The government is unlikely to make radical changes to the prudential framework to council curb borrowing to fund commercial property investment, it said this week.
Speaking at Room151’s Local Authority Treasurers Forum this week, officials from the Ministry of Communities and Local Government revealed the results of a review of the impact of last year’s changes to its investment code.
Ellie Dunnet, head of finance at Maidstone Borough Council, who is on secondment to MHCLG, told delegates that the post-implementation review found most councils are complying with the rules.
She said: “The majority of councils are using the framework sensibly and effectively. They are using it to deliver their policy objectives on behalf of their area. It is a reassuring finding but not a surprising one.
“There is an awareness that the concerns that prompted the review of the framework in the first place concentrated on a small number of outliers who were perceived to be taking extremely extreme risks – and possibly unnecessary risks – and not complying with spirit of guidance.”
Dunnet said that the review had found that it was difficult to define proportionality – a new requirement introduced in the revised framework.
This, she said was because in most cases, councils were investing both for regeneration and to raise revenue.
However, the review found that some councils needed to do more in terms of meeting the requirements for investment decisions to be made transparently.
Also speaking at the session, Matthew Hemsley, head of sustainability, accounting and capital in the department, said the government does not intend to restrict freedoms for all councils based on the actions of a few.
He said: “One of the things we want to inject into the conversation is that we want any response from the government to be proportional.
“When people say they don’t like current system what they really mean they don’t like the it they see which usually tends to be the bit the media focuses on – the outliers.
“Our job is to look at the system and highlight what it does as a whole. We don’t want to restrict chances to use commercial structures.”
Last year, former head of the local government finance unit at MHCLG raised the prospect of further action to restrict borrowing to fund property investment.
In March, he told Room151’s LATIF North conference in Manchester: “Interest by ministers in local authority commercialisation is not going to go away, and we are going to be expected to monitor the impact of the updated codes — both the MHCLG code and the CIPFA codes,” Caller said.
“I can’t say what will happen if local authority borrowing continues to increase at the current rate.”
