Cash-strapped councils are turning to private enterprise to plug their funding gaps – with mixed success

An artist's impression of the i360, from before its completion. Image: Marks Barfield.

The i-360 is a 162m-tall observation tower on Brighton’s seafront. It offers a fine view of the channel, the nearby Regency rooftops and, if you look hard enough, rough sleepers sheltering along the promenade.

The tourist attraction was funded by a £36m loan from the council, which it, in turn, borrowed from the government. The idea is that the tower will earn money from tourists which the authority can spend on cleaning the shop window of the city by the sea, freeing up council revenues for other projects.

In 2016-17, the council’s i-360 reserve contributed £840,000 to the upkeep of the seafront – namely, the landscaping works either side of the i-360 itself.

Meanwhile, the council’s plan to open an assessment centre for vulnerable homeless people has been shelved because none of the potential providers could do it with the funding the council offered: £280,000 per annum.

Andy Winter, chief executive of the Brighton Housing Trust, says: “It is a scandal that in one of the richest cities in one of the richest countries in the world we have almost 150 people sleeping on our streets.  The assessment centre is an important part of ensuring that everything is in place to help achieve that ambition. 

“But the council is trying to juggle its finances and commitment with both hands tied behind its back.  Adequate funding for the assessment centre is just not there at present which is one reason why Brighton Housing Trust did not bid for this contract.”

For its part, the council insists:  “We recently conducted a procurement exercise to secure a provider to deliver this new service. The bid we received met our financial requirements, but did not meet our quality requirements. We were therefore unable to award the contract.”

In plain English, the project has fallen into the funding gap: there isn’t enough money to do what it’s supposed to.

Brighton is a city that is a proud of its eccentric way of doing things. Elsewhere, councils have looked to more traditional methods of making money in the private sector.

Mole Valley District Council in Surrey, for example, has snapped up the building that houses a branch of supermarket Asda in Wales for more than £11m. Councillors say the deal for the supermarket in Ystalyfera will generate around £600,000 per year until the tenancy runs out in 20 years’ time. The authority expects to earn approximately £12m in total – a profit of around £500,000.

But the approach is fraught with risk. Surrey Choices is an arms length trading company set up by Surrey County Council to deliver social care services. An audit by Grant Thornton for the period ended 31 March 2016 found the company had made a loss of £4,152,821.

Hazel Watson, leader of the Liberal Democrats on Surrey County Council, says: “Using trading companies is not necessarily the answer to a council's financial difficulties. It is still possible to lose money and not to obtain value for money services for residents. Councils have to remember that public money is involved and that it has to be protected.


“Surrey County Council has spent millions of pounds using a wholly owned property company to purchase commercial properties around the UK. I believe that this is putting millions of public money at risk.”

There is a reason many councils are getting into these risky new ventures. Earlier this year the leader of Newcastle City Council, Nick Forbes, explained the sinister sounding ‘jaws of doom’ scenario for the benefit of Radio 4 listeners.

“If you imagine a graph with two lines on the graph,” he said, “One is plotting resources over time over time – and that is going  down. But the other line is the pressures on local governments and that is going up. Those lines are getting further and further apart. And it is that gap, what is local government terms we call the ‘jaws of doom’, that is filling local authority leaders with dread.”

But councillor Veronica Dunn, Newcastle’s cabinet member for resources, is less apocalyptic. “In these challenging times, the city council is keen to explore other avenues of investment and generating income,” she says. “We are currently reviewing our joint ventures, arms-length vehicles, governance, and our future direction of travel is being particularly reviewed.”

She added that the council is clear about its priorities. “Anything we do to commercially improve our position is done taking those priorities into account... Being entrepreneurial also means identifying the size of the risk and knowing what you should not get involved in or exposed to.”

So what steps are Newcastle councillors taking to mitigate that risk? The press office sent me a statement: “The review is a rolling programme of work, involving a number of people, and will take some time to conclude. Unfortunately we can’t provide specific details at this stage while the review is ongoing.”

Your guess is as good as mine.

Back in Brighton, Andy Winter is clear where the buck stops.

