Chartered Institute of Public Finance and Accountancy

Minutes

Committee PRUDENTIAL CODE STEERING GROUP
Date 31 May 2001
Venue Conference Room, CIPFA, 3 Robert Street, London WC2N 6RL

1 APOLOGIES

1.1 Apologies were received from Ian Brooke, Nick Buxton, Tim Day, Peter Derrick, Martin Easton, Richard Harbord, Ian Jackson, John Layton, Peter Morley, Paul Mueller and David Thomas.

2 INTRODUCTION TO THE WORK OF THE STEERING GROUP

2.1 The Chairman expressed a welcome to members of the Steering Group to the first meeting of the Group. The changes proposed to the local authority capital finance system are fundamental and CIPFA has been charged with a significant role in this - the development of the Prudential Code. He wanted all members to participate in a healthy dialogue concerning the issues facing individual stakeholders, so that the development of the Code is better informed as a consequence.

2.2 The Chairman introduced the first report (PCSG 1 00/01) on the protocol, terms of reference and composition of the Prudential Code Steering Group (PCSG). It is hoped that the Prudential Code will incorporate England, Wales and Scotland. It is a formidable task but he sensed genuine goodwill and support for the development.

2.3 The terms of reference are brief and encapsulate what the PCSG needs to do. The PCSG will report to the CIPFA Treasury Management Panel and through the Panel to the Institute's Technical Committee and, to a lesser extent, the Local Government Committee.

2.4 The initial timescales are tight, with a lot of development work required quickly in order to have a draft Code by November. Timescale beyond that will depend on how quickly other parts of the system, notably the legislative framework, develop.

2.5 The report on protocol, terms of reference and composition was noted and it was agreed that any detailed points would be picked up during the course of the meeting and that the Group would turn to the reports on statutory background.

3 STATUTORY BACKGROUND - H M TREASURY

3.1 Frances Houston tabled and introduced paper PCSG 2 00/01 on a national limit on the rate of increase in local authority debt. It was noted that the background to the paper had already been discussed in the Technical Sub Group of the Capital Programmes Working Party. A national limit is required in order to smooth transition to a new system, and in order to be able to act as a constraint if the economy as a whole requires it, with the emphasis being on the first of these. Much of the detail of the new system has yet to be developed and it will be clearer how a national limit should operate once more details of the system are known. It is important that the national limit is simple and clearly aligned with what it is seeking to measure - ie actual external borrowing plus any other "on balance sheet" transactions gross of investments. It would include both supported (by external government finance) and unsupported borrowing. It is envisaged that the DETR will decide appropriate allocation and monitoring arrangements. Work on the 2002 spending review starts at the end of this year and the new system ought to feed into that.

3.2 Pam Williams stressed that the method of allocating headroom will be consulted on, and that current thinking is for a broad allocation rather than a bid procedure.

3.3 Local authority representatives were concerned that a process that allocates down a national limit to individual local authorities would not be conducive to a prudential system. It is important for local authorities to set their own prudential limits rather than having these limits set for them through a national allocation, which could in turn be interpreted locally as targets. It is important that the Prudential Indicators set are the authority's.

3.4 Representatives from Wales and Scotland expressed concerns over how the national limit will be applied in Wales and Scotland in the context of devolution. It was noted that in Scotland, COSLA will be making representations that the definition of public sector borrowing ought to be changed. It was agreed that separate discussions will be required for how any national limit will operate in Wales and Scotland.

3.5 It was noted that local authorities throughout Great Britain will be starting from very different opening positions and that, in all cases, current debt can be considered as having been sanctioned by the government.

3.6 Mike Weaver commented that the current administration is seeking to renew public service infrastructure. Whilst control and administrative issues have to be sound, it is important not to lose the wider picture of the need for investment in public service infrastructure.

