How to stop local government in England becoming a Greek tragedy

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England

Over a decade ago, Greece faced a searing financial crisis. As a condition of receiving support from the international community, the Greek government was required to sell off a number of its major assets to private investors. These included key infrastructural and cultural assets — airports, ports, railways and even some of its islands. 

These actions were politically controversial. They were also economically questionable since they took place at fire-sale prices and potentially deprived the Greek economy of a stream of future revenues to ensure its long-term financial health. 

Today, a number of local councils across England confront a similar fate. Six of them have so far declared bankruptcy, including Birmingham, the largest council in Europe. The Local Government Association believe as many as one in five could follow suit in the years ahead. The financing gap they face over the next two financial years alone is estimated at £4bn.

These problems have deep roots. Since 2010, the budgets of English councils have been cut by more than a quarter. Because they are required by statute to preserve certain services, including social care, the brunt of cuts has been felt in areas such as transport, housing and culture. To save money in Birmingham the council has dimmed the street lights.

In an echo of the earlier Greek experience, as a condition of government support, local councils have recently been asked to sell assets to help meet their financing needs. These assets sales have included car parks, town halls, parks and libraries. Since 2010, around 75,000 assets are estimated to have been sold by local councils, raising around £15bn. 

Facing this financial squeeze, some councils have gambled for redemption through risky commercial ventures. But with resources and commercial expertise in short supply, some of these investments have gone sour. Alongside tax rises and spending cuts, that now leaves councils facing the permanent loss of assets, often with cultural and civic significance.

There is another way — one that comes from investing in local assets, through an urban wealth fund, rather than selling them. This combines continuing public ownership of local assets with private sector management of them. It brings commercial expertise into local regeneration to boost the long-term value of public assets, while avoiding the loss of revenue associated with fire-sale privatisation.

Measured at historic cost, the UK public sector owns non-financial assets of around £1tn, with ownership equally split between central and local government. Urban wealth funds would manage those assets on a pooled but local basis. They would do so to meet a range of objectives set by local government, which would retain ownership and an agreed share of future income, with the remainder going to the commercial developer.

These objectives would be part financial, part civic and environmental. The latter could include targets for housing, including affordable housing; for green spaces, to meet net zero objectives; and for cultural assets, such as libraries and museums, sports and leisure facilities, youth clubs and community centres. This avoids uncontrolled urban sprawl and makes citizen and environmental interests central to local regeneration. 

Local planning rules would be a potential barrier to such regeneration. But because this is public land being put to use in pursuit of a public purpose, a strong case could be made for a distinct public planning regime for urban wealth funds, which would fast-track and streamline existing planning rules.

The returns of this investment would be financial as well as civic. Let’s say half of public assets were placed in commercially-managed urban wealth funds, boosting their book value by a factor of two — a very conservative estimate. At an equally conservative rental yield of 5 per cent, that would deliver an income stream of £100bn each year for local councils, multiples of their current and prospective financial needs.    

While novel for the UK, this model is tried and tested internationally. It has been deployed successfully at a local level in a wide range of other countries, including Sweden, Germany, Denmark, Hong Kong, Singapore and the United States. Indeed, it has recently been trialled in the UK too, with Transport for London and Network Rail developing public land around the capital to create 20,000 new houses.

The answer to the financial plight facing English councils may be sitting under their noses. If central government could look beyond the end of theirs — ceding control to a set of local urban wealth funds — a high-income, housing-rich, net zero civic asset of huge potential could be unleashed. Without that, a further dimming of the lights or a Greek tragedy beckons.