Select Committee on Transport, Local Government and the Regions Memoranda


Memorandum by Chartered Institute of Public Finance and Accountancy (CIPFA) (LGB 29)

  CIPFA is one of the leading professional accountancy bodies in the UK and the only one which specialises in the public sector. It is responsible for the education and training of professional accountants and for their regulation through the setting and monitoring of professional standards. Uniquely among the professional accountancy bodies in the UK, CIPFA has responsibility for setting accounting standards for a significant part of the economy, namely local government. CIPFA's members work (often at the most senior level) in public service bodies, in the national audit agencies and major accountancy firms. They are respected throughout for their high technical and ethical standards, and professional integrity. CIPFA also provides a range of high quality advisory, information and training and consultancy services to public service organisations. As such, CIPFA is the leading independent commentator on managing and accounting for public money.

1.  INTRODUCTION AND SUMMARY

  1.1  In his foreword to the White Paper "Strong Local Leadership—Quality Public Services" the Prime Minister described it as setting out "a new vision for local government at the beginning of the 21st Century. It seeks to establish a partnership between central and local government, reflecting the critical importance of local authorities as a tier of democratic government, delivering high quality public services to local people".

  1.2  The Chartered Institute of Public Finance and Accountancy (CIPFA) welcomes the draft Local Government Bill as a further step towards making this vision a reality. In particular, the draft Bill confirms the Government's intention to introduce a prudential approach to local authority capital investment, replacing the present statute based prescriptive system of credit approvals. It introduces wider powers for local authorities to charge for discretionary services and to trade. The draft Bill also holds out the prospect of a reduction in regulatory controls and new powers for some authorities.

  1.3  In other respects, however, CIPFA's view is that the Bill does not move far enough in encouraging the "new localism" that is key to achieving the Government's vision. For example, the Bill implies no change in the balance of central and local funding and signals a further step away from a return of NDR to local control.

  1.4  In summary, CIPFA's views on the draft Bill are:

Capital finance and accounts

    —  the prudential approach to capital investment is a positive development but requires a supportive funding mechanism to deliver better investment;

    —  local authority accounting treatments proposed in the draft Bill should comply with United Kingdom generally accepted accounting practice (UK GAAP) wherever possible;

    —  the criteria by which pooled housing capital receipts will be redistributed from areas of better to poorer housing will need to be precise and transparent;

    —  the drafting implies that the pooling power could in addition apply to non-housing capital receipts.

Financial administration

    —  specifying a "minimum level of reserves" for local authorities is impracticable and should be left to local judgement and good professional practice;

    —  creating a statutory duty to monitor local authority budgets is unnecessary and wrongly implies that a majority of local authorities fail to keep track of their finances during the year.

Grants

    —  "formula grant" implies no change in the balance of funding and suggests a further move away from locally determined NDR;

    —  further details on the formula grant and method of allocation are required before CIPFA can comment in detail to the Committee.

Housing Finance

    —  repayment of "overhanging debt" only on transfer of housing stock does not appear to be an equitable use of taxpayers' money or fair to tenants where transfers do not occur;

    —  the proposal to redistribute excess rental income between local authorities also raises questions of equity.

Miscellaneous and general

    —  the clearance procedures for allowing charging for discretionary services are complex and may not encourage take up;

    —  trading powers should not necessarily be linked to a comprehensive performance assessment (CPA) rating, in particular for inter-authority trading which will benefit local government as a whole;

    —  a sophisticated CPA inspection system that concludes with a simplistic performance categorisation runs the danger of being discredited as a "broadsheet analysis, tabloid headline" approach to performance improvement;

    —  removal of regulatory controls and the granting of additional powers should not be restricted to already high performing or excellent authorities.

2.  CAPITAL FINANCE AND ACCOUNTS

  2.1  CIPFA welcomes the inclusion of clauses in the draft Bill that are intended to give effect to the proposals in the Local Government White Paper to introduce a new prudential system for capital finance in local government. The new system will provide a legislative framework that better supports strategic planning, asset management and proper option appraisal, and hence facilitates better service delivery.