 “The responsibility rests with government which has to make the necessary funds available,” he says. “At the drop of a hat it was able to find £1bn for the DUP to prop up its precarious hold on power.  Can you imagine what difference even half that amount would make in tackling rough sleeping?

“That would provide a legacy that Theresa May could be proud of,” he goes on. “But I guess she has other priorities which history will not judge favourably.”

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The best way to make housing more affordable? Raise interest rates

Lol, no. Image: Getty.

Speaking to the Conservative Party conference in September 2017, the UK prime minister, Theresa May, gave a stark assessment of the UK housing market which made for depressing listening for many young people: “For many the chance of getting onto the housing ladder has become a distant dream”, she said.

Now a new report by the Institute of Fiscal Studies (IFS) provides further, clear evidence of this. The study finds that home ownership among 25 to 34-year-olds has declined sharply over the past 20 years. Home ownership rates have declined from 43 per cent at age 27 for someone born in the late 1970s, to just 25 per cent for someone aged 27 who was born in the late 1980s.

The most significant decline has been for middle-income young people, whose rate of home ownership has fallen from 65 per cent in 1995-6 to 27 per cent now – most significantly hitting aspirant buyers in London and the South-East.

Causes and consequences

The IFS study lays the blame for all this on the growing gap between house prices and incomes. Adjusting for inflation, house prices have risen 150 per cent in the 20 years to 2015-16, while real incomes for 25 to 34-year-olds have grown by 22 per cent (and almost all of that growth happened before the 2008 crash).

A bleak picture. Image: Institute for Fiscal Studies.

But, as the report acknowledges, the problem goes much deeper than this. Home ownership rates differ by region. Although there has been a decline in home ownership rates for young people across all areas of Great Britain, the decline is less significant in the North East and Cumbria as well as in Scotland and the South West. The biggest decline in ownership has been in the South-East, the North-West (excluding Cumbria) and London.

So a person aged 25 to 34 is more than twice as likely to own their own home in Cumbria, as their counterpart in London. Worse, young people from disadvantaged backgrounds are less likely to own their own homes – even after controlling for differences in education and earnings. Home ownership continues to reflect a deeper inequality of opportunity in our society.


More houses needed

Part of the problem is that both Labour and Conservative governments have seen housing as a single, stand-alone market and have focused their attention on what is happening to prices in London. But housing is a number of different markets, which have regional variations and different interactions between the owner-occupier, private rented and social rented sectors.

Regional variations in house prices for similar sized properties reflect the imbalances of the economy: it is heavily reliant on financial services, which are concentrated in London, while the public sector makes up a significant share of many local economies – particularly in the North. Migration from across the UK to overcrowded and expensive areas – such as London and the South-East – have put property prices in those areas even further out of reach for would-be buyers.

To make matters worse, both Labour and Conservative governments have routinely failed to build enough houses. While the current government’s aim to build 300,000 new properties a year by 2020 is welcome, it is simply not enough to meet the backlog in demand – let alone address the fundamental affordability problem.

Where homes are being built, they’re often the wrong types of homes, in the wrong places. Family homes are being built, despite there being some 4m under-occupied such properties across the country.

Not that long ago, government was reducing the housing stock in many parts of the North, through the disastrous Housing Market Renewal programme. Houses are currently being sold in smaller cities such as Liverpool and Stoke-on-Trent for just £1. And none of the government’s actions suggest that ministers understand these issues, or are prepared to address them.

House price inflation – and the awful affect it is having on home ownership rates for young people – is part of a wider problem of the global asset bubble. This bubble has seen huge increases in the price of assets – stocks, housing, bonds – in high income countries such as the UK. Successive governments have helped to fuel this through quantitative easing, ultra-cheap money and successive raids on pension funds.

The ConversationWhat’s needed to address this asset bubble is a substantive increase in interest rates. But while this may slow the growth in house prices, the sad truth is it will do nothing to make housing more affordable for most young people.

Chris O'Leary, Deputy Director, Policy Evaluation and Research Unit and Senior Lecturer, Manchester Metropolitan University.

This article was originally published on The Conversation. Read the original article.