When Hackney Council announced they were in financial meltdown three years ago, residents raised weary eyes to the heavens. Another year, another crisis.

England's fourth poorest borough has a past littered with accounts of fraud, corruption and mal-administration. However, despite the welfare needs of its residents, the council's crippling debt is now being used as an excuse to strip the borough of voluntary sector premises and prepare public services for the private sector. The result is a cascade of property disposals leading to the closure of scores of community resources from nurseries to ethnic community centres, legal advice centres to libraries.

Despite several requests, Hackney Council wouldn't provide the exact amount of its debt.

During the late 1960s and early 1970s, local authorities borrowed money from central government to finance housing projects. Around thirty such blocks were built in Hackney but investment in their upkeep was not maintained. Many subsequently became uninhabitable, and have been knocked down or are in line for demolition. This left Hackney in debt, with fewer rent streams to service the debt. In a scenario familiar to third world governments, the interest on the debt grew larger than the money available for repayment.

A December 2000 policy and finance committee report, says: "In total, the council pays around £68 million in interest on capital debt. The majority of this interest is related to housing debt."

Based on this figure and multiplied by the average interest rate in 2001/02 of 8.6 per cent, the amount owed by the Council weighs in at a hefty £584.8 million.

This has led groups within the borough such as UNITE and HackneyNot4Sale to campaign for the government to "Dump the Debt"; a localised equivalent to the global "Drop the Debt" lobby. However, like the World Bank and IMF, the government has no intention of dropping the debt, preferring instead to provide assistance only if the recipient follows a strict privatisation agenda.

As one community activist put it: "Hackney can't turn down money from government and this puts control back at the centre. The council succumbs to whatever government policy is."

When Tony Elliston became chief executive of Hackney Council in 1995 the Labour group had divided into two camps and the following elections delivered a hung council. Elliston presided over £30 million worth of cuts in public services, which saw the closure of the school bus service, several nurseries and half the borough's fourteen libraries.

He then resigned his position in 1999 just prior to a damning OFSTED report and claims that central government were politically interfering with council affairs.

"They had a number of education authorities they could have gone for, all equally bad," Elliston told Red Pepper. "They could have done Islington or Tower Hamlets. That's not to say Hackney's education system was not bad. But it was not worse than the others. It was singled out because of political reasons. The official Labour group had been ousted and a breakaway group had taken over. Political knee-capping, that's what it was."

One departmental head after another followed Elliston. "Every single one had left within a year," he recalls. "The [government] inspectors started coming in, it was like a kind of dying animal and everyone was keen to get in and sink their teeth into it."

Various inspections took place, initially by a government body called the Improvement and Development Agency, which reported a "most grave and serious situation". This led the central government to impose section 114 of the Local Government Finance Act 1988, which prevents "any potentially unlawful expenditure ... likely to exceed resources available." This draconian measure again left the council in paralysis. Dustcarts sat idle in the depot awaiting repair, maintenance on people's homes were put on hold and all staff on temporary contracts were laid off.

Next came the Audit Commission, who conducted three inspections within nine months, concluding the council would need "significant support", and recommending that government should intervene. "We have decided that it is now appropriate that the secretary of state consider exercising his function under Section 15 of the Local Government Act 1999 to give a direction to the Council". It was the first time Section 15 had been invoked.

Under government directions the local authority began recruiting senior staff, starting with Max Caller as managing director in June 2000. Despite gross financial problems at the council, Caller's starting salary was £150,000.

Furthermore central government paid over £3.5 million in consultancy fees associated with Hackney's restructuring. A sizeable portion of this sum went to consultants Deloitte & Touche, who recruited seven temporary financial managers into each directorate. According to invoices obtained by Red Pepper Investigations, some of these consultants were taking home at least £2,420 a week. Their job, according to a government press release, was to "provide solid financial expertise and help tackle the borough's financial crisis."

The financial controllers took up their positions just prior to demands from government for the council to produce a three-year budget strategy. In its first year alone projected savings of £13 million have meant another round of cuts and closures of vital services. More nurseries are closing, the surviving libraries are again under threat, Home Help support has been reduced to visits of half an hour, grant money has been cut by 38 per cent, clothing awards for children reduced, play group funding slashed and the criteria for free bus passes for disabled tightened.

Workers who maintain services have also been targeted. In October 2001, the council imposed a 90-day rule on all sections of the workforce except those in education. This gave workers 90 days to sign a new contract stipulating poorer pay and conditions, or face dismissal.

Members of Unison initially refused to sign and some were sacked before being offered their same jobs back with reduced workplace conditions. At this point most signed up to the new regime but sent in letters along with their contracts stating they were signing under duress. Three hundred and fifty employment tribunals for unfair dismissal are due to be heard in February.

Residents and workers alike were hoping for support from central government to prevent a continuing decimation of services. When local government minister, Nick Raynsford, announced a £25 million support package in January, it seemed the government had answered their prayers. A spokesperson for the former Department of Transport, Local Government and the Regions, which has now been broken up, said the money was to "protect local government services for the people of Hackney". However this financing came attached with nine conditions, one of which stated that it could not be used to "offset failure to achieve savings". Crucially this stipulation meant the money could not be used to prevent cuts in services.

