Chartered Institute of Public Finance and Accountancy

Agenda

Committee PRUDENTIAL CODE STEERING GROUP
Date 10 May 2002
Subject Update on the Wider Prudential Framework
Venue Council Chamber, CIPFA, 3 Robert Street, London, WC2N 6RL

PURPOSE

To receive an update on the wider prudential framework from:

LOCAL AUTHORITY CAPITAL FINANCE - SCOTLAND

The Consultative Document - Renewing Local Democracy: The Next Steps - published on 27 March 2002 outlined the Executive's proposals for the reform of the local authority capital finance system.

Extract from Renewing Local Democracy : The Next Steps - March 2002

  1. Ministers also wish to consider other ways in which they can make it easier for councils to do their business, and encourage councils to take forward the modernisation agenda contained in the (Local Government in Scotland) Bill. To achieve this, local government needs to invest in the future - in new and improved forms of service delivery; infrastructure that meets the needs of the 21st century; information and communications technology to enhance their accessibility to citizens.

Capital Expenditure

  1. Ministers want to provide a framework for capital investment which supports the power of well being and the duty of Best Value; gives local authorities more flexibility and responsibility; enables them to make real choices and to make full use of the various options for financing improved services, including private finance; and requires authorities themselves to account for their decisions about the level and nature of the capital investment they undertake.

  2. For many years local authority capital expenditure has been controlled by central government. Local authorities require the consent of Scottish Ministers before they can incur capital expenditure. The system in place is largely concerned with limiting the amount of capital expenditure.

  3. Ministers therefore propose to abolish the existing system of capital consents. It will be replaced by a system under which:

    4. 4.1 Local authorities would have the power to decide their own capital investment subject to certain conditions, principally that they make those decisions in a manner prescribed in regulations made by Scottish Ministers.

    4.2 The regulations would require local authorities to set local prudential indicators (within a centrally agreed framework which would draw on the Chartered Institute of Public Finance and Accountancy's Prudential Code for Capital Finance in Local Authorities) establishing what they could afford to spend and borrow; to publish these indicators; and to limit their investment and borrowing to what could be afforded having regard to these indicators.

    4.3 The setting of the indicators and the consequent decisions on spending and borrowing would be audited and publicly reported.

    4.4 Ministers would have a reserve power to limit capital spending in certain circumstances, for example if an authority failed to apply the self-regulating approach properly; or to prevent an unsustainable surge in total local authority borrowing.

    4.5 Ministers would have powers to support national priorities through the award of capital grant.

  4. Subject to Parliament enacting the necessary changes to the law in the Local Government in Scotland Bill, Ministers will introduce these new powers and responsibilities at the beginning of 2004?2005. The Executive will work closely with councils, with Audit Scotland and other interested parties in preparation for implementation, and will consult further on the details.

Housing

  1. These proposals for a new system for encouraging capital investment come at a time when there is much change in housing. Local authorities are currently preparing for new responsibilities with regard to housing. These include the preparation of local housing strategies, homelessness strategies, supporting people and the transfer of responsibility for development funding. Communities Scotland, in its role as regulator, will be starting to assess councils' performance on housing management. In addition, a number of councils are preparing proposals for the transfer of their stock to community ownership. We believe that this is not the right time to introduce such a fundamental change to housing finance. We are continuing to look at ways to ensure the most effective way of supporting capital investment in social housing, including community ownership.