PRUDENTIAL CODE FOR CAPITAL FINANCE IN LOCAL AUTHORITIES
CIPFA
Comments from the Association of Chartered Certified Accountants
February 2002
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the proposed Prudential Code for Capital Finance in Local Authorities. These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Committee, a group of experienced accountants working in the public sector.We recognise that the Code has been written as part of a strategy of securing greater freedom for local authorities to control their own capital expenditure. We make the point that it is not advisable to underinvest in capital infrastructure as this places an undue burden on future generations. Thus for example, we believe that local authorities are now suffering from past under-investment in their housing stocks. This has resulted in a back-log in maintenance of council houses totalling approximately £19 billion. As result, authorities are being forced to transfer their stock to housing associations.
Performance indicators should not be used in isolation as reporting tools. All performance indicators should be set in the context of the authority's strategic plans and need to be explained with a suitable narrative. We believe that suitable performance indicators have been developed for inclusion in the proposed Code. These performance indicators should assist local authorities to monitor effectively the implementation of their strategic capital plans and their consequent level of borrowing.
General Matters
Maintaining appropriate investment levels1. The Code is written in a language which suggests that upper limits should be set on local authority capital investment, but not lower limits. We believe that inter-generational equity requires that suitable levels of investment are maintained, at least to maintain the fabric of local authority properties. Thus, for example, the level of back-log maintenance on local authority housing, currently estimated at £19 billion, is a burden on present day authorities which limits their policy options.
2. It is stated that the proposed Code should be consistent with, and support, local asset management planning. Mechanisms to support this objective, however, are not developed. We believe that a further performance indicator should be developed to measure any back-log maintenance which may develop over the management of an authority's capital assets.
3. This suggested performance indicator should be developed within the context of a cyclical condition survey of an authority's capital stock. This should ensure that complete coverage of the authority's capital estate is achieved at least once every ten years and lead to the development of a cyclical and planned maintenance scheme covering at least five years.
The context of performance indicators
4. Performance indicators should not be reported or used in isolation. We believe that they should be used to assist in the development of local strategic capital expenditure plans and suitable schemes for asset management. All performance indicators should be set in the context of the authority's strategic plans and need to be explained with a suitable narrative.
The distinction between indicators and targets
5. The proposed Code does not make a clear distinction between performance indicators and targets. We believe that, as part of their capital expenditure strategies and plans, authorities should establish clear objectives and measurable targets. Performance indicators may then be used to assist in the assessment of the extent to which these targets are being achieved.
Detailed Points
Stewardship of assets6. At paragraph 33, the proposed Code states that local authorities are required to have regard to asset management planning. This section of the Code does not, however, develop any guidance on this important aspect of the capital financing of local authority activity. We believe that this section of the Code should include additional guidance on asset management planning and capital maintenance.
Monitoring capital expenditure
7. In the section of the Code on monitoring against prudential indicators (paragraphs 51 to 54), no mention is made of monitoring for under-expenditure or to identify levels of borrowing below the expected figures. We believe that levels of investment or borrowing below planned levels may also indicate problems which could result, for example, in a failure to implement an authority's development strategy. For this reason, we believe that this section of the Code should be written to indicate that investigations should be undertaken if the actual figures are significantly above or below the expected or planned figures.
Consistency between paragraphs 42 and 54
8. Paragraphs 42 and 54 of the Code do not appear to be consistent. Paragraph 42 refers to medium term net borrowing. In contrast, paragraph 54 recommends that the Chief Finance Officer should undertake daily monitoring of the requirement for net borrowing.
Other long term liabilities
9. Commitments to Private Finance Initiative (PFI) contracts are an increasingly significant aspect of local authority finances. For this reason, we believe that, whether or not such commitments are included on an authority's balance sheet, PFI and similar commitments should be included within the definition of 'other long term liabilities'. This requirement should be included within the definition of other long term liabilities at paragraph 66 of the Code. There is reference at paragraph A.58 of the Code to the question of whether or not private finance transactions should be capitalised for financing purposes, and therefore by the Code.