A further condition attached to the financial carrot required the council to "establish the new body for education services in the borough". Subsequent to OFSTED's condemnatory report on Hackney's education service, central government ordered the council to privatise two key areas of the service. Schools minister, Estelle Morris, announced the decision: "The secretary of state will now direct Hackney to sign a contract. This is the first time we have been able to take decisive action, thanks to the new powers we took in the School Standards and Framework Act 1998."

Nord Anglia Education plc were awarded contracts to run the School Improvement and Ethnic Minority Achievement services. However, in a further OFSTED report written over one year after Nord Anglia took over, it listed school improvement as "functions, which are still unsatisfactory". Furthermore Labour councillor, Ian Peacock, told a Select Committee on Employment and Education, that Nord Anglia "has not made any difference in terms of day to day accountability."

As privatisation was unable to bring the desired results, the OFSTED report recommended "radical change". A joint team put together by the department of education and skills decided that a non-profit organisation should run education services in the borough, so the Hackney Education Trust was formed in August this year.

Parallel to this period of decision-making was an appraisal of how the financial services in the new trust should be run. For this analysis, the government selected PricewaterhouseCoopers (PwC) who concluded that long-term financial ownership, along with pensions, insurance and treasury management, should be carried out by Public Private Partnership (PPP). A spokesperson for the Office of the Deputy Prime Minister denied that by hiring PwC, government were forcing privatisation on the council: "Decisions on outsourcing are rightly the responsibility of local authorities."

However, backdoor expansion of private involvement in the new education trust could prove risky, as was noted by the joint team in their report:" The Audit Commission has signalled weaknesses in the capacity of the council to manage adequately contracts for outsourced services."

Certainly, the failure of past privatisation has left its mark. Much of the present crisis could have been avoided had the outsourcing of social security benefits to a company called ITNET been managed properly or not taken place at all. The contract began in 1997 and by the time it was brought back in house four years later, it had cost the people of Hackney £36 million. Elderly people were left paying their rent out of their winter fuel money in fear of eviction, as benefit claims remained unprocessed. The Benefit Fraud Inspectorate stated in a report on ITNET that an estimated 64,112 outstanding items relating to 33,347 claims were left undone.

Distraught residents desperately turned to the Hackney Law Centre and Citizens Advice Bureau (CAB) for help. According to the director of Hackney CAB, Sola Ayobade, both organisations felt the impact of ITNET's failure: "You can't even think about how it was. It was the evictions. Then the landlords would come in and say look we're about to lose our properties because we can't get our rent on the tenants we've got in. So we had all parties coming in, it was quite horrendous." In the cruellest irony, funding for both Hackney Law Centre and the CAB has been cut because of the debt created by ITNET's failure.

The CAB, who have already had to close one of its two Bureaus in the borough to new clients, now face further financial pressure after being threatened with a further 30 per cent cut in its grant. Meanwhile ITNET survived the ordeal, recently announcing pre-tax profits of £12.6 million for the last financial year. Further unfortunate irony came after the collapse of Railtrack. Hackney Council had invested part of its pension fund in 60,000 Railtrack shares and lost £100,000 when the rail company collapsed.

In order to make up for a shortfall in their revenue budget, Hackney Council began a policy called the "Property Disposal Programme". This involved the selling off of properties and land owned by the council and was set a target of £70 million for the last financial year but only managed £50 million. Once again central government stepped in to provide an "Unsupported Credit Approval" loan to bridge the gap of £20 million. This effectively put the council into yet more debt.

When selling assets local councils are supposed to achieve "Best Value" on all properties sold. However, minutes of meetings not in the public domain show that Hackney Council sold a package of nine buildings in Broadway Market, south Hackney, to a property development company called Stirling & Investments Ltd for a total of just £250,000.

At the time of purchase, the main shareholder in this newly formed company was Donald Beskine, an accountant working for the British government on a scheme to marketise eastern Europe. He was also principal advisor to the Bulgarian Economic Development Ministry and the Russian Federal Commission on the Securities Market. As managing director of the International Centre for Accounting Practices Beskine was employed by the European Union, USAID, World Bank and OECD to attract foreign investment into Russian enterprises. Stirling's bid was preferred over that of the Notting Hill Housing Trust, a London based housing association.

Despite a necessity for affordable social housing in the area, these one bedroom studios are currently being sold at £150,000 each. Stirling & Investments Ltd. also received regeneration money to renovate the buildings although Hackney Council claim to have no records of exactly how much.

Residents and social groups across the borough have argued vehemently that the Council is targeting asset sales on properties which are vital community resources. Atherden Nursery in Clapton was one such property. Whilst up for sale, the premises were squatted by parents of children attending the nursery in an effort to prevent closure. When the rest of the local community proved overtly supportive of the squatters stance, the council backed down and promised to reopen the nursery once vacant possession was secured. The parents moved out only for the council to renege on its promise and close it. Later in the year the property was sold for £420,000.

And there are plenty more closures to come. The three year budget strategy agreed with central government involves £13 million of cuts this year, £18.2 million in 2003 and £22 million in 2004. As the Council desperately attempts to address its internal problems within the strict parameters set by central government, the future of public services and voluntary sector community projects in Hackney looks increasingly bleak. Certainly the promises made by the present administration that public services will improve look much like Atherden Nursery does today. Empty.