The Prudential Code for Capital Finance in Local Authorities and Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes. Consultation.

The LGA exists to strengthen local government so communities thrive.  This means championing and being the voice of local government, ensuring it has the resources, powers and support to deliver the best possible outcomes.

This response has been approved by the Local Government Resources Committee.

The Prudential Code and the Treasury Management Code form two parts of the Prudential Framework for local authority capital finance. This was introduced by the 2003 Local Government Act and 2003 Capital Finance Regulations. It was a major step in freeing local government from centrally imposed borrowing controls and the Government placing genuine trust and reliance in local government’s ability to manage its own affairs according to the sector’s own professional standards. In England, the other two parts are statutory guidance published by MHCLG - Guidance on Local Authority Investments (“Investments Guidance”) and the Guidance on Minimum Revenue Provision (“the MRP Guidance”).

The Prudential Code and Treasury Management code were last reviewed in 2021 and the latest MRP Guidance (the 5^th edition) was issued in 2024. The latest Investments Guidance was issued in 2018, and a consultation on revisions is expected soon, as officials have commenced the process of reviewing it.

The current review of the Prudential Code and the Treasury Management Code is effectively a post implementation review of the 2021 codes. The areas identified in the consultation questions are mostly suggested minor improvements or clarifications. In our opinion, they do not warrant a full scale revision and re-issuing of either code.  Instead, there are alternative ways of improving guidance and supporting good practice, such as by the provision of more training. There is very little at all in the consultation about the Treasury Management Code. 

As well as being a major undertaking for CIPFA, when new codes are issued there is a significant resource implication for local authorities. Each local authority will have to purchase new copies of the code and associated guidance (currently about £2,000 for a full set) and have to spend time assessing the new codes and work out whether they need to change their practices to comply, for what are likely to be only minor changes, if any.

Question 1: Is a change in the structure and coverage of the Prudential Code, Treasury Management Code and/or the accompanying guidance needed to improve their application and the achievement of the Codes’ objectives? If so, what changes are required?  

The Prudential Code and the Treasury Management Code are both complex technical documents and as such will always be difficult for non-specialists to understand. Rather than considering reordering / restructuring the content, an alternative approach to improve understanding and application would be for CIPFA to invest further in training for both practitioners and for elected members who have responsibility for Treasury Management.

Question 2: Do you think that “have regard to” should be clearly defined in the Prudential Code and/or Treasury Management Code? 

The term “have regard” was included in the 2003 Local Government Act. This states that in determining how much money a local authority can afford to borrow, the local authority is required “to have regard to one or more specified codes of practice, whether issued by the Secretary of State or another”. The capital finance regulations then specified that this should include the Prudential Code.

If CIPFA is to include a definition of “have regard to” it will be providing an interpretation of the meaning of the legislation. It should think very carefully before doing this. A definition of “have regard to” is arguably an example of providing legal advice on the interpretation of legislation, or even, if it is part of the code, defining or deciding what that legislation means. We believe this is beyond the role of CIPFA.

Question 3: Should prescribed indicators be introduced to measure proportionality? If so, what would you suggest they should be?

Two of the Prudential Code’s objectives relate to proportionality:

1. a local authority’s capital expenditure plans and investment plans are affordable and proportionate, and
2. the risks associated with investments for commercial purposes are proportionate to their financial capacity.

What counts as “proportionate” at a local level will be decided by numerous factors, not all of which can be reduced to a simple (or even a complex) calculation. They will include a variety of local non-financial factors, local priorities and the appetite for risk. Such matters are matters for elected decision makers and it is a matter of judgement for politicians where the balance of risks and benefits lies in relation to any particular scheme. The code is helpful in ensuring proportionality should be central to decision making and that should continue. Prescribing a calculation that does not take account of local factors would be unhelpful.

Question 4: Should the Prudential Code include governance guidelines concerning the liabilities arising from group structures, particularly with regard to wholly owned subsidiaries and development corporations? If so, what would you suggest? 

While further guidance on group structures is something that has been called for, it is not clear that it needs to be part of the code.

Question 5: Should the “Determining the Capital Strategy” commentary in the Prudential Code include additional requirements for Investments for a Service or Commercial Purpose relating to ongoing performance and monitoring? If so, what do you suggest should be included?

The section on determining the capital strategy is an important part of the code. It is right that proper attention should be paid to the capital strategy and that those charged with approving it understand it and its implications. Ongoing performance and monitoring should be part of this – and at the very least must be seen as good practice. However, it is not clear that adding further clauses and requirements to the Prudential Code itself would help; it could make requirements more rigid and introduce further complexities. Instead, further guidance and training from CIPFA on capital strategies and on best practice would be a better way forward.

Question 6: Are there any other amendments to the Codes for service and commercial investments that are needed to improve transparency, governance and scrutiny or decision making? If so, what would they be?

We do not have any proposed amendments to make here.

Question 7: Should the Liability Benchmark be further defined and explained, to eliminate, as far as possible any scope for authorities to calculate or interpret it differently? If so, how?

Question 8: Should the expectation that the liability benchmark should reflect an authority’s current capital programme be made more explicit?

Question 9: Should the operational boundary be removed as an indicator, with the liability benchmark in its place, as a measure of how much debt a local authority would usually need under normal circumstances?

Questions 7 through to 9 all relate to the liability benchmark. In the current code the use of the liability benchmark is recommended but is not mandated. The first considerations should be whether there is a case for this to be changed and whether the liability benchmark should be mandated. The consultation document does not cover this. If it is to be mandated, then there will be a need for a wider and deeper understanding amongst all those in local authorities involved in Treasury Management and in assessing and approving capital finance limits. This includes officers and members, and even external auditors.

Question 10: Does the Prudential Code make it sufficiently clear that the authorised limit must be a true indication of what is actually affordable?

Question 11: If the answer to Q10 is “No”, should the Prudential Code include further guidance on formulating and determining the authorised limit so that it’s a truer indication of what is affordable? If so, what would you suggest be included?

Questions 10 and 11 are linked. The code makes it clear that affordability is key. However, anecdotal evidence is that what affordability means in practical terms is not always understood. For example, the consequences and choices for revenue budgets that will need to be made. This is an area where improved guidance could be helpful, although not necessarily as part of the code itself.

Question 12: Should the indicators for capital expenditure, the capital financing requirement, financing costs vs the net revenue stream and service and commercial income vs the net revenue stream include the two previous years?

The code is currently forward looking in its use of indicators, requiring a forward look of current plus two years. This is the right approach – it is about setting the strategy going forward. It is not clear that mandating reporting in previous years is necessary. Capital expenditure is lumpy and previous years indicators may not be relevant as an indicator of future indicators. That said, it should be of interest when setting the capital strategy and CIPFA should recommend it as good practice rather than updating the code.

Question 13: Should the prudential indicator for the maturity structure of borrowing require all appropriate 10-year bands for when the authority had debt maturing (ie 10–20 years, 20–30 years etc)?

The consultation document states that this is already good practice and is included in the guidance that goes with the code. If a new version of the code is to be issued, a new version could incorporate this directly into the code. However, given it is already advised in the guidance it does not feel like this is a major change and should already reflect current practice. 

Question 14: Are there any areas in the Prudential Code and/or Treasury Management Code where additional guidance or improvements are needed? Please support your answer by giving details of the amendments you would suggest.

See comments made in the Introduction. We believe the case needs to be stronger before a decision is taken to undertake a full revision and issue new codes. 

Bevis Ingram, Senior Adviser Finance

Email: [email protected]