Credit arrangements

  2.2  CIPFA is pleased to be developing the Prudential Code that will underpin the new system. However, CIPFA is concerned that some of the detailed clauses appear to run counter to the Government's stated intention to take, as far as possible, standard local authority accounting practices and concepts (which for the most part are compliant with UK GAAP) as the starting point. For example, clauses 6 and 7 are worded such that leases or contracts are credit arrangements unless otherwise specified by regulation. CIPFA strongly recommends that the new system should rely on local authority accounting practices to identify long term liabilities, and also the manner in which these are required to be charged over time to the revenue accounts of local authorities.

  2.3  The Government could have a power to over-rule these proper practices for specific types of lease or contract, in a similar manner to that proposed for capital expenditure in clause 16. Unless this change is made, large amounts of the detail in primary legislation within the current system will need to be reproduced as secondary legislation within the new system.

Capital receipts

  2.4  In the current system, useable capital receipts may be used either to finance capital expenditure or to repay debt. The ability to repay debt with capital receipts provides a useful flexibility and CIPFA would not want this flexibility to be lost. Therefore, CIPFA would prefer clause 10 1(a) (i) to be amended to include the repayment of debt as a legitimate use of capital receipts.

  2.5  The explanatory notes on clause 10 1(a)(ii) indicate that this clause is intended to facilitate the pooling and redistribution of a proportion of housing capital receipts "from richer authorities to those in areas with a greater need for new housing investment". However, if this is the intention, clause 10 is drawn too widely and could equally be applied to non-housing capital receipts.

  2.6  This clause appears to reduce the incentive for authorities to transfer their housing stock, particularly where part of the incentive is to create resources that could be used to finance the provision of new housing within the local authority area through registered social landlords (RSLs), or indeed to help tackle problems of disrepair in the private sector. To promote equity and fairness, the criteria on which pooled housing capital receipts are to be redistributed will need to be precise and transparent.

Depreciation

  2.7  In order to comply with UK GAAP, provide good management information and to ensure the sustainability of capital investment, CIPFA recommends that depreciation is charged within the accounts of local authorities and is resourced. If, instead, the Government chooses by statute (for example by regulations made under clause 21—Accounting practices) to require a different amount to be charged for the purposes of taxation, then it is recommended that such regulations are phased out as quickly as possible and that a commitment is made to this effect. The full application of depreciation would be consistent with the Government's fiscal strategy, which treats depreciation as a part of current expenditure, and with resource accounting.

Government support for capital investment

  2.8  In the notes on additional measures it is stated that there will be a power to make a wide range of capital or revenue grants to local government. CIPFA recommends that the prime method of providing government support for capital investment in local government should be through revenue support. Capital grant makes capital investment free to the local authority at the point of delivery. This has adverse effects in skewing management decisions, which are widely recognised. At a time when the government has recognised this for its own activities, and is moving away from a system where capital is "a free good", it would be at variance to introduce such a system for local government.

  2.9  Capital grants can have a valuable role in, for example, pump priming. However, if they are used a major source of finance they may result in poorer management decisions, unsustainable capital investment, increased central government control and, possibly, rationing. In order to maximise the effectiveness of the new system, CIPFA recommends that government support for local authority capital investment be focused on support to the revenue account, to support future depreciation and interest costs.

3.  FINANCIAL ADMINISTRATION

Minimum reserves

  3.1  The draft Bill proposes reserve powers for the Secretary of State to determine minimum levels of reserves for local authorities. CIPFA concurs with the White Paper statement that the Government's "preference would be not to make use of these powers". CIPFA does not accept that there is a case for introducing such a statutory minimum either as an absolute amount or a percentage of budget, since only a minority of local authorities in England are judged by the Audit Commission to have "inadequate reserves". Such an intervention would run counter to the promotion of local autonomy and conflicts with the increased financial freedoms implicit in the draft Bill.