3.7 Other parts of the system, for example, asset management plans, are encouraging longer-term capital planning. However, it was noted that the current lack of flexibility and the limited resources available through the single pot initiative disincentive long term planning. A more flexible system will encourage more resources to be put into longer term planning. This in turn will inform the debate on whether it is necessary to impose a national limit.

3.8 It was also noted that affordability is a key factor in the new system. This involves a change of mind set - instead of spending up to a nationally set limit, for local authorities to work to what is affordable, practical and required.

3.9 Frances Houston stressed that the expectation is that the national limit will be a light touch control. It is difficult to define how the national limit will operate until further details of the new system are known. The work of the PCSG in developing a Prudential Code has the opportunity to influence decisions on how the national limit will operate and this fact was welcomed by the Group.

4 STATUTORY BACKGROUND - DETR

4.1 Pam Williams introduced paper PCSG 3 00/01, a simpler capital finance system - replacing the Local Government and Housing Act 1989, Part IV. This report has been considered by the Capital Programmes Working Party. It is the basis that has been agreed so that instructions can be drafted for legislation. There are certain key elements of the system that need to be provided by central government, such as the ability to borrow and to invest. The expectation is that for most things reliance can be placed on accounting standards to define for example credit arrangements, but there is a need for a power of statutory over-ride. It is expected that this will need to be used, for example, in the treatment of some leases and for capital receipts. It is not yet clear exactly where the boundary between legislation and the Prudential Code should lie, for example on the process for setting and approving prudential indicators, and links to the asset management plan. This will be a technical matter on which lawyers will advise. A process involving full Council is envisaged, both for the authority's capital strategy and prudential indicators. This could logically be part of the budget setting process, with freedom to revise in-year.

4.2 The DETR was asked to consider the implications for those local authorities who are education authorities of borrowing and credit approval type activity by schools; also whether national parks should be included within the prudential system.

4.3 It was agreed that the framework proposed in paper PCSG 3 00/01, combined with monitoring by external auditors, would provide a robust framework.

5 STATUTORY BACKGROUND - NATIONAL ASSEMBLY FOR WALES

5.1 Lisa James introduced paper PCSG 4 00/01, secondary legislation in Wales - local authority capital finance. Wales will be covered by the same primary legislation as England. The National Assembly for Wales has powers as regards secondary legislation. In addition, primary legislation may be written in such a way that it comes into force at a different time, to be determined by the National Assembly. The Assembly has published its own consultation document 'Simplifying the System: local government finance in Wales'. The responses to the capital proposals were very positive. Work is progressing on a joint White Paper for England and Wales later this year.

5.2 It was noted that whilst in England ministers of the current administration had confirmed their intention to legislate, no such announcement has been made in Wales. However, the matter has been discussed at Cabinet and the relevant papers are available on the Internet.

6 STATUTORY BACKGROUND - SCOTTISH EXECUTIVE

6.1 Mary Munro tabled and introduced paper PCSG 6 00/01, local authority capital finance. Currently Scotland is not so heavily regulated with respect to capital finance as in England and Wales. There is a relatively simple system based on an annual capital consent letter. This means that ministers have the flexibility, should they decide to do so, to make significant changes without recourse to primary legislation. If a decision is taken to proceed with a prudential framework in Scotland, the change could most probably be implemented more quickly than in England and Wales. Whether there would be a need for a 'long stop' national limit in Scotland and how it would operate is not yet clear.

6.2 It was noted that there is concern in Scotland from some authorities that are currently in a negative equity position over how the Prudential Code will impact on them. It was noted that this would also be relevant elsewhere.

6.3 It was noted that representatives from Scotland are 'signed up' to participating in the development of the Prudential Code.

