Capital Finance Framework
- Meeting of Finance Scrutiny Committee, Monday, 22 November 2021 7.00 pm (Item 20.)
- View the background to item 20.
Report of Head of Finance.
The committee received a report of the Head of Finance. The Head of Finance introduced the report. This paper provided an update to members regarding government policy and regulations.
Since 2020 there had been a number of reviews and reports that commented on the adequacy of the capital finance framework and in July 2021 the Ministry of Housing, Communities and Local Government (subsequently renamed the Department for Levelling Up, Housing and Communities - DLUHC) published a policy paper titled ‘Local authority capital finance framework: planned improvements.’
The paper set out the actions proposed to address the perceived inadequacy through a ‘lines of control’ model. The model could be found in the Capital Finance Framework, paragraph 4.1.5 and the planned actions that underpinned the model were as follows:
· Improving the role of DLUCH as an effective steward of the local government capital finance system (detect and manage)
· Improving local practices and capability (detect and manage)
· Putting in place appropriate tools to intervene with local authorities where necessary (manage)
· Ensuring that the Capital framework is fit-for-purpose to constrain financial risk and drive sound decision making (prevent)
Full details could be found in the Capital Finance Framework, paragraph 4.1.6.
There were also proposed updates to the Prudential and Treasury Management Codes of Practice. This included proposals to amend reporting requirements, including increasing the required frequency of reporting on prudential indicators to members from at least twice a year to quarterly and the reinforcement of existing Treasury Management guidance that required cash to be managed as ‘one pot’. The latter point was supported by the creation of new Treasury Management prudential indicator – the ‘Liability Benchmark.’ The draft guidance for calculating the ‘Liability Benchmark’ had been seen by the Head of Finance and would form part of the Treasury Management Strategy and the Capital Investment Strategy which would go before Cabinet in January 2022.
Public Works Loans Board lending terms and conditions had been updated in November 2020 along with guidance for applicants. The guidance was later revised in August 2021; key points are as follows:
· The revised terms and conditions prevented the use of PWLB borrowing to finance investments made on a debt for yield basis; any income must be invested in causes specifically linked to the core functions of the local authority.
· Any local authority’s capital expenditure after 26 November 2020 must comply with the revised terms or lose access PWLB borrowing, even if funded from other resources.
· Selling an existing investment to acquire another investment asset would result in access to PWLB being withdrawn; however, authorities with commercial property may invest in the repair, renewal and updating of their existing commercial properties.
· Investment in an asset for regeneration purposes would be allowed but any surplus income must be invested in causes linked to the core functions of the local authority.
Under the Capital Finance and Accounting Regulations 2003, local authorities must set aside MRP for the repayment of debt. This is an annual charge to the revenue account. A consultation was expected to be launched shortly in respect of proposed strengthening of the regulations moving forward. Until the outcome of the consultation was known, it was not possible to assess any potential financial impact.
The Chair asked when the conclusion of the process was likely to be. The Head of Finance responded saying that draft guidance was expected in December 2021 and the council’s draft Treasury Management policy which was due to go out on 25 November 2021 noted that changes may be made at a later date due to these proposed changes to the Capital finance Framework. With regards to the Treasury Management and Prudential Code changes, there was an expectation of a soft implementation period in year 2022-23 with full compliance expected from 2023-24.
The MRP timeline would be different due the need for legislation. This meant that it was not likely to be implemented before April 2023.
Councillor Saffery asked whether the government had provided any indication of alternative forms of revenue for councils and whether the new Secretary of State was likely to impact the proposed changes. The Head of Finance informed the committee that there had been no significant changes brought forward by the Secretary of State to date. With regards to the council shifting to alternative revenue streams, the government had taken the view that local authorities has taken too much risk with investing in commercial assets, however this was not true across the board and formed part of the criticisms posed by the local authorities in response to the proposed changes. There was also the idea that it may not be right for local authorities to make use of cheap borrowing from PWLB to invest in commercial property as this would inflate the property market. This was thought to be part of the reasoning for the government’s proposed changes. This being said, the Head of Finance raised the issue of the income gap that would undoubtedly be increased if local authorities had to divest commercial assets and the impact the decreased revenue would have on service delivery.
The Portfolio Holder asked the Head of Finance if any authorities had actually fallen into financial difficulty due to poor commercial investment. The Head of Finance explained that some authorities had faced some financial challenges with investments into joint ventures and wholly owned companies, however the council commercial portfolio had managed to withstand the impact of COVID and was still financially viable.