CPWP(2010)1st Meeting

CAPITAL PROGRAMMES WORKING PARTY

Minutes of the meeting held on

Thursday 4 February 2010 at 2:30pm

Room 1/ABC, Eland House, Bressenden Place,

London SW1

Present

Mark LuntleyLocal Government Association

Chris BrewerLocal Government Association

Stephen WoodLocal Government Association

Tom LawrenceLondonCouncils

Andy RalphHMTreasury

Mark FrankelDebt Management Office/PWLB

Mandy BrethertonCIPFA

Peter McLachlanHome Office

Sunil ParekhHome Office

Ian SkinnerNational Assembly for Wales

Debbie Edwards Audit Commission

Neil Riddell (Chair)Communities and Local Government

Trevor Emmott Communities and Local Government

Graham FletcherCommunities and Local Government

Helen WoodwardCommunities and Local Government

Julian BaldwinCommunities and Local Government

Cliff Lambert (minutes) Communities and Local Government

Item1. Minutes of last meeting (15 July 2009)

1. The minutes were agreed. Reference was made to Item 6 (Reform of Council Housing Finance) and the issuing of the consultation paper on the abolition of the HRA Subsidy System. CLG said that the intention was to issue the paper within the next few weeks. For Item 3 (Response to the CLG Select Committee Report on Investment Guidance) CLG said that the Bank of England and FSA were up to date with developments and could attend CPWP meetings should they wish. CIPFA said that likewise the CIPFA Management Team may attend meetings on an ad-hoc basis too. It was noted that there had not been papers for Agenda Items for recent meetings and the Group agreed that papers would be provided whenever possible.

Item2. Review of Capital Finance Regulations, Investments Guidance and MRP Guidance

2. CLG said that, having gone out to consultation on 16 November 2009 it had received over one hundred responses by the closing date of 4 January 2010. With regard to the draft Capital Finance Regulations, apart from a number of minor technical changes, at least two more significant revisions were being considered (subject to Ministerial agreement). One related to lease reclassifications. The draft regulation had covered the case where operating leases became finance leases. CLG now accepted the need for a “mirror-image” regulation to cover the reverse situation, where finance leases were reclassified as operating leases. The intention was that both regulations would be transitional measures and thus apply only to existing leases. The other main change related to the regulation on the use ofcapital receipts; it was proposed that up to 4% of a capital receipt could be used to cover the costs associated with the disposal of non-housing land (rather than the 2% originally proposed).

3. On the Investments Guidance, CLG said that the responses had generally been very positive and only minor departures from the draft were likely. The guidance would have the effect of encouraging local authorities, when addressing the question of credit risk, to supplement credit ratings with other kinds of information. It was not however the role of the Government to offer advice on those alternative sources of information. The guidance would also encourage authorities to look critically at information received from external treasury management advisers. There seemed to be scope for authorities to share information on the quality of the services they were receiving from such advisers and perhaps work collectively to drive up standards. CIPFA were also preparing a guidance note on the use of advisers. In addition, the CLG Select Committee had asked the FSA to look at the regulatory framework for advisers.

4. There was discussion of the treatment in the revised guidance of borrowing in advance of need. CIPFA said that an authority should have a robust business case for any such action and considered three years as the maximum period. For central government, however, there were additional concerns. The Treasury said borrowing from the PWLB to invest funds in a bank was not desirable since it effectively increased the amount of gilts the Government needed to issue and then allowed local authorities to place the money in the market with the potential for outcomes such as that in Iceland. That was why the guidance took a slightly more negative view of this practice than CIPFA’s guidance.

5. The LGA asked about the extent to which local authorities needed to assess the creditworthiness of the broader banking sector. Treasury said that the FSA took a fairly robust view. It was a complicated area but local authorities were informed investors and should be aware of the risks. The LGA said that local authorities were risk averse post-Iceland and therefore keeping to banks with high ratings and using short term options. Treasury said that it understood the picture on banks was quite mixed. It had more or less stabilised for large banks but smaller banks without credit ratings were still having problems. Markets were looking at them unfavourably. With regard to building societies, there seemed to be a need for some more sensitive sector-specific form of credit risk assessment. With respect to the MRP Guidance there would be some technical changes but the final product would be along the lines of the consultation paper. The final guidance on both investments and MRP would be published as soon as possible but until then local authorities could safely rely on the drafts, given that the changes would be minimal.

Item 3. PWLB Interest Rates: consultation exercise

6. PWLB provided an update of the position since the last meeting. The consultation paper was issued in September 2009 and the final date for responses was 8 January 2010. The paper proposed the introduction of intra daily rate redeterminations, which for technical reasons would be likely to reduce the spread between the rates for advances and early repayment. The local authorities had previously complained that the size of the spread was disincentivising them from the prudent early repayment of debt. The Treasury, in consultation with the DMO/PWLB, had considered the responses and were advising Ministers, who would decide shortly, but the technical and operational changes would take longer to come into effect. An announcement would be made as soon as possible.

7. LGA and London Councils both said that there was a need for transparency in terms of local government debt and public sector borrowing. PWLB said that the statutory requirements were to set rates in such a way that the NLF did not make a loss, but PWLB did not have a profit-and-loss account.

Item4. Pre-Budget Report update

8.CLG said that it would be useful to update the CPWP briefly on the PBR, which had included issues which had been touched on at the last meeting. Depreciation and asset management were being looked at internally and the potential for authorities to borrow against the possible new revenue streams identified were being considered –the Common Infrastructure Levy, TIFs, new build council housingFeed-in tariffs, and the Renewable Heat Incentive. The Spending Review had not been initiated as yet. Treasury said that Treasury Ministers were keen on looking at how depreciation might work in local government, and how it might link into asset disposals/management. CLG were undertaking work and would report back to Treasury. If it was seen as potentially workable – which would require due consideration of the costs of moving to full depreciation - further work would follow. Ministers were keen to introduce new income streams but this would need to be reconciled with the overall position on public sector borrowing. The intention was to report on the consideration of these issues at the Budget.

9. The LGA said that depreciation had been discussed previously. Affordability for local authorities would be a key question. Depreciation was about using up an asset but it could provide for increased complexity in local authority accounts. CLG said that if depreciation were introduced in its purest form then it would simplify accounts. London Councils said that there were concerns with asset sales and the falling value of receipts.

10. The Treasury said that it was keen to have flexibility in capital allocations and reduce ring fencing but as future public finances were more constrained it remained likely that Ministers would wish to use smaller future allocations for their particular priorities. Local government capital issues would clearly be influenced by developments with regard to the public finances as a whole, and the balance between fiscal stimulusand fiscal consolidation.

Communities and Local Government

Strategy, Revenue and Capital Division

4 March 2010

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