Policy paper

Local government capital investment and borrowing: proposed measures to address risk

Published 12 May 2022

Applies to England

The government has just introduced new legislative powers to increase and spread prosperity and opportunity across the UK. Empowering local leaders to grow their local economies and improve public services will need local capital investment to meet its objectives.

It is, therefore, more important than ever that the capital system is robust and effective at protecting taxpayers’ money while supporting local freedoms to make much needed investment. Government must make sure it has the appropriate powers to directly address instances of highly risky practices. We are, therefore, announcing today the government’s intention to expand its statutory powers to directly tackle excessive risk within the local government capital system in England.

The powers we are seeking, should provide the government the flexibility to intercede where it is appropriate and necessary to do so based on the government’s assessment of risk. Our targeted approach means that the majority of councils can still continue to borrow and invest in much of the same way they are currently doing.

The proposed powers will provide the government with a more flexible range of intercessions where excessive risk is present to require authorities to provide specific information, undertake commissioned reviews, place borrowing caps in relation to a range of risky activities or take specific actions to reduce its level of risk.

The government recognises that there is no one-size-fits-all approach, and the individual circumstances of each local authority must be taken into account in assessing risk. There are, however, metrics which the government will have regard to in determining whether it is appropriate to the use the statutory powers. These are being refined through working with the sector but include:

• Proportionality of debt. This would be measured as total level of debt compared to the local authority’s financial capacity (the financial resources at the disposal of the local authority.

• Proportion of capital assets which are investments taken in order to generate net financial return or profit.

• Estimates show that the authority is not meeting its statutory duty to make sufficient provision to repay debt.

• Proportion of debt held by the local authority where the counterparty is not local or central government. Including credit arrangements and loans.

Further, where there is evidence of financial failure, for instance the issuance of a Section 114 notice, the government will consider the use of these powers where capital practices have been identified as a significant contributing factor.

We are approaching those local authorities likely to be particularly vulnerable to these sources of risk to offer to work supportively and cooperatively on how they can reduce their risk exposure.

These measures form part of a multi action, cross government approach to addressing risk across the capital system. Other actions include updating statutory investment guidance and Minimum Revenue Provision regulations.

HM Treasury has also issued an update to the Public Works Loan Board lending guidance (PDF, 288KB), addressing lending to authorities where there is a more than negligible risk of non-repayment.