The National Audit Office is investigating the growing trend of councils borrowing from the Public Works Loan Board to fund property investment, it has emerged.
The probe was revealed by Sir Amyas Morse, outgoing comptroller and auditor general of the National Audit Office during evidence this week to the Housing, Communities and Local Government Select Committee this week.
The watchdog’s move comes amid growing concern over the practice of local authority borrowing cheaply to fund revenue-raising property investments.
Sir Amyas told the committee: “We are doing some work on it. We are doing a report on this at the moment that is in process.”
He said that the report would focus on “how rigorously the department is supervising this”.
“I haven’t talked to the department about what our emerging findings are but obviously for that reason you will guess from the fact we are doing a report on it that we think it is an interesting subject,” he said.
“I think it is fair to ask questions about it.”
Morse said that the NAO’s interest in the subject had been prompted because “it is a trend and in some areas it is quite localised to some authorities so it is worth looking at that.”
A spokesperson for the NAO said that the investigation into council borrowing to fund property investment will form part of a wider report into council commercialisation.
The spokesperson said that the body will speak to officials in the Ministry of Housing, Communities and Local Government, as well as other stakeholders.
The report is likely to be released towards of the end of this year, the spokesperson said.
In January, the , encouraging them to scrutinise council accounts to ensure that balance sheets are not being manipulated in order to justify commercial ventures.
Sir Amyas told the committee: “The auditors guidance is encouraging them to look at the capabilities of councils to really make these investments well.
“We are not saying it is up to us to say ‘you shouldn’t be making commercial investments. Of course not.
“Councils are entitled to do it but have they got the right skill sets on board, the experience, have they got portfolio management skills and things of that sort.
“That is the sort of thing we are urging auditors to look at so they can understand the level of risk involved.”
In 2017, MHCLG permanent secretary Melanie Dawes announced measures to ensure councils were not taking unsustainable risks in their property investments.
However, she said: “That sense that one size doesn’t fit all is very important. We are not in the market for saying this is OK and that not, or some sense of trying to be restrictive about this.”
In February 2018, the department released the final wording of its revised investment code, including a softening of draft proposals on transparency requirements relating to property investment.
Following concern over the continuing behaviour of some councils borrowing large amounts to fund revenue-raising commercial activities, the Chartered Institute for Public Finance and Accountancy announced last year that it would produce more guidance on the issue.
Also last year, Martin Easton, head of capital and treasury at Birmingham City Council, said the trend was a “craze”, comparable to investment in Icelandic banks, LOBOs and interest rate swaps.
Last year, government figures outlined an increase in spending by councils on acquiring land and buildings of 59% in the space of a year.
