(2 years, 6 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
Sir Geoffrey Clifton-Brown (The Cotswolds) (Con)
Mr Deputy Speaker, would you please thank Mr Speaker for granting me this opportunity to raise the matter of Cotswold District Council and funding for solar farms?
The council’s Liberal Democrat administration proposes to borrow a staggering £76.5 million to fund various capital projects. The plans were laid out in a report presented to the council’s capital programme investment board on 24 March 2022 and during a subsequent cabinet meeting on 4 April 2022. The full public document pack is available on CDC’s website.
The problem is that if a local authority is ever put into special financial measures, for example as seen in 2018 when Northamptonshire County Council effectively declared itself bankrupt because it could not pay its bills, it is the taxpayer, via the Government, who always ends up paying for disastrous financial decisions made by local councillors.
So what exactly are these proposals as laid out in the circulated tactical delivery plan? Well, page 66 states that the council wishes to borrow a total of £76.5 million to finance various projects, at the same time exhausting the council’s general reserve fund. The plan envisages that £49.7 million be borrowed to finance climate change and green energy investment projects. The largest of these projects is to buy five solar farm sites for a total of £46.5 million. There is more than sufficient finance in the market to fund these schemes without the council’s intervention. In addition, there are plans to borrow £25 million for investment in a variety of projects described as investments for economic development and asset usage, although further details on these schemes are currently not available.
From the delivery plan setting out the substantial amount of money that the council intends to borrow overall, just one project so far has been approved in this entire programme—a £1.8 million housing loan to contribute to Cottsway Housing, which produces income below target. This is a good thing. Borrowing to invest in social housing would really benefit the people of the Cotswolds. However, this is a comparatively small sum compared with the overall amount that the council proposes to borrow, despite its having tangible benefits for the people of the Cotswolds and the fact that it should be prioritised in the building of homes, especially social housing. I understand that councillors were originally advised that about half the borrowing was for social housing, only to later discover from the plans that only £1.8 million had been allocated.
The total amount of this borrowing is spread over five years. However, according to the plans, it appears that some £50 million is scheduled to be spent next year, as they are showing an income for the following year. If this borrowing occurs, it is equivalent to mortgaging council tax payers in the Cotswolds for a generation. The Liberal Democrat administration says that these investments are green and follow economic growth priorities for the council. So what is wrong with that? Well, there is strict legal guidance that all local authorities must act with financial probity, including not borrowing excessively in a way that could put the council’s finances at risk. Please could the Minister confirm this in her reply?
We have seen many recent examples of councils losing huge amounts of money in failed investment schemes. For example, Nottingham City Council ultimately lost £30 million of public money in 2015 after it set up and invested in Robin Hood Energy—a localised green energy company that ran into financial difficulties and could not pay its bills. By 2019, the council was forced to bail it out. In 2020, Croydon Council effectively declared itself bankrupt with a £73 million shortfall. It borrowed £545 million during a three-year period to invest in commercial and housing properties. The council invested £30 million in the Croydon Park hotel in 2018-19. A central Government taskforce was sent to oversee an audit in 2020, following these risky property investments and the council ignoring repeated warnings on its dire financial situation, and last year the council had to have a £120 million bailout from the Government.
Only today, my hon. Friend the Member for Eastleigh (Paul Holmes) raised during Prime Minister’s questions the shocking fact that by 2025 Liberal Democrat Eastleigh Borough Council will have a debt of £650 million following investment in property projects. Cotswold District Council hopes to borrow the money from the Public Works Loan Board at 3.3%, making a profit on the loan by obtaining a return of 7.5% from the investment. The problem the council has with this proposal is that in order to curb excessive substantial, and risky, borrowing from the PWLB, I and others on the Public Accounts Committee have recommended to the Government that they prohibit loans in what I call exotic investments. Such projects include solar farms, and even commercial property investments, purely to make a return on the investment. Could the Minister please confirm that bodies would not, under the PWLB’s loan criteria, be eligible for a loan for an investment in a solar farm?
Furthermore, any application to the PWLB must—this is critical to the whole debate—be accompanied by a repayment statement known as a minimum revenue provision, or MRP, setting out the repayment period and how the council will repay the loan on top of paying interest payments. As an illustration, the proposed loan by Cotswold District Council of £76.5 million, repayable over 25 years, would require annual payments of around £3 million per annum. That is purely to pay off the loan, without any interest payments. The plan does not say where the money borrowed will come from, the duration of the loan, nor how the borrowing will be repaid.
I remind the House that the council’s annual core spending was only £11.2 million last year. From that £11.2 million, which needs to pay for all services if there is to be a balanced budget without a deficit, it would need to deduct £3 million for the annual loan repayment. In the financial year 2021-22, the council forecast a budget of £12.55 million; £5.5 million is from council tax, £3.278 million is from business taxes, and the balance of around £4 million is from a variety of Government grants, which are not necessarily recurring. The council’s finances are fairly flimsy in any case. Will the Minister confirm that the size of this loan—£76.5 million—would be totally disproportionate and unaffordable, given the council’s current income, from which loan repayments and interest would have to be deducted?
