Heather Jameson 13 July 2020

Ministry was 'blind' to council investment risks says watchdog

Ministers have been blind to the risk of commercial investments by councils, Parliament’s spending watchdog has claimed.

Chair of the Public Accounts Committee (PAC), Meg Hillier, said the Ministry of Housing, Communities and Local Government (MHCLG) ‘did not even bother’ to keep track of investments.

She said: ‘In just three years some councils’ external borrowing has exploded – and all on MHCLG’s sleepy watch.

‘Councils are locally led and must make their own decisions. But it is hugely disappointing that the Department does not have a clear view of potential risk of over exposure despite the Committee warning about this four years ago.’

She has warned that those councils dependent on income from their investments are now ‘in a very risky position’ and in danger of technical insolvency.

Ms Hillier added: ‘The department did not even bother to keep track of the underlying numbers or likely risk but at the end of the day, central Government will have to step in if a council fails.

‘Taxpayers and service users need to know that the Government has their back and can see and help prevent serious problems with risky commercial investments.’

According to the damning report, councils have spent £6.6bn on commercial investment in the last three years – up 14 times on the previous three years. A total of 91% of the spending was financed by borrowing.

It follows an earlier report by the PAC in 2016 which warned of the danger of increased commercial activity, but the warnings went unheeded and investments ‘ballooned’. The report states: ‘The Department’s attempts to improve its data and to strengthen guidance to the sector have not been sufficiently urgent and have failed.’

While the Treasury has attempted to clamp down on borrowing, the PAC report concludes it is too little, too late. It calls for a comprehensive review of the prudential borrowing framework.

The report also calls on MHCLG to publicly challenge risky behaviour, intervene where investments are outside the spirit of the prudential code and improve transparency and data.

As the on-going Redmond review into local audit continues, the PAC has called on the ministry to detail its response within three months of publication of the report.

Chair of the Local Government Association’s resources board, Cllr Richard Watts, defended council’s actions. He said: ‘Councils have faced a choice of either accepting funding reductions and cutting services or making investments to try and protect them.

‘As the Committee rightly highlights, this was an approach that was encouraged by government.’

He called for the Government to extend its commitment to covering a portion of lost income from fees and charges during the pandemic to cover commercial losses.

‘Access to cheaper short-term loans with delayed repayments on all new and existing debt would also help them tackle the significant cash flow problems that are threatening their efforts to lead communities through the immediate COVID-19 crisis and beyond,’ he added.

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