Essex council found to have borrowed over a billion to fund solar farm purchases

Rockfire CEO Liam Kavanagh with a local councillor. Picture: Twitter

Ealing Council has lent as much as £30 million of the borough’s cash reserve to a local authority in Essex which has borrowed over £1 billion on a short term basis mainly to fund renewable energy schemes.

The Bureau of Investigative Journalism (TBIJ) and the Financial Times have reported that Thurrock Council has short-term debt equivalent to 11% of all such borrowings by local authorities in the country and £450 million more than any other council.

Concerns have been raised about the level of risks taken on and the possible knock on effect on local authorities across the country if the solar farms into which the money has been ploughed do not achieve the promised returns.

Thurrock has obtained short-term loans from over 150 local authorities across the UK including Ealing, which claims that the total loans outstanding are £20 million rather than the £30 million figure given by TBIJ. The Greater London Authority has also lent £188 million. Thurrock used the money to invest through a company called Rockfire Capital which specialised in solar energy schemes.

Hounslow say that since 1 April 2019 they lent the local authority a total of £25 million, but this has been repaid in full with interest during April 2020 and no money has been lent to Thurrock since.

The investments were made by Sean Clark, Thurrock’s director of finance, who oversaw £604 million being put into these schemes. Given the low interest rates charged by councils like Ealing the returns from the investments have, up to now, generated a positive return for Thurrock which has allowed the local authority to increase spending and run a balanced budget.

A report from last June state that this “commercial approach” had “led to a Thurrock council which no longer looks at what it doesn’t have, but what it does have; at what it can provide, rather than what it can’t”. They have increased their general reserve by 40%, put £1mn towards new police officers and spent heavily on tackling anti-social behaviour, mental health support and environmental improvements. Despite this they still raised council tax by 3.49% this February.

Mr Clark told TBIJ that the investments were prompted by intermediaries approaching him with money making opportunities. During an interview he admitted that he was wondering whether he had gone too far.

Many councils use the availability of cheap short term credit to generate investment returns. It was revealed in 2018 that Spelthorne Council had borrowed £1 billion to invest in property even though their annual budget was just £1 billion.

The assumption has been up until now that lending to other local authorities is a riskless way to generate some return on cash balances held by councils. It was believed that should any other council have difficulty paying back loans, central government would step in to make sure that there wasn’t a cash crunch among councils.

Conservative-led Thurrock’s investments in the solar industry began in 2016 after brokers used by Warrington council introduced their council officers to Rockfire Capital. They were persuaded to invest a substantial sum in a solar farm near Swindon. Thurrock was not the only authority to invest in Rockfire, they have raised £432 million in total using bond schemes which is distributed among a series of holding companies each responsible for a solar farm project. The various operations are all controlled by Liam Kavanagh, the founder of Rockfire Capital.

According to TBIJ no accounts have been filed by Rockfire Capital Bonds Ltd for the period in which Thurrock made a £74 million investment in the company.

Up to now the projects that Thurrock have invested in seem to be generating adequate returns to service their interest expense. However, Rockfire has become involved in a legal dispute over the state of the solar farms it purchased using the loans. It is alleging that they had a series of defects and the case is due to be heard this year. In the event of a default the loans made by local authorities would be secured against the solar farms.

According to the Financial Times the level of debt in the Rockfire group is very high in comparison with its assets and therefore the level of risk for lenders is considerable. Rockfire disputes this saying the method of valuing their assets was incorrect.

After being contacted by TBIJ, Rockfire took down its web site which included a glowing endorsement from Sean Clark of Thurrock Council

Councillors in Thurrock are concerned about the lack of scrutiny over the way these massive investments have been accumulated. They were told retrospectively back in 2016 that council officers had invested in the Swindon solar farm project using delegated powers.

Labour’s John Kent, who was the leader of the council at the time, “It was signed off by officers with no reference to members whatsoever. I knew absolutely nothing about it”.

