Council that gambled £1bn on the property market set for government takeover

A Surrey council that gambled more than £1bn of public money on property investments is set to be taken over by government commissioners after amassing disastrous debt.

A report published today describes the reckless decisions made by senior staff at Spelthorne Borough Council, which put its services at risk with a business model that hinged on buying up and renting out commercial properties. It has now accrued the second-highest debt per resident of any district authority in England.

Inspectors said there is serious concern that the situation could be far worse than the council is letting on, with its commercial income due to drop by half in the next five years.

Spelthorne’s investment spree took place in the mid-2010s and was revealed by the Bureau of Investigative Journalism (TBIJ) in 2018. Seven years on, its total debt equates to roughly £10,000 per resident.

Jim McMahon, the minister for local government and devolution, has written to Spelthorne’s chief executive and council leader saying he wants to appoint external commissioners to address the report’s “grave concerns”.

The government commissioned the inspection in May 2024 in response to Spelthorne’s levels of debt, which a year earlier had stood at £1.1bn, or 87 times the council’s spending power (the national average was 5.6).

Effects of austerity

TBIJ revealed Spelthorne’s financial problems during a 2018 investigation into the risks local authorities were taking to replace funding that had been cut by the austerity programme. Councils across the UK had borrowed vast sums of money to invest in commercial property, hoping that the rental income could be used to fund the services when government funding dried up.

Spelthorne was by far the biggest spender. It paid for its investments with money borrowed from the Public Works Loans Board (PWLB), a government lending body for regeneration and infrastructure projects. Councils have since been banned from using it for money-spinning ventures.

Spelthorne’s strategy soon started to unravel. Auditors KPMG found “significant weaknesses” in the processes behind the £385m purchase of a BP research centre in Sunbury-on-Thames, then refused to sign off the council’s 2017-18 accounts after being advised that the £239m purchase of three office buildings had breached rules around profit-seeking.

Today’s report said Spelthorne had paid little regard to long-term planning, risk management or how the property market might change.

The council has projected it needs to make £8.6m of savings by 2028/29, the equivalent of 33% of its net budget this financial year.

“The council is in a critical financial position, burdened by unsustainable debt levels, significant investment risks, and systemic governance weaknesses,” the report said. “[Despite] mounting financial pressures, no clear path forward has been outlined.”

It said the council’s senior management team had displayed a “culture of over-optimism, a lack of curiosity, and limited self-awareness about the full extent of the risks”.

Spelthorne was run by the Conservatives when the investments were made and the council admitted at the time it was “heavily reliant on investment income” to pay for services.

‘Culture of insularity’

One of the driving forces behind the investments was council leader Ian Harvey. He repeatedly dismissed concerns about the policy but was ousted by fellow Conservative councillors in June 2020.

“Acquisitions were reportedly driven by a small group of councillors and officers, with insufficient consideration of potential risks and limited opportunities for effective challenge,” the report said.

“There is a culture of insularity and over-optimism within the senior management team, particularly regarding the council’s investment strategy. Senior officers appear overly confident, with some asserting that the biggest risk to their investments comes not from their own actions or inaction, but from external intervention.”

The report makes 13 recommendations, including that the government consider appointing commissioners with financial and investment expertise to oversee the council’s recovery process.

Although Spelthorne could be abolished as part of a proposed reorganisation, the report makes clear that the council’s issues “need to be addressed as a matter of urgency, regardless of any structural changes”.

The council has been under no overall control since the local elections in May 2023. Its leader, independent councillor Joanne Sexton, said in response to the report: “This administration has faced a challenging time and has been actively pursuing the right solution to manage the historical debt that it has inherited.

“We have met with the local government minister and we have agreed to work in partnership to take decisive action in the remaining time we have before local government reorganisation is implemented.”

Spelthorne is the second district council in Surrey to be subject to government intervention as a result of investment-related debt. In May 2023, commissioners were sent into Woking after it accrued £2bn in debt.