Another day in the casino: what does the melting economy mean for County Hall’s house-building ambitions?
By Peter Tremayne on 26th September 2022
Senior Cornwall councillors will tomorrow (Tuesday) be asked to approve more loans to their house-building company, Treveth – knowing that the Bank of England could impose an emergency increase in interest rates at any moment.
The company wants a relatively small “revolving loan” facility of £3.135 million for projects at Camborne and Bodmin. Treveth’s 2022-26 business plan was approved by Cornwall Council’s cabinet in March.
But that business plan was written at a time when interest rates were below 0.5%. They increased to 0.75% on 17th March, just six days before the cabinet approved the business plan.
By Thursday of last week – before the government’s spectacular “mini-budget” – interest rates had already rocketed to 2.25% and inflation to around 10%. The construction sector is particularly badly affected by the new economic environment.
Most forecasters think interest rates will reach at least 3.5% by the end of the year and could top 5% next year. The Bank of England monetary policy committee is on standby for an emergency rate rise, possibly today.
Some Conservative MPs are thought to be ready to submit letters of no confidence in the new Prime Minister Liz Truss if the pound falls below $1. Ms Truss has been Prime Minister for only 20 days.
Treveth’s business plan boasted of its ambition to “grow its business significantly. Its strategy for growth includes providing a continuous supply of at least 250 homes per year as well as diversifying into commercial workspace, town regeneration, specialist housing and other investments that will help the council deliver on its growth objectives and increasing the return to the council.”
While forecasts are one thing, the economic facts of the past six months cannot be denied. And they mean the Treveth business plan is no longer worth the paper it was written on.
The approved loan structure assumes Treveth will borrow from the council at 5% - “a calculation on a blended development and investment risk as advised by external consultants.”
A report to councillors about Treveth in December last year said: “The proposal is for interest rates to reflect market rates and risk at the time that business cases are presented.”
The report also warned of a “significant risk in the rise in raw material and construction costs, the rise in values and uncertainty in the medium term.”
The construction of houses for sale on the open market is not a statutory requirement for Cornwall Council. Last week Cornwall Council’s deputy leader, councillor David Harris, warned that County Hall is facing a £62 million deficit this financial year and would have to contemplate a future in which it concentrated only on the provision of services required by law.
In 2019, when in Opposition, councillor Harris warned that the then Liberal Democrat-Independent administration was undertaking a huge gamble by setting up Treveth.
Warning that the company would consume millions of pounds before returning a single penny of revenue, he described the financial plan for Treveth as risking: “a financial mess that the people of Cornwall will be paying for for many years to come.”
Also in 2019, councillor Harris complained that too many details of Treveth’s financial structure, and the council’s exposure to risk, were being kept unnecessarily secret. Much of the report to tomorrow’s cabinet meeting is also secret.
Cornwall Council’s own business plan assumes revenue from Treveth. The odds of getting “jam tomorrow” are now much longer than they were three years ago and the stakes are now much higher than they were in 2019.
But now it is councillor Harris who is at the table.
In a similar vein, Graham Smith wrote:
Cornwall Council officials will tomorrow (Monday) start trying to revise assessments of some of their long-term investment projects in the light of new economic forecasts stemming from Friday’s dramatic mini-budget.
The judgement eventually reached by County Hall’s executives could be significantly different to the optimism expressed by the council’s political leadership.
Of particular concern is the impact of the dramatic increase in interest rates which are expected to follow Friday’s historic government borrowing and the subsequent collapse of sterling.
Inflation, currently at 10%, is now certain to rise quickly. The cost of a tank of petrol has already risen £5 because of the slide in the value of the pound.
These factors had already been having a major impact on the construction sector, which has seen dozens of firms go bust this year in the face of soaring costs.
Cornwall Council, already looking at a forecast deficit of £62 million by the end of the financial year, is gambling heavily that its own “investments” will soon deliver dividends.
The reality is that those “investments” are now at even greater risk of becoming “losses” – and that the new level of interest charges on the council’s £1.2 billion debt will quickly become unsustainable.
In short, the council’s business plan – always controversial – no longer works. Strategies built on borrowing, at a time when interest rates were at historic lows, now look foolhardy.
But central government policy – which appears to be echoed by Cornwall’s Conservatives – is that it now makes sense to borrow even more in the hope that the economy will magically grow by 2.5% a year. It is an approach which has already bankrupted some local councils.
One example of how County Hall will now struggle to make its numbers add up is the £170 million Pydar redevelopment project in Truro. Originally conceived and approved by the former Liberal Democrat-Independent administration, officials were as recently as 2021 claiming it would be financed entirely by the private sector.
But in recent months the council has been forced to admit that local taxpayers will be forced to underwrite 100% of the costs. In terms of risk assessment, Pydar now looks like a dagger pointed at the heart of County Hall’s finances.
The council is also preparing a Newquay Airport “strategic review” which will call for more public cash to support a major redevelopment programme, aimed at attracting hoteliers and leisure companies.
Another concern for officials is what Friday’s 42-page “Growth Plan” means for planning rules and regulations at the council’s flagship Truro New Town development. Last year planners behind the proposed 3,800-home Langarth estate celebrated their “Building With Nature” design award, even before the first brick could be laid.
Part of the “strategic masterplan” calls for a net gain in biodiversity – a tough call, given that more than 100 acres of prime agricultural land is about to disappear under concrete.
Councillors have also called for the main developer – the council’s own Treveth company – to be “exemplary” in its approach to energy conservation and climate impacts.
But the government’s Growth Plan not only identifies Langarth as one of its target “investment zones” for deregulation, it specifically promises to abolish the requirement to deliver environmental gains.
Wildlife organisations are furious that new Prime Minister Liz Truss, within days of taking office, is now “tearing up the green stuff.”
The Growth Plan says: “New legislation will be brought forward in the coming months to address these barriers by reducing unnecessary burdens to speed up the delivery of much-needed infrastructure. This includes reducing the burden of environmental assessments, reducing bureaucracy in the consultation process and reforming habitats and species regulations.”
The Growth Plan also identified Falmouth docks as an “investment zone” – posing questions over what this means for the local neighbourhood development plan, approved by a local referendum last year.
A County Hall statement on Friday said: “We are in the early stages of that conversation with government and will be developing our plans further when details of the process are set out.”
Council leader Linda Taylor was more upbeat: “This is a real show of faith in Cornwall and welcome news for our residents and our business community.
“The investment zones will help to increase growth, create better jobs and increased opportunities for new and existing businesses.
“Clearly the process is in its early stages, but I look forward to discussions with government about how we can further unlock Cornwall’s potential.”
County Hall’s enthusiasm for eye-catching capital projects, while struggling to provide essential core services such as adult social care, is a long-standing political controversy.
Last week Conservative councillor David Harris, the cabinet member responsible for County Hall’s finances, told colleagues: “We are going to have to start looking at where we have a duty to spend money as opposed to areas where we have the power to spend money.”
Finally, the next AUOB (All Under One Banner) Kernow march, to demand greater powers for Cornwall, will take place in Penzance on Saturday 1st October. All are welcome and anyone interested in attending should gather in the Morrab Gardens from 12.00 noon onwards.
The march will start at 1.00 prompt
Mebyon Kernow – the Party for Cornwall is pleased to confirm that Cornwall Councillors Loveday Jenkin (Crowan, Sithney and Wendron) and Andrew Long (Callington and St Dominic) will be among the speakers at the event.
Please support AUOB Kernow on Saturday if you can.