NEED TO KNOW
NEWS ANALYSIS The proposals aim for a sustainable approach to commercial activity
TREASURY MANAGEMENT
CIFPA proposes code revisions Tightened wording aims to further restrict councils’ ability to borrow money for commercial property investments aimed at raising revenue By Oliver Rudgewick
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n February, CIPFA launched separate consultations on significant amendments to two of its main codes – the Prudential Code and the Treasury Management Code. Both could have major impacts on how authorities invest their money, according to experts. Currently, the Prudential Code states that “authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of the extra sums borrowed”. CIPFA is keen to change “purely” to “primarily”, to mirror wording used by the Treasury in November when it banned borrowing primarily for yield purposes through the Public Works Loan Board. CIPFA’s proposals would cover all borrowing from all sources. “The change outlined is aimed at addressing misinterpretation by some local authorities, which pushed the boundaries of the code by engaging in excessive borrowing to fund commercial activity,” according to CIPFA’s senior
technical manager, Richard Lloyd-Bithell. However, one local authority finance chief worries that the proposal could stifle authorities’ abilities to raise funds to help fund frontline services. “The biggest issue is recognising that councils do have to look at alternative funding streams,” Adrian Rowbotham, chief officer for finance and trading and Section 151 officer at Sevenoaks District Council, tells PF. “It closes the door without addressing the real issue – funding for local government.” However, Lloyd-Bithell says restricting councils from seeking to raise revenue from commercial property investment is vital.
“The proposals are about ensuring a measured and sustainable approach to commercial activity,” he says. “We want to address a minority of the sector taking disproportionate levels of debt for yield investments.” Proposed new wording makes it clear that the new restrictions would not cover borrowing where the
We completely recognise that within a regeneration project there will be commercial activities that help with delivering services
primary aim is “rooted in the function of the authority and [where] the making of the return is incidental to the function– eg, regeneration”. Lloyd-Bithell says: “We completely recognise that within a regeneration project there will be commercial activities that help with delivering services.” CIPFA also proposes that councils create a ‘liability benchmark’ indicator, based on predicted future cashflows and minimum revenue provision for debt repayments. David Blake, strategic director at Treasury adviser Arlingclose, says: “Authorities have had this in their toolbox for many years now, and it is something we find very useful. It is good to
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