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Office of the Deputy Prime Minister

Comments from the Association of Chartered Certified Accountants

August 2002

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to provide comments to the Office of the Deputy Prime Minister on the proposed Local Government Bill (the draft bill). These comments have been developed in conjunction with our Public Sector Technical Issues Committee, a group of experienced accountants working in the public sector.

ACCA welcomes the proposals put forward in the draft bill which will give local authorities greater discretion to borrow, up to agreed prudential limits, to finance capital programmes.

We do not, however, consider that it is appropriate for the "robustness of the estimates" used by an authority in preparing its budget or the "adequacy of the proposed financial reserves" to be governed by regulation. These are matters of professional judgement which should be determined according to the particular circumstances of an individual authority.

The draft bill assumes that the primary objective is still to avoid over-spending by local authorities. We consider that greater consideration should now be given to the matter of under-investment by local authorities and the failure by some authorities adequately to maintain their capital assets.

We also believe that returning business rates to the full control of local authorities would be an important step in redressing the balance of their funding.

Detailed Comments

1. ACCA welcomes the proposals on capital finance which will give local authorities more discretion to borrow to finance capital expenditure when they are in a financial position to do so. We also support the development of a Prudential Code for Capital Finance in local authorities, which will underpin the proposals in Chapter 1.
   
2. We note, however, that the proposals in Chapter 1 would give the Secretary of State (or the National Assembly for Wales) wider powers to set new regulations and orders. We believe that these powers present the risk of undue prescription developing in secondary legislation.
   
3. We believe that the section on "Credit arrangements" should be drafted to ensure that PFI and other public private partnerships are included within the scope of such arrangements or are specified as such in the associated regulations made by the Secretary of State (or the National Assembly for Wales). This would maintain current practice whereby regulations define all private finance transactions as credit arrangements and all payments made under such schemes are defined as capital expenditure.
   
4. The increased use of PFI and other public private partnerships will lead to local authorities entering into long term financial commitments. Such commitments should be considered in a comparable manner to other items of capital expenditure. Existing or proposed schemes should also be taken into account when an authority determines its own prudential level of borrowing.
   
5. The definition of a long-term credit arrangement in subsection 6(4) of Chapter 1 is unusual. A criterion of duration, as defined by the terms of the credit contract, would be more straightforward. If an entity continues to owe money on a contract for a long period of time, this amounts to a long-term credit arrangement, regardless of how far the other party's commitments are fulfilled.
   
6. We raise two questions in relation to this subsection:
   • how are authorities to determine when two or more contracts are to be "taken together" (6 (1)(b)) ?
     and
   • how can the estimation in 6 (4) be made at the time that the contracts are entered into (rather than at the end of the next accounting period) (6 (5)) ?
     
7. We are concerned that the proposal in Clause 10 for a proportion of housing capital receipts to be pooled "so that spending power can be redistributed from richer authorities to those areas with a greater need for new housing investment" would provide the Secretary of State with undue powers which may be seen as excessive. For this reason these proposals should be re-considered.

    

   Part 2: Financial Administration

8. ACCA does not consider that the additional powers provided in this part of the draft bill are necessary, although we welcome the easing of the requirements of Section 114 of the Local Government Finance Act 1988.
   
9. It is inappropriate for the Secretary of State (or the National Assembly for Wales) to make regulations to cover the "robustness of the estimates" used by an authority in preparing its budget or the "adequacy of the proposed financial reserves". These are issues of professional judgement which can only be determined by the particular circumstances of an individual authority. We believe that the current duties of an authority"s Responsible Financial Officer under Section 114 of the Local Government Finance Act 1988 and the powers of the auditors of local authorities are sufficient to ensure that local authorities exercise adequate control over their finances.
   
10. Local authorities have now suffered a prolonged period of under-investment. There is, for example, a backlog estimated to be in the region of £19 billion relating to the maintenance of council housing. The draft bill assumes that the primary requirement is still to restrain spending by local authorities. We consider that further consideration should be given to ensuring that authorities are provided with the powers and resources to undertake the required level of local investment to maintain adequately their capital assets and that those authorities which do not undertake the necessary investment are encouraged to do so.

     

    Part 3: Grants etc.

11. ACCA believes that the merging of the Revenue Support Grant and the National Non-Domestic Rate (NNDR) amounts will not enhance the transparency of the financing of local authorities by central government. On the contrary, the separate identification of NNDR is important, particularly during local council discussions with the business community.
    
12. We also believe that returning business rates to the full control of local authorities would be an important step in redressing the balance of funding for local authorities.
    
13. Subsections 33(5), 34(3) and 36(2), which allow the payments of the proposed formula grant to occur after the end of the financial years to which they relate, may be unduly onerous for local authorities which are attempting to plan their finances prudently.
    
14. Any payments proposed to be made under Sections 48 (Loans to Public Works Loan Commissioners) or 49 (Payments towards local authority indebtedness) should be included within the next Local Government Finance Report to Parliament. This should ensure that such payments are subject to full parliamentary scrutiny.

     

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