Funding community enterprises: The powers of parish councils

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1 Funding community enterprises: The powers of parish councils Introduction This guide is intended for community groups setting up a community-owned business (e.g. shop, pub, cafe) who are in the process of seeking funding and support, and wish to understand the role and responsibilities and financial powers of their local parish councils. Parish council role Although a fair number of (but by no means all) rural community enterprises go ahead with the support and involvement of their local parish councils, the extent to which a parish council can aid such enterprises is not yet widely recognised. First, a parish council is a statutory local authority with democratic legitimacy lying at the heart of its community i.e. it has political clout. It has an advocacy and motivational role and links to other parts of the public sector. Second, if a community shop, pub or village hall is threatened with closure, parish councils in England having the general power of competence (for more see below) can use their legal and financial powers to intervene to trigger the community right to bid to buy the facility and can keep it running, including through the provision of financial support - by loans, grants, or guarantees - buying the building or the business, or subscribing to shares. Parish councils can also help start new community shops or services by giving small grants or, where appropriate, in addition to those things already mentioned, borrowing to make an investment. In an interview in November 2011, the then Local Government Minister called for councils to sit down with their local community and make sure every effort was made to keep rural services alive. He cited three interesting examples of parish council action: the purchase of the freehold of a local Post Office; a substantial grant towards a new-build community shop and cafe; and the purchase of land to expand a popular local market. See Small grant schemes Parish councils will generally have a small grants scheme, available to not-for-profit groups working to provide services or amenities in their neighbourhood. These are usually in the region of around , and are well worth applying for, to act as seed capital or a fighting fund. For parish councils not having the general power of competence, the total of such sums is capped by a statutory formula, but those enjoying the general power are constrained only by their budgets. So can parish councils provide more substantial help? Unless a community group has a strong association with the local parish council, it is unlikely to be aware of the council s powers to provide funds to finance or to participate directly in a venture and, indeed, to borrow money for the purpose. It is worth forming a close association with the parish council and actively keeping the councillors informed, encouraging them to see the likely

2 benefits to the community they serve. The council, once involved, can then be asked to discuss its potential role as regards borrowing, making grant aid or direct participation through acquiring the property, fitting out or buying shares and reviewing its eligibility to do so (see below). What is new? A fundamental principle of the Localism Act 2011 is the transfer of powers from central to local government and from the higher levels of local government to neighbourhoods. The Localism Act has given local authorities, including parish councils, a general power of competence, enabling them to do anything that is not specifically prohibited by law. This replaces in England the powers of well-being (Local Government Act 2000) that previously governed the capabilities of parish councils. The powers of well-being still apply in Wales. What is the general power of competence? On 1 April 2012 the general power of competence came into effect for parish councils in England, allowing councils specifically to: Carry out any lawful activity Undertake any lawful works Operate any lawful business Enter into any lawful transaction This might include making grants or loans, giving guarantees, buying the freehold or taking a lease or subscribing for shares. To qualify as having the general power of competence, there are three conditions of eligibility that must be met by a parish council: 1. Two-thirds of the Council must have been elected 2. The clerk must be qualified 3. The clerk must have undergone training in the general power of competence through the Certificate in Local Administration (CiLCA) module How does a parish council go about borrowing? Once a parish council has established that it has the general power of competence and wishes to borrow to fund a local project or asset, it can seek a loan from a variety of sources, including from the Public Works Loan Board (PWLB), which lends to local authorities at low interest rates. The PWLB lends to parish councils (in England) and community councils in Wales. Applicants in England will need a borrowing approval from the Department for Communities and Local Government (DCLG), and need to approach their County Association of Local Councils before applying for this approval. In the case of Welsh councils, they will need approval from the Welsh Assembly Government. A list of County Associations of Local Councils and local liaison officers can be found on the NALC (National Association of Local Councils) website, In a nutshell, there are four steps: 1. The community enterprise approaches the PC for funding

3 2. The PC seeks advice from NALC via its local liaison officer 3. NALC checks the PC s status before applying to DCLG who have to approve any borrowing for capital expenditure in England (or, in Wales, the Welsh Assembly Government). 4. Once borrowing approval has been agreed the PC can apply to the PWLB or any other lending institution (although most apply to the PWLB due to the low interest rates). How much will such a loan cost? The UK Debt Management Office website - has a section on lending to parish councils, which gives full details of the current rates of interest for Public Works Loans, and offers a calculator for estimated repayment costs over different repayment periods, which can be from 2 to 50 years. There is no upper or lower limit on borrowing. The decision has to be made by the parish council with a view to its ability to make the repayments. Quite often a parish council will be able to absorb the cost but there is also the potential to increase the parish precept. When considering approaching the local parish council, however, you should be aware that it is likely to be looking to minimize precept increases. While parish councils are not currently included in council tax referendum principles, Ministers have made it clear that they are keeping this under review for future years. If council tax referendum principles were applied to parish councils, councils with precept increases which exceeded the principles would be required to hold a referendum to seek the approval of local electors; the result of the referendum would be binding. Councils would be responsible for meeting the costs of any referendum, and any precept increase which was attributable to borrowing would not be excluded from considerations for council tax referendum principles. CASE STUDY: Milland Village Stores, West Sussex Milland Village Stores in West Sussex, a purpose-built, oak-framed shop and café, opened in December To kick-start the project, Milland Parish Council borrowed 56,000 from the PWLB, and gave this in the form of a grant to the community group, The Milland Community Shop Ltd (an IPS Community Benefit Society), which retained responsibility for the project and ownership of the building (a further 120,000 was raised in other grants and fundraising). The council has managed to fund repayments of the loan with no increase to the parish precept. Does a parish council have to take on extra responsibilities when borrowing? It is important to note that the parish council does not have to take ownership of an asset in order to fund it. The funds raised by a borrowing council can be advanced to a community enterprise, although the payments remain the responsibility of the parish council. Funds sourced from borrowing which are advanced to a third party must be in the form of a grant (as in the Milland example, above). The parish council cannot on-lend', or in other words take out a loan, lend the amount to a community enterprise and then expect repayment.

