How did Woking Borough Council end up with a mountain of debt?

This episode of The Woking Examiner tries to answer three questions

1. With borrowing commitments standing at £2.4 billion how did Woking Borough Council end up with such huge loans?
2. With annual loan repayments of £60 million and climbing and Council Tax income of £10 million how does it make ends meet?  
3. Does it actually make ends meet?

Woking Lib Dem Councillor Peter Graves takes a close look at the inner workings of WBC's finances with fellow Councillor and Finance Portfolio Holder Dale Roberts. 

Transcript

Peter Graves: 0:04

Hello and welcome to the Woking Examiner Podcast. In this series of podcasts, we interview the councillors, portfolio holders and supporters who are assisting the Lib Dem run Woking council as we seek to address the many years of mismanagement committed by previous administrations. I am Peter Graves, councillor for Pyrford Ward. Over the course of the series, the people I interview disclose the realities that lie behind the decisions they're making as they continue to unravel the complexities of the financial dissonance, which we inherited in May, 2022. Today I'm with Dale Roberts finance portfolio holder since May of last year, having been elected as councillor for St. John's in May of 2021. It's been Dale's role in the last few manic months to try to unravel the council finances by engaging with the officers and other external agencies, and then devise an affordable plan for moving us onto a positive and sustainable footing. It's been his role to set a realistic and affordable medium term financial strategy. Dale, welcome and congratulations on your new role.

Dale Roberts: 1:16

Thank you, Peter. It's great to be here and thank you for inviting me.

Peter Graves: 1:21

Not a problem. It's good to see you again. So could we start with, by, by looking at at Woking finances? And so looking back over the last 10 and 15 years, Why did councils feel the need to borrow such vast sums of money?

Dale Roberts: 1:36

Let's start with first principles. Local authorities have three main sources of revenue, government grants, so money from central government in either a specific grant to pay for in specific individual name services, or a general grant revenue support grant, sometimes a formula grant. Secondly, business rates. So a tax on business premises, which local authorities collect for central government and they retain some of it inordinately complex. And then there's council tax, a property tax levied on residential properties, and we're all familiar with that because we'll pay it.

Peter Graves: 2:12

Yep.

Dale Roberts: 2:13

Then over the last decade or so, there have been deep cuts to that grant funding. Grants, in fact, including retained business rates were cut 37% in real terms over the 10 years to 2019 Deep cuts.

Peter Graves: 2:28

Yep.

Dale Roberts: 2:29

And at the same time, flexibility was reduced on raising income tax, sorry on raising income through council tax,

Peter Graves: 2:38

Yep.

Dale Roberts: 2:39

because of changes made in the 2011 Localism Act. That meant that local authorities have been constrained in terms of being able to raise council tax. So inevitably English councils went on a spending spree looking for investment opportunities to generate the income that they've lost in government grants. Councils have become increasingly reliant on income from commercial investments ever since.

Peter Graves: 3:06

That's interesting. So effectively, A lot of money being taken away from councils. They've been restricted on how much they can increase council tax, and so many councils have had to look for other sorts of income. I can get my head around that but Dale explain why did the previous Woking administration feel the need to take such enormous financial risks?

Dale Roberts: 3:31

Borrowing has been used for regeneration, Sheerwater

Peter Graves: 3:37

Yeah.

Dale Roberts: 3:37

for example, but it's grown out of all proportion. Look, there are around 300 uh, borough and district councils in England by size, we're something like 230th. But we have these enormous levels of debt. We have the highest level of commercial debt relative to our size of any authority. And so we have this enormous debt. And fundamentally, investment is all about return and risk. There's always risk, always greater risk, greater return, less risk, less

Peter Graves: 4:08

Yes. Return.

Dale Roberts: 4:09

It's, basic economics. None of this is for the fainthearted. None of it is really for small, relatively small borough councils. These projects because they're regeneration. These projects were justified as low returns because they're delivering social benefits, but they had high risk now, low return, high risk. They're enormous projects for a borough of this size. The private sector wouldn't be interested in projects that are high risk and low returns. So the borough took all the risk, even if the projects didn't go completely to plan and projects like these never, ever go to plan. There was no margin. for error and history has shown that there are errors cost for the red car park is just one example. 58 million.

Peter Graves: 5:00

Wow.

Dale Roberts: 5:01

just astonishing. The borough felt it had the skills to deliver these projects. It manifestly didn't. Nor did it do enough to acquire those skills, capacity, capabilities. As an example, an external advisor recently commented that they would've expected that there'd be a commercial financial role. And that just doesn't exist today in either our subsidiary companies or in the borough. At this level, we just don't have the people, the structures, the skills, the capacity, the capability to be doing what we've done. So we became this enormous bank and property management without the resources to do it well.

Peter Graves: 5:43

That's really helpful, Dale, because what I hadn't appreciated was that Woking actually sits as quite a small borough out of the 300 councils we are 230th, but we've got this massive debt of 2.4 billion which, even, to my mind is overwhelming. But can you explain exactly who is lending to who within this picture?

