Agenda item
Implications of Brexit for Local Government
Minutes:
6.1 The Chair welcomed to the meeting Councillor Geoff Taylor, Cabinet Member for Finance and Customer Services and Ian Williams, Group Director Finance and Corporate Resources from London Borough of Hackney.
6.2 The two areas discussed under this item were:
6.3 Britain’s exit from the European Union and the implications for local government
The Commission asked the Council to provide an update on the implication of Brexit to councils. Looking at local: economy, labour market and Hackney Council’s plans.
6.4 Further information on Income generation and commercialisation
The Commission asked the Council to provide information about services that have the potential for income generation - beyond increasing fees and charges – and to provide an overview of the Council’s approach and work on income generation for services across the organisation and the potential for commercial activity.
6.4 Brexit report
6.4.1 A 2 year negotiation period will commence when Article 50 is triggered at the end of March 2017.
6.4.2 The first task for central and local government is to understand the extent to which European Union (EU) legislation affects its operations. For example the majority of EU waste management law has been transposed directly into domestic law within the UK. This means that the relevant legislation and requirements on local authorities will not automatically or immediately be affected by the UK’s exit from the EU.
6.4.3 A 2013 LGA report suggests that around half of all regulations affecting local councils originate from the EU but other commentators have put the figure at 70%. Given that many of these regulations have been implemented by Primary and Secondary legislation in the UK, they will not lapse in the event of leaving the EU. For example waste operations are largely governed by EU directives.
6.4.4 The former Secretary of State for DCLG was reported to have said “he argued successfully for English local government to be part of the negotiations on the terms of our exit… When we are transferring powers from the EU toBritain Ithink itis essentialthat Whitehallis notthe defaultdestination forthem”.
6.4.5 The Council continues to work with colleagues in London Councils and the GLA with regards to London devolution following the budget announcement.
6.4.6 The UK economy is vulnerable due to its “twin deficits” – budget and current account. The current account was a record 7% of GDP in 4Q 2015, and when added to the budget deficit, the twin deficits amount to 10% of GDP, which in emerging markets is usually seen as the point at which investors become deeply concerned. There is a possibility that Brexit will catalyse those risks. The latest announcement from the Chancellor indicates the UK economy is showing signs of modest strength.
6.4.7 There is still business activity whilst there preparation for Brexit get underway. There are positive moves for the local economy like Amazon occupying the whole building it moved into and making the location its principle place of business.
6.4.8 The UK was due to receive approximately £5.3 billion in European Union structural funds in the 2014-2020 programming period and many local authorities have publicly voiced their concerns regarding the withdrawal of access to EU funding.
6.4.9 At this present time, projects currently funded by the European Structural and Infrastructure Fund (ESIF) will continue to be bound by their existing arrangements and some suggestions have been made that the UK government could step in to the position of the EU if and when the UK exits the EU, assuming it is within the current 2014-2020 Operational Programme.
6.4.10 Local authorities have relied on EU structural funding and the European Investment Bank (EIB) as a source of finance for local authorities. The European Investment Bank (EIB) has invested some €42 billion in the UK over the past ten years.
6.4.11 Local authorities must manage their buildings and procurement in line with energy efficiency rules based on EU law. The basis of these is the 2012 Energy Efficiency Directive which is transposed into UK law via a number of pieces of secondary legislation. The Directive establishes measures to help the EU reach its 20% energy efficiency target by 2020 and places a requirement on public authorities, which includes local councils, to ensure they purchase energy efficient buildings, products and services.
6.4.12 For Trading Standards the EU has extensively legislated in the realm of consumer protection and health and safety, with UK legislation therefore largely based upon EU Regulations.
6.4.13 For procurement Local government must comply with EU public sector procurement rules. The most significant requirement is for all public contracts over 209,000 euros to be published in the OJEU, thus making them accessible to suppliers from across the EU. In the short term, there will be no impact on the council’s procurement activities as the current rules are enshrined in UK law and will not lapse upon leaving.
6.4.14 European regulations prevent the Government from providing state aid to companies of over £200,000 in any three-year period. Tax reliefs and exemptions also fall into the definition of state aid.
EU legislation has changed the landscape of workers' rights and whilst it is unlikely that any government would significantly reverse the core principles surrounding discrimination rights, TUPE, agency workers, holiday provisions etc.; in the medium term we should be prepared for changes and deviations from the current regime. This could benefit (or potentially adversely impact) local government.
6.4.15 May 2018 is the proposed deadline for implementation of the General Data Protection Regulation (GDPR) within the EU, and many local authorities are in the process of preparing for its introduction. The Information Commissioner's Office's current position is that organisations should assume the GDPR will apply in May 2018, as the UK will need to prove equivalent data protection standards to the GDPR if it wishes to trade within the single market.
