Fit for purpose in a complex world

25 Oct 17

CIPFA aims to strengthen risk management and due diligence by uniting its prudential and treasury management codes. Alison Scott explains. 

When I first trained, local authorities were told exactly how much they could borrow and, on the whole, mainly borrowed for service-based assets financed by loans from the Public Works Loan Board. How times have changed.

Since the Prudential Code for Capital Finance in Local Authorities was introduced, councils have been able to determine their own borrowing limits provided that their borrowing is prudent and affordable.

In addition, in recent years, ‘commercialism’ has come to the fore.

What authorities mean when they talk about commercialism varies considerably. For some, it is around providing services through different vehicles; for others, it is about using commercial structures to leverage investment in their areas and generating income for services.

The driver for all is the same – falling resources, the withdrawal of central government support and a need to invest in their areas and support economic growth.

The variety of approaches and scale of investment by some authorities brings with it new governance issues.

It is vital that, when making decisions, local authorities have access to specialist skills and advice, understand all the risks involved and ensure that the total risk remains proportionate to the overall resources available.

This presents a challenge for the professionals as these decisions have to be made by elected members who may have neither the background knowledge to understand the technical details nor the resources to create lengthy due diligence processes – matters that are best placed with officers.

It is against this background that the recent consultation on the prudential code and the Treasury Management Code took place.

It put forward two main changes:

● The introduction of a capital strategy to provide full council

with a concise, accessible view of the authority’s approach to

borrowing, investment and treasury management, with a focus

on risk management

● The extension of best practice in treasury management to cover

all investments to improve due diligence and ensure risks are

managed effectively.

Early feedback and analysis of responses has raised a number of issues where, with hindsight, the intentions of CIPFA’s capital and treasury management panel may not have been clear.

The capital strategy is intended to pull together reporting requirements around both codes into a single overarching structure, not duplicate what is already required.

The panel was clear it did not want to place undue burdens on local authorities – it wanted to improve councillors’ understanding and provide a holistic view.

It also accepts that, while it would encourage all local authorities to make progress in considering their strategy in 2018, it is unlikely that all local authorities will be in a position to produce a full capital strategy until 2019 given the planning periods for capital programmes and investment strategies.

In extending the Treasury Management Code to all investments made for commercial gain, the panel did not intend that capital expenditure on income-generating assets should be brought within treasury management teams; the aim was that the discipline around the consideration and management of risk and enhanced governance and due diligence arrangements should apply to decisions to purchase these assets and during ongoing review.

Treasury teams, along with property professionals, have a specific skills and knowledge that authorities may wish to use when they develop processes and consider investment decisions.

In proposing what is a more fundamental change to the two codes, CIPFA’s aim is to support and complement statutory investment regulations and guidance to provide a regime that remains fit for purpose in a more complex environment.

 

 

 

A supportive code

The framework established by the prudential code should support:

● Local strategic planning

● Local asset management planning

Proper option appraisal.

The objective of the prudential code is to provide a framework for local authority capital finance that will ensure for individual councils:

● Capital expenditure and investment plans are affordable

● All external borrowing and other long-term liabilities are within prudent and sustainable levels

● Treasury management and other investment decisions are taken in accordance with professional good practice.

When taking decisions concerning the latter three points, the framework will ensure councils are accountable as the information will be transparent.

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