It seems that the motivation for taking on all this borrowing was the desire to invest in schemes to generate income. However, as other councils doing the same thing have found to their cost, these schemes are highly risky and could make the finances worse, which would pose a considerable risk to the core finances of the whole council. No commercial bank would ever contemplate agreeing to such a loan. Could the Minister confirm that the PWLB will require a repayment schedule for the so-called MRP?
Under the Chartered Institute of Public Finance and Accountancy code, the council’s financial section 151 officer is required to give advice to councillors about the financial probity of such a large borrowing plan. The section 151 officer can ultimately give a section 114 notice, warning a council that, given the overall state of the council’s finances, the level of borrowing is not sustainable.
Another proposal mooted by the council is issuing green bonds to publicly finance these projects. Securities such as these are regulated by the Financial Conduct Authority. Cotswold District Council anticipates that an issuance programme will be aimed at small investors, although no details are available at this time. Even if the council could begin to sell the bonds in the markets, can the Minister confirm that this form of finance would also come under the financial probity regulations, under which the section 151 officer would have to warn councillors of the effect on the council’s finances of such large borrowing? Furthermore, as a financial instrument, it would have to be authorised by the regulator, the Financial Conduct Authority.
Cotswold District Council has increased council tax by £5, which is a 3.6% increase in the tax bill for residents. That is above the official cap in England of 2.99%—the maximum allowed without a referendum of local council tax payers, and a cap that some 286 councils across England and Wales are exceeding. Given the cost of living squeeze, the council should not look to put up council tax by that much while planning this huge amount of borrowing. It should focus on increasing council tax as little as possible, in order to help people with the cost of living, and should focus on delivering its core strategic services of waste collection and planning, rather than spending our money on feasibility studies.
Although the Government have set some achievable targets under the green agenda, such as bringing all greenhouse gas emissions to net zero by 2050, and securing global net zero by mid-century to limit global warming to 1.5°, there is evidence that, faced with the cost of living, people are asking the Government to help with the squeeze on bills by slowing down the increases in green levies. The same applies to the extreme borrowing that is proposed by Cotswold District Council for solar farms.
Worryingly, I do not see any statements from the council that it is trying to live within its means. Instead, it continually says that the Government are cutting various grants. In fact, in recent years, central Government—the Minister’s Department—have given it significantly more money, as is laid out in the local government settlement, which includes £16.3 billion in settlement funding for local councils in England this financial year. With other grants and an estimate of council tax included, the core spending of councils across England will rise to £54.1 billion, which is an increase of 4.6% on the previous year. There is no pressure on the council to borrow all this money to increase its income. The settlement will partly help to reverse the trend of council tax accounting for an increasingly large proportion of any council’s spending power.
There is no evidence that the council or councillors have the experience to successfully manage a long-term investment programme of this size and complexity. Delivering a financial plan on the scale that is proposed would require considerable financial expertise in the council, which could be lacking, as the competent long-term financial officer, head of finance and deputy CEO has recently resigned. The Liberal Democrat authority also proposes carrying out the programme before the local elections in May 2023. Even the biggest and best commercial banks would struggle to find suitable investments involving that amount of money, and to do the necessary due diligence on them, in just 12 months.
The proposals by Cotswold District Council to borrow a breathtaking £76.5 million, as stated in the plan circulated to its capital programme investment board and cabinet, clearly demonstrate financial incompetence amounting to a recklessness that has the potential to bankrupt the council. At the very least, it will mortgage the council for the generation to come. I urge Liberal Democrat councillors, in the interest of Cotswolds council tax payers, to think again, and I urge the Government to use all their powers to stop councillors borrowing that unsustainably large amount of money. I thank the Minister for being here to answer my debate.
The Minister for Levelling Up Communities (Kemi Badenoch)
I start by congratulating my hon. Friend the Member for The Cotswolds (Sir Geoffrey Clifton-Brown) on securing a debate on this important topic. Borrowing rules for local authorities may not be the sort of thing that generate many column inches in the newspapers, but they really matter to the day-to-day workings of local government. In many ways, these rules are the guard rails that help to govern decisions around the investment of public funds, which is why it is vital that hon. Members have as much clarity and transparency as possible on what councils can and cannot do, as well as having the opportunity to challenge and raise instances of what they perceive to be misallocation of funds.
My hon. Friend is a tireless campaigner on behalf of his constituents and I applaud him for bringing the issue to the House today for discussion. First, he asked whether the borrowing in question was within the lending rules of the Public Works Loan Board. Under Public Works Loan Board guidance, a project for service delivery includes education, highways and transport, social care, public health, culture, environmental and regulatory services; police, fire and rescue; and central services. I can confirm that projects related to climate change are included in that.
