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PrintPrudential Code
The
Prudential Code for Capital Finance in Local Authorities
CIPFA has played a key role in the development of the prudential framework for capital investment by local government. This replaces the previous complex regulatory frameworks in England, Wales and Scotland. The new system is one based largely on self-regulation by local authorities. At its heart is the CIPFA Prudential Code for Capital Finance in Local Authorities. This is potentially the most significant and positive change in local authority finance for decades and will enable authorities to take greater control of their investment in the fixed assets that are central to the delivery of quality local public services. The prudential framework commenced in local authorities throughout Great Britain in April 2004.
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.
Terminology
The 2004 SORP, the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom, makes some changes to terminology. These are:
- the Fixed Asset Restatement Reserve is renamed as the Fixed Asset Restatement Account
- the Capital Financing Reserve is renamed as the Capital Financing Account
- 'Deferred Charges' has been deleted as a heading from the Balance Sheet because any unamortised deferred charges properly carried in the balance sheet must correspond to a recognised asset category, eg intangible asset, and should be disclosed as such.
Accordingly, references within the Prudential Code to the Fixed Asset Restatement Reserve, Capital Financing Reserve and the Deferred Charges element of the Balance Sheet should be taken as reading the Fixed Asset Restatement Account, Capital Financing Account and Intangible Assets respectively.
The Prudential Code for Capital Finance in Local Authorities: Guidance Notes for Practitioners
The
prudential framework for local authority capital investment, introduced through
the Local Government Act 2003 and the Local Government in Scotland Act 2003,
is having a real and beneficial impact on service delivery by supporting strategic
planning for capital investment at a local level.
CIPFA has published further guidance on the application of the Prudential Code that underpins the new framework, in particular identifying how the Code interfaces with the legislative context in which it operates. The guidance also reflects the experience of practitioners during the first application of the Code.
The guidance concentrates specifically on the application of the Prudential 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 detailed understanding of its technical content.
For existing purchasers of the Interim Guidance Notes, these new Guidance Notes cost £160.00 per copy. For new purchasers, the Guidance Notes cost £195.00 per copy
NB: Amendments to the SORP Guidance Notes for practitioners that are consequential on the introduction of the prudential framework have been made and the new Guidance Notes for the 2004/05 accounts are available via the CIPFA Shop.
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.
Preliminary
Guidance on the Prudential Code
CIPFA have published introductory guidance to the Prudential Framework. This is available as a PDF document download or in the form of a free pamphlet from CIPFA Publications. The contents of the document are listed below:
- Introduction
- The Impact of the New System
- The Legislative Framework
- The Scope of the Prudential Code for Capital Finance
- Corporate Governance
- Decision Making on Capital Investment
- Affordability
- Prudence
- The Next Steps
To download a PDF of the guidance, please click on the link shown below. Alternatively you can contact publications@cipfa.org or telephone 020 7543 5605 to order a copy of the booklet from CIPFA publications.
Preliminary Guidance on the Prudential Code - PDF (230k) [PDF Help]
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. This includes: CIPFA and IPF courses and publications; website addresses; and references to statute.