The wake of the Equal Pay scandal in Scottish Local Authorities has resulted – rightly – in significant compensation payments from Councils to the women affected by underpayment over many years.
The cost to Glasgow of these settlements has been calculated at £700 million and the Council has decided to raise much this money by effectively mortgaging its fixed public assets such as buildings. A financing deal covering buildings such as sports centres resulted in around £500 million passed in 2021 with little fanfare but in September 2022 the announcement that around £200 million of the remaining money would be raised by mortgaging more iconic buildings such as Kelvingrove Art Gallery has met with significantly more public backlash.
Scottish Local Authorities have strict limits on the scope and terms of borrowing agreements. It is not possible to use borrowing facilities designed for capital investment (such as the Public Works Loan Board) to fund shortfalls in revenue spending (caused, in this case, by the equal pay settlement payments).
Instead, the Council has set up an Arms Length External Organisation (ALEO) called City Property Glasgow to act as a stepping stone. The ALEO – a private company owned almost entirely by the Council – is free from the borrowing restrictions placed on the Council and can borrow money on the open market. It will borrow the £200 million required and buy the buildings from Glasgow City Council who will lease them back from the ALEO. Once the loan is paid off, ownership of the buildings would transfer back to the Council – though in November 2022, it was found that this return process had not been finalised and would be negotiated only at the end of the loan period (reference article) – opening the possibility that that the assets would not return to direct Council ownership. Information obtained from Glasgow City Council indicates that the Council will pay back the loan at an annual cost of £40 million per year over a period of 30-40 years.
While the Council has stressed that the buildings technically remain in public ownership throughout this process, it is not clear what will happen if the Council defaults on its rent payments or if the ALEO defaults on its loan or otherwise goes into administration while the buildings are within its ownership – presumably it will be for the creditors to negotiate ownership of those assets or to forcibly sell them into the private sector to recover their investment.
The terms of the financial agreement that (excluding to adjustment for annual increments and inflation) Glasgow City Council will pay approximately £1.2 billion to £1.6 billion in rents to cover a loan of just £200 million – a mark-up of six to eight times the original loan.
Applying these known numbers to a commercial loan calculator backs them up. A £200 million loan borrowed on terms similar to a mortgage that is paid back over 30 years does indeed result in an annual payment of £40 million and a total payment of £1.2 billion. The annual interest rate of this mortgage works out at 20% – significantly higher than a typical homeowners mortgage even in the current economic circumstances of the time of writing.
As stated, it is not possible for Glasgow City Council to use the Public Works Loan Board to fund the equal pay settlement but if it had been or if a loan on similar terms could have been arranged then this would have resulted in far less cost to the public purse. As of October 2022 when the sell and lease deal was announced, the PWLB was offering 30 year loans at a rate of approximately 5%. For a £200 million loan, this would have resulted in annual repayments of just £13 million per year and a total repayment of £390 million – less than twice the original loan.
This entire story is a stark illustration of the financial straitjacket that Scottish public bodies are bound by – at National and Local level – and should act as a clarion call for significant reform of borrowing powers to prevent Scottish public assets, which should be managed as perpetual public assets for the Common Good, being used as collateral for loans!