Responding to COVID-19: insight, support and guidance
Commercial investments often do not align with council’s primary purpose – delivering high quality services.
Prudence is the central pillar of local government financial management. The principle of prudence requires local authorities to ensure that any financial activity, whether borrowing or investment, is affordable and sustainable in the long term. Yet what is considered prudent will vary from authority to authority based on its own service delivery needs. The line between a good investment and a bad investment can be razor thin and dependent largely on context.
This is what makes the recent accounts from the Public Works Loan Board (PWLB) so interesting. The accounts for 2018/19 have shown nearly a 77% increase in new loans advanced to councils, with PWLB liabilities having risen to £78.34bn. With the current liabilities cap set at £85bn, it would seem that the sector is close to maxing out its credit card.
Our analysis of the data at individual local authority level shows a substantial increase in the sums owed by local authorities to the PWLB. Outstanding debts have increased from £51.2bn in 2010 to over £77.5bn in 2019, a rise of over 50%, with increases seen across all types of councils – from the GLA to Trowbridge Town council. The dramatic increase in outstanding debt to the PWLB comes both as a result of an increase in the levels of borrowing, and the number of authorities getting in on the action. The number of authorities borrowing from the PWLB has increased by nearly 60% since 2010, from 990 to 1,570.
The drivers behind this are understandable. Years of austerity and a push for councils to be more entrepreneurial mean the ability to borrow at a lower rate of interest is an attractive concept. This is particularly the case when there is no requirement to disclose to the PWLB what the purpose of loan is to be.
We can only speculate on the reasons behind this level of borrowing based on what we see going on in the sector. Whether with a view to investing in commercial opportunities or restructuring an organisation’s debt, borrowing absolutely has a role to play in good financial management.
However, the scale of borrowing, particularly where taken to fund investment in commercial property, is a matter for concern. Such activity pits public funds against high levels of potential financial risk.
Local authorities must consider the long-term sustainability risk implicit in this level of debt. CIPFA’s Prudential Code aligns with statutory guidance, and is clear that authorities must not borrow more than or in advance of their needs purely in the interest of profit.
We would also question whether suitably robust plans for how to repay such a high level of debt are in place. With the retail market in particular on the downturn, subject to the whims of macro-economic trends, local authorities cannot be certain that the return on their investment will overcome the anchor of their debts.
While CIPFA will continue to endorse local authorities’ ability to determine for themselves what the acceptable parameters of borrowing are within their local context, we urge everyone to have due regard for the Prudential Code.
Simply put, commercial investments often do not sit well with the primary purpose of local authorities, which is the delivery of quality services to local residents. Responsible borrowing and long-term thinking must prevail in uncertain times.
Local authorities have historically been one of the strongest arms of the public sector as far as financial management and resilience is concerned. And it is a simple fact that the avoidance of all risk is neither appropriate nor possible.
CIPFA will continue to support the sector to manage these risks in accordance with the prudential code, and to ensure prudent use of the public pound. But it cannot be denied that these figures are worrying. The local government credit card is reaching its limit, and maxing it out could mean catastrophe for some of our most vulnerable citizens.
This article first appeared in LGC.