With councils across Wales facing year-on-year budget cuts, an increasing number are getting into commercial activity in an effort to boost their coffers. But is it a good idea to invest taxpayers' money in potentially risky commercial ventures? IAN CRAIG looks at the issue.

ONCE upon a time it was simple.

The government gave each council a pot of money, which they spent on schools, buses, bin collections and other public services.

Some years that funding would go down, and councils would have to make cuts, but others it would go up, meaning services could be restored or new ones set up.

But those days are long past.

With councils seeing their budgets cut year on year on year, many have begun to act more like businesses, buying up properties and making investments, to avoid having to cut vital services or make more unpopular council tax rises.

Monmouthshire County Council has set up a £50 million commercial investment fund, and

in March bought the freehold of the Newport Leisure Park in Spytty Road - which includes a Cineworld cinema, xercise4less gym, Home Bargains superstore, Energi Adventure park, and a range of restaurants such as McDonalds, Burger King, Pizza Hut and Harvester - for £21 million

.

But concerns were raised about the way the sale was conducted - with the purchase agreed behind closed doors, with no opportunity for councillors to scrutinise it.

The council has also shelled out

£7 million to buy CastleGate Business Park in Caldicot

, £5 million for a livestock market near Raglan, £4.5 million for a solar farm in Crick.

Newport City Council is setting up a similar fund

, with council leader Cllr Debbie Wilcox saying it was hoped income from investments could help offset budget cuts.

Speaking in April she said: "If we do not adopt a more commercial approach then we are going to have to cut more jobs and more services."

And earlier this month Caerphilly County Borough Council announced it was setting up a similar scheme, including spending £425,000 on three new senior staff posts.

Blaenau Gwent County Borough Council has also taken steps towards taking a more commercial focus.

A spokesman said: "Blaenau Gwent recognises its financial challenges as the funding landscape from central government has fundamentally changed.

"A chief commercial officer was appointed on January 7, 2019 with a brief to develop a commercial strategy for the council to meet these challenges.

"The approach is to think differently and the plan is to redesign services to reduce costs and maximise income where possible.

"The council is actively renegotiating its commercial contracts and its approach to procurement. We also aim to develop our digital capabilities to deliver services more effectively and to make the best use of our assets and property."

Torfaen County Borough Council has not formally taken similar steps and did not respond to request for comment.

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Although the potential benefits of this approach are many, as with any commercial venture or investment, the risks are many.

And with many councils taking out borrowing to funding their new ventures, it would be understandable for taxpayers to be concerned about the trend.

In the 1970s and 80s Hammersmith and Fulham London Borough Council entered into billions of pounds worth of deals involving assumptions that interest rates would fall - and faced massive losses when rates went up.

It was not until a lengthy - and costly - journey through the courts had concluded that the transactions were ruled invalid by the House of Lords.

The Chartered Institute for Public Finance and Accountancy (CIPFA) provides guidance to local authorities and other public-sector organisations on how to manage their finances, and last year set out new guidelines on commercial activity.

The organisation's head of policy and technical Don Peebles said the combination of falling government funding as well as low income rates for borrowing meant it was little surprise councils were looking into alternative ways to fund services.

"Public services are under tremendous stress amid ten years of austerity," he said. "Add to this a decline in government grants, it is unsurprising that local councils will tell us that having to look to new forms of income is itself a modern feature of local government finance."

But he warned councils should consider "the long-term sustainability risk implicit in becoming too dependent on commercial income, or in taking out too much debt relative to net service expenditure".

"It is the role of local authorities to serve their community, including protecting public funds," he said. "This means avoiding exposing them to unnecessary or unquantifiable risk."

Mr Peebles said, where local authorities do take out borrowing, it should set out exactly why the decision was taken, how it will be used and what procedures are in place if the expected returns do not materialise.

"This type of borrowing is also not consistent with the primary function of local authorities, which is the delivery of local services to the local population," he said. "It is important therefore to distinguish between borrowing to fund wider regeneration projects and purely for investment."

And he said the slowing property market and downturn in high street retail in recent years meant councils should be especially cautious.

Big names once seen on high streets across the country including Toys R Us, Patisserie Valerie and Maplin having gone bust in recent months, and other big names including Woolworths a distant memory, and other major retailers including Debenhams, New Look and House of Fraser are closing stores in an effort to stay afloat.

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"Management of these assets can be complex too, and at times they will require significant vision as well as investment to maintain profitability," he said. "This is of course a relatively new area for councils to be stepping into. It remains to be seen how successful the long term management of these assets by local authorities will be. It will also be interesting to see the private sector response and how they react to any market distortion."

Concluding, he said: "If commercial investment does remain part of the future strategies of local authorities, it should not be one of the core pillars of funding.

"To do so ties public services to the property market, and the less proportional the borrowing which has occurred, the greater the risk will be."

But with budgets falling, many councils feel that have little choice.

A spokesman from the Welsh Local Government Association - the organisation overseeing councils in Wales - said: “The way in which councils work has evolved greatly over the last few years, especially due to almost £1 billion cuts to funding for local services seen over the past decade.

"As part of their response to the challenging financial climate, all authorities, to a greater or lesser extent, are increasingly seeking commercial opportunities available to them to generate income to reinvest in local services.

"Such an approach should be aligned to local authorities’ strategic vision in their respective areas."

And they added councils should "rigorously explore the merits and risks attached to any investment opportunities before deciding whether or not to pursue further" and follow CIPFA guidance on the issue.

The Welsh Government is currently developing updated guidance on the issue.

A spokeswoman said: “Decisions about investments are for local councils to make.

"Our current guidance sets out the need for councils to consider both security and ease of access to the funding they invest as well as the technical guidance they receive from professional bodies, such as the CIPFA.

"CIPFA’s guidance suggests councils’ commercial investments should be proportionate to the resources they have.

“We will take this into account as we develop updated Welsh Government guidance over the summer.”

Despite what some in Westminster have claimed, it's clear austerity is far from over - and as long as councils are squeezed it seems this is a trend which will continue.