Government inspection of Spelthorne Borough Council's finances extended

In May, the government wrote to the heavily leveraged local authority, the second most indebted borough council in the country, over concerns surrounding its debt conditions and financial management arrangements.

It has now written again to say it is extending its deadline until January 31, 2025 – with the scope of the inspection remaining unchanged.

The Government first began engaging with Spelthorne Borough Council in May 2022 over its capital risk and the review covers their concerns over how the council is governed, and the strength of its audits, scrutiny and risk arrangements – and in particular its finances.

Its debt is second only to bankrupt Woking among borough councils.

A Spelthorne Borough Council spokesperson said of the delay: “The snap general election earlier this year interrupted the appointment of the Best Value Inspection team.

“The delayed appointments have had a knock-on impact on the original timeline which has resulted in this extension.”

The council’s extremely high levels of debt and borrowing, as of March 2023, stood at £1.1 billion – 87.1 times the borough’s core spending power (CSE) and 52.4 times its total service expenditure.

In perspective, average CSE for councils such as Spelthorne is 5.6.

Spelthorne has followed a similar path to other Surrey authorities, such as Woking, Runnymede and Surrey Heath in borrowing vast amounts to pay for regeneration projects in the hope of creating long-term revenues.

Many councils have used this to stave off real term cuts to their spending power and maintain services residents value.

The problem comes, as in the case of Woking, when local authorities can no longer afford to pay back their loans, or if income from the investments are too low.

Spelthorne Borough Council has not yet reached that stage but the Government is seeking assurances that its long term position is secure.

Between December 2016 and August 2018, Spelthorne Borough Council bought eight investment properties for a cost of about £1 billion.

It used this money, borrowed largely from the Public Works Loans Board, to generate income to support its revenue budget and thus maintain a wide range of discretionary services.

The council’s total borrowing, as at December 31, 2022, stood at some £1.1 billion with £1.08bn from the Public Works Loans Board – the same body that lent to Woking Borough Council and countless others.

Between 2023 and 2027 the council had plans to borrow a further £332 million -most of which was to be spread across the next two financial years.

It has set its authorised borrowing limit to £1.45 billion for the next four years.

The Government has also highlighted the KMPG Public Interest Report on the 2017/18 accounts, published in November 2022, that raised concerns over the Spelthorne’s investments “and set out the auditor’s view that the authority acted unlawfully in borrowing and then purchasing three properties in 2017/18″.

The vast majority of its property portfolio, 95 per cent, are office buildings – with just 10 tenants accounting for 75 per cent of its lettings income – and one business BP provides £18million in rental income each year.

About half of its leases end within 10 years and 94 per cent within 15 years.

This places a lot of pressure on the council to retain its handful of key tenants and could prove ruinous should major contracts not be retained, or new ones found.

This has already been evidenced when it lost a previous tenant resulting in a £4million loss.

A July 2023 report read: “Although Spelthorne Borough Council has effective mitigations in place, this cannot provide complete protection.

“The loss of a major tenant (as has already happened because of the impact of Russia’s invasion of Ukraine, which resulted in a £4 million loss, including £2.4 million from the loss of a Russian-owned tenant) can impair commercial income.

“Over the next two years the council faces an income shortfall of some £10 million owing to the loss of key tenants.”

Other risks facing the council include a devaluation of the assets it acquired through borrowing.

It has spent £952m on eight major purchases that collectively were worth only £882m as per 2022, with only the Sunbury Business Park increasing in value from the time the council bought the site, up from £384m to about £387m.

This is more than wiped out by Charter Building, a property in Uxbridge the council purchased for £135.98m and last valued at £99m.

This devaluing means that should the council ever be in a position that it needs to sell assets, it would find itself in a deficit and need to cover the gap.

Not that the council is actively looking to do so as the income its investments bring in contribute to discretionary services.

“Annually these contribute approximately £10 million net to the council’s revenue budget, enabling the council to continue to deliver services that would otherwise have to be cut, including for example such valued services as Meals on Wheels or community centres”, a Chartered Institute of Public Finance and Accountancy report found.

The same report, the Spelthorne Borough Council Review of debt/investment risk profile July 2023, however also said there was “a significant budget deficit of some £9.306 million is projected over the next three financial years.”

Responding to the original best value review, a spokesperson for the council said: “We welcome the independent review and will work with the inspector and her team.

“This administration has taken many decisive and positive steps since the May 2023 election including instigating a full external independent review of our commercial property portfolio.

“Additionally, we have reduced future borrowing requirements by nearly £200m and are pursuing alternative ways to deliver more affordable housing.

“We will continue to work with (the government) in an open and transparent way and look forward to receiving the findings of the report.”

“The rental income received from our commercial property portfolio more than covers the financing costs and provides a significant contribution to support council services, additionally there is a reserve to cover possible income variation in future years.”