When money is cheap to borrow, and organisations are faced with funding reductions and long-term uncertainty, it’s hardly surprising that they look for ways to generate income. However, for local authorities, the decision it is not that simple. Borrowing and investing are governed by the prudential framework and with it comes a set of expectations. There is some degree of flexibility and tolerance within the framework, but step out of line and parliamentary scrutiny is in place to highlight poor behaviour.
That scrutiny recently came in the form of recommendations from the Public Accounts Committee (PAC), which reported back last week on local authority investment in commercial property. While the report aimed its criticism at the Ministry of Housing, Communities and Local Government (MHCLG), the sector itself should not be surprised by the report’s recommendations. The reality is that over the last three years, local authorities have spent £6.6bn on commercial property. That sort of number does not go unnoticed, especially when there is a lack of detailed data at national level to support these headline figures.
Unsurprisingly, the PAC’s recommendations also called for action on improving and reviewing data. The committee was emphatic that MHCLG needs to improve the data it has on local authority investment activity and any associated risks, and has welcomed the department’s serious data review.
Good data and evidence are essential if the sector is to fully understand the risks related to investments in commercial property. Local authorities will certainly have clear business cases for investment activity, and the principles of good financial management should mean that this data should be available for scrutiny. As with anything data-related, it’s the practicalities around collection and comparability that must be considered. It’s also important that any data collected is future-proofed. The committee’s recommendation for MHCLG to also collect information on the different and innovative forms of investment activity will need to be properly thought through. CIPFA has a wealth of experience and expertise in data collection, and is happy to support the department as this new approach is developed.
The policy responsibility for the prudential framework, as well as a wider remit for the local government finance system, lies with MHCLG. This means the department must ensure the prudential framework functions as intended. Reflecting on the PAC’s recent recommendations, it's clear that they believe the principle-based nature of the Code has not been sufficient. While the majority of local authorities have complied with the policy’s intentions, there is strong evidence that some have not, with the PAC stating the ”department has been complacent while £7.6 billion of taxpayers’ money has been poured into risky commercial property investments”.Even without the additional economic risks that have resulted from the COVID-19 pandemic, the direction of travel for local authority commercial ventures was apparent. The flexibilities within the framework were being stretched too far. CIPFA has called for the Code to be made a statutory requirement. It would prove to be a notable change from the current position – where authorities are required merely to ‘have regard to’ the principles of the framework.
The recommended review of the prudential framework will need to include a sector-wide approach. We at CIPFA welcome the 12-month time scale, as it will provide the opportunity to consider what framework best supports a post-pandemic environment. It’s clear that local authorities will need to play a central part in the recovery and so we must make sure that the framework supports this. The review will no doubt also be informed by the results of the ongoing PWLB consultation, and other policy developments over the autumn.
It’s fair to say the review could lead to some significant changes in local government finance - impacting the long-term investment strategies of local authorities. A new equilibrium has to be found to better balance investment, income and assurance so that both local authorities and central government can move forward with confidence.
This article first appeared in Local Government Chronicle.
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