Warrington outlines robust defence of out-of-borough investments
0Warrington Borough Council has outlined its reasons for departing from government investment guidance and continuing to borrow to invest in revenue-generating property outside its boundaries.
The council’s executive board will next week consider its capital strategy for 2019/20, which outlines a £614m extension of its “invest to save” programme.
The programme covers a wide portfolio of investments, including commercial property, loans to housing associations, and solar farms.
In its capital strategy, the council says: “Under this strategy and others, the council have due regard to prevailing guidance and the prudential code.”
However, it adds: “In certain instances, notably in giving loans to London housing associations and purchasing assets outside its area for investment purposes, the council have decided not to have full regard to the guidance or the prudential code in these instances.”
In February last year, the government released a revised investment code in an attempt to tighten up on councils investing – particularly in property – with the sole purpose of generating a yield.
The move was prompted by concerns over councils using cheap borrowing from the Public Works Loan Board to finance risky gambles in the property market.
However, the revised government guidance allows local authorities to depart from the guidance as long as they “explain, in their strategy, the rationale for this decision”.
Warrington, in its new capital strategy, argues that the investment power under section 12 of the Local Government Act 2003, applies irrespective of the location of the investment.
“It applies equally inside or outside an authority’s area,” it said.
In addition, the investment return earned on these investments “is invested in the council’s capital programme and leads to economic development in Warrington”, the strategy continued.
It also said that the government guidance “seems to acknowledge that local authorities do and can borrow in advance of need, and that what is required is not prohibition but rather greater transparency”.
Warrington also drew a distinction between the concept of “borrowing in advance of need” and “borrowing in order to invest”.
It said: “There is a need to invest in order to make a return.
“Where both the financial pressure and the investment opportunity currently exist the borrowing in our mind is not borrowing in advance of need.”
The council added that borrowing is undertaken and advanced at the same time the investment is undertaken.
Speaking to Room151, Lynton Green deputy chief executive and director of corporate services at Warrington said: “Our policy statement is overt and very clear.
“Members want to be very clear about why we are doing certain things and the way we are doing them.”
He added that the council is committed to its approach of only applying minimum revenue provision on any reduction in value booked during yearly valuations – rather than the whole amount of spending funded by borrowing.
He said: “We don’t want to pay twice for the debt by paying MRP on properties whose value hasn’t dropped.
“These investments are held for the potential of a future sale.
“This approach ensures we won’t get to the point of deciding to sell an asset after say 10 years and find the value has dropped.
“It just means that if we sell a property after five years and are able to pay off the debt, we won’t have wasted money on paying unnecessary MRP, the debt would be covered by the capital receipt.”
Green said that the council’s Invest to Save approach was already freeing up more money to pay for services in the borough.
“In 2018/19, our net debt costs equate to 4p out of every pound we spend.
“Last year it was seven.
“Next year it is just under a penny.
“It shows that the borrowing we have been doing recently has been paying off in terms of service provision.”
Warrington’s new capital funding programme shows that the Invest to Save scheme is budgeted at £328m in 2019/20 and £250m in 2020/21.
But Green said that a sharp drop in 2021/22 to £35m was not an indication that it was following the example of Spelthorne Borough Council, whichRoom151 last week revealed was calling a halt to its £1bn commercial property strategy.
He said: “In the past we have potentially set our capital financing requirements at a higher level than needed, this gave us additional headroom to explore schemes without detriment to our Prudential Indicators.
“Now, as our approach matures, we are basing the figures more directly on projects and investments that are already in the pipeline.
“We are still committed to the invest to save approach with a financial and social return we’re not winding it down.
“We still intend to mitigate risks by spreading our investments in a wider portfolio, from property to loans to housing associations to solar farms and other renewable energy”