Dale Roberts: 6:05

It's a great

Peter Graves: 6:05

question

Dale Roberts: 6:06

Peter. It's one of just one of the things that makes the financial picture more complicated than perhaps it should be. So the borough, the council, are borrowing from someone called the Public Works Loan Board, effectively the government,

Peter Graves: 6:21

Brian.

Dale Roberts: 6:21

the vast bulk of that borrowing is then lent to two subsidiary companies owned by the council Thameswey, first one, and then Victoria Square Woking Limited. The borough in that case, is then effectively acting as a banker with those two subsidiary companies.

Peter Graves: 6:41

I think that's made it much clearer. But to make it absolutely crystal clear for our listener. We've got a situation where a small borough council is effectively acting as a bank without the skills or capacity to do so. Doesn't really sit that well with me. But perhaps you can explain what that bank has been using the money to build. What have we got out of it, as it were?

Dale Roberts: 7:08

The big ticket items are the. Most people will know about i our Sheerwater. Sheerwater has been built through the Thameswey business. Now, not all Sheerwater, but we're something like 800 million pounds into Thameswey. And then secondly, Victoria Square. So the towers in the town center standing at something like 700 million plus it needs working capital closer to 750 million. The council isn't just a bank. It has purchased assets for itself over the years. So the borough owns Export House, the former BAT building, Maurice House, Duke's Court, Victoria Gate, Mines House Albian House opposite the station and many other assets. But as I say, the big. The really big items are Thameswey and Victoria Square

Peter Graves: 8:00

That, that's fascinating, Dale, because I couldn't get my head around how we've got these assets. We've got some fantastic assets in Sheerwater. We've got Victoria Square towers in the town center. We've got some quite, impressive. Buildings in the center of Woking as well, but what I need to understand, and perhaps you could explain this for our listeners what was the actual plan for paying back the debt to the Public Works Loan Board and where would it come from?

Dale Roberts: 8:31

Because these two projects particularly, Victoria Square and Sheerwater are regeneration schemes. The benefits are social, housing, regeneration. They're not financial. So the business cases had these underlying assumptions that we could continue to borrow from Public Works Loan Board when these projects didn't deliver cash or profit for many years. The other assumption was always that the project costs were back loaded. They would ultimately be covered. They'd ultimately deliver a return when the project reached the end of their life, 50, perhaps 60 years time, for Victoria Square, Or as and when the housing in Shearwater has been sold and, or been let where they're for rental, So the challenge with that is that loans have consequences. The consequences of loans, as we all know, are repayments interest and capital that's got to be paid every year. The council have to pay, as we know from the EY report, the council have to pay 60 million a year for loan repayments. And just to put that into perspective, Our total spend as a borough on all the services we provide outside of housing is 40 million.

Peter Graves: 9:59

Whoa.

Dale Roberts: 10:01

We pay for all that we do 40 million. Our interest our loan repayments are 60 million a year.

Peter Graves: 10:07

So as I understand it we've got to we have a total spend on services of about 40 million pounds. But then on top of that, we're paying. 60 million pounds in loan repayments. That really does that really does worry me. I'm sure our listeners would also be concerned about that. But currently what are our debts? I Are we in the black or are we in the red? How does it actually stand there?

Dale Roberts: 10:31

Yeah that's that's a question that's not easy to answer, but I'll try and so think about the debt. Debt stands out in terms of existing committed debt, 2.4 billion. And the independent financial review, the EY report I mentioned earlier without making this two party political, we, the Lib Dems,, secured that, through an opposition motion. And you know that report came out of work that we did in opposition. Anyway, that report suggested the net asset position was 142 million. Add it all up. Not that you could ever do this, by the way. Sell it all off and you end up with 142 million. You, You'll hear this talked about a lot. however, we absolutely should not rely on that. The EY report was an analysis of valuations provided by the previous administration. They didn't validate those valuations. Of course they can change. They they change all the time, nor did they nor did they validate the basis of those valuations. So just for example the new auditors Menzies they made this discovery recently back in our 2020 accounts. That there was an overstatement profits by 14 million and turnover by 30 million in a single year's Thameswey accounts.

Peter Graves: 11:46

Whoa.