  3.2  Local authorities, on the advice of their chief financial officers, should make their own judgements on such matters taking into account all the relevant local circumstances, which will vary between authorities. For example, a well-managed authority with a prudent approach to budgeting should be able to operate with a relatively low level of balances. CIPFA considers that there is no need for additional statutory safeguards to prevent local authorities from over-committing themselves financially. Currently there is statutory requirement for local authorities to set balanced budgets and for chief financial officers to report to members where there is the likelihood of this not being achieved.

  3.3  CIPFA is currently revising its guidance on local authority reserves and balances for consultation later this year. In general, external auditors of local authorities "benchmark" authorities against CIPFA guidance. The paper will set out the principles by which individual authorities should consider the adequacy of their reserves, including their overall financial standing (level of borrowing, outstanding debt, council tax collection rates); their track record in budget and financial management; their capacity to manage in year budget pressures; the strength of their financial management and reporting arrangements; their virement and end of year procedures in relation to budget over/underspends at authority and departmental level; the adequacy of their insurance arrangements to cover major unforeseen risks; and the effectiveness of their overall approach to risk management. These factors can only be properly assessed at local level.

Statutory budget monitoring

  3.4  For similar reasons, CIPFA does not believe that a statutory duty for local authorities to monitor their budgets in year is necessary. The legal and professional responsibilities on chief financial officers to carry out this role and to report to their authorities are sufficient safeguards. CIPFA has recently issued for consultation a revised version of its 1999 publication under the title "A Statement on the Role of the Finance Director in a Modern Local Authority" which includes good practice guidance on this subject. A CIPFA Standard of Professional Practice on Budgetary Planning and Control will provide a further source of good practice when issued this autumn.

4.  GRANTS

  4.1  The draft Bill includes a proposal to amalgamate revenue support and redistributed NDR into one funding stream to be named "formula grant". In our view this is unlikely to make the approach any easier to understand or explain, particularly as the term "formula grant" is itself non-descript and does not communicate to taxpayers the purpose of the funding. "Local service support grant" would be preferable.

  4.2  On a more technical point, the draft Bill tends to treat revenue, capital and financial management as separate issues rather than an indivisible whole. The Bill does not set out how the 'formula grant' will work, yet as long as it remains the dominant income stream for local authorities, it is crucial to their financial standing and financial management; and it impacts directly on the "going concern" concept. If the prudential capital control system is to operate successfully, then local authorities must have access to an assured and adequate level of resources to invest in their assets, whether to replace or renew existing assets or to provide for new needs

  4.3  Although the White Paper included commitments to establish a high level working group to examine all aspects of the balance of funding and to reduce the incidence of ring fenced grants, CIPFA does not detect in the draft Bill or commentary any movement on these fronts. It is commonly accepted that the present imbalance compromises local financial autonomy and distorts the impact of council tax rises as a result of the gearing effect. Arguably the imbalance affects the ability of local authorities to be transparently accountable to their electorates for the resourcing and delivery of local services.

  4.4  CIPFA is also concerned that the proposal to merge NDR redistribution into formula grant will have two disadvantages. Firstly, it "detaches" the business community, a key partner with local authorities, from any sense that they are contributing to the provision of their local authority's services. In the context of a longer term vision for a "new localism", this is not a positive development. Secondly, it signals a further step back from the possibility of returning the business rate to local authority determination. Certainly this decision does not fit well with the general framework of freedoms and accountabilities that the draft Bill professes to support. CIPFA's view is that this area of the Bill should be revised or at least leave the possibility open of a change in the funding balance through return of NDR and/or other measures in the near future.

5.  HOUSING FINANCE

  5.1  CIPFA has already commented at 2.5 and 2.6 above on the draft Bill's proposals to redistribute housing capital receipts from "richer" areas to those with a "greater need" for housing investment. Similar points about transparency, equity and fairness can be made concerning the draft Bill's proposals for the government to pay off "overhanging debt" (ie the outstanding debt owed by an authority where the capital receipt arising from a LSVT is insufficient to clear the whole housing related debt) for transferring authorities but not for local authorities which retain their housing stock.

