Tory leader’s £1bn office buying spree ‘leaves dangerous legacy’ for council

Ian Harvey cannot help but chuckle when recalling how easy it was to borrow £385m from the Public Works Loans Board to buy BP’s vast Sunbury-on-Thames research centre soon after he became Conservative leader of Spelthorne borough council, Surrey, in 2016. “I found it laughably easy, to be honest with you,” he said. “There was no real control over it. I’m told it was pretty much a phone call. It took about three days.”

Harvey, who was ousted as leader of the council in the summer, went on to borrow millions more from the PWLB, a Treasury agency, to purchase seven other commercial buildings, including £170m on an office in west London and £285m on three offices in the Thames valley. By the end of his four-year reign, the council had borrowed £1.1bn – about 100 times Spelthorne’s core spending power of £11m. “There were other local authorities that did small-scale things before us, but BP broke the mould because it was so much bigger than anything else,” he said.

Related: English councils went on property spending spree to offset cuts

Spelthorne’s debt-fuelled spree is just the most dramatic example of how councils have been encouraged to make commercial investments to offset budget cuts during a decade of austerity. Richard Watts, the chair of the Local Government Association’s resources board, said some councils are now faced with mounting losses: “Ten years of massive cuts to local government forced councils to look elsewhere for money, but as a result of the pandemic some of these new sources of income are drying up .

“If the government doesn’t step in to make up the shortfall, the losers are going to be ordinary residents because we’re going to see another very deep round of local council austerity.”

The latest local authority financial returns to the government – which have not yet been published – show English councils have already lost £372m of income from market investments, including commercial property, since the country went into lockdown in March and expect to lose a total of £541m by March 2021.

While many councils have invested within their boundaries to improve local areas, some smaller councils – like Spelthorne – have poured millions of pounds of borrowed public money into speculative property acquisitions much further afield. This has prompted concerns that authorities dependent on rents from largely empty office blocks and struggling shopping centres may find it increasingly difficult to service the huge debts they have built up, and ultimately be forced to cut services.

Councils are supposed to base their investment strategies on a statutory code, which prohibits borrowing to invest solely for profit.

Don Peebles, the head of policy at the Chartered Institute of Public Finance and Accountancy, which is responsible for the code, said public money is being misused: “It is like somebody going to a building society to borrow money to buy a house, but instead of buying the house they put it on a horse.”

Peeebles adds that councils are taking huge risks: “It means public services are exposed to the vagaries of the market. If there is some volatility in the market, then it could impact adversely on their ability to deliver those essential services – and that is what we are seeing at the moment.”

The backdrop to Spelthorne’s debt-fuelled spending spree was the tight squeeze on local government budgets after 2010. Harvey argues he was forced to look for other sources of revenue because the council’s funding from central government was forecast to sharply fall.

“We were basically living on reserves and selling things off. Morale was on the ground because [council officers] couldn’t achieve much,” he said. “It was hugely unfair.”

However, nearly 30% the council’s budget for services is now dependent on rent from properties purchased by Harvey, who resigned from the Conservative party after he was deposed. While the financial figures so far released indicate the vast majority of the rent has been collected, the council admits: “Covid poses the most extreme economic stress test for more than two centuries”. Since the beginning of the pandemic it has already agreed £1.27m worth of rent deferrals. Restricted council papers seen by the Observer show that Harvey, in one of his final acts as leader, agreed to another deferral, worth £4.46m, with the troubled workspace firm WeWork to help “absorb the difficulties brought about by the Covid crisis”.

Harvey admits this is “not ideal” but insists the council is performing better than other commercial landlords. “There is risk in anything, but it is negligible,” he said .

Not everybody in Spelthorne is reassured. Lawrence Nichols, a Liberal Democrat who chairs the council’s audit committee, said Harvey left a “potentially dangerous” legacy for the borough that could unravel in 10 or 15 years when all break points in the contracts come up. “High-value decisions are not getting the scrutiny they need. The financial acumen here is really thin,” he said. “It is a rotten borough.”

This month it emerged that KPMG, the council’s auditors throughout most of Harvey’s leadership, warned in August that the investment properties the council purchased in 2017-19 might be unlawful because the authority failed to have regard to the statutory code prohibiting borrowing purely to profit from investments.

Spelthorne council said it had complied with all legislation and guidance, including having regard to the prudential code. It said it was completely transparent, with the council’s investments listed on its website. It added that it had assembled an experienced team to manage its commercial investment strategy and had built up a £20m sinking fund to protect services from fluctuations in rental streams: “Even on the worst case modelling, the figures indicated that we have more than sufficient sinking funds to ensure that the revenue budget is not adversely impacted at any point over the next 10 years.”

The Ministry of Housing, Communities and Local Government said it had provided councils with £6.4bn worth of support during the pandemic. It added that councils must properly consider the risksand opportunities when they made investment decisions: “We share concerns about a minority of councils that continue to expose themselves and taxpayers to unnecessary risk. We have a set framework which councils must observe and we will continue to monitor this,” said a spokesperson.