LGA response : Call for views on new local authority capital flexibilities

General points

• The current flexible use of capital receipts scheme, which has run since 2016/17 and has now been extended until March 2030, has been welcomed by councils. According to Revenue Outturn statistics, in the seven years from 2016/17 to 2022/23, 108 individual local authorities (of which more than 100 are councils) have used the scheme and applied a total of £918 million of capital receipts. The amount applied in individual years has varied from a minimum of £88 million in 2021/22 to a maximum of £200 million in 2019/20.
• In the same period (2016/17 to 2022/23) local authorities generated a total of £24.3 billion capital receipts and £18.2 billion of capital receipts were applied to finance new capital scheme (receipts do not need to be used in the same year that they are received). This means that only about four per cent of capital receipts received in the period have been applied to the flexible use scheme. It is clearly a useful option for local authorities and has been important to a minority but it is not central to the operations of the majority nor the main use of receipts.
• Councils are best placed to know what works best for their community, so it is right that the Government is considering granting additional flexibilities and the LGA welcomes the opportunity to respond to the call for views. However, additional flexibilities should not be seen as a substitute for the requirement for a long-term plan to sufficiently fund local services through multi-year settlements; this is still the priority call on the Government from local government. Based on the figures announced in the provisional settlement, we calculated that councils currently face a funding gap of £4 billion over two years; this gap will be reduced by additional funding that it has been announced will be included in the final settlement but the figures from the current flexible use of capital receipts scheme show that even the remaining gap cannot be met by sales of assets. It is not considered likely that the spending pressures currently bearing on councils which are contributing to these deficits can easily be brought under control in a way that would justify capitalisation. 
• Further, the availability of saleable assets will not be universal across all councils; that less than a third of all councils have used the current scheme is an indicator that there will be many councils that will be unable to benefit from additional flexibilities on use of receipts.
• Capital receipts (and borrowing even more so) are not “free money” and they can only be spent once. They cannot be used to fund long term ongoing revenue pressures. Using them extensively to finance revenue costs is also likely to have a negative impact on capital investment by local authorities; to an extent, without an adequate funding settlement for some councils additional “freedoms” just means “freedom to choose between a wider range of difficult options”. 
• The ability to use capital resources to fund revenue costs must not be seen as a way out of the Government addressing other problems facing local government. For example, if, as is currently planned, the statutory override for the Dedicated Schools Grant reserves comes to an end on 31 March 2026, the existence of additional capital flexibilities should not be used as a reason for the Government to leave councils to pick up the accumulated deficits (which some estimate will exceed £3 billion by that date) without proper financial support. Clarification on intentions on this point would be helpful.
• The requirement for a balanced revenue budget for local government means that councils are not to be able to fund revenue costs through borrowing. (Borrowing for capital costs is different as the service / value received from the capital spending will be spread over several years). The introduction of flexibilities that effectively allows revenue costs to be funded by borrowing (by “capitalising” them) does potentially allow for some of today’s costs to be pushed onto future years. Such measures need to be considered very carefully and strong consideration needs to be given to the impact of the future financial sustainability of individual councils. These flexibilities would be more useful to councils if they were matched by a commitment from Government to fund the additional pressures facing local government in the future. 

Specific Questions on options 

Question numbers used here are those in the online response form rather than the document published with the consultation.

Questions 1 to 3 cover contact information.

Question 4. Does this option (option 1) meet the objectives and principles as set in this document? Please provide detailed comments.

• Yes. There is scope for a sensible and prudent extension of the current arrangements to allow capital receipts to be applied to invest to save schemes that will generate revenue savings. For example, at present the scheme does not allow non-statutory redundancy costs to be covered in the scheme. Redundancy costs frequently make up a significant part of the upfront costs of invest to save schemes and it is logical that the scheme should be extended to include financing all of them.
• The logic of extending the scheme to cover the financing of general cost pressures is not so clear. Like reserves, capital receipts can only be spent once and if they are used to fund general pressures, the pressures will still be there the following year.  This strategy is therefore only likely to be affordable and sustainable where councils (1) have the capital funding available and (2) can use the time bought through capitalisation to bring spending pressures down.  It is not clear how many cases this will involve.

Questions 5 and 6 seek specific information from individual local authorities.

Question 7. Should this flexibility be constrained to a specific area or type of expenditure? Or certain types of expenditure be excluded? Please provide detailed comments.

• Eligible expenditure should be the one-off up-front costs and other unavoidable costs incurred until the agreed outcome of the qualifying scheme is delivered. Provided the expenditure is one off and the scheme results in a revenue pay back (saving) over time, there does not appear to be any reason to restrict the type of costs that qualify. This should be widened to include transferring amounts to build up revenue reserves (as is suggested under option 3 where it is restricted to the sales of investment assets only).

Question 8. In your view, are there any risks or unintended consequences that the Government should consider?     

 Are there risks for Government?

