CIPFA today launched a consultation on proposals to strengthen the Prudential Code, following growing concerns over local government commercial property investments.
The Prudential Code is a professional code of practice that aims to ensure local authorities’ financial plans are affordable, prudent and sustainable.
To date, the provisions in the Code have not prevented a minority of councils from taking on disproportionate levels of commercial debt to generate yield.
The Code currently states that “authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed”. This has been clarified previously to include “therefore, local authorities must not borrow to fund primary yield generating investments”.
The key changes outlined in the consultation include:
- clearly stating that borrowing for debt-for-yield investment is not permissible under the Prudential Code, as it does not constitute the primary purpose of investment and represents unnecessary risk to public funds
- ensuring that any commercial investment is consistent with statutory provisions, proportionate to service and revenue budgets and consistent with effective treasury management practice
- strengthening requirements to assess the affordability of commercial activity within local authorities’ capital strategies
- the addition of sustainability and ensuring that capital expenditure is consistent with a local authority’s corporate objectives (such as diversity and innovation) and to the objectives in the Prudential Code
- the introduction of new prudential indicators on affordability
- the introduction of the Liability Benchmark to promote good practice and understanding of local authority’s debt management in relation to capital investment.
The proposed changes will prevent future misinterpretations of the Code and strengthen the necessary regard to its provisions to protect local decision making and innovation.
Rob Whiteman, CIPFA CEO, said:
“A minority of councils are currently misinterpreting or not having regard to the current provisions of the Prudential Code. If this trend continues without strengthened provisions, local authorities risk further government intervention into the Prudential Framework.
“Strengthening the Prudential Code will ensure local authorities are protected from unnecessary risk and reduce the threat to the existing principles-based system that allows councils the self-determination to innovate responsibly.
“We encourage finance professionals across the local government sector to share their views.”
Meg Hillier MP, Chair of the Public Accounts Committee said:
“The Public Accounts Committee has been concerned about how some councils are investing in risky portfolios for commercial benefits. It’s good that there is now a consultation about the Prudential Code. Councils are responsible for their own actions but when failures can have a huge impact on service users and taxpayers it’s time to revisit the guidance and avoid some of the worst failures.”
The consultation will be open for 10 weeks and responses must be submitted by 12 April 2021.
ENDS
Notes to editor:
The consultation paper can be accessed here.
The proposals follow on from the National Audit Office report into local authority commercial investments (Feb 2020), as well as recommendations by the Public Accounts Committee (Jul 2020) that the Prudential Framework should be reviewed.
Local authorities are required by regulation to have regard to the Prudential Code when carrying out their duties in England and Wales under Part 1 of the Local Government Act 2003, in Scotland under Part 7 of the Local Government in Scotland Act 2003, and in Northern Ireland under Part 1 of the Local Government Finance Act (Northern Ireland) 2011.
Since the Prudential Code’s last review in 2017, over three years (2016/17 – 2018/19), £6.6bn was spent by councils on commercial property, with £2.3bn of that on retail acquisitions. This represents 14.4 times more spend on commercial property acquisitions when compared with the preceding three years.
The Prudential Code was developed as a professional code of practice to support local strategic planning, asset management planning and proper option appraisal for local authorities when developing their programmes.
Key objectives of the Code are to ensure, within a clear framework, that local authorities’ capital investment plans are affordable, prudent and sustainable that treasury management decisions are taken in accordance with good professional practice and that local strategic planning, asset management planning and proper option appraisal are supported.
About CIPFA
CIPFA, the Chartered Institute of Public Finance and Accountancy, is the professional body for people in public finance. CIPFA shows the way in public finance globally, standing up for sound public financial management and good governance around the world as the leading commentator on managing and accounting for public money.