Don Peebles: The revised Prudential Code and the future of capital investment

Recent changes to the Prudential Code mean new responsibilities for finance chiefs to report on capital strategy but, says Don Peebles, councils remain free to determine their own capital strategies.

The terms financial austerity and commercialism, and the risk from both, are all key conversations around the local government finance table. Yet, it is more important than ever that any changes within public sector delivery or process continue to reflect transparency, accountability and good decision making.

So, when CIPFA’s Prudential Code was being updated last year, it was important to ensure that the changes were there to strengthen and improve the existing framework.

This is, of course, a very different landscape to the one in 2004, when the code was first introduced. At that time borrowing was statutorily controlled by central government. Local authorities had fought hard for the right to make decisions on their own capital finance strategies. As part of the agreement to this change, the Prudential Code played a pivotal role in providing assurance that the decisions made around capital finance would have at their heart the principles of affordability sustainability and prudence.

Local authorities wanted to continue to operate within a framework that was flexible enough to support not stifle innovation, but durable enough to provide assurance for those who operate within its principles and those who oversee that activity.

Changes

So, what are the key changes in the latest version of the code? The key strategic change was a proposal to introduce the requirement for a capital strategy to be formally reported. The chief financial officer would need to report explicitly on the risks associated with that capital strategy.

CIPFA has found local authorities to be supportive of this development. This reflects the fact that they have, in many circumstances, already produced a document similar in nature to the strategy that has been proposed, but that it might not have been formally recognised.

It also reflected a very clear understanding by finance professionals for the need to have a document that sets out a long term context for the capital and investment decisions that they are making focusing the process and ensuring they can demonstrate they have considered:

• Capital expenditure
• Debt and borrowing and treasury management
• Commercial activity
• Long term liability
• Knowledge and skills

What has not changed is the principles-based approach, rather than any attempt to be prescriptive. This allows each local authority to determine its own prerequisites, whilst taking account of any statutory requirements and this flexibility has made implantation more manageable.

The feedback also welcomed the fact that timing constraints were recognised, and a statement was issued that working towards a 2019/20 implementation would be understandable.

Combined authorities are now a recognisable part of the local landscape and so, unsurprisingly, the new Prudential Code includes this development. The ability to understand risk and liability across all parts of an organisation is essential for the long term sustainability of these complex structures. There is recognition that there may need to be further work on the practicalities and consideration currently being given to this, but the principles always remain valid.

The prudential code has at its centre the belief that all decisions should be affordable, prudent and sustainable, and these core principles have been brought forward unchanged from previous versions of the code. Section six reminds authorities that they “should also consider carefully whether they can demonstrate value for money in borrowing in advance of need and can ensure the security of such funds”.  Despite early media debate to the contrary, this does not represent change.

What has changed is the financial landscape in which the public sector now operate and the commercial pressures this brings on investment decisions, making the code more essential than it has ever been.

Don Peebles is head of  CIPFA UK policy & technical.