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In practice both prudence and affordability have to be analysed and managed from a risk perspective, so in addition to the core issue of borrowing in advance of need, commercial property investment brings risks. Those risks could be very difficult to manage, or when taking note of this that prudence and affordability have been achieved. If there is reliance on investment income, this means that the potential failure or a downturn of the property market will have a direct impact upon local services.
So local authorities need to decide how to exercise their borrowing powers, their duty to determine affordable limits, as well as their use of investment powers. I advise local authorities to carefully review CIPFA’s statement, and also have regard to the statutory investment guidance. In the meantime, further guidance on this subject will be developed. I would add even if powers can be identified, authorities will need to be able to demonstrate that it would be reasonable to use them.
Legal precedents, concepts of fiduciary duty and the elements of the prudential framework should operate together to ensure that authorities differentiate properly between what they could do, and what they should be doing. Their primary function remains the delivery of local services to the local population.
This article originally appeared in Room151.