• See general points made above. The scheme flexibilities should not be seen as a substitute for the requirement for a long-term plan to sufficiently fund local services through multi-year settlements. The scheme is helpful and adds additional flexibilities. But it is only a supplementary use for capital receipts, and it is only available to those local authorities that have capacity to generate sufficient capital receipts.
• Capital receipts can only be spent once and using them for this scheme means they are not available for investment in capital infrastructure. That could be mitigated over time by the revenue savings made, but this will only apply if the scheme is limited to invest to save schemes. The risks of funding ongoing general revenue pressures though the scheme are not mitigated.
• Using capitalisation to provide temporary funding for pressures that cannot easily be brought under control by local action or where there is no guarantee of future revenue funding from Government is not a sustainable budget strategy. 
• We note the requirement for Efficiency Plans to monitor the use and impact of capitalisation. Whilst it is undoubtedly necessary to ensure that councils consider the use of these flexibilities carefully, this adds a burden to councils at a time when resources are already stretched. 

Question 9. Does this option meet the objectives and principles as set in this document? Please provide detailed comments.

• The extension to allow borrowing to fund the revenue costs of invest to save projects makes sense and widens the potential availability of the scheme to those local authorities that do not have the capacity to generate additional capital receipts.
• This will of course mean immediate additional ongoing revenue costs from servicing the costs of borrowing (as is acknowledged in the consultation document), and the payback from the invest to save projects will need to be high enough to more than cover this to make the project worthwhile. This may mean that there is little take up of the scheme. However, the additional flexibility will be welcomed by those local authorities that are able to use it. 

Questions 10 and 11 seek specific information from individual local authorities.

Question 12. In your view, are there any risks or unintended consequences the Government should consider?

• See general points made above about overall risks. Local authorities will need to act prudently in line with the prudential framework for capital finance in assessing their ability to borrow. 
• Restricting the scheme to one off costs of invest to save schemes will clearly mitigate a lot of the risk. The introduction of discounted PWLB rate for borrowing under the scheme should reduce revenue risk further and increase the number of projects where the savings outweigh the costs.

Question 13. Does this option meet the objectives and principles as set in this document? Please provide detailed comments.

• It is clear that the Government would like to incentivise councils to dispose of investment assets. Councils will need to continue to consider the right time to sell these assets in accordance with achieving best value. If local authorities are being allowed to use the proceeds from the sale of investment assets for various purposes, there is no reason why they should not also use the proceeds from the sale of surplus operational assets as well. Doing so will help avoid confusion over what counts as an “investment asset”. There is also no reason to restrict this to property assets.
• It is noteworthy that the definition of investment asset used here is different from the one used in the CIPFA Prudential Code, CIPFA Treasury Management Code and also by the Public Works Loans Board in its lending guidance (all three use the same definition). Introducing a new definition (even if it is likely to identify largely similar assets) is bound to cause confusion and should be avoided.

Questions 14 – 17 are for individual local authorities.

Question 18. Are there alternative or additional incentives (to divest of some or all of investments assets) that, in your view, would be effective?

• Prudent management of portfolios should ensure that any assets are sold at an appropriate time and for optimum benefit.

Question 19. In your view, are there any risks or unintended consequences the Government should consider?

• The risk is that local authorities will divest themselves of assets at a sub optimal time in order to benefit from the incentives, As a result they will not receive best value for money from the assets and their sale and will in the long run lose revenue income streams. Alternatively, since councils are obliged by law to seek best value it may be that they are legally unable to use any incentives offered if the result would be a sub optimal disposal.
• The management of property assets is a long-term undertaking and hurried sales are more likely to result in sub optimal value from the proceeds of sale. One suggestion that has been made is that if assets scheduled for sale could be exempted from the calculation of the need to make MRP provision (for a fixed period) this would enable immediate revenue relief as well as allowing for the sale to be arranged at a better time. 

Discounted PWLB interest rate

Questions 20 to 23 ask individual local authorities about whether they would make use of a discounted PWLB rate of 0.4% below standard PWLB rate for projects that would otherwise qualify for flexible use of capital receipts and if so how much would they borrow.

• While these questions are for local authorities to answer (as they relate to metrics on the expected take up of the scheme), a discounted PWLB rate would be welcome. 

Risks and mitigations

Question 24. Do you agree with these additional controls to apply to any local authority that uses the capital flexibilities or PWLB discount rate? Please provide details.

• Risk mitigation (i) (transparency) is good practice that local authorities should follow in any case. 
• Risk mitigation (ii) – mandatory payback period. Each project should have a clear payback period. It is not clear that a mandatory period set in the scheme is needed.
• Risk mitigation (iii) is about commissioning and imposing external assurance and review. Local authorities already have clear governance requirements and an additional independent review adds an unnecessary layer of bureaucracy. It is also disproportionate. Statistics show that in some councils, in year use of the current scheme could be as low as a few thousand pounds; being required to commission an independent review of such a project would almost certainly make it unviable. 
• Risk mitigation (iv), limiting flexibilities to certain types of expenditure. See comments made in answers to questions relating to options 1 and 3. The potential risk is caused paying for ongoing costs from a one-off source, not the category or type of spending as is mentioned here.
• Risk mitigation (v) independent review of the use of flexibilities at the Government’s discretion. Presumably the Government can already commission such a review if it deems it necessary; if so this would not be an additional restriction. 

Question 25. Are there additional controls that the Government should require with respect to all or some of the options set out? Please provide details.

• Please see comments made under general points above.

Contact:

Bevis Ingram
Senior Adviser Finance
Phone: 079 2070 2354
Email: [email protected]