7 OUTLINE OF PROCESS AND ISSUES TO BE DEVELOPED FOR THE PRUDENTIAL CODE

7.1 The Secretary introduced paper PCSG 5 00/01, outline of the process and issues to be developed for the Prudential Code. The work for the development of the Prudential Code is within the agreed work programme for CIPFA's Policy and Technical Directorate. It is within the work programme of the Treasury Management Panel and the Panel has established the Prudential Code Steering Group, with agreed protocol, terms of reference and composition. The timetable for the development of the Code is outlined in the report and there is a tight timescale in order to develop a draft Code by November. The timescale beyond that is dependent upon the statutory framework. DETR is providing resources for the development of the Code, which has enabled the dedication of a significant amount of the Secretary's time to the Code. The process for the development of the Code is through CIPFA's governance and procedures, and the final Code will need to be approved by the Institute Council. CIPFA's responses to the consultations on local government finance in England, Wales and Scotland had outlined the process for the development of a possible Prudential Code. They had identified three main issues for the Code:

(a) a prudential system and external debt
(b) a prudential system and capital commitments
(c) a prudential system and treasury management.

It was proposed that the content for the Prudential Code be considered in these three sections and that initially, three reference groups of members of the PCSG be established to consider these by email before the next meeting. It was envisaged that the reference groups would comment on initial drafts to be undertaken by the Secretariat in the case of (a) and (b), and by Peter Morley acting as a consultant to the Secretariat in the case of (c). An outline of the issues proposed to be covered in the three papers was given in paper PCSG 5 00/01.

7.2 On timescale, it was stressed that whilst the current administration had confirmed its intention to proceed with legislation, there was no assumption that the current administration would be elected or, if so, if the legislation would be in the first Queen's Speech of the new Parliament. The timescale may need to be reviewed in light of legislative developments.

7.3 It was agreed that it is important to have first drafts for comment as a practical way of proceeding. Some concern was expressed that this would limit the input of members to the development of the Code. It was stressed that whilst some key issues are questions of definition, which are technical issues, many other are issues of process that have in no sense yet been decided.

7.4 It was queried why credit ratings are on the list of issues to be considered and it was noted that this subject will inevitably arise as part of the prudential developments, and therefore ought to be dealt with.

7.5 It was noted that the manner in which any statutory replacement for the Minimum Revenue provision (MRP) in England and Wales interfaces with the Prudential Code will need to be established.

7.6 It was agreed that the interface between the Code and capital strategies will need to be considered. In particular, it was noted that affordability is not the only relevant issue. Capital programmes must address strategic plans and they must be capable of being implemented, ie practical.

7.7 It was agreed that the three reference groups proposed should be established and that individual members will email the Secretary with their choice of group(s) within 48 hours.

8 IDENTIFICATION OF ANY OTHER MATTERS WHICH NEED TO BE CONSIDERED WITHIN THE PRUDENTIAL CODE

8.1 Pam Williams commented that the requirements of ring fenced and self financing accounts, notably the Housing Revenue Account but potentially others, will need to be addressed during the development of the system.

8.2 Peter Swaby queried whether capital charges will have a role in the prudential framework. It was noted that capital charges are part of the definition of the total cost of services. Also, the issue links with the next item on the agenda, depreciation.

9 THE ROLE OF DEPRECIATION

9.1 The Secretary reported that CIPFA has indicated to the government that, in the longer term, depreciation could play a useful note in a new prudential system. The PCSG were asked to agree to receive a report on this at its next meeting. Stephen Sheen would undertake the initial drafting of this, as a Consultant to the Secretariat.

9.2 Pam Williams commented that, as paper PCSG 3 00/01 makes clear, it is intended that any statutory code for the replacement of the MRP will pave the way in the future for a, probably phased, move to the making of a proper depreciation provision.

9.3 It was agreed that the potential role for depreciation in a new prudential system should be further explored and the PCSG agreed to receive a report on this at its next meeting.

10 DATES FOR NEXT MEETINGS

10.1 Thursday 26 July at 2.00 pm
Friday 21 September at 10.30 am.
All meetings will be held at CIPFA, 3 Robert Street, London WC2N 6RL, unless separately notified.