The ice edges of Norwegian glaciers that have held their secrets for millennia are being slowly forced back by searing temperatures. As the white stuff disappears, archaeologists are being presented with Viking walking sticks, weapons, and even human remains that haven’t seen daylight in generations. While the summer sunshine is also beating down on our own villages and towns, it is the COVID-inspired lockdown, rather than the unseasonal weather, that is lifting the veil on some of our Local Authorities’ age-old secrets. Unfortunately, the discoveries are often just as grisly as anything you might find in a Norseman’s fjord.
Worse, our Councils’ artefacts have little to do with some ancient Danegeld and everything to do with the pound in your pocket right now. Because the national lockdown has revealed the flaws in ludicrously ambitious gambles taken by many Councils that decided to become speculative property investors, placing bets on your behalf with debt doled out by the ‘Public Works Loan Board’, or PWLB.
The PWLB is different to most lenders. For a start, it has, until recently, been formally led by twelve Commissioners on behalf of the Crown, using powers dating back to 1875. More importantly, it also takes a rather unusual approach to approving loans to Councils asking to take out debt on your behalf: there is no assessment of a Council’s ability to repay; no investigation into how the money will be used; and no paper trail, because all applications have to be made by phone with funds normally issued within two days. To further sweeten the deal, the PWLB lets Councils take out large loans at cheaper-than-market rates – normally around 1.91 per cent for a 5 year loan and around 2.45 per cent for a 45 year loan.
Unsurprisingly, Councils have been rushing headlong into these new debt deals. It is not uncommon for the PWLB to issue more than 1,000 loans a year, taking the outstanding principal owed by Councils to more than £85.7 billion at the last count. Now, the cost of COVID might have taken some of the shock out of such figures, but when you get up around the £90 billion figure, then pretty soon you’re talking real money (actually, about £1,400 of new debt for every individual woman, man and child in the country).
That debt is not evenly spread between Councils, either, since a few have chosen to make their own mountains out of it. A handful of Local Authorities with existing extensive PWLB debt are the most likely to apply for additional loans – partly because of their familiarity with the system and partly because of their growing reliance upon it. The National Audit Office reports that 80 per cent of the cumulative PWLB spending used to buy commercial property is done by only 14 per cent of Local Authorities.
And that’s where the real rub lies. The PWLB was originally established to fund essential capital projects specific to local areas. But some of our more ‘inventive’ Councils have been using these loans to gamble on commercial property purchases (incredibly, often outside their local patch), hoping that the rent from private tenants would cover overspending elsewhere. The most active of these Councils have really been getting stuck in, with a handful ramping up their median gross external borrowing levels from three per cent of their spending power in 2015-16 to 756 per cent of their spending power in 2018-19. To put that in practical terms, one Council with gross annual income of about £70 million took on £380 million of debt to fund just one deal – effectively making them major property speculators that only dabble in public services.
There are three big problems with all of this.
First, most voters don’t know it is happening – and they probably wouldn’t appreciate their Council taking on risky debts to drive up local property prices if they did. The NAO warns there is “insufficient transparency and reporting to elected members or the public; limited internal challenge to decision making; [and] reduced governance to enable faster decision-making”. That can’t be good.
Second, the Council Officers designing these debt-funded speculations, and the Councillors signing them off, rarely have any particular idea what they’re getting into. Using vast amounts of debt to buy commercial property on the high street – when online shopping was already changing the business case for it, even before visitors were locked down and locked out – must rank up there with Gordon selling the gold as an astute investment decision. They have been betting on red when the roulette ball has been comfortably settled on black for some time.
And third, like a racetrack loser hoping for one last chance to get back level, as things go belly up, profligate Councils will claim Whitehall did not give them enough money in the first place and, worse, turn to taxpayers across the country to bail them out.
Thankfully, the new Government is starting to get a handle on things and introduce some accountability to what has been a worryingly opaque system. As of this year, the Treasury has assumed effective control of the PWLB and HMG is trying to ensure investments focus on housing, infrastructure, and front-line services. It has also warned Councils that they should stop making “speculative commercial investments” before they come a cropper.
To be fair, some Councils are also looking at alternative sources of cash, such as issuing debt themselves through a new Municipal Bonds Agency – though this obviously still carries significant risk for the taxpaying public.
In addition, I’d like to see a cultural change. If Councils feel they really have to borrow to boost their area, they could use that money to attract and retain private investment – for example, by continuing the suspension of Business Rates or resisting the temptation to charge for the parking that the public has already paid for (twice). Local Authorities could even remove their own incentive to fund speculation with debt by simply spending less.
In my day job, I run a political intelligence agency and we try to help clients see what’s coming around the corner. For four years, we have been writing briefings about what would happen when the next downturn revealed Councils’ use of PWLB debt and the knock-on effect on Local Authorities’ ability to fund local amenities, spend (and spend effectively) on infrastructure projects, and create a positive environment for local businesses to flourish and genuinely create wealth for local communities. Sadly, that downturn has now come on the heels of a virus.
COVID-19, like some contagious version of melting Scandinavian ice, is going to reveal a lot about local public finances that people would have preferred stayed hidden. It’s worth remembering that state employees, as admirable as some are, rarely have special investment insights. In fact, they are just ordinary people, perhaps even your neighbours and, newly denuded by lockdown, some of their choices about what to do with your money are looking pretty silly.
As archaeologists root around in the Norwegian sludge, I’m reminded of the legend that the Viking god Odin gave an eye in return for knowledge. Now we know how some Councils spend our money, I fear it will cost us an arm and a leg.