Rate This Page
PrintPrudential Code
The Prudential Code for Capital Finance in Local Authorities
The Prudential framework was first introduced in 2004, replacing the previous complex regulatory regimes.
It was fully revised in 2009 following a period of consultation and now incorporates changes as a result of the move towards International Financial Reporting Standards It emphasises the links with strategic planning and asset management. The Prudential framework requires local authorities to demonstrate that its capital expenditure is prudent, affordable and sustainable. The framework is underpinned by a set of Prudential Indicators.
The following factors should be taken into account:
- service objectives, i.e. strategic planning for the authority
- stewardship of assets, e.g. asset management planning
- value for money, e.g. option appraisal
- prudence and sustainability, e.g. implications for external borrowing and whole life costing
- affordability, e.g. implications for council tax
- practicality, e.g. achievability of the plan
In order to assist in the practical implementation of the Prudential Code there are two sets of guidance.
Practitioners Guide to Capital Finance in Local Government
The publication uses worked examples throughout to allow practitioners to apply theoretical concepts to practical examples. In carrying extracts from the relevant legislation and the Prudential Code, the aim has been to produce a one-stop guide for both those with previous local authority capital finance knowledge and those new to the subject. Key to all those involved in capital finance will be the comprehensive guidance on the application of the new MRP rules.
The guidance concentrates on the application of the Code in respect of issues of affordability, prudence and sustainability. It is commended to finance professionals within local government and to others, especially service and property managers, seeking a thorough understanding of its technical application.
Long term planning can exploit the new capital freedoms
Writing in the June 2005 edition of Spectrum, Stephen Hughes, Strategic Director of Resources, Birmingham City Council, suggests long term business plans to exploit the freedoms available under the prudential framework.
An evaluation of the links between capital accounting and the prudential framework
Download the discussion paper: The Role that Depreciation Could Play in Local Government Finance
Option appraisal - discount rate
Considering what discount rate to use for option appraisals? The following extract from the CIPFA Prudential Code - guidance notes for practitioners offers the following advice
Compliance with the requirement of the Code to have regard to value for money when setting the prudential indicators will also demand that local authorities have effective systems of option appraisal for individual projects. Option appraisal had become a rarely used skill within local government as a consequence of the absence of a genuine local choice as to whether to adopt revenue or capital based options for service delivery. Under the prudential system it will again be both possible and necessary to appraise the merits of new capital investment.
Each local authority will also need to make its own decision as to whether it would be more appropriate to use the weighted average or the marginal cost of capital. The essence of the question is whether the cost of funds should be taken as the weighted average costs of each type of capital funding or the specifc costs of the additional capital being raised to finance a particular project. In practical terms this decision rests on whether the new investment and its funding will remain separately identifiable. In local authorities the integrated or holistic approach taken to borrowing means that the borrowing used to fund a particular project does not have a distinct identity so the weighted average cost of capital is likely to be chosen. It is possible that, for some other methods of financing capital investment, the marginal cost of capital may be the appropriate basis for net present value calculations. These are matters that must be determined by the professional judgement of the CFO.
Where an authority has subsidiary commercial undertakings, the choice of a discount rate can be even more problematic as it should reflect the cost of capital to that organisation rather than to the local authority that owns or controls it. Since the organisation has an identity separate from its owners, which may be the local authority that provides capital, there is scope for considering local discretion in setting a discount rate.
In order to avoid extensive debate about the appropriate interest rate, a practical course of action is to use a range of rates, to test whether they make any difference to relative priorities. In many cases there may be little difference in the pattern of cash-flows. Where relative priorities are changed a judgement can be made as to the most 'realistic' discount rate, with other rates being introduced via sensitivity analysis.
Up, up and away - how local authorities are using their prudential borrowing
powers
Paul Gosling explores this in his 10 December 2004 article in Public Finance.
Read the article.
CIPFA welcomes 'important step forward' in local government accounting procedures
CIPFA has welcomed changes, announced in October 2004 by the local government minister Nick Raynsford and to be brought in over the next few years, which will mean that depreciation will hit the bottom line in local authorities' accounts and that Government financial support for the maintenance of assets will be linked to the cost of holding and maintaining them.
CIPFA's local government finance and policy assistant director, Maureen Wellen, said: "This is something that CIPFA has strongly recommended, provided that the affordability issue can be satisfactorily addressed." Click here to view the full press release.
Delivering regeneration for the City of Glasgow: exercising freedom within boundaries
Glasgow's renaissance in the 1980s and 1990s has been one of the major success stories in UK urban regeneration. In an article in the September 2004 Spectrum, Lynn Brown of Glasgow City Council celebrates these successes, acknowledges that major challenges remain and discusses Glasgow's approach to capital investment for regeneration in the climate of the new prudential framework.
CIPFA's Prudential Code paves the way for improved local authority asset management
CIPFA issued a press release welcoming the announcement that the prudential framework would commence in England from 1 April 2004. Under the new arrangements local authorities determine their own programmes for capital investment in fixed assets that are central to the delivery of quality local public services.
To read the full press release, please click here.
Prudential Code approved by the CIPFA Council
The Institute Council on 11 September approved the CIPFA Prudential Code for Capital Finance in Local Authorities. The final Code incorporates the recommendations made at the meeting of the Prudential Code Steering Group on 8 July 2003. The minutes of that meeting can be found on the PCSG web pages. The Code was published in October 2003.
CIPFA Technical Enquiry Service
The Technical Enquiry Service provides information and advice to councils on the new prudential framework for capital finance, CIPFA courses and publications; website addresses; and references to statute.