Prudential Code set to be tightened following property deals

Rob Whiteman, chief executive, CIPFA

A review of the Prudential Code on capital finance for local authorities is set to tighten up the guidance for property investments outside a council’s own area, the head of CIPFA has warned.

Rob Whiteman, CIPFA chief executive, speaking at Room151’s FDs Summit at the London Stock Exchange last week, warned that if governance surrounding commercial property deals was not beefed up it could threaten the “ability” of local government to self regulate capital finance through the code. He said current governance for property deals for “purely commercial investment” was “not quite fit for purpose”.

During the conference Whiteman said that before the general election central government was preparing to introduce new regulations to stop investment by local authorities outside their areas of jurisdiction. A new-look prudential code will aim to set a higher bar for investments aimed at purely commercial objectives.

Whiteman said: “Acting as a commercial developer outside a borough’s own area is probably not what we’re about and we’re not created for the purpose.

“We’re not just there to make money; we’re there to maximise income for tax payers but taking risks to become a property, or a commercial property owner, which has got nothing to do with societal benefits for our community, other than it giving us money — I think is a bridge too far for many public bodies.

“Regardless of what I think, that’s where the Treasury is.”

Room151 reported in that the Prudential Code could be amended to tackle concerns about the huge number of property acquisitions made by local authorities over the past two years. Some critics have warned councils are causing a “credit bubble” by borrowing to buy shopping centre and office developments.

DCLG permanent secretary Melanie Dawes also warned last week at the same conference that the treasury management investment code could be amended with the “security, liquidity and yield” test applied to commercial property acquisitions.

She said: “We are looking at extending the requirements to consider security, liquidity and yield, in that order, to all investments, and not just financial investments.”

Rob Whiteman stressed his belief that commercial property transactions needed “equal or greater” governance than treasury management strategies or pension fund investment decisions.

He said: “The question is whether cheap publicly available money through the PWLB is there for purely commercial purposes where you will invest in assets outside of your area, where they will have no implications for services, no implication for societal benefits or regeneration, they’re purely a commercial investment.”

He added: “With pensions fund decisions, you have to have a pension fund committee, you have to have advisors, there’s a very strong system of governance.

“For treasury management, you have to have a treasury management strategy that you put to council in order that members are aware of the parameters in which you operate. I strongly suggest that any purely commercial investment should have equal or greater governance.”

Whiteman warned that HM Treasury has a group looking at commercial property deals asking whether risks were being properly assessed. He said private sector developers had complained that the property market was being distorted by the involvement of local authorities.