Dale Roberts: 11:46

You, we should, and we are doing a lot more work on this more significantly is Victoria Square. This is Victoria Square. At the time of that EY valuation was valued at its cost. Whatever we pay to build it, that is what its value was. Let's say 700 million. Right and proper to, to value it that way. But once it becomes operational, that's not how you value an asset like that. You value an asset like that based on its potential income over a period of time, and I think it, I think we'd all understand that commercial income has changed dramatically since the point at which the Victoria Square project was conceived and where we are today. That valuation, hundreds of millions, it really needs to be challenged. And in any case, ultimately the value of an asset such as this is only real when it changes hands when someone buys or sells it. So it, but it could be entirely unrealistic. Unrealistic to assume that in the current market it could be sold at its cost. It's hypothetical, but all valuations are, and the difference could be hugely significant. I think that's the real point that, that I think the point I'm trying to make here, Peter, is that, that, that net asset position of 142 million wafer thinner in itself, right? 2.4 billion of debt. Be examined more closely and can't be considered in any way robust. Uh,

Peter Graves: 13:16

So now the obvious question really is where are we getting the money from to repay those loans? Over to you, Dale

Dale Roberts: 13:25

That's right. Yeah. That the money to repay those loans needs to come from the council's own companies from Victoria Square and Thameswey.

Peter Graves: 13:35

Yeah.

Dale Roberts: 13:35

These companies today aren't generating the cash to repay those loans. The business plan plans suggest they will do over time, certainly after 50 years. But that leaves the question about how those loans are repaid this year, next year, indeed, for the next 49 years. Those companies are repaying existing, borrowing with new borrowing.

Peter Graves: 14:01

So these companies, the Thameswey Group and Victoria Square Woking Limited Dale are, repaying existing borrowing with new borrowing as I understand it. But what exactly are the repayment terms for the borrowings.

Dale Roberts: 14:17

So far, most of the loans from the Public Works Loan Board to the council are at pretty low rates, 2% over a period of 50 years. Somewhere around 2%. However, and we've talked about this because the business plans require new loans. To pay old loans, we have to pay the prevailing rate

Peter Graves: 14:41

Oh, I

Dale Roberts: 14:42

any of those new loans. As interest rates go up, as we've seen them do so dramatically the costs go up. And so this is, this is interest rate risk. Now, and we've. As a new administration, we've done a lot of work on explaining all of this to councillors and I think in a way that it hadn't been done before.

Peter Graves: 15:02

Being a little bit more transparent, I than perhaps had been the case in the past. Is that a fair assessment?

Dale Roberts: 15:08

That's right. We're certainly going out of our way. To make sure everyone understands the implications of where we are and any decisions we need to make. Because, councillors members, they're representing residents so right, it's right and proper that they understand all of this. And as I say in a way that I don't think has been done before or certainly clearly enough before.

Peter Graves: 15:34

So Dale, in the current situation, how difficult has it been for you to set an affordable budget?

Dale Roberts: 15:45

Candidly, Peter, it's a precarious situation. There are a number of problems. The first is the council's dependence on commercial income. Um, the, um, the assumption was I believe that the market would simply come back, post covid. Um, the, the borough was so dependent on commercial income that it wasn't willing to face up to the reality that it's changed. It's never coming back. At least. The way it was, the pandemic accelerated two fundamental changes. Firstly, hybrid working that impacts the office rental market. And then secondly, online shopping. We all know this, don't we? So there's huge move, uh, that was already happening, accelerated by, um, the pandemic that changed, fundamentally changed the purpose of a town center, which is no longer a predominantly no longer a retail destination. Now over time, we can reconfigure office space and the town center. That's a major undertaking. It's many, many projects. It'll take many years. And for now we simply have less commercial income until we get this right. Less commercial income, uh, as a council. And there's a bigger problem that we need to fix both, and that's the scale of the borrowing. The subsidiary companies aren't generating cash as we discussed the council should be making some provision for the repayments, uh, for those long-term loans, putting aside money, uh, and it's not putting enough aside. Uh, currently we're putting aside something like 6 million. Prudent view fairly common prudent view is that we should set aside 2% of the borrowing effectively if it's asset backed. Um, it suggests that you are assuming you are writing down the asset over 50 years, so 2% that will be 30 million on the 1.5 billion we've lent to Thameswey and to Victoria Square. Now, I, I'm not suggesting that's the only prudent view. Prudence is a judgment. But as we engage with the government and the government appointed review board, we're going to likely be required to take a more prudent position than we have done previously. Somewhere between where we are today, set I, as I say, a small number of millions to perhaps tens of millions. Remember our total spend on services excluding housing is around 40 million. We we only retain 10 million of the council tax that we collect. Other commercial income covers the balance and is dwindling, and we may be required to put aside this enormous sum to be determined. Now that we're engaged with the government, who quite rightly have raised concerns over the scale of the debt.

Peter Graves: 18:52

Thank you Dale for that fascinating insight into the history of working finances. It is great to see that these matters are being exposed to councillors and residents who for for too long have been kept in the dark. I'm sure that listeners found it as revealing as I did, and it concerns me that we seem to have overstretched ourselves so much to the point. Where we have a council tax income of about 10 million pounds, but at the same time have loan repayment commitments of 60 million pounds per annum, and that's for the next 50 years. It does seem that some unacceptably rash decisions were made and that there was a frightening lack of preparation and scrutiny. Thanks for listening to this episode of The Working Examiner Podcast, we look forward to you joining us again next time.