6.4.16 In relation to affordable homes there is concern about the impact on the construction industry. The decision to leave the EU has prompted warnings across the construction industry about the impact of prolonged uncertainty on house prices and the cost of borrowing. It is an industry that is to some extent reliant on migrant labour; between 2007 and 2014, it was estimated that the proportion of EU migrants in the construction sector rose from 3.65% to 7.03%. Limits on free movement could, therefore, have an adverse impact on building costs and supply, at least in the short to medium term.
6.4.17 Access to local government housing. Changes to the free movement of EEA nationals may impact on their eligibility to apply for local authority housing. There is no automatic entitlement to council housing in the UK.
6.4.18 In relation to LGPS over the short term, the decision has resulted in considerable volatility, with impacts on currency, gilt yields and equity markets. The initial fall in gilt yields saw a significant increase in the Fund’s liabilities, with the funding level falling back to 72% from 77%.
6.4.19 The Council focuses on low risk sterling institutions and has a very conservative approach to its investment. The Council’s investment portfolio has no exchange rate risk so there is no direct impact of the decrease in value of the pound.
6.4.20 There are current discussion about how local authority is classified, if they will be seen as retail investors or a professional investor.
6.4.21The most immediate and obvious impact on the Council to date has been on the costs of products and materials. The prices have increased as a result of the depreciation in the value of sterling.
6.5 Income Generation and Budget Update
6.5.1 In response to the questions raised under matter arising from previous meetings the Group Director Finance and Corporate Resources provided 2 early examples of the work the council can do in relation to income generation activity. This involved acting in the role of a developer for the Borough.
6.5.2 The Council has two carried out mixed development schemes Tiger Way and Nile Street.
6.5.3 The officer highlighted the dilemma’s approach, benefits and risks of undertaking this type of income generation activity.
6.5.4 Dilemma:
· The council is in need of additional school places as a result of the demographic change and the success of schools in the borough. There are policy contradictions, like the Government putting large amounts of funding into building free schools.
· The current funding available for schools is not sufficient to build the schools required by the borough.
· The pressures and impact locally of London’s housing crisis
· The amount of investment required in other community infrastructure, e.g. leisure centres.
6.5.5 Approach:
· Council’s response was to take on the role of developer in order to maximise the land value for local residents and retain ownership of the land.
· For developments like Nile Street and Tiger Way developers rarely identify the volume of affordable housing required. The Council in this role has combined housing needs with education facilities. The construction started on site November 2016.
· The proposals for the Britannia leisure centre was subject to public consultation and the decision will be taken by Cabinet in April 2017.
6.5.6 Benefits:
· The profit acquired by the council from taking on the developers role is reinvested in community infrastructure e.g. affordable housing, schools and a leisure centre
· By taking on the role of developer the Council retains ownership of the land
· The Council has more influence over sales strategies, apprenticeships and can incorporate other ways into work programmes.
6.5.7 Risks:
· The Council takes on the risk of sales for the properties. This risk has been heightened post Brexit. They are currently finalising the marketing strategy for sales but taking into account the Council’s ethos.
· The capacity to deliver on a large number of highly complex schemes with significant expenditure levels.
6.5.8 Nile Street will be a purpose built pupil referral unit, 29 storeys, 175 residential units.
6.5.9 Tiger way will provide a 2 form entry primary school, 89 residential units, 11 and 14 storey pavilions.
6.5.10 With the Council taking on the role of a developer it means they have taken on risk, construction, sales and project management for the development from start to finish but they have greater opportunity to drive out higher levels of affordable housing.
6.5.11 The Cabinet Member for Finance and Customer Services highlighted the council has been building up its capacity to undertake this role over several years. The council has created a team capable of successfully managing a development like Tiger Way.
6.5.12 Members asked to define what commercialisation means. It was explained as covering fees and charges; entrepreneurial; investment; shared services or trading company.
6.5.13 When local authorities look to trade there needs to be transparency and accountability with the charging regime. There are limitation as to what the council can charge for. The Council’s markets operation was used as an example of an operation whereby the council can charge a levy but they cannot make a profit from the charges. Adopting this approach has taken the markets operations from running at a deficit to covering its costs. It was pointed out if the council does wish to apply charges it needs to conduct market research and provide services that are pitched at the right value. The Council’s Building Control services was cited as an example of a service that has not achieved success in obtaining business from the open market.
6.5.14 Local government operates within a legislative framework that governs their trading and charging ability. The Local Authorities (Goods and Services) Act 1970 gave powers to enter into agreements with other designated public bodies.