4 Another way of funding a community enterprise is for a parish council to retain ownership but to lease to the community group at a much reduced or peppercorn rent, and over an appropriate term. For example, a parish council could purchase and own the freehold of a village pub or a shop, then in turn lease the building to a third party (such as a community group or IPS) on a short-term lease, with the lease being renewed when it nears its term. Other parish councils may be happy to arrange a long lease with the community group. CASE STUDY: Hurst Green Community Shop & Centre, East Sussex In the centre of the village of Hurst Green in East Sussex is a disused 1950s-built Catholic church, which a group of residents decided could be a great location for a shop, cafe and youth centre. They approached the parish council, which agreed to take out a 50,000 Public Works Loan to part-fund an 80-year lease on the building (the balance of the lease s cost, another 37,500, was raised by the action group via grants). It was written into the lease that the parish council would sub-let the premises to the Hurst Green Community Shop and Centre Ltd (an IPS Community Benefit Society) at a peppercorn rent. The precept has not been increased. The reason behind the parish council owning the head lease was that it was easier for the council rather than the community group to negotiate with the relevant legal departments, and also at the time the lease was drawn up the IPS was not formally constituted. What happens if the enterprise fails? If the parish council is to use its powers to raise funds, it has first to examine the risks of the enterprise and satisfy itself that there are contingency plans in place. Full community consultation is necessary before a community group approaches the PC requesting funding. A wholehearted response from council taxpayers in favour of a community enterprise will help the PC decide whether to undergo the risk of borrowing for an enterprise which might fail within the lifetime of the loan, and of any increase in the precept. CASE STUDY: Thorncombe Village Shop & Café, Dorset When the shop in the village of Thorncombe in Dorset faced closure, the residents rallied and approached the parish council for assistance in forming a community shop and running it as a community enterprise. The plan evolved that the parish council would buy the freehold of the existing shop with flat above, and the community would then form an Industrial and Provident Society (IPS) to run the shop which they would lease from the parish council. To purchase the shop premises, the parish council arranged a loan with West Dorset District Council (under its Community Lending Management Policy) of 127,000 over 20 years. The shop was then leased to Thorncombe Village Shop Association Ltd (an IPS), the rent payments matching the loan payments. To ensure that the parish council would be covered if the enterprise were to flop during the term of the loan, West Dorset DC organized a referendum among the villagers with the stipulation that at least 66% were to be in favour of a precept increase should the venture fail (Band D would see an increase of 50p per week on their council tax). As it turned out, 85% agreed to this and the deal went ahead, which left the shop association to find the funds to refurbish and fit out the shop and café. For details of the loan between the two authorities, see

5 Considerations Willingness. Aside from the natural conservatism of parish councils, they have a financial duty of care to their taxpayers. The risk of having to raise the precept by a small amount may seem a trivial consideration in return for a valuable asset such as a village shop, but the community s support really needs to be demonstrated first. In deciding whether or not to draw down a loan a parish council will need to satisfy itself that it can meet the twice-annual repayments over the term of the loan. Parish size and location. There are many wide and disparate parishes in the country, which can cover more than one village and have very odd boundaries and mixed populations. What is going to be good for one set of parishioners may not suit another; this may be an insuperable stumbling block for the PC. Eligibility. Only approximately 20% of parish councils at present fulfill the conditions for the general power of competence. It can take 12 to 18 months, and the willingness of the clerk, to progress from a situation where none of the three conditions is being met, to being a council with the correct criteria for borrowing. Other factors. To borrow from the PWLB, there is an expectation that the parish council must not already be sitting on reserves which could be used to meet the costs. Building up substantial reserves is not an uncommon occurrence when the council has been steadily preparing for other large-outlay projects such as village hall repairs etc. Also, another potential obstacle is that a PWLB loan may not be agreed until all planning permissions are in place, and in the situation of cooperative pubs, where offers to acquire premises need to be quickly negotiated and often well before the project is fully off the ground, the inability to be certain of the loan funding will create difficulty. Why should parish councils be encouraged to use their powers? The kinds of funding outlined in this paper can be formative to a project. Relatively unencumbered money, free of vastly time-consuming grant applications and their attendant uncertainty, can kickstart a project that might otherwise take months or years to get off the ground. Using the powers available to the parish council enables a community to invest in its own infrastructure. The social value of amenities such as village shops, cafes and pubs is immense and will generally measure very favourably against small increases in precept. However, community consultation is a key issue, as is a good understanding between any prospective community enterprise and its local parish council.