The government’s crackdown on councils who borrow to invest in property outside their own areas means authorities face a “double standard”, according to Chris West, former finance director at Coventry City Council.
In February, the government issued revised investment code guidance which made it clear that the government considered such borrowing as “borrowing in advance of need”, which is banned under CIPFA’s prudential code.
Speaking this week at Room151’s LATIF North conference in Manchester, West said that the move was a retrograde step.
West suggested the attitude toward Local Government Pension Scheme (LGPS) investment, on the one hand, and treasury allocation of funds, on the other, was unfair.
He said LGPS could invest “all over the world in any asset”, whereas treasury investment by a council in property outside its own borders was considered problematic. He said: “Isn’t that a complete double standard?”
However, Innes Edwards, treasury manager at Edinburgh City Council, argued that councils should not be allowed to use the practice.
He said: “What the prudential code does not say is that you should speculate on margin.
“Looking in from the outside, a number of authorities seem to be borrowing from the Public Works Loan Board at an interest rate, investing in a property with a greater yield and basically pocketing the arbitrage between the two interest rates.
“In doing so they have really used the UK government’s credit rating.”
He added that pension funds were likely to have a bigger spread of investment types than treasury investors, which would cover for losses due to any future property downturn.
Speaking during the debate, Paul Woods, chief finance officer at the North East Combined Authority, said: “Coming from a part of the country where we are desperate for investment — and it is difficult to get investors to come in — why wouldn’t a council invest in [its] own area?
“We can earn 6%, 8%, 11% by investing in our area. I have always been able to describe to members that this is for the benefit of our area first, and we might be able to make a return as a secondary objective.”
He added: “I think that is much better from a professional point of view to be able to justify what we are doing.”
