As outlined in the foreword to the code, the text of the code is divided into sentences and paragraphs in bold types and sentences and paragraphs in standard type. Only the words in bold type are formally part of the code, the words in standard type are only “part of the Prudential Code insofar as they assist in interpreting the Prudential Code”. We would question whether this arrangement is widely understood or even necessary; the practice is not used for the Treasury Management Code. However, assuming this arrangement is to stand, where appropriate our responses will comment on whether the words being consulted on should be “bold” or “standard”
Question 1: Do you have any comments or observations on the amendments to the code relating to new Objective for proportionate commercial investments? (Prudential Code para 1(f))
While we support the objective of proportionality generally and agree that council commercial investments should be proportionate, we think this is not the proper place to say so. The inclusion of this as an objective of the Prudential Code exceeds the core purpose of the code.
Question 2: Do you have any comments or observations on the amendments to the code relating to the inclusion the legal status of the code in Chapter 3? (Prudential Code para 12)
As drafted, the new paragraph 12 outlines the legal position of the code in that local authorities must “have regard to” the code. This is already widely understood and is defined by legislation. The words are in standard typeface and so do not form part of the code as such but are just explanatory. In our response to the first consultation, we stated that while we had no major objection, it “does seem to be an unnecessary complication. The status of the code is defined by legislation and could be changed by legislation. Including the current status within the code makes it less stand alone and timeless”. The new words as drafted confirm our earlier opinion.
Question 3: Do you have any comments or observations on the amendments to the code relating to the reference to environmental sustainability in contents of Capital Strategy? (Prudential Code para 24).
The proposed change is to replace the words “including links to the authority’s policies on capitalisation” with “including how capital expenditure is prioritised in relation to the strategic priorities and policies of the authority, such as environmental sustainability”. In our response to the first consultation, we commented that this should already be the case and so we supported it. This remains the case.
Question 4: Do you have any comments or observations on the amendments to the code relating to Capital Strategy’s requirement to summarise investments into treasury management, service, and commercial purposes? (Prudential Code para 24)
Question 5: Do you have any comments or observations on the amendments to the code relating to the greater clarity on commercial and service investments in the Capital Strategy, including limits, and compliance with requirement not to borrow to invest for return? (Prudential code 24)
The amendments for both question 4 and 5 add significant detail to what should be included in the capital strategy. Including more information can be supported, however, the definitions need to be clear, understood and accepted.
Question 6: Do you have any comments or observations on the amendments to the code relating to the explicit requirement to set and monitor the treasury management prudential indicators in the TM Code LA Guidance? (Prudential Code para 43)
Question 7: Do you have any comments or observations on the amendments to the code relating to the quarterly monitoring of prudential indicators as part of normal budget monitoring reports? (Prudential Code para 43)
The amendments referred to in both questions 6 and 7 are in bold typeface and so form part of the code. The additional requirement is to monitor quarterly (rather than for an unspecified timescale) and for the reporting of the monitoring to be part of the integrated revenue, capital and balance sheet monitoring. The setting and regular monitoring of these indicators are clearly very important, but we would question whether defining how and when this is done in this detail and as part of the code itself will allow this to be done in an optimal way.
Question 8: Do you have any comments or observations on the amendments to the code relating to the revision of ‘Paragraph 45’? (Prudential Code para 48 – 52)
In our response to the earlier consultation, we argued that the proper place for a direction that local authorities should not borrow to invest primarily for a financial return is the government’s statutory investment guidance, and that revisions to that guidance for England in 2018 sought to do just that. We also expressed concerns that the wording proposed in the earlier consultation was unclear. These new paragraphs are a mix of bold typeface (51) and standard typeface (49, 50 and 52). The paragraph in bold makes it clear that “An authority must not borrow to invest primarily for financial return”. While we continue to argue that the Prudential code is not the right place for this statement, we accept that the wording now proposed is at least clear and therefore an improvement on what was proposed in the earlier consultation.
Paragraph 52 goes into detail of the new PWLB lending terms. Again, we question whether this is appropriate for the Prudential Code as it means that the Prudential Code will need to be revised the next time that the PWLB alters its lending terms. We suggest that this paragraph is reviewed and deleted as it is superfluous.
