Austerity-hit board defends ‘high risk’ investment strategy | local government

IIn an ideal world, Cathy Mitchell wouldn’t have to spend her time worrying about an investment portfolio of over £1billion. The former barrister and deputy leader of Warrington Borough Council would typically have her mind on schools, adult social services and bus services, with the investments looking after themselves. But things are far from normal for the borough of Cheshire or its portfolio of assets: one of its flagship holdings – a 50% stake in struggling company Together Energy – is reportedly set to go smoke.

Warrington has followed advice across the country by pumping money into commercial projects in hopes of generating returns that can offset a decade of Conservative austerity. However, critics say the Labor-led council has taken the high-stakes strategy too far: pouring public money into risky businesses in property, energy and finance – including some companies backed by super-rich conservative donors.

“I’d rather not be involved in investments because we have better things to do,” says Mitchell, who is the consultancy’s portfolio holder for enterprise resources. “But until we’re funded properly by the government, I don’t think we have much choice.”

Warrington’s bet on energy supply is about to backfire on Together Energy as it prepares to appoint directors. It is the latest of nearly 30 smaller suppliers to face collapse amid soaring wholesale gas prices that are contributing to the UK’s cost of living emergency. The company declined to comment.

The council’s investments since 2019 – made with the aim of generating a return and tackling energy poverty in one fell swoop – have brought it over £50m of debt, equity and collateral exposure to Together , which is based 200 miles away in Clydebank.

While it’s unclear how much Warrington could lose, it’s believed to be lower than the overall figure suggests. Mitchell says she can’t comment on an actual situation, but insists that safeguards are in place and proper governance checks have been carried out before investing.

“It’s not the council that manages it; it’s a real energy business,” says Mitchell. “They are industry professionals with a lot of experience. We brought in external advisors and held an internal workshop where we got all the other [political] parties involved [before investing]. We have been very careful with the investment.

His detractors disagree. The stake in Together Energy is just one of many deals for the town known for its rugby club and former yarn industry. They include shares in a bank, loans to an e-commerce giant and properties ranging from shopping centers and business parks to solar farms in Hull, York and Cirencester.

Andy Carter, Tory MP for Warrington South, fears the council has bitten off more than it can chew. “He didn’t have to do that,” he said. “Other councils in the north west have much lower borrowing levels and operate in a different way. It’s a decision made by the councilors to take what I think is a really risky strategy, and some of those risks are now coming home.

“I’m not saying councils shouldn’t borrow. To do [it] here and there to make strategic investments in your community is a good thing. But Warrington took it to an extreme level.

Undeterred, councilors last week approved a new £37.5million loan, this time to affordable housing developer Auxesia Homes. Backed by European firm Matter Real Estate and Gary Metcalf, a property developer who briefly owned Chester City Football Club, Auxesia specializes in accommodation for service staff and NHS workers in the North West.

Critics say it should have been looked at more closely. “Have any lessons been learned from the council’s Together Energy investment? asks Conservative Councilor Ken Critchley. “You have to wonder why the usual lenders to private companies don’t make these loans.”

Conservative donor David Rowland, who controls Redwood Bank, in which the council has a stake. Photography: Shutterstock

Elsewhere, the city has a 33% stake in the Redwood merchant bank, which is controlled by conservative multimillionaire donor David “Spotty” Rowland and his son Jonathan.

Another Tory donor, Matthew Moulding, billionaire owner of The Hut Group (THG), was secured a loan worth over £150million by the council. The loan is secured at the online retailer’s extensive distribution site on the outskirts of Warrington.

Halfway between Manchester and Liverpool, Warrington is linked to both by the world’s first intercity railway and has motorways on three sides. This has led the town to a warehousing boom in recent years – although it started in 1987 when Ikea chose Warrington for its first UK store.

Mitchell says most investments are backed by physical assets, so Warrington is protected against default and the council invests in local employers who are creating much-needed growth and jobs. A Redwood spokesman declined to comment on the owners of the bank, but said it had lent £133million to the city and region since its launch four years ago.

Mitchell says the investment is necessary to fund services and represents “union values ​​in action”. She adds, “It’s hard to avoid conservatives when dealing with these kinds of companies. Sometimes you have to deal with people you’re not on the same page with.

Warrington has never been short of ambition. Its town hall is an elegant Georgian mansion, and the opulent gates outside were originally created for Queen Victoria. He gained infamous fame, however, in 1993, when an IRA bomb killed two young boys.

After years of decline, the city has injected £130million into the redevelopment of Times Square into a public market and cinema complex. A similar investment in nearby Preston has been applauded for being ‘municipal socialism’ in action.

Andrew Burns, associate director of the Chartered Institute of Public Finance and Accountancy, which represents public accounting professionals and sets standards, says Warrington’s approach is not new. Birmingham started a bank over a century ago under Neville Chamberlain, he says, while noting growing demands for local financial autonomy to “level up” Britain’s poorer parts. But while he agrees there are questions about how far Warrington is pushing him, he adds: “The ultimate test is the local ballot box. If people don’t like what they do, they can vote for them.

Warrington's Time Square restaurant and leisure complex, backed by the council.
Warrington’s Time Square restaurant and leisure complex, backed by the council.

Seeking returns on investment, Warrington racked up debt worth £1.6bn. And that is set to rise to £2.3billion within two years, putting the council on track for debts worth more than 400% of operating income. With interest rates rising to tackle soaring inflation, higher borrowing costs could put a greater strain on the local authority.

Warrington mainly borrowed through the Public Works Loans Board, a Treasury agency that allows local authorities to borrow at low rates – close to those enjoyed by the UK government. However, with councils like Aberdeen, Lancashire and Guildford, it has secured funds from global investors in the bond market. Moody’s, the credit rating agency that monitors the council’s finances on their behalf, noted that Warrington has a “high risk appetite” but a track record of delivering on budget.

Local authorities across the UK have been strained during the pandemic, with revenues collapsing and pressure on services increasing. Ministers had to intervene in the cases of Northamptonshire and Croydon, which issued Section 114 notices – meaning they could not meet their obligations. Last March, the National Audit Office warned that 25 councils were on the brink of insolvency.

Opposition leaders question whether Warrington should be allowed under central government rules to adopt such a risky strategy. “It was kind of like the Wild West,” Carter says. “Anyone can come in and borrow, and do whatever they want. This is certainly the case with Warrington.

A government spokesman said councils were not allowed to borrow to invest for return but were ultimately responsible for their own investment strategies, adding: ‘We have clearly advised that councils should not put taxpayers’ money at undue risk in the pursuit of commercial revenue. ”

Warrington’s other MP, Labour’s Charlotte Nichols, who represents the north of the city, admits the debt burden is a problem. “Of course, that raises concerns, especially from people who don’t think the board should be about investing,” she says. “Ultimately, I agree with this assessment, but I don’t see any credible alternatives offered. The government must spit or councils like ours will be forced to find other sources of revenue.

Mitchell says there would be worse dangers for Warrington if the board stopped investing. He has had to find £173m in savings since austerity began in 2010, which works out to 60p for every pound. “It’s about trying to protect people. What would it look like if you instead reduced services for children at risk or for vulnerable people who need care at home? »