Aberdeen city council has taken the unusual step of appointing economic advisers to assess its prospects for the bond market, as a growing number of local authorities turn to the world of high finance amid central government cuts.
Councillors in Scotland’s third largest city will get advice from three experts on the state of the regional economy, and will help the panel with the annual assessment of a credit rating agency Moody’s. Aberdeen is one of a handful of councils to raise money by selling bonds, raising £370m in November 2016 to help finance a £1bn capital spending programme.
Stephen Boyle, RBS’s chief economist, Hanan Morsy, an economist at the European Bank for Reconstruction and Development, and Douglas Peedle, chief economic adviser to Jersey, will sit on the panel of experts. They will be paid as much as £17,000 a year for working one day a month, for a term of up to three years.
The move comes amid the increasing financialisation of local authorities. Whitehall cuts are pushing councils to either scrap services or borrow to invest in profit-making schemes. Although devolution means Scottish councils are funded differently to the rest of the UK, Holyrood has also come under criticism for squeezing local authorities.
As well as using the bond markets, authorities are taking out cheap loans from the Public Works Loan Board, a Treasury agency, as they plough money into property developments and other investments.
Councils spent at least £1bn on property investments last year. The London borough of Newham has invested in a Welsh solar farm, and Warrington borough council spent £30m buying shares in a bank based in Hertfordshire.
The trend raises questions over the qualifications of local officials to spend public money on speculative deals, and they could also be entering into relationships in the City of London with savvier partners with potentially differing interests. In the late 1980s, Hammersmith and Fulham council west London, bet on derivatives in a scandal that led to authorities being banned from such activities.
Many councils’ pension funds have paid advisers, but Aberdeen is believed to be among the first to hire a standing panel of economists. Local authorities typically rely on external advice from accountancy and law firms when making investment decisions.
Aberdeen might benefit from expert economic advice owing to its reliance on the oil industry, which makes the city vulnerable to movements in the value of crude. A crash in prices in 2014 – from more than $100 (£78) a barrel when the Scottish independence referendum was held in 2014 to as low as $27 last year – led local unemployment rates to rise by a quarter.
The city’s move into the bond market does, however, raise the risk that speculators could bet against the council should oil prices wobble again. Moody’s also links its view of Aberdeen to the UK’s creditworthiness as a whole, which could change should the Scottish government look to hold another independence vote. Moody’s rates just five councils: Aberdeen, Warrington, Cornwall, Guildford and Lancashire.
Joel Benjamin, a campaigner on council finances, said he believed a local authority could go bankrupt within the next decade. “That’s going to prompt a pretty quick reappraisal of risk by local authorities,” he added.
Aberdeen makes a significant contribution to the Scottish and UK economies, with a “gross value added” contribution of more than £18bn and GVA per head of £36,726, which is 55% higher than the Scottish average. The council co-leader, Douglas Lumsden, said: “To have such a knowledgeable and experienced group in place is of great benefit, not only to Aberdeen city council but to the region as a whole.”
The experts will also share their reports with the Scottish government’s own panel of economic advisers, which includes the Nobel prize-winning economists James Mirrlees and Joseph Stiglitz.