Local authority investment decisions have been making headlines in recent months, with some elements of the national press calling into question the role of local authorities in investing in property and assets as a means to generate income. However, as funding has decreased councils have increasingly relied upon new sources of income to plug the funding gaps. Councils investing in property and other assets is nothing new; many local authorities have historically held major assets such as retail sites, farms and residential property. In recent years however, the emphasis on using these assets to generate a commercial yield has become much greater and this has involved out of area investment.
APSE’s own research with CIPFA property services found that in 2016 alone around £1billion was invested in property and assets. Accordingly, the scaling up of investments by local councils has peaked the interests of the Department for Communities and Local Government (DCLG), and they have now issued consultation in response which seeks to amend the prudential framework.
The Prudential framework includes:-
• The Prudential Code prepared by CIPFA (applying to England, Scotland and Wales)
• The Treasury Management Code prepared by CIPFA (applying to England, Scotland and Wales)
• The Statutory Guidance on Local Authority Investments prepared by DCLG (applying to England [major authorities but also applying to parishes and other smaller authorities if the total of investments exceed set thresholds)
• The Statutory Guidance on Minimum Revenue Provision prepared by DCLG (applying to England and to major authorities only) DCLG are now seeking to strengthen the regulation and guidance as to how local councils invest, particularly in properties, because they are concerned by a number of issues.
One such cause for concern is that as local authorities are increasingly reliant upon alternative sources of income and invest in property and other markets, they are exposed to macro-economic trends, which given the levels of exposure, they argue could leave councils with structural deficits in their budgets.
There is also concerns that liquidity should be assured and that liquidity and security of assets investments should be the key considerations over and above that of yield from the asset. Government has also expressed concerns that the type of investments currently being utilised by councils goes beyond their core purpose in delivering services; they have specifically referenced the need for greater transparency in investment decisions and that reporting should outline not just the ‘what’ but the ‘why’ as to investment approaches. DCLG have made it clear that councils ought not to be ‘borrowing in advance of need’; this relates to a form of ‘carry trade’ whereby councils are borrowing at lower levels of interest, such as through the public works loans board, in order to invest in a development where they can earn back a higher level of interest or yield, generating an income from the asset or development. Whilst this appears to be acceptable for strategies linked, for example to local regeneration, with a demonstrable benefit to the local area, it is termed as ‘borrowing in advance of need’ whereby this process is utilised for out of area investment where there is no obvious link to local benefit –other than a monetary one.
DCLG have said that they do not wish to restrict local authorities in using commercial structures to kick start local economic regeneration to deliver services more effectively. However, they have warned the primary duty of a local authority is to provide services to local residents, not to take on disproportionate levels of financial risk by undertaking speculative investments, especially where that is funded by additional borrowing.
APSE has produced a full briefing on this issue which is available here and we will report further on the outcomes of the proposed revisions to the Prudential Framework through APSE’s advisory groups, website and briefings service.
For more information contact Mo Baines, APSE Head of Communication and Coordination at firstname.lastname@example.org