Clarification on proposed changes: Q&A
Updated 2 February 2018
Applies to England
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Clarification on proposed changes to statutory codes on Investments and Minimum Revenue Provision (MRP)
Our consultation on the proposed changes to the statutory guidance on local authority investments and the statutory guidance on Minimum Revenue Provision (MRP) closes on 22 December 2017. We are not able to make any changes to the proposals until we have analysed consultation responses.
However, we do not want to do anything that makes it more difficult for any local authority to balance their budgets in 2018 to 2019 and for this reason, we are encouraging all local authorities to discuss any concerns that they may have in advance of formally responding to the consultation.
Local authorities have asked a number of common questions about our proposals. Answers to the most common of these are as follows.
Q. Can you clarify what the section on borrowing in advance of need means?
We do not want to restrict opportunities for local authorities to use commercial structures to kick start local economic regeneration to deliver services more effectively. However, the prime duty of a local authority is to provide services to local residents, not to take on disproportionate levels of financial risk by undertaking speculative investments, especially where that is funded by additional borrowing.
For this reason we are proposing that all local authorities disclose the contribution that each investment makes towards the core objectives of the local authority. The proposals also make it clear that borrowing solely to fund yield generating investments is borrowing in advance of need. Local authorities will be able to borrow to fund investments that have multiple objectives, including generating yield.
Q. Do the proposals on MRP mean that local authorities no longer have the flexibility to decide what is prudent provision for debt?
We want to ensure that local authorities make prudent provision for the repayment of debt. The government believes that it is for local authorities to assess what is prudent according to their circumstances. The proposals aim to continue to give local authorities flexibility to define prudent provision and to change the methodology that they use to assess this if needed.
Q. Should local authorities apply the current or the proposed Codes whilst making decisions during the consultation period?
It is for individual local authorities to make their own judgement as to whether they apply the current guidance or the prospective guidance to decisions that they are taking now, in consultation with their external auditors where they feel that is appropriate. Government has no intention of seeking to second guess or comment on local decisions taken in accordance with local standing orders.
Q. Are the changes to the MRP guidance prospective or retrospective?
The government does not expect any local authority to recalculate MRP charged in prior years due to the proposed changes in methodology. Where a local authority has changed the methodology that it uses to calculate prudent provision and generated what the current guidance calls an ‘overpayment’ it can continue to incorporate that overpayment into future calculations of prudent provision..
Where a local authority has selected a long asset life for borrowing or has decided not to charge MRP on non-Housing Revenue Account debt, we would expect the calculation of future year’s MRP to be made under the new guidance, which will be set out in the government response following completion of the consultation.
We have suggested maximum useful economic lives in the draft for consultation, but if any local authority believes that there are reasons why these maximums are inappropriate for borrowing to support particular activities, we would encourage them provide the evidence to us. If a local authority feels that it needs to adjust the useful economic lives that it is basing its MRP charge on, then that adjustment should only be applied to future year’s calculations.