The officers said that the deal couldn’t be disclosed because of commercial sensitivity.

Since its initial investment in Swindon, the amount of money that Thurrock has put into renewable energy schemes has increased exponentially. According to its 2018-19 accounts, published last June, the council had £702m tied up in the sector of which £604m is specifically in solar.

Thurrock’s had employed a company called Arlingclose to advise their treasury management function. They were not consulted about the loans being taken out by Sean Clark. Arlingclose resigned as advisors to the council last year citing ‘differences of opinion”. Arlingclose declined to comment when contacted by TBIJ and Thurrock Council refused a Freedom of Information request to see correspondence between them and the council.

National guidelines state that councils must not borrow more than or in advance of need purely in the interests of profit. Mr Clarks says that he believes that the loans taken out were within guidelines because the auditors had signed off on them for the last three years.

According to Don Peebles of head of policy at the Chartered Institute of Public Finance and Accountancy (Cipfa), which oversees the rules for local authority borrowing, "If local authorities take on substantial debts to make commercial investments with the aim of supplementing their ordinary revenues, there are two big concerns. One is that this debt has to be repaid irrespective of whether those investments perform, and second there is the concern that council services will become dependent on commercial income.”

Information on payments Thurrock makes to suppliers, which it is obliged to publish under transparency rules, show the council had made interest or loan repayments to at least 150 local authorities in nearly every part of the UK, from every type of council to police and crime commissioners and fire authorities, between April 2016 and September 2019. The public bodies lending the money are not made aware of what it is to be used for and thus far all loans made have been paid back. When a repayment comes due Sean Clark will ask for the borrowing to be extended or pay back the money by borrowing from another council.

There has been a significant increase in council-to-council borrowing in the past five years, rising from £4.5bn to £11.9bn at the end of 2018-2019. Thurrock is by far the largest short term borrower of any local authority in the country accounting for 11%. It currently owes £1.08billion to other authorities more than double any other council. Its total debts are set to top £2billion.

Thurrock say there is no reason for concern about their financial situation. Cllr Shane Hebb, the cabinet member for finance, told TBIJ “At their most recent meeting the Corporate Overview and Scrutiny Committee made it clear that they do not have concerns about the investment strategy and borrowing levels.”

They add that the investments that they have made continue to provide significant income to the authority despite the coronavirus outbreak and that they are in line with the council’s strategic approach of investing in renewable energy rather than commercial property investments as other councils do.

They say that the figure of £1 billion in short term borrowing is overstated and that the council’s ‘hard debt’ is just £280 million, unchanged from 2012. They say they borrow from other local authorities because they offer more competitive rates and provide better value. These loans also generate income for the lending authorities so the council’s approach also supports local government more generally and the UK economy.

Local Liberal Democrat councillor Jon Ball believes that there is cause for concern that Thurrock may be forced to issue a section 114 notice (which is the equivalent of going into liquidation for a local authority. He said that the way the investment scheme in which Thurrock has invested is structured means that Barclays Bank would be paid back first before other lenders such as Ealing. He has asked the council’s director of finance Bassam Mahfouz if the council have quantified the financial cost if the loans were repaid and what would be the financial cost of asking for early repayment.

Cllr Ball said, "I've discovered that £30m of Ealing residents' money is at risk as part of a speculative investment organised by Thurrock Council. I have asked 5 key questions. At this difficult time when Ealing Council's resources are stretched on the local Coronavirus response, Ealing's Labour administration need to reassure residents that the money we need for vital services is safe."

An Ealing Council spokesperson said: “It is not unusual for councils to provide short-term loans to other authorities. We have provided Thurrock with two short term loans totalling £10 million, which will be repaid within the current financial year. Any interest accrued from this loan can be used to invest in local services.

“Ealing Council has made no investments in Thurrock’s solar panel scheme highlighted in the national media nor is our loan repayment dependent on its success.”

May 29, 2020