CIPFA has been vocal in its concern about the trend towards borrowing by local authorities for commercial purposes. The drivers behind this trend are entirely understandable. Money is, and has been, tight for the last decade, and new revenue streams are required in order to be able to provide the same quality of local services. But the borrowing framework used for these revenue streams was not designed for those purposes. In fact, that type of behaviour is specifically precluded.
This has resulted in local authorities undertaking projects to borrow to generate revenue through investments in commercial properties. Decisions around property acquisitions with substantial commercial income are difficult. Local authorities are not property management companies and their duty in protecting the public purse must include being able to demonstrate value for money and the security of any investments.
However, when investing in properties such as office blocks, shopping centres and retail parks, such guarantees of prudence and affordability are difficult to come by. The profitability of such assets is a moveable feast, subject to the whims of a fluctuating marketplace.
The use of borrowing to fund commercial investments continues to be a key concern, especially when concentrated amongst a small pool of UK authorities. CIPFA has expressed concern that such activity is not the appropriate way to relieve the financial burden weighing on local authorities.
In November last year, we issued further guidance. The guidance, Prudential Property Investment (2019), seeks to ensure that local authorities are asking the right questions about whether they can and should proceed with commercial property investments. To put it bluntly, just because an authority has the ability to invest in these assets, does not mean that it is advisable to do so. More pertinently, the use of borrowing to make those investments means that the action being taken is contrary to the prudential framework.
In today’s Budget, Chancellor Rishi Sunak effectively echoed our concerns, announcing a consultation on new measures that in future would specifically prevent borrowing from the Public Works Loan Board (PWLB) to fund commercial endeavours.
This represents one of the most significant interventions in local government finance by government since the inception of the Prudential Framework in April 2004. The underlying rationale for the proposed measures, to prioritise the use of the PWLB for investment in services and local regeneration, is entirely consistent with the message we’ve been sending to the sector.
While we absolutely welcome the changes proposed in the coming consultation, we also understand the financial pressures being faced by local government. Today’s announcement further highlights that a long-term solution is needed for local government funding in its totality.
We also appreciate that the avoidance of all risk is neither appropriate nor necessary. Most authorities have demonstrated as prudent an approach to borrowing and investment as is practically possible, however the fact is that real risks accompany the use of taxpayers’ money for commercial investments. As a result, the simple reality is that commercial investments often do not sit well with the primary purpose of local authorities, of which at the core is the delivery of quality services.
The existing prudential framework is intended as an enabling regime, representing flexibility in public financial management. We believe it should stay that way. The interventions that will be outlined by government in the consultation announced today could signal a move towards a more prescriptive framework.
The most appropriate way to safeguard the current framework is to demonstrably have regard to the Prudential Code and to be advocates for the principles therein. This means that my practical advice to all local authority treasurers is to operate these new measures with immediate effect. This will enable councils to avoid all risks associated with borrowing from PWLB for commercial purposes during the transition period.
This article first appeared in Local Government Chronicle.