I make it clear that the Government understand that although borrowing is necessary to deliver local priorities, it does carry risk, so it is important that it is done sensibly to keep local authorities’ finances sustainable. My hon. Friend will no doubt be aware that in recent years, a small minority of local authorities have taken excessive and unnecessary risks with taxpayers’ money. Those risks have backfired. That has been all too visible in the high-profile cases of councils that have become too indebted or have made substantial investments in projects that have ultimately proved too risky or too large.
On my hon Friend’s points about the scale of the borrowing that Cotswold District Council intends to do in comparison with its annual income, it goes without saying that disproportionate levels of debt expose councils to financial risk. It is not just the size of the debt that can create issues; some authorities invest in novel activities outside their areas of experience or expertise, which can lead to financial loss when the investment is mismanaged. My hon. Friend will remember what happened with Robin Hood Energy, Bristol Energy and Together Energy. While councils are sometimes very well meaning in trying to tackle important issues such as achieving net zero, we cannot forget that the energy market can be volatile, and councils need to be sure that they are getting the right advice when proceeding with such investments.
That is not to say that local authorities should not undertake borrowing. I want to make it clear that the Government recognise that commercial investments can be necessary and appropriate when made sensibly. Sensible investment can play an important role in helping us to power forward on issues that are central to the Government’s agenda, be they levelling up, net zero or building the homes that the country needs.
On my hon Friend’s point that the Government should stop Cotswold District Council borrowing this money, as he will be aware, councils have responsibility for setting out capital strategies for their area, and they will be held accountable by their communities. Local leaders should understand local issues and prioritise accordingly; it is the Government’s expectation that they should be able to make decisions that reflect the needs of their communities.
In making these decisions, every local authority has a duty to comply with the prudential framework by making sure that its plans are prudent, affordable and sustainable. As my hon. Friend highlighted, taxpayers should not have to foot the bill for preventable mistakes. The Government will, of course, step in where there is clear evidence that local authorities are not complying with their legal duties or acting in the best interests of their taxpayers.
Our focus, as my hon. Friend might expect, is on making sure that we have a system that is genuinely fit for purpose.
Sir Geoffrey Clifton-Brown
Will my hon. Friend confirm that the guidance to the Public Works Loan Board has recently been changed so that no investment that is made purely to increase return is allowed? Will she also confirm that any application to the PWLB will have to be accompanied by a statement including a minimum loan guarantee repayment, so that it is crystal clear to everybody in the Cotswold district how these loans will be repaid?
Kemi Badenoch
I can confirm that my hon. Friend is correct on the first point. The council cannot invest purely for profit, but because its investment has a net zero element, it would qualify under the guidance. However, it remains to be seen exactly how the proposal will manifest itself. I cannot confirm the second point at the Dispatch Box, but I will get officials to write to him formally with a comprehensive answer. He is absolutely right to raise the point that there is guidance out there that should ensure that councils invest prudently.
In July 2021, we set out what might be called a multi-pronged approach to supporting our role as steward of local investments by improving local decision making and capability, and by developing proportionate tools for intervention, when that might be needed. We continue to work with the sector to implement our proposals and keep the system under continuous review.
I turn to my hon. Friend’s point that the council lacks the experience to successfully manage the programme. To be clear, when local authorities make decisions to borrow to invest in areas such as solar farms, it is important that they have the relevant expertise in the market, and that they have the governance in place to challenge the parties and people running the projects if they are being mismanaged or appear to be falling behind schedule. The council will need to satisfy itself, taxpayers and the electorate that it has the necessary expertise to manage complex projects without exposing itself to excessive risk.
Sir Geoffrey Clifton-Brown
I am grateful to the Minister for giving way again; she has been generous. Considering that there is more than adequate private finance to fund these solar farms, is it right that a local authority should invest in such a risky venture?
Kemi Badenoch
I thank my hon. Friend for that point. He is right that the Government should not be competing too much with the private sector, but it is not for me to determine what a council should or should not do. Councils are elected and have mandates, but they must be responsible in spending taxpayers’ money. We do not want, as a corollary of that, the Government intervening too much in councils’ decisions. We have empowered councils to do the right thing and, as I said, we expect them to satisfy themselves and taxpayers that they have the necessary expertise to manage complex projects and not expose themselves to excessive risk. We would expect any council to comply with good practice guidance from not just the PWLB but organisations such as the Chartered Institute for Public Finance and Accountancy, and to take on board lessons learned from other authorities. We want to support local authorities in investing responsibly. In March—my hon. Friend may not be aware of this—we commissioned a review of the governance and capability of local authority investment and borrowing, and that review will report later this year.
I thank my hon. Friend for bringing the issue to the House, and for raising this case. It is important that local authorities remain financially sustainable, and the Government take that seriously. If he would like to raise any further points, I will be happy to write to him with further details. Members from across the House care about local accountability and protecting taxpayers’ interests. I am sure that Members will agree that that needs to be achieved in the right way, and that local authorities’ spending needs to be sustainable and not beyond their means.
Question put and agreed to.