In addition the words as drafted are misleading and they ignore the clauses in the PWLB lending terms on eligibility for access refinancing loans, supported by clarification in the PWLB guidance that “The government recognises the benefits of having ready access to the PWLB for refinancing. The PWLB will therefore lend for this purpose even if the local authority is planning activity that makes them otherwise ineligible for PWLB support”.
Question 9: Do you have any comments or observations on the amendments to the code relating to authorities with commercial financial investments who expect to borrow: annual strategy to review options for exiting commercial investments? (Prudential Code para 53).
Paragraph 53 is a mix of standard and bold typeface. The words in bold (so part of the code) instruct local authorities with a need to borrow to review options for investments first and “should not take new borrowing if financial investments for commercial purposes can reasonably be realised”. The words in standard typeface (and so explanatory only) are that “Authorities with existing commercial investments (including property) are not required by this Code to immediately sell these investments”.
There is a major concern that the instruction in this paragraph, coupled with the other documents that were published alongside the consultation, will encourage local authorities to take sub optimal decisions with regard to investments and so make significant unnecessary losses. If the intention is not to encourage a fire sale of investments (and it should not be) then:
the words currently in standard type should be made bold and so included in the code.
The word “immediately” should be deleted. A time limited word like this has no place in what is a permanent code. If authorities are not required under the code to sell existing investments now, then that should hold in the medium and long term as much as in the short or immediate term. The inclusion of the word “immediately” adds a further layer of confusion. It implies either that there will be a point when the “immediate” period is over at which point local authorities are required to sell all investment assets or that a further revision of the code will be made once this “immediate” period is over and a decision made as to whether authorities are being instructed to sell their assets under the code. Neither of these scenarios are acceptable.
Question 10: Do you have any comments or observations on the amendments to the code relating to the new prudential indicator for net income from commercial and service investments as % of net revenue stream? (Prudential Code para 81-85)
Question 11: Do you have any comments or observations on the amendments to the code relating to the Investment Prudential Indicators to be reported together with investment indicators under Statutory Investment Guidance? (Prudential Code para 83).
Questions 10 and 11 cover technical changes to the calculation of prudential indicators and indicators of affordability. In our response to the earlier consultation, we emphasised that the views of individual local authorities and of finance practitioners within the sector on these proposed changes will be important. This response still holds.
Question 12: Do you have any comments or observations on the amendments to the code relating to inclusion of Heritage Assets in definition of CFR? (Prudential Code para 90)
The views of practitioners and of authorities with significant heritage assets will be important on this point.
Question 13: Do you have any comments or observations on the amendments to the code relating to the new definition of Commercial Property? (Prudential Code para 91)
This definition is in standard typeface and is therefore just explanatory. We have no significant comments on this. The definition appears to be reasonable.
Question 14: Do you have any comments or observations on the amendments to the code relating to the removal of the deduction for interest and investment income from definition of Financing Costs? (Prudential Code para 94)
This paragraph is in standard typeface and is therefore just explanatory. We have no significant comments on the proposed deletion.
Question 15: Do you have any comments or observations on the amendments to the code relating to the revised definition of Investments (to include non-financial assets held primarily for financial return)? (Prudential Code para 95)
This is a new paragraph and is in standard typeface so it is therefore just explanatory rather than formally part of the code. This seems to cover the same ground as the additional documents published alongside the code (see general points above) but as we have already stated it is not clear how these interrelate. It is therefore difficult to understand exactly what is being proposed and why this is being included in the code.
Question 16: Do you have any comments or observations on the amendments to the code relating to the clarification that Net Revenue Stream excludes capital grants and other items? (Prudential Code para 96)
These additions are in standard typeface and so are therefore just explanatory and not part of the code. We agree it would be correct to exclude capital grants from the net revenue stream. It is not clear whether the reference to the other items (contributions and donated assets) is also just capital; we expect that this is the intention which can be supported, but it could be made clearer. We suggest that it is amended to read “capital grants and other capital contributions including donated assets”.
Question 17: Please detail any other comments on amendments to the code or further observations.
Further comments have been made in the general points section of this response.