Capital finance and companies

November 13th, 2017

CLG is consulting, from 10 November to 22 December 2017, on changes to the prudential framework of capital finance, set out in the Local Government Act 2003, Regulations and CIPFA Codes, and in particular statutory guidance on local authority investments and guidance on minimum revenue provision, applying to local authorities in England.

The Statutory Guidance on Local Authority investments (“Investments Guidance”) covers proper practices that local authorities are required to follow when making investment decisions. It gains its statutory status from Section 15(1)(a) of the Local Government Act 2003, under which local authorities are required to have regard to such guidance as the Secretary of State may issue.  The Investments Guidance was last updated in 2010, following Parliamentary inquiries into local authority investments in Icelandic Banks. As a result the Investments Guidance was very focused on investments in financial institutions.

Over the past seven years, the economic and regulatory landscape has changed significantly. The prolonged low interest rate environment has meant that investing spare cash in banks will not generate a return. In addition, the introduction of the General Power of Competence has given local authorities far more flexibility in the types of activity they can engage in.  The changes in the economic and regulatory landscape have led the sector to consider different and more innovative types of investment activity. As a result the Government feels that it is time to look into updating the guidance as part of the more general update of the statutory codes comprising the prudential framework.

The revised guidance retains the requirement for an Investment Strategy to be prepared at least annually. However, in recognition that the CIPFA consultation on the Prudential Code introduces a new requirement for local authorities to prepare a Capital Strategy, the revised guidance specifically allows the matters required to be disclosed in the Investment Strategy to be disclosed in the Capital Strategy.

The Government proposes introducing a new requirement to include quantitative indicators that will allow assessment of exposure. The Government does not propose to specify particular indicators or thresholds.

The Government proposes the following definitions for non-financial assets:

• Security: the revised guidance recognises that a local authority will normally have an asset that can be used to recoup capital invested. Therefore, the revised guidance requires local authorities to consider whether the underlying asset is impaired and if it is, to detail the actions planned or in progress to protect the funds invested.

• Liquidity: the revised guidance requires local authorities to set out the procedures for ensuring that funds invested in a non-financial asset can be accessed when they are needed.
The Government proposes requiring local authorities to disclose their dependence on commercial income to deliver statutory services and the amount of borrowing that has been committed to generate that income.

The revised Guidance requires additional disclosure by local authorities who borrow solely to invest in revenue generating investments.

The Investments Guidance has always required disclosure of the steps Treasury Management professionals have taken to ensure that they have sufficient knowledge
and expertise to be able to take sensible decisions. The Government believes that it is
sensible to extend this requirement to statutory officers, Councillors and other key
individuals in the decision making process.

The Capital Finance – Guidance on Minimum Revenue Provision (“the MRP Guidance”) contains statutory guidance that local authorities are required to have regard to when calculating the annual amount of MRP to put aside. The MRP Guidance gains it statutory status from Section 21(1A) of the Local Government Act 2003, which allows the Secretary of State to issue guidance “about the accounting practices to be followed by a local authority, in particular with respect to the charging of expenditure to a revenue account”.  Local authorities are normally required each year to set aside some of their revenues as provision for debt. More precisely, the provision is in respect of capital expenditure financed by borrowing or long term credit arrangements.

The MRP Guidance was last updated in 2012 following the introduction of HRA self –
financing.  The Government feels that it is time to look into updating the guidance as part of the more general update of the statutory codes comprising the prudential system.  There are four main changes proposed from the previous guidance:-

• Definition of “prudent provision”
• Meaning of a charge to the revenue account
• Input of changing methods of calculating MRP
• Introduction of a maximum economic life of assets.

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