The Treasury has published new orientation which limits local authority access to advances from the Public Works Loan Board (PWLB) if there is a ‘more than negligible risk’ of a council’s ability to repay its debt without government support.
The government put the restrictions in place due to a build-up of what the guidelines describe as “very high debt levels” in some local authorities.
The guidelines state: “Failure to repay loans undermines the PWLB’s ability to continue to provide accessible, low-cost loans to local authorities to undertake investment projects.”
The Debt Management Office (DMO) will monitor the councils’ financial risk using the capital risk measures recently proposed in the Leveling and Regeneration Bill by the Department of Leveling, Housing and Communities (DLUHC) .
The government is trying to sharpen its arsenal a little to give more support to the prudential code. It’s really giving boards a reason to follow the guidelines and make sure there are consequences if they don’t.
David Green, strategic director of Arlingclose Treasury Advisers, told Room 151: “It’s a welcome change to see DLHUC and Treasury working together in a joint approach.”
If risk monitoring raises specific concerns about a board, the Treasury will contact the authority to begin a commitment period. As part of the process, the board may make representations regarding its capital expenditures and debt.
The PWLB guidelines have expanded its criteria to include previous board decisions and investments, which is a new approach.
Green said: “The government is trying to sharpen its arsenal a bit to give more support to the prudential code. It really gives councils a reason to follow the guidelines and make sure there will be consequences if they don’t.
The changes will not apply to authorities that adhere to the code, as it provides “sufficient assurance regarding the risk of non-reimbursement”.
Nick Harvey, pension and treasury adviser at CIPFA, told Room 151: “CIPFA believes that the majority of authorities will not be affected by the tighter restrictions on borrowing. We support the principle that the measures only target the authorities who may have taken too much financial risk, and not the sector as a whole.
“The restriction in the availability of loans is due to the recognition that the activities of a minority have led to increased risk and leverage in the sector, with highly publicized fallout. The changes are not inconsistent with our revised Code, as it does not permit borrowing primarily for performance,” he said.
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