Source · Select Committees · Public Accounts Committee
Recommendation 8
8
This Committee highlighted in 2016 that the Department appeared complacent about the risks from local...
Conclusion
This Committee highlighted in 2016 that the Department appeared complacent about the risks from local authorities increasingly acting as property developers and commercial landlords with the primary aim of generating income. It also pointed out a risk that the local capital finance framework might not be able to cope with the current, rapidly changing and uncertain institutional and economic environment.19 In that financial year (2016–17), English local authorities acquired commercial property worth £1.8 billion.20 The then Committee recommended the Department develop a much better understanding of these risks, and ensure the framework governing local government capital finance reflected developments in the sector.21 The Department worked with the Chartered Institute of Public Finance and Accountancy (CIPFA) to ensure changes to CIPFA’s statutory prudential and treasury management codes by December 2017. The codes are key parts of the framework governing local authority borrowing and local authorities are required to “have regard” to them. The Department revised its own statutory guidance on local authority investments by February 2018.22 Local authorities bought a further £5.8 billion worth of commercial property in 2017–18, 2018–19 and the first half of 2019–20. In May 2020, the Department told us that its changes had not had “all the effect” that was needed and further changes were required. We concluded the Department had continued to be complacent about the true nature and scale of the issue and that the ‘soft’ approach of guidance changes had failed.23 The Treasury made changes in November 2020 to stop local authorities borrowing from government if they make commercial property purchases. The Department told us these changes had “a very significant impact on borrowing”.24
Government Response
Not Addressed
HM Government
Not Addressed
2.1 The government agrees with the Committee’s recommendation. Target implementation date: Summer 2022 2.2 The government published its policy paper Local authority capital finance framework: planned improvements on 28 July 2021. This sets out the range of measures being taken to make sure that local authority investment decisions are compliant with the Prudential Framework. The government worked with CIPFA on the updated Prudential Code, which more explicitly limits investing primarily for profit. The government intends to update its own Statutory Guidance on Local Government Investments in 2022. In addition, where authorities have approached the government for financial support, and where capital practices have contributed to the financial failure, the government has made reducing risk part of the conditions of support. 2.3 In the July 2021 document, the government set out its intent to consult on strengthening the Minimum Revenue Provision (MRP) duty in response to the issue of some authorities not making adequate provision to repay debt, an issue identified by the NAO and the Committee. The department’s consultation on strengthening compliance with the MRP duty concluded on 8 February 2022. The consultation sets out proposed changes to regulations. The proposals are designed to stop the two main mechanisms authorities use to avoid an MRP charge: using the proceeds from asset sales instead of meeting the cost from budgets; and, not making MRP on debt that was used to purchase commercial assets. The department plans to publish its response in spring 2022. The department will consider, in discussion with HM Treasury, what further actions are needed for those local authorities that remain non-compliant with the MRP duty.