Stronger decisions in a risky world

1 Feb 18

Councils are having to be bold and brave in how they deliver services. The new prudential code addresses the cumulative risk inherent in this, says CIPFA's Jo Pitt.

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In December 2017, CIPFA published the revised Prudential Code for Capital Finance in Local Authorities and Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes.

Since it was first issued in 2004, the prudential code has always been about supporting those who take decisions on capital investment.

This updated version follows an extensive consultation and review, which took into account comments from voices across the local government and public finance landscape. It was of paramount importance from the outset that the voices of those who use the prudential code were included in the updated version.

The new prudential code has to reflect the very different public sector landscape finance leaders are now in.

This landscape has gone through close to a decade of austerity and financial uncertainty, but it is also one of reinvention and, increasingly, of local decision making. Combined, these four factors mean that local authorities are being asked to be bold and brave in the way they provide public services.

However, being bold and brave invariably means thinking and doing things differently and, for local government, this has often resulted in greater risk.

Increased risk is not in itself something that needs to be avoided, but it automatically raises the question of what local government considers an acceptable overall balance between risk and return. It’s that risk conversation that dominates discussions in the public sector. Individual local authorities and other stakeholders, both private and public, all have a view. Individual risk appetite varies between organisations, influenced by factors such as funding, leadership or political ambition.

The new prudential code seeks to improve the understanding of that cumulative risk at the individual local authority level. 

It has been designed to ensure that capital expenditure plans are affordable, prudent and sustainable, and that treasury management decisions are taken in line with good professional practice.

It is important to remember that the code is not about the investment decision itself but supports local strategic planning, local asset management planning and proper option appraisal.

Every organisation must ensure it has the resources and skills in place to have a full understanding of the risks involved and how they will be managed in both the short and long term and be able to demonstrate that decisions are being made that are consistent with capital strategy.

As a consequence, the update has taken almost a year from the initial consultation discussions and this reflects the importance placed on getting it right for the sector.

Getting it right ensures that when an organisation has fulfilled the objectives set out within the framework, it has demonstrated it is achieving a prudential approach to capital expenditure, investment and debt.

The new publication recognises this by reinforcing the fact that effective financial planning, option appraisal, strong governance and risk management all support good decision making.

It does not, however, work in isolation and part of the success of the code includes ensuring it continues to be integrated within a wider statutory framework, as this has enabled capital investment to remain a matter for local decision making.

Strengthening the code in light of the changing face of public sector delivery and addressing areas of public concern will enable it to continue to play a key role in capital finance in local authorities.

By following the established framework, councils will continue to determine their own capital investment programmes and the benefits of these will be seen in the delivery of high-quality services to the public for many years to come. 

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