Plans to further tighten guidance on councils borrowing to invest in commercial property could reduce the flexibility of local government to deal with funding pressures, according to James Goudie QC.
Claims that austerity has ended are grossly exaggerated.
Local authorities have been exposed to the cumulative effects of austerity for a full decade now, with no let-up in sight.
Coupled with this, government grants to local authorities have dramatically declined
What are local authorities to do?
If they reduce services, they face challenges.
The challenges sometimes succeed.
The challenges invariably entail costs, usually largely irrecoverable.
The scope for reduction in expenditure is limited.
Many of the services are provided pursuant to statutory duties.
Authorities have to look at raising more income.
However, their powers to increase council tax are restricted.
Moreover, other charges are usually confined to cost recovery, and seeking to make a profit is generally prohibited.
One of the few options is to take steps to increase the return on investments.
This potentially includes investment in property, and especially commercial property, which is not subject to secure tenancies and right to buy.
There is no fundamental vires issue, whether the funds created are for capital expenditure, such as regeneration, or revenue expenditure, upon services.
Local authorities have broad investment powers, wide powers to acquire property, and (in England, but not Wales) the general power of competence.
Of course, all powers have to be exercised prudently and reasonably, and with an eye to downturns in the property market.
But what if the authority needs to borrow from the Public Works Loan Board (PWLB) in order to invest?
This is the tricky area.
There are of course broad borrowing powers, and it may be prudent and reasonable to exercise them, but they are in addition subject to duties to have regard to guidance both from central government and from CIPFA, and both have issued, and revised, guidance.
Central government guidance was apparently tightened in February 2018.
But in a confusing way and to an uncertain extent.
In particular, there has been confusion between borrowing in order to invest and borrowing in advance of need.
What is clear, and welcome, is an emphasis on transparency; and that assets require management, which is especially challenging when the assets are not local.
What is new at the end of 2018 is that CIPFA is expressing increasing concern about borrowing in order to invest in commercial property.
However, HM Treasury does not appear to be doing anything to restrict the PWLB in providing the borrowing.
Proportionality parameters may be laid down.
Appropriate ratios may be prescribed.
These would give rise to very difficult questions, and seriously intrude upon the freedom of authorities and the need for flexibility, not least in relation to the timings of borrowing and of investment.
Also, borrowing in advance of need is an inappropriate and unhelpful concept.
However, whatever the statutory guidance, to which regard must be had, may be from time to time, and whatever the issues of interpretation to which the guidance may give rise, investment on a large scale in commercial property is an activity which requires all due diligence and prudence, even when there is a lack of a plausible alternative.
James Goudie QC, is joint head of chambers at 11KBW where he acts for and against clients operating in and with the public sector.