  5.2  From the perspective of the tenant who remains with the local authority, part of their rental payment services the historic housing debt rather than being applied to repairs, maintenance and improvements. The "playing field" is not level and taxpayers' money is being used in a discriminatory fashion. There is also a measure of "perverse incentive" in the proposal as it benefits authorities that have not maintained their housing stock in the past to a standard where the market value exceeds the historic debt.

  5.3  The "perverse incentive" and equity arguments also apply to the draft Bill's proposals that where local authorities generate surplus rental income, even though incurring management and maintenance expenditure comparable with other authorities, that the surplus be transferred to authorities which cannot generate sufficient rent income. While the justification that such surpluses should no longer benefit authorities' revenue accounts may be equitable on the grounds that tenants should not "subsidise" council tax payers, the assumption that it is equitable for one authorities' tenants to subsidise another's is not. Arguably, equity would dictate that rents should be reduced to match expenditure and that redistribution and equity should be achieved centrally through housing revenue account subsidy. The assumption behind these proposals seems to be that housing is a national service and that money from one area can be readily moved around the country.

6.  MISCELLANEOUS AND GENERAL

Charging for discretionary services

  6.1  The proposals for calculating charges for discretionary services, including limiting charges to the recovery of costs and the possible capping of charges, seem to be over-elaborate and not designed to encourage take-up. Leaving the setting of charges for discretionary services to the market would seem to be more straightforward, assuming that the local authority did not have a monopoly on supply.

Trading

  6.2  The commentary makes clear that the Government intend the availability of new trading powers to depend on favourable comprehensive performance assessments (CPAs). CIPFA hopes however that these restrictions will be flexible enough to take account of the different levels of commercial risk involved in different types of trading. Arguably low risk trading should be open to a wider range of authorities.

  6.3  Perhaps the greatest practical need is for power for trading between neighbouring local authorities, and between county councils and their district councils, for work and services within the functions of both parties. Existing powers for trading between such partners (for professional, technical and maintenance work, and IT) have been widely used for many years with, so far as CIPFA is aware, no serious failures.

  6.4  CIPFA believes it would be constructive to allow such trading for all types of work and services within the functions of both parties, without limitation by reference to the CPAs of contractor local authorities. All local authorities stand to benefit from inter authority trading (for example through shared services) and it should not be made more difficult to trade with another local authority than with the private sector.

Performance categories

  6.5  CIPFA supports a robust, value-added inspection regime for public services and also supports the joining up of inspectorate activity to increase the efficiency and reduce the burden of inspection. However, CIPFA is concerned that the draft Bill's approach to CPA is based on a sophisticated system of inspection leading to a very simplistic performance categorisation. There is a danger that this "broadsheet analysis, tabloid headline" approach will discredit the process and will not produce the improvements that CPA is designed to achieve.

  6.6  Local authorities are complex organisations and potentially few will be able to demonstrate that they are consistently "high performing" across all functions. Inevitably the judgement will be "on balance" and therefore it will be important that local authorities are clear as to how they can move between performance categories and have the means and incentives to do so. It will also be important for local authorities to understand the relative weight of the judgements applied by the Audit Commission, OFSTED, the Social Services Inspectorate and other inspectorates or assessment bodies in arriving at the overall conclusion on an authority's performance rating.

  6.7  The draft Bill proposes that the Audit Commission place local authorities into performance categories. The commentary indicates that the Secretary of State will have no power to vary the Audit Commission's decision on individual authorities. The Secretary of State will then exercise powers to determine the removal of regulatory controls or to grant additional powers depending on the performance categories. The extent to which this system provides incentives for local authorities to improve depends on the attractiveness of the rewards on offer. Arguably, while exemption from capping is welcome, the fact that it has not been used since 1997 indicates that it is not a prize that will promote significant improvement by itself.

  6.8  Notwithstanding the previous comments, CIPFA would encourage that the removal of regulatory controls and the granting of new powers is not restricted only to those authorities judged to be already in the "high performing" or "excellent" category. Authorities that are "striving" or "good" logically deserve opportunities to demonstrate that they can act responsibly and with innovation. CIPFA would also encourage a degree of controlled experimentation in giving some freedoms and additional powers to a sample of less well performing authorities to see whether this stimulates better performance.


 
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