Councils deliver vital local
services to our communities, but their budgets have been slashed by
Conservative cuts. This has led to pressure on local authority finances that
has affected a range of services and the loss of important community assets. Under
Tory austerity, Uttlesford is seeing a 20% reduction in funding over the next
four to five years with the expected elimination of the New Homes Bonus and the
Rural Services Grant. Our public services must rest on the foundation of sound
finances, yet locally Conservatives are committing to high risk investments to
tap new revenue streams with no strategy in place and no expert oversight. Uttlesford
Labour will ensure that council investments deliver the necessary returns to
plug the funding gap caused by the Conservative central government, while
ensuring that risk is minimised with sufficient oversight, accountability and
With the council ever more reliant on investment income, risks to investments will pose a risk to the council’s ability to pay for our local public services. Risk should be the focus of council attention.
Under the current Tory leadership, the future of Uttlesford District Council’s long-term finances rest largely on the fortunes of the council’s investment in one single business, the Chesterford Research Park, which is focused on biotech and pharma sectors and 50% owned by the council’s Aspire (CRP) subsidiary, an investment that has so far cost the council more than £50 million – the other 50% is owned by Aviva Investors. Through loans to Aspire, Uttlesford is devoting millions more to the renovation of Newnham Building, a property on the park, yet has struggled to find tenants to rent any of the four laboratory suites.
Awareness of risk is the biggest step to planning for potential pitfalls, while failure to plan can lead to unexpected and possibly disastrous consequences. In 2008, Uttlesford was hit by the collapse of the Icelandic bank Landsbanki in which it had deposited £2.2mn. While much of the money was eventually recovered, the council was subjected to years of uncertainty. The council’s investment in CRP is many times bigger and therefore requires a fuller appreciation of risk in order to avert a similar event.
The failure to discuss emerging risks, such as Brexit, in council subsidiary Aspire (CRP) Ltd’s annual risk statement to Companies House is amateurish and reckless. It fails to meet the basic requirements of an annual return – to identify risks it faces as a result of its activities – and instead adopts a rose-tinted view of its long-term risk profile.
Aspire’s Director’s Report claims that “market risk takes the form of property valuations, which have a direct impact on the value of investments.” However, for UDC the market risk comes in the form of risk to short-term income, not just long-term property values that are of most relevance when an asset is disposed. Nevertheless, its inability to ascertain proper market value was demonstrated in the £2.7m downward “fair value adjustment” of Aspire’s stake in CRP, which means that in its first year of operation the value of Aspire’s investment dropped by just under 6%. While in time the asset value is likely to appreciate, this massive decline in just one year reveals the Tories’ reckless naiveté, buying a stake in the research park that was arguably over-valued.
In terms of revenue flows to the council, around 40% of the CRP’s net income comes from just two tenants. With CRP earning the council a net income of around £1.5 million to £1.7 million annually, these two businesses provide at least £600,000 in funding to plug the gap caused by cuts in central government funding. If either tenant ends their lease and is not replaced, our local services will be drastically cut. Our services therefore depend on their business risks, which are tied to one specific sector. Issues such as over-supply of research parks in the Cambridge area, economic risks and specific risks to the biotech and pharma sectors are not fully appreciated yet have a major impact on council funding.
Uttlesford places great trust in Aviva’s risk assessment with Aspire’s Director’s Report for 2017/18 simply referring to Aviva’s approach to operational and credit risk in lieu of its own. As a leading institutional investor, Aviva Investors – Aspire’s partner in the CRP – has global assets under management of over £315bn, of which property investment represents 7.6% while its largest single asset classes are equities (13.0%) and fixed income (45.7%). Aviva Investors’ risk profile and approach to its joint venture in CRP (0.2% of its entire property portfolio and 0.02% of its total AUM) will be very different to UDC/Aspire.
Aviva Investors can withstand any losses from such a marginal investment, while UDC is heavily financially reliant on income from CRP, which represents its sole investment to date and a major income stream. It will be less interested in income from investment than it will be in the return from selling its stake, while for the UDC there is UDC will not be able to take such risks and must be mindful of the risks to its investments and plan accordingly.
Compared to other councils’ investment portfolios, Uttlesford’s return on investment is poor and does not reflect a multitude of emerging and long-term risks. The council has justified its investment on the basis that it is earning a gross return of around 4% from the loan to Aspire to acquire the stake in CRP. However, Uttlesford also must pay back the loan it took at a rate of 0.5% – the council is earning income from the difference in interest rates on its borrowing and lending, which amounts to a net yield of 3.5%.
With no institutional investment experience of its own and Aspire’s non-executive directors having little or no expertise in this area of commercial real estate, Uttlesford has shirked its responsibilities to conduct risk assessment and is highly reliant on a multi-national corporation to make the key judgement.
It is time for a complete rethink and an open and honest debate about council investment strategy. Having stirred up the debate, Saffron Walden Labour Party believes it can contribute to the strategy through constructive criticism that challenges some of the narrow political dogma and economic naiveté.
Uttlesford Labour will secure local finances by adopting the following measures:
- Uttlesford’s investment portfolio will be structured into two funds: commercial and strategic. The commercial fund would seek to create a return of at least 3% above the consumer price index with assets that can be divested as they reach maturity. The strategic fund would consist of investments that can help develop the local economy, deliver a steady return and held over the long-term with the aim of a gross return of at least 4%.
- Investment will be spread across several asset classes – fixed income, real estate, private equity, and public equity – to ensure a broad range of risk. We would move towards the norms of asset allocation, taking the advice from an asset management company with experience in long-term investment funds.
- All new investment in CRP should be halted and growth in the park should be secured through raising capital from other investors, particularly those with a sound track record in managing research parks.
- A housing development company, as outlined in Housing and Planning, will form part of the council’s strategic investments. We envisage this will provide a steady rate of return with local risk than commercial real estate due to strong demand for housing in Uttlesford. We will examine how this could work in tandem with the Housing Revenue Account to deliver new council homes.
- A venture capital scheme could form a small part of the strategic fund, but delivering potentially high rates of return. This scheme would support local start-ups in the proposed Stansted Airport Enterprise Zone. See Economic Development.
- We will hedge all investments to offset risks. We will seek to choose the best asset managers with specific strategies with alternative/non-traditional risk exposures that potentially offset market beta in the larger portfolio.
- Fixed income and public equity investments should be managed by external asset managers, including passive index-tracking funds as well as actively managed funds that aim to beat benchmark rates of return.
- With the council set to be more reliant on business rate retention, it is crucial that the investment strategy is not entirely tied to the local economy or we will find strong pro-cyclical revenue flows with the potential for deficits during recession. We would identify assets that are not so exposed to the trends that affect business rates.
- In order to protect local public services and ensure fiscal prudence, we will raise the council precept to the threshold of 2.99% annually, not the 1.99% advocated in Uttlesford’s Medium Term Financial Strategy. With inflation set to exceed 2% over the medium-term alongside growing responsibilities and fiscal pressures, we believe that higher council tax rises are inevitable and that it is dishonest of the Tories to pretend a 1.99% rise is attainable.
- We will offset the impact of these precept rises with an increase in discretionary payments for council tax support, so that no local families facing hardship will be adversely affected.
- We will work with other councils in and around Essex with a view to establishing a sovereign wealth fund with £1 billion assets under management through the pooling of portfolios.