By Don Peebles, Head of CIPFA Policy & Technical
Looking back over last year, our national news was dominated by our sputtering Brexit negotiations and the latest antics of Donald Trump’s presidency. The mounting difficulties across areas of UK local government finances rarely got a look in. But whenever they did, the focus was often on concerns over councils increasing investment in commercial properties for investment return.
That this is happening is no great surprise, nor is it in itself grounds for concern. Councils have already absorbed years of austerity cuts and are facing increasing cost pressures to deliver services. Couple this with the concerted push for more fiscal self-sufficiency, particularly for English councils – the government’s move towards 100% business rates retention and allowing councils to add an additional 1% to council tax – and with local leaders’ desire to help shape communities, then seeking new revenue streams seems both obvious and necessary.
This short term reflection disguises the long term success story that since 2004 CIPFA and local government professionals throughout the UK have delivered a system of self-regulated borrowing and capital financing for our local public services.
Debate over economic development schemes that rely on commercial rental streams is not new and neither is assembling and procuring land to increase development value. Though, of course, these all these carry commercial risk. What is more relevant, however, is the changing environment both financially and in terms of public service delivery which places a different focus on how our public funds are used.
How this is taking shape in practice can be thought of in two ways: first, buying offices and other buildings primarily for their income-yielding capacity; second, councils make large economic regeneration investments, with the intention of growing the business rates base. Both these approaches are maybe reflected in a surge in borrowing.
The financial challenge comes in managing the commercial risk. The more commercial the venture, the more considered the due diligence needs to be. Doing it successfully requires teams having the skills in place to evaluate, communicate and manage that risk. To judge affordability on the basis of what could go wrong, and not just on the cost of borrowing. And ensuring the level and type of governance appropriate to the risk.
In December last year, CIPFA published the revised Prudential Code for Capital Finance in Local Authorities and Treasury Management in the Public Services
. And while the Code has always been about providing support to those taking decisions on capital finance, the new version better reflects the landscape of today’s modern public sector.
What it seeks to improve the understanding of cumulative risk at individual local authority level. It reinforces the importance that capital expenditure plans are affordable, prudent and sustainable and that treasury management decisions are taken in line with good professional practice.