6.5.15 The Local Government Act 2003 made provisions to trade in activities related to their functions with a view to profit making through a company. But councils would need to set up a trading company separated from the local authority for this activity.
6.5.16 The Localism Act 2011 sits alongside existing powers. Allows Council’s to do more than under previous wellbeing powers and previous legislation. The act provided general power of competence, this is in recognition that local government is maturing. They have powers to do anything that an individual can do providing not expressly prohibited by other legislation. Includes power to charge for an activity or to undertake a commercial activity. For example the council could set up a housing company for private rented units. However the Council is not permitted to run any business operations of a private company through the Council’s General Fund.
6.5.17 For fees and charges the council has specific powers to charge for services, e.g. section 19, Local Government (Misc Provisions) Act 1976 – charging for the use of leisure and recreational facilities.
6.5.18 The council has a general power to charge for discretionary services.
· Local Government Act 2003, but does not apply to mandated services or for those services a LA has a duty to provide
· Not to be used where charging is prohibited or other specific charging regime applies
· Taking one financial year with another, income from charges should not exceed cost of provision.
6.5.19 For charging services it was noted the council cannot run the operation at a deficit for more than 3 consecutive years. For areas like Building Control services this has proved challenging.
6.5.20 In regards to trading the general power of competence to charge for services, this does not provide the power to make profit. Other powers that allow for commercial trading for profit:
· Local Government Act 2003
· Localism Act 2011
· Must be through a company
· It must be ltd by shares, ltd by guarantee, provident or industrial societies.
6.5.21 Profits generated can go back to Council via dividends or service charges. Luton Borough Council was cited an example whereby the council receives dividends from its share in Luton Airport.
6.5.22 For trading if setting up a company the following considerations need to be taken into account:
· Commercial – e.g. cost of bidding for contracts, if appropriate. The cost if the bid is not successful.
· Financial – e.g. potential tax liabilities. The company should be managed so it is not subject to heavy tax liabilities.
· Business Case required to be approved
· Legal constraints include: tax, state aid, structures; companies Act and MPM.
6.5.23 Examples of commercialisation in other boroughs:
· Essex Cares – Essex CC providing social care services
· Solutions SK – Stockport Council provides range of services including Financial Management, catering, highways and waste management
· Swindon Commercial Services – as above with recent addition of survey, design, installation and maintenance of domestic solar panels
· Kent County Council – significant range.
6.5.24 The Hackney Learning Trust trading entity was cited as an example of a services not achieving the expected income from the traded services market.
6.5.25 In the budget announcement there was extra funding for social care. The Council is awaiting details of the conditions attached to this funding.
6.6 Questions, Answers and Discussions
(i) Members queried about the impact of Brexit on immigration controls and the effect on local government and the local economy. Members also enquired if local authorities should be considering the powers they need following Brexit.
The Cabinet Member for Finance and Customer Services advised London Councils was drafting up proposals to make requests for powers. This could be an opportunity for London to receive more powers but this would require making confident demands. In his view London needed to be bullish in its requests for powers.
(ii) Members commented on the potential of trade barriers if the UK leaves the single market and the impact of this on local businesses. There was also the potential of labour shortages. Members urged the Council to support local businesses to overcome the challenges Brexit could potentially bring.
(iii) Members referred to immigration and enquired if the Council had information about the number of EU nationals working within the borough. Member’s query related to the preparations by the Council, local partners (NHS) and businesses for Brexit and the potential impact on the local labour market.
(iv) Members enquired if there were any projects within the borough that were beneficiaries of EU funding and queried how they will continue to be funded following Britain’s exit from Europe.
The Group Director Finance and Corporate Resources advised for the projects set up and currently in operation they will continue to be funded.
It was highlighted that Hackney acts as the accountable body for EU funding on behalf of the 6 Growth Boroughs. The Council has noticed that applications are being subject to more rigours assessment than previously.
The Cabinet Member for Finance and Customer Services advised in regards to the Council’s direct employees he could not confirm if the Council recorded an employee’s residential status with different countries.
As details emerge the Council will review the situation.
(v) Members commented there is evidence that house prices are falling and this has impacted house prices in central London. Members queried if the fall in house prices had impacted on the housing market in Hackney and the council’s regeneration plans?
The Group Director Finance and Corporate Resources explained in the role as a developer the council was very careful not to overestimate. The Council carried out bench marking and trend analysis and have been cautious when predicting the estimated income.
(vi) Members suggested the Brexit report should be circulated to all Councillors.
|
ACTION
|
Report on implications of Brexit to local authority is circulated to all Councillors. |
(vii) Members made the following comment:
For the Council getting the role of a developer right this could be used to make a claim for a Community Land Act. This provided a practical demonstration of what can be achieved through collective gains of property wealth. This also highlighted the need for culture change in relation to the management of this type of activity. The role of councillors would be to understand the risks and benefits of this because investment in property was a long term gain.
