Councils braced for restrictions on borrowing for property investment

Photo (cropped): Wilson Dias, Flickr, CC By 2.0

Chancellor Philip Hammond is set to formally restrict the ability of councils to borrow from the government to fund revenue-generating property investment deals.

Room151 understands Treasury is poised to overrule DCLG and introduce rules reducing the scope of councils to invest funds borrowed from the Public Works Loan Board on property acquisitions, despite the best efforts of Department for Communities and Local Government (DCLG) permanent secretary Melanie Dawes to avoid formal curbs.

Last month, Dawes told delegates at Room151’s treasury conference that her department favoured a collaborative approach to ensuring councils avoid wasteful investments in commercial property, focusing on changes to voluntary codes.

However, an article in this week’s Daily Telegraph said the chancellor, in his Budget statement, “is expected to unveil tough new rules on council investing next month”.

Responding to the rumours, Andy Burns, current CIPFA president, said: “First and foremost we stand for sound financial management and we wish to defend the principle-based permissive Prudential Code, but all councils have to act within the spirit and letter of the code. Regrettably it appears that perceptions of a minority acting outside the spirit risks curtailment of flexibility for all.”

The Telegraph article claimed that civil servants fear councils are putting their finances at risk by making large commercial property investments in order to raise income. Room151 has spoken to a number of sources who believe that the Budget will introduce restrictions on what PWLB borrowing can be spent on.

Paul Dossett, head of local government at Grant Thornton, said that if the rumours prove correct “it shows that the Treasury has a very limited grasp of the current funding position of local government and even less idea about the statutory basis for local authority budget setting which requires a balanced budget to be set by law.

“Local authorities have been investing in property and other developments for many years.

“Any business that was cash rich and revenue poor would do the same thing and be bolder in that as the revenue position has tightened.”

Dossett said councils should take appropriate financial and legal advice as well as following proper governance processes before embarking on significant real estate purchases.

But he said that fettering councils’ powers to raise money through commercial activity would have an adverse impact on councils’ ability to provide services unless the move was accompanied by new money.

He said: “Knee jerk overreactions to this issue help no one – unless of course it prompts the Treasury to provide more money to provide basic public services such as adult and children’s social care which are under extreme pressure and which are driving further costs in other areas such as the NHS.”

Dawes, in her comments last month, reiterated her department’s continuing desire to assist councils deriving income from commercial activities.

Melanie Dawes, DCLG. Photo: Tina Miguel

She played down any fears the government might attempt to dampen property investment through statutory restrictions or ministerial directions, saying: “That sense that one size doesn’t fit all is very important. We are not in the market for saying this is OK and that not, or some sense of trying to be restrictive about this.

“I don’t think we would know how to do that from central government, actually. And what we have learnt over the past 10 to 15 years is that if we do get too prescriptive, often we create a cliff edge that gets us all into trouble.”

She added: “We do support what you are trying to do here. We do not want to restrict opportunities for you to use commercial structures.”

Instead, Dawes put emphasis on the importance of statutory codes which provide guidance to, rather than restrictions on, councils which borrow to fund property investment.

She said that her department and the Treasury had “a very strong partnership to make sure we are on the same page”.

Speaking alongside Dawes at Room151’s conference, Burns emphasised the importance of self-regulation through the statutory codes that govern council finance.

He said: “I hope we can resist those that argue for a rules-based approach.”

It is an argument that the sector appears resigned to losing, at least insofar as funding property development with PWLB loans is concerned.