In recent years, local authorities have increased their 'prudential' borrowing to take advantage of the low interest rates offered by the Public Loans Work Board. In this box we discussed the example of Spelthorne Borough Council, looking at some of its riskier investments in commercial property and how those may pose a risk to the public finances in the event of an economic downturn.

Recent years have seen a marked rise in ‘prudential’ borrowing, driven increasingly by local authorities taking advantage of low interest rates offered by the Public Works Loan Board (PWLB). Local authorities’ PWLB debt has risen from £64 billion in March 2015 to £66 billion in March 2017 and now stands at £77 billion in March 2019.a There are currently seven authorities with outstanding balances in excess of £1 billion: Transport for London, the Greater London Authority, Birmingham City Council, Leeds City Council, Woking Borough Council, South Lanarkshire Council and Spelthorne Borough Council. Spelthorne Borough Council, home to just 100,000 people, has acquired its £1 billion of PWLB debt in the space of just three years.

Spelthorne’s PWLB borrowing has mainly financed the acquisition of commercial property. The Council argued that it was using fixed low rates of interest to “help offset the impact of disappearing general revenue grant support from the Government”.b On its largest investment so far – the £385 million purchase of the BP campus in Sunbury-on-Thames – the independent auditor of its accounts cited a “number of significant weaknesses in the Authority’s arrangements to secure economy, efficiency and effectiveness in its use of resources”.c Since then Spelthorne has made further high-value property purchases – an office block in the City of London and another office development in Nine Elms, Battersea – more than doubling its PWLB borrowing.

Woking Borough Council has also taken on £0.6 billion of PWLB debt since March 2017,d financing the acquisition of retail and property sites, with its largest investment so far the new Victoria Square commercial and property development (at an estimated cost of £500 million).

In May 2019 the Public Accounts Committee highlighted concerns that while governance arrangements for the sector as a whole were “generally robust”, some councils have “audit committees that do not provide sufficient assurance, ineffective internal audit, weak arrangements for the management of risk in local authorities’ commercial investments, and inadequate oversight and scrutiny”. It also recommended that MHCLG increases its oversight of the sector urging it to ensure “concrete actions and outcomes on a timely basis”.e

A number of commentators have highlighted the risks from the concentration of local authority investments in commercial property, given uncertainty over the future financial prospects of such investments. Commercial property is often among the hardest hit asset classes during economic downturns. Prices fell 24 per cent in two years around the 2008 financial crisis.

This box was originally published in Fiscal risks report – July 2019

a Ministry of Housing, Communities and Local Government, Borrowing and investment live table, Q4 2018 to 2019, July 2019.
b Spelthorne Borough Council, Statement of Accounts 2016-2017, February 2019.
c Spelthorne Borough Council, Statement of Accounts 2016-2017, February 2019.
d Debt Management Office, Public Works Loan Board year end values.
e House of Commons Committee of Public Accounts, Local Government Governance and Accountability, Ninety-Seventh Report of Session 2017–19, May 2019.