An investment spree billed as an income generator to protect frontline services in a cash-strapped London borough has provided a cautionary tale about the perils of over-reach as local authorities across Britain face mounting financial and social pressures.
Twice in the past two months, the Labour-run council in Croydon, on London’s southern fringes, has issued a Section 114 notice — announcing de facto bankruptcy — after failing to fulfil a legal duty to balance its books. It is the second council forced into this position — after Northamptonshire in 2018 — although local governments across England have struggled with dwindling financing, exacerbated by the pandemic.
Croydon now faces a sustained period of self-inflicted austerity to cap 10 years of cuts imposed by the central government. It has already axed 410 posts and is consulting unions over the loss of 142 more. Services — including children’s centres, libraries and welfare advice — will be stripped back under stringent “renewal” plans.
The borough’s financial straits are indicative of systemic flaws in the way local authorities are funded, following the failure by successive national governments to heed calls for reform. Over the past decade, Westminster has slashed a fifth — £15bn — of central funding to councils without designing effective means for them to raise equivalent sums locally.
“Many councils were in a difficult financial position before the pandemic,” said James Jamieson, chair of the Local Government Association, which estimates they are facing additional costs and income losses of £9bn this year, with a £3bn funding gap.
In common with some other councils, including Northamptonshire, Croydon was attracted by commercial investment as a means of bolstering its income and compensating for central government cuts.
The borough has also confronted unique challenges. Its centre is full of ageing office blocks built to accommodate overspill from London but in need of modernisation. Its demographics have undergone rapid change as lower-income families priced out of the inner city have migrated south, adding pressure to social services and housing.
“They [the council] were trying to use relatively cheap money to speed up new development in the centre of town and separately to improve the quality of housing,” said Prof Tony Travers, an expert in local government at the London School of Economics. “They got trapped partly by Covid-19.”
The virus has run amok, wiping out revenues from assets acquired with government-subsidised loans at premium rates back in 2018.
“They got themselves into a hole they tried to cover up and it’s gone into a spiral,” said Louise O’Hara, area representative for Unison, the public service union. She said some council functions would now be “deleted” altogether and social worker caseloads would increase — just as needs are going up.
In mid-December the council, which has debts of more than £1.5bn, applied for £150m capitalisation from the Ministry of Housing, Communities and Local Government to cover projected deficits to 2024 — of which £70m is for 2020. The decision is pending.
“We are clear about the scale of our serious financial situation but we also know what improvements we need to make to put things right,” said Hamida Ali, leader of the council.
Among its distressed assets are a hotel now in administration and a shopping strip deserted during lockdowns. They cost the council a total of £80m.
The pandemic has also complicated efforts to get a property development subsidiary, Brick by Brick, in a healthy enough position to produce returns. Set up by the council in 2016 “to deliver high-quality and affordable housing”, the company says it has completed 293 homes on 15 sites since its creation, and generated £23m of revenue in 2020. “We are delivering,” said a spokesperson.
Along the way, however, there have been delays, cost overruns and other mishaps, including the construction of shared ownership properties for which Brick by Brick was not registered as a provider, so potential buyers could not secure mortgages. Chris Philp, the Tory MP for Croydon South, argued these problems were predictable.
“Councils should not be engaging in commercial property speculation for obvious reasons: they don’t have the requisite expertise,” he said.
Underlying Croydon’s ill-fated investment strategy have been glaring governance failures, brought to light by a public interest report issued at the end of October by Grant Thornton, the council’s auditors.
The report said this year’s financial projections included an “optimistic” £3m in dividends from Brick By Brick, to which the council has lent almost £200m. It “has yet to receive any dividend or any interest owing on loans” from the company, they said.
“The council’s approach to borrowing and investments has exposed . . . future generations of taxpayers to significant financial risk,” said Grant Thornton’s report, which outlined numerous shortcomings in “oversight”.
Robert Jenrick, housing secretary, indicated on Friday that Croydon and other councils in severe distress as a result of commercial decisions, would have to sell off some assets to pay down debt in return for any bailout.
“It wouldn’t be right to ask the exchequer, the broader taxpayer, to meet shortfalls without having done so,” he said.
A council spokesperson said the future of some assets is now under consideration. But selling in the current climate would be less-than-optimal, according to PwC, which has advised Croydon on its renewal plan.
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