Responding to COVID-19: insight, support and guidance

We all have a role in addressing excessive commercial risk

28-01-2021

By Rob Whiteman, CIPFA CEO

When he spoke at the LGA finance conference earlier this month, Communities Secretary Robert Jenrick was clear that councils must curtail the risk of their commercial investments or understand that government will take a more active role in managing this. His department's Permanent Secretary, Jeremy Pocklington, set an equally clear tone at a recent CIPFA roundtable for CFOs. They stressed the importance of taxpayer funds being used in an appropriate, responsible and accountable way for the benefit of communities.

It's no wonder this is coming to the forefront of government attention. Over three years (2016/17–2018/19), £6.6bn was spent by councils on commercial property, with £2.3bn of that on retail acquisitions. This represents 14.4 times more spend on commercial property acquisitions when compared with the preceding three years.

Discussions around the purchase of commercial property have grown to the extent of questioning the governance and commercial skills of the sector. It would be regrettable for future potential innovation by the majority of local authorities to be constrained as a result of the bad press generated by relatively few councils. Many authorities continue to be innovative, displaying commercial skills while still understanding fundamental issues, such as their core public purpose, appropriate levels of risk when using public funds and compliance with the Prudential Code.

Ultimately, the core purposes of councils are the provision of public services and economic regeneration that meet local need and achieve value for money. Like everyone, we have grave concerns about the level of cuts meted out to local government over the last decade and continue to lobby hard for more resources, but CIPFA has given leadership and remained clear that facing budget challenges is not cover to take excessive commercial risk and misapply the Prudential Code. The idea that commercial income can be used to cover services does not override the fact that borrowing for yield only is unequivocally "in advance of need" under the Code.

My observation is that the sector has been very tolerant of those councils misinterpreting the Code, even though it undermines the case for sector freedoms. What we hear clearly from the Secretary of State and Permanent Secretary is that the government does not share any such tolerance and all councils will see their freedoms reduced if problems persist.

Moving forward, as we recover from the impact of COVID-19, councils are vital to the revival and regeneration of local economies, and CIPFA hopes we can keep the Prudential Code regime in place to see investment in service innovation, development programmes, infrastructure and housing. Everyone in the sector who wishes to see this too should assist CIPFA to ensure any residual non-compliance with the Code ceases. And we hope reform through Redmond ensures that high quality external audit challenges local decision-making and accounting treatment where needed.

Local government often has highly developed commercial acumen to use complex instruments and enter into commercial partnerships and contracts, for example on regeneration schemes, but this is not universally the case. Generally in the private sector, material commercial decisions first involve very rigorous internal challenge and governance, second, external challenge and detailed analysis from the capital markets which provide finance, and third, reference to shareholders/major investors to ensure they are supportive of the strategic intent. Councils rely on the first of these in the absence of the other two, and CIPFA promotes using independent advisors and independent audit committee members to make governance as strong as possible. Our Treasury Management Panel is further looking at definitions and information needs to drive good comparative management information on investment returns to assist this.

Finally, while CIPFA will work with CFOs and finance departments to raise skills through an enhanced CPD technical compliance statement and training arrangements, as well as offer commercial skills training for audit committees, the clear messages from Robert Jenrick and Jeremy Pocklington demonstrate that compliance with the Prudential Code needs sector-wide attention from leaders, cabinets, CEOs and directors of regeneration too; and not seen as just a bureaucratic hoop for CFOs to get through with their auditors. Some councils with ready access to the PWLB through the Prudential Regime are leveraged on commercial activity in a way that the capital markets would not support in the corporate sector. Put bluntly, such high borrowing is distinctly uncommercial. Where excessive commercial risk has been taken, it's a sector-wide failure that we all have a role in addressing.

This article first appeared in the Local Government Chronicle.