Our survey of senior local government officers reveals the expectations and priorities for commercial activity.
The halving of central funding for local government in the first seven years of this decade makes it essential that councils find new sources of income.
Advocates believe that commercialisation, broadly defined as a council charging for services that it is not legally obliged to provide, can ease financial pressure.
Commercial operations such as council-owned companies selling services to either the public or private sectors, or local authorities earning an income from the property they own, offer a means of providing the funding for services which would otherwise have to be closed.
An LGC survey in conjunction with DWF as part of a special report released today, and to which 145 council chief executives and senior officers responded, sheds new light on the extent they believe commercialisation offers opportunities. However, it also shows real concern that councils lack the capability and skills to act as commercial entities.
One sceptic told us: “The idea that councils can successfully engage in significant commercial activity is a dangerous fantasy.” But this is not the experience of most.
Peter Fleming (Con), leader at Sevenoaks DC, explained that plugging funding gaps was a key motivator in his council’s decision to commercialise. “Our government funding was disappearing and we needed to fill that gap,” he said. “Not all that gap could be found by making savings.”
However, he argued that investment income was not “an end in itself”, but instead “something that allows us to continue to deliver public services”.
This was backed up by Tracey Lee, chief executive of Plymouth City Council. She said that her authority saw commercial “in the widest sense”, helping the council fulfil its ambition for social good. “But many of the things we do make an impact on the bottom line,” she said.
Two-thirds of survey respondents expect their revenues from commercial activity to rise up to 25% in the next three years – though in some cases this may be from a low base. A further 6% expect it to rise between 25-50% over the same period, while 12% expected commercial revenues to drop 0-50%.
Alongside the forecasts of increased revenues from commercialisation, most survey respondents were able to specify in which channels they expected to see increased revenues.
Some 61% of those surveyed said they would generate more revenue from council-owned trading companies, 59% reported property sales would see a rise in income, with 53% expecting the same from property rental.
Such projects can offer income for a council or save it money. Wirral MBC and Cheshire West & Chester Council set up Edsential to support schools, saving “a significant amount of money”, according to Wirral chief executive Eric Robinson. Plymouth City Council’s CATERed, set up with local schools, now serves 2.5 million meals each academic year, with profits reinvested in the service.
However, councils’ commercial activity can prove controversial. Earlier this year the Chartered Institute of Public Finance & Accountancy warned local government not to expose public funds to “unnecessary or unquantified risk” when borrowing to invest in commercial property.
In October, research by The Bureau of Investigative Journalism, in conjunction with LGC, found the number of councils investing in assets they deemed “investment property” increased from 35 in 2015-16 to 71 in 2017-18. According to Freedom of Information responses from 309 out of 353 councils contacted, the amount spent on properties bought specifically for investment purposes has risen from £76.4m in 2014-15 to £1.8bn in 2017-18.
In the local government financial settlement in December, housing and communities secretary James Brokenshire said there were ongoing talks between the Ministry of Housing, Communities & Local Government and the Treasury on possible “further intervention” where councils are deemed to be exposing themselves and taxpayers to too much risk.
Local government minister Rishi Sunak later clarified to LGC that ministers will not curtail most councils’ commercial investments, and that concerns about overexposure apply to only a “handful” of authorities.
Perhaps just as controversially, car parking revenue increases were expected by 56% of LGC’s respondents. Such fees are often criticised by struggling high street retailers. In November, the RAC Foundation reported that in 2017-18 income from parking operations by 353 English local authorities was £867m, having risen by a third from £658m in 2013-14.
Westminster City Council led the field with a surplus of £57.6m for 2017-18, with other London boroughs close behind. Brighton & Hove City Council was the only authority not from the capital in the top 10 surplus-generating authorities.
One comment illustrates the mix of pitfalls and opportunities that council officers feel in relation to commercial projects. “We are selling off the family silver,” the respondent said. “The council has set up a property company to develop properties but don’t understand how to do it.”
However, they said that in their role they had a successful trading unit “that needs to go private” to fully exploit the market. “The dinosaurs in finance don’t move quick enough,” they added. “Four years of pushing and we’re nowhere!”
Outside of parking and property, councils have set up commercial projects in a number of different fields. According to the survey, some 22% of councils provide a commercial service in energy, 46% in legal services and 32% in care services.
Over the next three years many survey respondents are considering commercial projects across these areas. Some 21% of respondents’ councils want to set up a trading service for energy in this period, 14% in commercial waste and 12% in education services.
Not all such projects have been successful. One survey respondent said: “Although there are several traded services currently, they are under review and commercial success has proved elusive. It is likely that the review will result in several of these services being brought back in house at significant cost.”
There were also signs of unexplored potential to monetise existing services. Another respondent said: “This council tends to charge other departments within for these services but is for some reason reluctant to bring money in by charging outside of the council for them.”
There remains a lot of concern that councils lack the skills needed to commercialise successfully. Some 69% of respondents said they were concerned that councils lack such skills, with 31% saying they were confident of the opposite.
Ms Lee said that in Plymouth they “felt it was very important to make sure we had the right expertise” for the council’s property portfolio. The council had a history of internal expertise, so made the decision to build on that rather than rely extensively on third-party expertise.
“For us, our internal expertise absolutely understands the local market and has built good relationships with the property sector within the city. We have brought in some extra skills into the team as the portfolio has grown,” she said.
“This is not preaching about what’s the best way. Everybody must make their own decisions.”
Cllr Fleming said that as a smaller district council without a lot of property stock, Sevenoaks DC lacked the right expertise. Its strategy was to hire somebody for a short time to enable it to ask the right questions.
The council then approached an estate agent to access a suite of skills in the property market. Explaining the approach, Cllr Fleming said: “Part of it is about relationship building, and part of it is about going to the right people at the right time.”
Much expertise within the property market is associated with protecting against potential downside – and there is risk attached to all commercial projects. Some 78% of those surveyed believed that the commercial risk their council faced was appropriate, with the rest saying it was too great.
Cllr Fleming noted: “The value of investment may go down as well as up. If you’re looking for investment income there’s always a risk attached to it.” But he added that money kept in bank accounts or stuffed under the mattress will be devalued through inflation – itself a risk.
“When we were first having these conversations as a council we had money in the bank. When we looked at it against inflation we were losing value every single day. When we looked at it in those terms the risk of doing nothing was as great as doing something.”
Ms Lee said it was important to “make sure you’ve got a diversified portfolio”, that you take account of costs and that you have a long-term strategy. Plymouth has previously invested in direct development where the council felt there was a gap unfilled by the private sector.
“With all of those things you don’t go into them lightly, but we’re not frightened of part of the investment fund doing direct investment,” she said.
Read LGC and DWF’s full report: Commercialisation: Safeguarding the future of local public service delivery