Harry Fone: Councils should stop risking our money, playing the property market

15 Feb

Harry Fone is the Grassroots Campaign Manager for the TaxPayers’ Alliance.

In recent years the TaxPayers’ Alliance has taken a keen interest in the commercial property and investment portfolios of local authorities. We have highlighted the billions of pounds of taxpayer cash at risk if expected gains fail to materialise.

Perhaps a more lucrative and safer option for local authorities would be to pursue commercialisation of services that they already provide. In theory, authorities should have a good understanding of the market they are operating in. Additionally one would expect the majority of capital and startup costs to have already been paid. Unlike commercial investments, these ventures tend to take place inside a council’s borough rather than outside, making management, operations, and accountability, more straightforward.

With this in mind, it was interesting to see how Gedling Borough Council has faired in its attempts to profit from its pet crematorium and tree-cutting services. Once again it shows how poor planning and a lack of care can have negative consequences for local taxpayers.

For both of the services it sought to commercialise, a business plan was not presented to the cabinet. In the case of the pet crematorium, a business case was only drafted three months before it was due to begin its commercial activity. To the best of my knowledge, no business case has been put forward for the tree-cutting services. Imagine if someone in the private sector tried to get a business loan from a bank without a suitable plan, they’d be laughed out of the door and rightly so.

So it shouldn’t come as much surprise that the recent findings of an internal audit were less than complimentary of how these ventures have been undertaken. Similarly, expected profits have not materialised and currently both services are running large deficits that were never forecast. In a report to Gedling’s cabinet, proponents of the pet cremation service believed it would contribute £88,000 and achieve 16 per cent market share in the first year citing a “fully developed business case”. In reality, this business case didn’t exist.

Furthermore, no calculations or methodology were submitted on the numbers of cremations expected to be undertaken annually. To date, losses have totalled £86,000, with deficits of £51,000 in 2019-20 and £35,000 in 2020-21. The crematorium expected income of £173,000 in 2019-20 but actual income was ten times lower at just £17,000. No wonder then that the audit described the project brief as not providing “sufficiently detailed information to allow an accurate understanding of the potential risks involved.”

Things were no better for the tree-cutting service. Combined profits after two years were estimated at £80,000 but a total deficit of £74,000 is now forecast. Once again predictions were way off the mark. Of course, the pandemic has a big part to play in this and these fledgling ventures have only been trading for a couple of years. Typically most new firms don’t make a profit until their third year of operation. There is still time to turn the ship around. But there’s no escaping the fundamental problem that taxpayers’ cash has been haphazardly exposed to risk.

That said, it does seem much more sensible that local authorities would want to pursue the commercialisation of existing services over commercial property investments. While the potential rewards may not be as great, the risk should be reduced. Councils are typically already established in these sectors and are well placed to enter the marketplace but only if they get the basics right. As Gedling’s internal audit states:

“The market research undertaken and subsequently presented to Cabinet was insufficient, meaning cabinet were unable to effectively scrutinise the report, to ensure the Pet Cremation service was financially viable.”

Councils should not assume that profits come easily and proper planning isn’t required. If staff lack the skills to conduct this analysis then they should seek third-party specialist advice.

There are, of course, no guarantees in business, even the best-laid plans can be no match for market forces. If successful though, local authorities can use commercialisation to generate more revenue which can be funnelled back into frontline services or ideally reversing years of council tax hikes. Gedling currently has the 26th highest Band D council tax bill in England at £2,101. In the last 20 years, bills have increased by nearly 90 per cent in real terms. Turning existing council services into profit-making entities could be a big boon for local taxpayers.