The National Audit Office has just published its latest report into local authority investment in commercial property and recommends a toughening up.
a. The Ministry of Housing, Communities & Local Government (the Department) should improve the relevance and quality of data and analysis it has on authorities’ acquisition of commercial property to understand more fully any associated risks and to provide greater assurance on framework compliance.
b. The Department, with HMT as appropriate, should broaden its analytical work on local authority commercial property acquisition to:
• assess potential market-distortion effects;
• understand any value-for-money risks associated with access to PWLB borrowing; and
• assess the investment risks that the sector as a whole is exposed to through the national ‘portfolio’ of investment properties.
c. The Department needs to articulate clearly both the nature and scale of behaviour causing it concern in relation to both borrowing in advance of need and disproportionate borrowing. It should:
• monitor trends more actively at sector level to understand compliance; and
• assure itself that it has sufficiently flexible forms of intervention supported by robust evidence to enable it to target particular behaviour.
d. The Department, working with CIPFA as appropriate, should review the prudential framework, its oversight and intervention arrangements, and underpinning data to ensure they remain fit for purpose in the context of an increase in local authority commercial activity. In doing this the Department should:
• examine whether varying interpretations of the authorities’ borrowing and investment powers in the sector are having an impact on the resilience of the prudential arrangements; and
• review recent changes in local authorities’ investment and borrowing activities and their underlying motivations to understand fully:
• the drivers behind recent changes in behaviour in different types of authority, and the relative importance of each driver
- the extent to which authorities have undertaken activities that test the limits of the framework such as borrowing to invest solely for yield;
• the extent to which changes to the codes and guidance have genuinely changed behaviour or whether other factors such as the recent rise in the PWLB rate might have been more significant; and
• whether recent changes to the codes or guidance have had any unintended consequences that may have increased risk.