(viii) Members compared the Council’s work when acting in the role as a developer to the development at the old fire station site in De Beauvoir. This development had not produced affordable housing units. The developers have made a contribution to units in another location. This highlighted the difference in culture and social responsibility between the council and the private sector as a developer.
The Group Director Finance and Corporate Resources pointed out the funding being made available to build a school was in circa of £20 million. It was noted to build a school to the standard and facilities like Urswick School would require funding in circa of £35 million.
(ix) Members referred to commercialisation and enquired when the Council would be in a position to make a decision about its approach to commercialisations and income generation.
The Group Director Finance and Corporate Resources informed Members this was their initial progress - driving better value from their assets.
(x) Members enquired if the Council can start considering how it might use the London Housing consortium framework to assist with its role as a developer?
The Group Director Finance and Corporate Resources advised they do use a number of frameworks and he was currently investigating if they can use the Housing Consortium framework.
The Cabinet Member for Finance and Customer Services highlighted an income of approximately 2/3rd of a million was needed to cover the cost of a 1% rise in council tax. Therefore effective entrepreneurial ship needs to be achieving this level of income to make a difference to the Council’s budget.
(xi) Taking into the consideration the Council’s experience and expertise from its role as a developer, Members enquired if the Council would consider providing the same housing scheme to other local authorities to generate income?
The Cabinet Member for Finance and Customers Service explained the Council does have capacity to do these projects but it is not an endless capacity. The Council has built up expertise in this area but this is very costly.
(xii) In discussion it was noted there were limited sites across the borough they could develop. However acting as a project manager or carrying out the scheme for another borough would need a continuous stream of business for viability but it was worth the council considering this type of partnerships with other boroughs.
The Group Director Finance and Corporate Resources explained the council does work with other councils in a variety of business areas but they need to ensure they do not dilute their capacity to do the work in the borough.
Members urged the Council to consider roles such as a project manager for large developments as this role could command a sizeable fee.
(xiii) Members wanted to establish what the Council had learnt from its experience of the two income generation examples mentioned. Members recapped on their experience from the process and pointed out there were a number of challenges.
The Group Director Finance and Corporate Resources advised from the projects they had learnt they need to engage with the construction industry in the early stages of development to take on board their observations and feedback. At the earliest opportunity they should make sure Ward Councillors are informed and briefed. Be more open about the regeneration scheme. There are will still be obstacles with the full engagements process for example the demand for school places can dictate the pace of development.
The Cabinet Member for Finance and Customers Service also added that communication was key. The Council should be upfront with residents about the long term view and future needs. It was the role of Councillors to express the needs of people who were not present at the time of the development but who may need to use the service / provision. If people were presented with this information it was likely that they would be less objectionable to the development and take future need into consideration.
(xiv) Members referred to the developments that have decision making boards and enquired if they experienced tension from having 2 arms of accountability. Members enquired who would oversee performance management and the management of the boards.
The Group Director Finance and Corporate Resources advised they needed to make sure the relevant departments not involved in the project, but would be part of the process, were adequately resourced. E.g. the Planning department had sufficient staff to carry out the planning role for the scheme and that they were not just expected to agree to the scheme because it was being developed by the council. Recognising how to use their resources effectively, when to use the appropriate resource and skill sets and getting appropriate legal agreement.
The Cabinet Member for Finance and Customers Service acknowledged the scrutiny of this area of work was an interesting observation.
(xv) Members commented there was a job for Wards Councillors to meet with officers and ensure the view of Councillors and Ward Councillors were taken into consideration.
The Group Director Finance and Corporate Resources confirmed the current administration appeared to be willing for officers to talk to Ward Councillors at the early stage of development for the proposals. This could lead to the process being more beneficial for all parties.
(xvi) Following this discussion Members noted:
· Commercialisation activity is important
· The council should concentrate on activities it was good at doing
· This would require culture changes and having the right expertise to support the activity
· Accountability to Councillors and Ward Councillors was important
· Municipal enterprise should be built in.
(xvii) The Chair suggested the Commission writes to the new Scrutiny Panel to ask them to continue the work G&R started on income generation and to monitor the council’s progress in this area.
|
ACTION
|
Chair of G&R to write to Chair of Scrutiny Panel and to request for income generation work to continue with scrutiny monitoring the progress of this area. |
The Cabinet Member for Finance and Customers Service reminded Members increasing fees and charges was not sufficient. As previously stated to make an impact on the Council’s budget, the income generated needed to be £100,000s not £10,000s.
Supporting documents:
PDF 82 KB