I am writing this as news comes in that Warrington Council has become the second Council in England to lose a shed load of money by establishing a company, Together Energy’, to sell electricity. Apparently, the full amount is not yet known but could mean a loss to Warrington’s beleaguered taxpayers of anything between £30 and £100 million. They seemed to forget the basic rule that the value of investments can go up as well as down!
Warrington invested for the best of reasons – trying to keep energy prices down for their communities, and particularly the poorest members of that community. It clearly moved into an area which was speculative and where it did not have the expertise to evaluate the risk. Like other suppliers it has been caught out by a huge rise in energy prices. The first council energy scheme, in Nottingham, went bust though almost 2 years ago and well ahead of the current energy cost crisis.
That makes me think once again of why, how and where councils should invest. I spend a fair amount of my time doing this as I chair the Local Authorities Mutual Investment Trust (LAMIT). We look after about £3.7 billion of local authority’s funds in accounts from tiny councils to the biggest and wealthiest councils. We do so through 3 accounts, short-term we operate the Public Sector Deposit Fund which can be used to make deposits for as short a term as overnight; for medium term investment we have a Diversified Income Fund; and for long term investments we have the Local Authority Property Fund.
Why do councils invest? They do so for a number of reasons:
In the short- term they want to even out their use of cash and make sure that any penny they have is earning something. Like all of us there are times of the month and times of the year when they have more money than at others. Investing until the day, week or month that it is needed makes sense. That’s usually into some sort of cash account.
They want to invest in projects in their local area or very close by to assist regeneration initiatives. Here getting the highest possible return is not just dictated to by the highest financial yield but by the benefits given in the medium and long term to areas under their control. They usually direct money into land or property purchases, development of buildings or occasionally into individual companies.
They want to invest some cash into long term managed assets which generate a good return for taxpayers over a long period of time.
They invest in companies like electricity companies where they think they can get a benefit for their residents.
The need for caution is evident in this quote from Cllr Ian Marks, the Lib Dem finance spokesperson in Warrington, ‘Regeneration in the town, solar farms and housing are risks worth taking. However, I say again, that right from the start we have opposed the investments in Together Energy … They were too risky, and councils have no expertise in such businesses.’
The Government has taken an interest in this lately because there have been some real problems which have been there for some time, but which have been cruelly exposed through the effects of COVID. The two electricity failures are included in those but there have been property failures as well. Northamptonshire County Council had huge problems with the local investment into a new HQ and was one of the key reasons that the Council ran into huge financial problems and eventually was wound down into two new unitary authorities.
Some councils have undertaken speculation into property way outside their area and way beyond what would appear to be a sensible risk analysis based on their own size of income that could be used to prop up failing investments.
Many of the investments that Councils have been made are sound because they have done local things using local knowledge. Portsmouth City Council has made a number of investments in their port and port handling. Eastleigh Council owns Hampshire County Cricket Ground. Both these investments were well thought through and are assisting the council in both creating or preserving local jobs and keeping the council tax in their area down.
The Government have looked at this and have done two things. Firstly, they have increased the cost of borrowing through the Public Works Loan Board which has dampened down the desire of some to make speculative rather than regenerative investment. Secondly the Chartered Institute for Public Finance Accounts (CIPFA) has produced new guidance for councils about how all this can be safely managed.
The keynote to the successful borrowing is, as ever, a strong understand of why the investment is being made, both the risks and potentials of an investment accompanied by a strong due diligence of potential partners.
That’s where LAMIT comes in as the Local Authority component of CCLA which provides an investment service for the none profit sectors of Churches, Charities and Local Authorities. In total they have more than £14 billion invested which means they can employ people who spend their entire working lives looking at investment opportunities and are big enough to pool risk. If a council has a problem with one of three properties it has invested in it is a big problem. If LAMIT have a problem with one of the 100+ properties that we manage it is a much more manageable problem.
I have no problem with councils being entrepreneurial. We all have to be nimble with our finances and extract every penny of value from our assets. All investment carries an element of risk which is why councils like all investors must either know what they are doing or know someone who does know what they are doing.
Whether you run a Church, Charity or Local Authority, no matter how big or small that organisation might be and want to know more about short medium and long-term investments don’t ask me. I have to take my shoes and socks off to count to more than 10! Contact Andrew Robinson at Andrew.email@example.com and he will arrange for someone to get in touch. For more information on CCLA go the CCLA website www.ccla.co.uk.