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concerned local authorities could not wait to ditch leasing, but it
was probably a mix of all those factors mentioned above and
maybe some personal experience too. On reflection, it’s likely the initial fall away of leasing after the arrival of the Prudential Borrowing Code was due to a new and changing focus on best value, which incorporated outsourcing of services. Many of the more traditionally leased assets were being dealt with by alternative arrangements, for example: The drive for efficiency and value for money were the key reasons for the Prudential Borrowing Code’s application. The focus was now on the longer-term use of capital with more emphasis on developing strategic and affordable plans and the use of option appraisals to ascertain value for money. This approach has since evolved and at a CIPFA Prudential Borrowing Code Conference last December, the entire focus was on demonstrating how the Code has been applied and developing accurate and focused option appraisals that deal with both quantitative and qualitative issues in more detail – resulting in financial and operational/service requirements being linked. I believe the Prudential Borrowing Code means different things to different people. I guess we in leasing see it as specific to our industry, and the financial and operational managers at local authorities see it as the freedom to spearhead new projects, which had previously and frequently been stalled, due to scarce funding. As a result capital expenditure has grown significantly in housing, transport and education with a mixture of local authority funded “spend to save” projects including |
Special Educational Needs
accommodation for children, new car parks, leisure centres and
call centres. It has also grown with private finance initiative
projects such as Building Schools for the Future, Decent Homes
and improved lighting in town centres and on our roads. One of the contributing factors for local authorities’ decreasing use of leasing has been their longer-term focus on capital. They have taken advantage of the flexibility the Code has allowed and extended borrowing periods to take advantage of the lower rates offered by the Public Works Loan Board (PWLB) and LOBO (Lender Option Borrower Option) loans, as provided by many commercial banks, for debt re-structure and to support the growing rise in capital expenditure projects. Through affordability demonstrations, many local authorities have been able to reduce their overall borrowing costs and thereby improve a major Prudential Code indicator measure. This longer borrowing development is supported by the PWLB average loan period, which in 2005/06 was measured at 31 years, up from 14 years pre Code. Some LOBOs have been written with term periods beyond 75 years. These loans are becoming less popular following concerns from CIPFA about the risks involved. These loans are often offered at discounted rates in the early periods with higher rates fixed by the lender at later stages in their life. It is now believed that the average loan period has risen further to beyond 40 years. So it is clear that local government was focused on the bigger picture for the Prudential Borrowing Code, but one could argue that it really does not make sense funding assets with an efficient working life of five to seven years with loans spanning periods beyond 30 or 40 years and a depreciation policy that operates on what the Treasury calls an opaque system. This issue is currently being reviewed by the Department of Communities and Local Government (DCLG). |
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