The widespread trend of commercialisation among public sector organisations – particularly investing in residential and commercial – is not new.
The trend emerged in full following the financial crisis and has been an important way to navigate austerity measures and budget cuts.
The latest trend within this movement is new, however, and has seen public sector organisations investing in opportunities outside their own authority. The figures show an huge increase in the amount of investment that is moving across local authority boundaries – more than double the percentage last year, in fact. This isn’t surprising but it is deeply concerning for a few reasons.
The first reason is simply exposure to risk and the expertise within these organisations to deal with risking borrowed public money. It can be, and has been, argued that spreading bets across the country dilutes exposure, but the lines between innovation and risk are becoming increasingly blurred.
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Assuming that public sector organisations have the expertise to deal with these investment decisions, all should be OK. But a Zurich Municipal survey of chief executives and risk and financial professionals at local authorities found that the majority thought commercial decisions were being taken with either partial or no understanding of the relevant risks, while many suggested that their colleagues needed additional training in this area. These investment decisions now seem less assured.
Can we always account for local knowledge and understanding of these sorts of investments? How much can any of us living and working on the south coast claim to know about high street or office property in Carlisle or Scarborough, for example? Yet these kinds of investment scenarios are becoming increasingly common.
As outside-of-authority risk grows, local authorities should be calling on business partners, such as insurers, to make sure they are asking the right questions before making these investments. Do they understand the local economy? Have they run crisis scenario planning sessions and assessments? Have the right risk-appetite-to-tolerance ratios been identified? The hope is that these questions have been asked and answered, yet the data suggests that, routinely, they have not.
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