameters with areas where they will not go. Others are searching for fast returns on investments that are not part of a coherent strategy.”

Councils’ strategies span between well-researched local regeneration investments, selling their professional services to other councils and playing the property market. There is a world of difference between these things, says Clive Betts (Lab), chair of the House of Commons housing, communities and local government select committee, and MP for Sheffield South East.

“There are certainly some circumstances where it is part of the local authority’s duty to intervene and purchase empty or failing properties in their city centres as part of a plan to develop the area,” he says.

“Local authorities can borrow cheaply for such investment, but they need very good data and expertise. That is very different to buying a shopping centre elsewhere in the expectation of raising money quickly.”

Looking inside

Away from property, there is a lot of other investment activity – some traditional, some novel. Nottingham City Council’s cautious expansion has come via its direct labour organisation. A wide range of business units, from leisure to waste management, are clustered together within a broadly conventional council department.

“Even though officers get quite excited about different structures like companies, the waged workforce don’t and it causes uncertainty,” says Andy Vaughan, corporate director for commercial operations at the council.

“Remaining as a council department rather than a company or joint venture doesn’t mean the commercial approach isn’t there. You need a strong corporate centre and then it’s about leadership and the culture.”

Each of the business units has a five-year strategy, with an annual business plan and performance management meetings every six weeks. Mr Vaughan is big on “profit with a purpose” to rebuff the idea that councils should not be making money and that they must always spend big on external expertise.

“We are not frustrated private traders: we are driving income to raise revenues for services,” he says. “It is about understanding the market we are working in and rigorous performance management.”

He adds that his council has the skills necessary to do that.

The money-making jewel in the department’s crown is the commercial waste service. When the council intensified its hunt for new revenue sources in 2010, opportunities for it quickly emerged, Mr Vaughan says. Trade Waste sells its services to businesses locally and in neighbouring areas, and has deals with Derby City Council and Rushcliffe BC.

Nottingham moved in as Rushcliffe exited the sector, while Derby formally delegated trade waste collection in the city early in 2018. Turnover has risen from £4.3m in 2013 to £6.8m in 2018, with a four-fold rise in its surplus to £1.7m over the same period.

“We compete on quality and price,” Mr Vaughan says. “We had the capacity to dispose of the waste and with our collections we are now achieving economies of scale. Our own domestic waste takes priority, but it is about knowing the local market and being savvy about using the lorries at your disposal.

“That means having anchor customers but then offering deals to other customers so we don’t have trucks coming back half-empty. Rather than a council fees system, our sales force can use flexible pricing.”

Trade Waste is now “being more discerning” because it is running out of capacity to dispose of the waste, Mr Vaughan says. His team will explore supply chain integration to address that long term.

This reflects the “incremental versus strategic” approach to commercialisation in Mr Vaughan’s mind. The former is doing “a bit more” than statutory responsibilities, but “does not provide enough income now”, he says. Strategic commercialisation involves mergers and acquisitions to raise significant profits for other frontline services.

Regeneration game

In Durham, commercial activity is focused on regeneration, the “top priority” for the council, according to Jeff Garfoot, Durham CC’s head of corporate finance and commercial services.

“Many of the things we have been doing to further that aim could be deemed commercial,” he says. “With austerity many authorities are moving to commercial activity to make money to protect frontline services.

“Our regeneration activities have been turning a profit but it’s important to have an effective medium-term financial plan that has given us a strong balance sheet. That gives the cabinet the confidence to engage in commercial activity.”

Much of this activity focused on economic development has been delivered through Business Durham, charged with driving the development of new business in the county. This sits within the council as part of regeneration services, but has its own brand.

Business Durham has also invested in a portfolio of offices and laboratories, including the North East Technology Park (NETPark) which the council says is one of the fastest growing science, engineering and technology parks in the UK. As well as being the landlord, Business Durham provides specialist support services for the hi-tech tenants.

The branding is important in winning business round, Mr Garfoot believes, given that companies “often see councils as a waste of time and effort”. “From my viewpoint it has always been arm’s length, with its own office,” he says. “It has been recognised as ‘slightly less council’ and that has helped it.”

NETpark, Stockton-on-Tees

NETpark, Stockton-on-Tees

Like Mr Vaughan, Mr Garfoot says that larger councils do have a lot of expertise in-house. He argues several factors shape an individual authority’s approach. “What people do with commercialisation would depend on size,” he says.

Durham CC also raises funds through more conventional local government trading activity, offering professional services to other councils and businesses inside and outside the county. These include the school improvement service, health and safety, and occupational health.

