In-Depth

  • How local councils are investing commercially to generate revenue and bolster growth

How local councils are working commercially to generate revenue and bolster growth

How local councils are investing commercially to generate revenue and bolster growth

AT A GLANCE

•  Investments in commercial property and other assets are among the ways North West councils are generating revenue.

•  Arms-length companies are increasingly being formed by the region’s councils to boost growth, jobs and regeneration.

•  More commercially savvy actions are giving councils access to funding streams which may not otherwise be available to them.

Local government is undergoing an unprecedented period of change, and budget pressures combined with rising service demand has prompted councils to embrace a more commercial approach. From property investment to the creation of new arms-length companies, Move Commercial looks at how local authorities here in the North West have levered in investment to bolster growth and support regeneration.

Words by Matthew Smith

Commercialisation and self-sufficiency have been central to council strategy in recent years and have become more important than ever in the current economic environment.

Local authorities are exploring innovative methods to sustain growth and combat funding challenges by investing in property, acquiring stakes in major infrastructure assets and establishing new companies.

Property investment is emerging as a preferred asset class and has been central to Liverpool City Council’s strategy to offset a 58% – which equates to £330 million – reduction in central government funding since 2010.

“Reductions in government grants mean that we are going to become more reliant than ever on generating our own income to deliver services by being more entrepreneurial,” says Ged Fitzgerald, chief executive of Liverpool City Council.

In 2014 the local authority purchased the city’s iconic Cunard Building – a deal which later saw Public Health England move 80 staff into the building and has also attracted the forthcoming British Music Experience (BME). When it opens in March, BME will employ 35 people and is expected to attract thousands of visitors each year, generating positive footfall effects for neighbouring attractions.

“The Cunard Building deal brought a net financial benefit to the council of £1.3m in the first year and has the potential to bring in an additional £2m per year in rent,” says Fitzgerald, elaborating on the council’s role as a commercial landlord of the site.

“An independent valuation of the building has shown that it is currently worth £27.8m, which is almost double the amount we spent on its purchase and refurbishment, meaning the city now has a more valuable asset.

“We call it Invest to Earn and it’s about using the council’s ability to borrow and invest cash in projects which deliver a real benefit for the city.”

Since 2012, Invest to Earn is said to have created and safeguarded 2,000 jobs and apprenticeships, attracted £150m of external funding and delivered £3m annually to support essential services.

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During MIPIM UK last October, Fitzgerald announced that the council had been considering a bid for the neighbouring landmark Royal Liver Building, which is currently on the market, although the local authority has since ruled itself out.

“We took a good look at the Royal Liver Building but decided not to bid,” Fitzgerald tells Move Commercial.

“We will build a good relationship with whoever does buy it because the waterfront buildings are so vital to the city.”

Away from the Three Graces, the council has also streamlined its operation by moving staff from the Municipal Buildings, which it is now selling, and the former Millennium House, for which it received £3m, into the Cunard Building to reduce accommodation overheads.

“We are bringing millions of pounds every year which we wouldn’t otherwise have had as a result of such investments.”

Prompted by property market uncertainty, Liverpool City Council manages its exposure by imposing legal frameworks, conducting risk and stress tests and setting aside a prudent amount of money to allow for most eventualities.

And buying prominent properties outright isn’t the only option for savvy councils to make a commercial investment. Elsewhere in the North West, Warrington Borough Council and Manchester City Council have chosen to acquire stakes in other valuable assets.

Warrington Borough Council is set to acquire a 33% share in a new challenger bank which will locate its northern regional office in the town, giving SMEs in the borough and around the UK improved access to finance.

Meanwhile, Manchester City Council owns shares in Manchester Airport Group and the airport, which have in turn generated dividends of £8.374m and £6.76m respectively to help fund council services.

Other councils across the region have recognised that services can, however, be more effectively and efficiently provided through alternative channels.

“Reductions in government grants mean that we are going to become more reliant than ever on generating our own income to deliver services by being more entrepreneurial.”

