Around £858 million was invested by 116 UK local authorities in three Icelandic banks that were put into administration last week.
Smaller district councils have been particularly badly hit. The amounts they are owed add up to significant proportions of their annual budgets.
As Construction News went to press it was not known whether the local authorities will get their money back, but several have said they will have to review their spending if the money does not materialise.
Future capital investment projects are now in doubt. Construction industry chiefs believe these would be first to be cut as they are a lower priority than delivering day-to-day services.
Six out of the seven local authorities in Gloucestershire put a combined total of £31 million in the troubled Icelandic banks – Kaupthing, Glitnir and Landsbanki.
Gloucester City Council has £2 million with Landsbanki, about 8 per cent of its total investment, while Stroud District Council has £3 million with Glitnir, 12 per cent of its £24.9 million investment fund.
Tewkesbury Council’s £1 million invested with Landsbanki is 3 per cent of its total investment of almost £33 million. Cheltenham Borough Council was badly hit, with 22 per cent of its £50 million reserve fund invested in the failed banks.
A Cheltenham spokeswoman said: “The council is currently of the opinion that it will get the money back so it will be business as usual and projects will not be affected, but if that situation changes then the whole investment portfolio will have to be reviewed.
“The council is unable to give any firm guarantee at this stage on long-term capital projects.”
The National Federation of Builders said it was closely monitoring the situation, while the Construction Products Association said it did not expect to see ongoing projects stopped. But the CPA warned that projects not yet agreed with contractors could now be delayed or reviewed causing a knock-on effect on workloads in 2009-10.
Local authority projects form a significant proportion of UK construction work and are becoming increasingly important as the private sector is hit by the credit crunch.
The 10 worst affected councils have £295.6 million between them in the failed Icelandic banks. The councils have 77 projects planned for the next six months worth a total of £1.9 billion, according to Glenigan.
Kent County Council, which has the most invested in the failed banks, also has the highest total value of projects in the pipeline. But it said there would be no impact on services as the £50 million represented just 2 per cent of the council’s overall £2.6 billion budget.
Council leader Paul Carter said: “Kent County Council does not have a liquidity problem and there will be no adverse impact on services, which includes salaries and pensions.”
Analysis: Don’t cut maintenance – push for a VAT cut instead
By Brian Berry
At the moment no one quite knows how much money will be lost through local authority investments in Icelandic banks and how
this will affect the councils involved.
Given that building work is often the first thing to be cut back in difficult economic circumstances, spending on building new infrastructure – and repair, maintenance and improvement of council properties – could potentially be under threat.
However, cutting spending on construction, particularly RMI, would be a false economy for councils as properties would fall into serious disrepair and end up costing more to repair in the long-run.
We would urge all councils to appeal to the Treasury to cut VAT on home maintenance and repair from 17.5 per cent to 5 per cent.
This will help to ensure that councils can continue to carry out much needed RMI work on their properties, particularly their tenants’ homes.
We would also encourage councils to open up the tendering process to smaller, local building firms as they can often offer more competitive prices.
Brian Berry is director of external affairs at the Federation of Master Builders