COVID-19 has been one of those issues that started slowly and then escalated exponentially. In the early days, messaging from government that it would do whatever it takes to defeat the pandemic gave the local government sector reason to be hopeful that additional costs would be met. However, as time has gone on, that message has become murkier and less distinct, with Robert Jenrick himself warning councils that not all costs related to the pandemic will be covered.
This uncertainty only exacerbates the financial risks that have emerged as a result of the current crisis. CIPFA recently took a snap poll of section 151 officers, which found 83% of respondents felt that delivering budgets in 2020/21 was the most significant finance issue facing their organisation. At a recent Public Accounts Committee hearing, I commented on the challenges around balancing budgets, with councils facing a triple threat: unable to achieve savings; facing additional costs; and experiencing reductions in income. While some of this income is drawn from fees and charges, for many it increasingly includes income generated from borrowing to fund a commercial property portfolio.
The issue of commercial investment in property is one that CIPFA has been alert to for a number of years, and is covered in the Prudential Code, which councils must have regard to. While most authorities are taking prudent decisions when it comes to their commercial endeavours, there are some who have overexposed themselves to risk by borrowing to fund their investments. These risks have been exacerbated by the current pandemic, with decisions that may have seemed viable at the time of investment now carrying much higher risks.
CIPFA is keen not to stifle entrepreneurship or innovation within councils. This is an area in which we regularly see good practice. Many local authorities have in-house skills. Where they don’t, they are seeking out robust external advice, with strong governance arrangements in place to make decisions based on that advice.
However, the fact remains that the Prudential Code specifically prohibits borrowing to invest in the sole interest of yield. CIPFA agreed entirely with a point made at a recent Public Accounts Committee hearing– public bodies should not have greater commercial freedoms than the commercial sector. Councils must remain public bodies, rather than become vehicles for property development with an ancillary local authority function. Where taxpayers’ money is involved, an appropriate attitude to relative risk must be taken.
Despite what we would see as inappropriate levels of borrowing to invest being undertaken by a minority of local authorities, CIPFA still firmly believe that a principles-based framework, which enables councils rather than regulates them, remains the best way of approaching commercial borrowing. That isn’t to say there aren’t ways in which managing commercial activity in the sector could be strengthened.
More informed investment decisions could come from improved access to data. While individual councils have access to their own local information, they have no way of knowing what investment decisions are being made by other similar authorities. Enhanced national structures for local data collection would enable knowledge sharing and make benchmarking exercises easier and less costly.
Ensuring the section 151 officer has a seat at the top table will support the positioning of finance as central to decision making, and give the local authority’s top team access to regular expert advice.
Amendments could be made to the Prudential Code that mean the council as a whole is obligated to comply with the principles it sets out, rather than just the section 151 officer. This would help to create a culture of financial accountability that extends beyond the finance team to the wider organisation.
And of course, both internal and external audit have an important role to play in scrutinising investment decisions that are taken. To that end, we look forward to the findings and recommendations of the Redmond Review later this year, which will identify ways to strengthen the audit function.
COVID-19 has completely upended all areas of the public sector, recalibrating entirely the risk environment, casting many financial decisions into a new light. The opportunity to scrutinise our approach to these new risks must not be squandered.
This article first appeared in Local Government Chronicle.
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