Arms-Length Organisations (ALOs) are not-for-profit companies and, by establishing them, councils retain a discrete degree of control through funding agreements and boardroom influence.

Cheshire East Council is at the vanguard of such an approach and has created seven wholly-owned operators, including the Skills and Growth Company, property development firm Engine of the North and planning and construction advisory service Civicance. The group of companies is forecasting an overall profit of £612,000 so far for the local authority.

“This demonstrates that the business model set up by the council for delivering services is proving to be successful,” says Councillor David Brown, deputy leader of Cheshire East Council.

“We will continue to deliver new initiatives that benefit our residents and businesses and ensure that our council taxpayers are receiving value for money.”

Since forming on 1 April 2016, the Skills and Growth Company in particular says it has generated an estimated £21.4m for the local economy, engaged with 85 businesses and created 250 high value jobs.

“We have agreed a fairly robust performance framework with the council and we’re tracking progress against those performance metrics,” says Julian Cobley, managing director of the Skills and Growth Company.

“One of the major projects we are pursuing is to rollout fibre broadband to 10,000 additional premises by the end of 2017 and we are currently on target to deliver this.”

The company is delivering against three major strands on behalf of the council, including business support and inward investment, innovation and growth, and skills and employment.

“In a time of austerity we need to think about delivering services differently and our objective is to increase the outputs that are not only better value for money, but potentially more commercial,” he says.

“We are supporting businesses to create over 600 new jobs in priority sectors and secure £5m of investment capital with an overall net effect of hopefully growing the GVA in Cheshire East by £70m.”

The firm is managing the development framework of the Bentley masterplan, currently under public consultation, which outlines the long-term future of the Bentley factory in Crewe.

“Bentley is a major employer in the borough and we aim to manage the development framework of its masterplan on behalf of the council to galvanise that complete joined-up approach,” explains Cobley.

“With a different emphasis and culture than multifaceted councils, we can maximise efficiencies and apply for funding streams that aren’t necessarily available to local authorities and perhaps be more agile and responsive to the market.

“The council can’t necessarily trade services and think about generating profits, whereas we could potentially do that.”

However, profit is a secondary outcome that Cobley says needs to converge with the local authority’s primary social aims.

“We want to provide that engagement role to create employment which could potentially reduce demand on the public sector and with business rates potentially coming under local authority control we will become more self-reliant.

“The major difference between our model and others is that we have consciously aligned the skills and growth agendas, identifying that a business can invest capital but it also needs to invest in skills.”

Having observed the performance of Cheshire East Council’s ALOs, Wirral Council is also considering creating similar regeneration companies.

“The removal of the Revenue Support Grant in 2020 means the only money available to invest in the borough, and the services residents rely on, will be money we can raise ourselves,” says Councillor Phil Davies, leader of Wirral Council.

On announcing plans for ALOs last year, Cllr Davies told Move Commercial that the council must save £132m over its four-year budget with £90m achieved by using existing resources, renegotiating contracts and growing its income base and £40m saved by 2020 from fundamentally redesigning services.

Since 2010 Wirral Council has adapted by using reserves and selling assets but limited scope exists to make similar savings.

“We will create new companies, charitable trusts and social enterprises – better capable of delivering high-quality front line services in a more efficient and commercial way than currently provided,” says Cllr Davies.

“Simply put, by 2020 Wirral will be going it alone and must be self-sufficient.

“This means councils like Wirral must make radical reforms to how we deliver services, how we strengthen our economy, support business growth, and encourage new firms to move here and create jobs.”

Subject to agreement, the ALO will aim to enable the council to involve and empower communities and businesses and be more commercial in how it engages with investors and developers.

“We must simplify the way Wirral Council does business so we’re consistently on the front foot,” adds Cllr Davies.

“Risks can be mitigated by looking ahead and using business intelligence and expertise out there in Wirral to ensure that we act in a timely and appropriate way.”

Considering the approach of different councils it’s clear that commercial approaches are leading the policy agenda and although risks are presented, the failure to commercialise may pose far greater challenges.