Perhaps more controversially, given criticism about local government’s flirtation with the property market, is the creation of the £20m venture capital fund Finance Durham, an extension of the Business Durham brand. The funds are drawn from the council’s capital programme, with the fund set up in 2017 and starting to invest a few months later.

So far 10 projects have been invested in on an equity or loan share basis. As part of the agreement, the fund managers and Business Durham provide the firms they invest in with business support intelligence.

The council anticipates its £20m investment being worth £27m by 2027. Mr Garfoot says the council accepts that some projects will fail, and its financial planning does not depend on such a return.

“We expect it to be an evergreen fund: as loans are repaid or we liquidise the equity that money goes back into the fund to be reinvested,” he says. “If we were to take £27m out in 10 years’ time that would be a windfall to the council.”

Probing partnerships

In nearby Stockton-on-Tees BC, the investment strategy is aimed at both income generation and regeneration. In December the council approved a £30m fund which will be used to buy, rebuild or refurbish property and land in its six town centres.

Chief executive Neil Schneider says the fund will build on existing efforts to repurpose the town centres as multi-purpose rather than retail-focused. This follows significant investment in town-centre based libraries, leisure centres, public spaces and public art.

“We are bucking a trend and we recognise that some of these investments either won’t produce a return or will only do so after many years,” he says. “It is about regeneration and investing in the place. No-one else is going to do it and the local authority has to have ambition and provide leadership for its place so that we enable the private sector to invest.”

Several other major investments by the council are set to produce either savings or profits to fund frontline services. The Hampton-by-Hilton hotel opening in the next few month is fully owned by the council and budgeted to provide a £250,000 profit. A new crematorium developed and owned by the council is expected to contribute a similar surplus.

In each case Mr Schneider says the council engaged external advisers and explored either joint ventures or going out to tender. It decided to press on as sole investor, taking out a £17m loan.

The hotel will be managed on the council’s behalf by an external firm, with the council paying to use the Hilton brand. Mr Schneider says that at least six private businesses, including bars and restaurants, have opened within 1,500 metres of the hotel since the decision was taken.

Stockton-on-Tees BC has also embraced the joint venture route. The council is working with a Scottish charity to build a specialist children’s home, budgeted to save it at least £200,000 a year by reducing out-of-area placements, in turn improving outcomes for its residents. It will also be building a town centre housing development in a joint venture with a home builder.

Warrington BC is dabbling in the financial sector. It analysed and consolidated its diverse commercial activities into a commercial strategy in early 2017.

Several years before the council partnered with Capita and Lloyds TSB to provide mortgages to local people. Some 200 local households benefited from a scheme that around 60 councils signed up to, later pulled when the government launched its help to buy scheme. With Lloyds TSB publicly owned, the bank felt continued participation in the local government scheme, which had provided around 5,000 mortgages, was inappropriate.

Since then, however, Warrington has gone a step further by establishing its own bank in a joint venture with a City of London financial adviser. Danny Mather, the council’s head of corporate finance, says the main reason for doing so was that since the 2008 crash banks have stopped lending to small and medium-sized businesses.

“We were being approached by small businesses and research suggested a £34bn shortfall in lending,” he says.

“That was a particular issue in the north-west and we started looking at this at about the same time that the term ‘Northern Powerhouse’ was first being used.”

After significant due diligence and an options appraisal, the council decided to create a bank that would lend on a national basis to small and medium-business, with Mr Mathers saying the national focus was needed to create economies of scale. Four years after the idea was first floated, the bank is operating with a southern base just outside Luton, with six employees at its Warrington office.

Changing times

While councils’ approach to investment is attracting rising attention, Mr Reeves argues that fashions in local government’s strategy for commercialisation tend to come and go.

“There was a wave a decade ago where councils liked joint ventures where they owned 51% of the stake. In the last 5-10 years the sector has been asking more what they want to achieve in terms of the investment and whether they are looking for a short or long-term return. They’ve tended to develop a commercial strategy – in other words,” he says.

“That is one reason we’re now seeing more hybrids: in some case councils are cosying up with community groups in joint ventures, while in others they’re creating a big structural organisation.”

Still, Solace’s Mr Reeves has little time for those who contend that councils lack the right expertise nationally.

“The idea that we as a sector get outmanoeuvred by the private sector is rubbish. The best in the public sector matches the best in the private sector. There is much greater variation within sectors – we are great, for example, at understanding conveyancing and constructing deals,” he says.

Such confidence might help those sceptical hotel guests sleep a little easier in their publicly-owned beds.

Read LGC and DWF’s full report: Commercialisation: Safeguarding the future of local public service delivery

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