Commercial pursuits: how local authorities can navigate the investment arena
Jes Ladva, Head of our Government Practice, explains how local authorities can get commercial investment right
Across local government, commercial investment is an increasingly popular method of income generation. With central government pushing an agenda of self-reliance and devolved powers, diversifying revenue streams is now a necessary undertaking to meet the demands on frontline services. As a result, local authorities are pursuing ever more expansive investment strategies.
According to a recent joint Local Government Information Unit and Municipal Journal report more than three-quarters of local authorities have taken out loans to invest in commercial property. In many cases, the revenue generated from these ventures will be used to stem the mounting pressures on adult social care, children’s services and homeless support.
Whilst it might be an attractive proposition for any local authority looking to put an end to its financial woes, commercial investment is not without its perils. Increasing scrutiny around how local authorities spend budgets and provide value for money has led to calls for a parliamentary inquiry into local government finances. It means both the public and central government spotlight is firmly centred on these projects.
Getting commercial investment right has therefore never been more important and its success for any local authority will often hinge on the expertise of those involved. Local government leaders are now required to develop annual investment strategies, borrowing strategies and capital investment plans explaining how ‘non-core’ investments contribute towards core service delivery. It not only requires a ‘money-making’ mind-set, but also means enhancing senior leadership teams with commercially astute individuals.
Negotiating loans, generating ‘business’ roadmaps that offer insights into return on investments and regular assessments of economic risk factors are just some elements of any given foray into the commercial arena. The latter is a critical aspect of commercial ventures. Depending on the investment, a local authority may require expertise in anything from high-street retail trends to knowledge of the energy sector, property market or financial trading.
It is a challenge that almost all local authorities have risen to; contending with a diminishing support grant by innovating and diversifying their income generation. This has led to a demand for individuals with a cross-section of skills, with public sector talent acquisition becoming increasingly sector agnostic.
Local authorities need to be looking for senior leaders who can navigate political agendas at the same time as developing viable commercial roadmaps. It requires a unique blend of commercial acumen and political awareness to ensure that both the economic and social impact of any given investment upon a local area is considered. ‘Investment for investment’s sake’ is a mantra to be avoided, whilst individuals who can deliver commercial investments from the perspective of what local authorities want their local areas to look like should be sought after.
In addition to the public sector’s home grown talent, there is a thriving community of fund managers and investment bankers who are equipped with a ‘public sector spirit’ and are keen to offer their skills. These individuals can put together investment rationale alongside advisory boards to assess projects, manage investment portfolios and develop scoring matrices to ensure councils are not wasting their time on unsuitable investments. They are often highly experienced in securing the right price on property and can ensure contingency funds are used as efficiently as possible. Critically, they can do all this within the context of what a local authority wants for its constituents.
There’s no doubt that the future is fraught with risk. As the need to make money to protect front-line services grows, the number of joint ventures will increase and more local authorities will develop into large structural organisations that incorporate investment arms and business units. It is a future in which the financial sustainability of local government is far from certain. However, there is a cohort of commercially talented individuals on hand who are ready and able to help meet the challenges ahead.