LGA raises concerns over capital risk metrics proposed by Government

The LGA made the comments in its response to the Government’s consultation on the implementation of capital risk metrics and mitigation measures, which was launched in May this year and has now closed.

The changes form part of powers under the Levelling Up and Regeneration Act which give the Secretary of State the ability to review and intervene in councils to address excessive risk in local authority borrowing and investment.

The LGA said the potential threat of intervention based on the metrics could “stifle innovation and local investment”, with particular reference to proposed changes to metric 2.

Under the current system, metric 2 measures the proportion of the total of a local authority’s capital assets which is investments made, or held, wholly or mainly in order to generate financial return.

The Government consultation proposed replacing metric 2 with an approach that would measure investment income as a proportion of total service expenditure.

The LGA warned this revised metric would identify councils that had been successful in making investments, rather than those which had made poor returns.

It said: "There is a danger that the existence of this new metric will stifle innovation and local investment. It is therefore critical that if this measurement is used that any local authority identified by this metric should be assessed more widely before it is formally taken as "breaching" the metric and any intervention action is initiated."

Elsewhere, the LGA said: "While we recognise that many of the factors identified by the metrics do represent potential risks to councils, it is important also to recognise that best practice is to manage risks and that it is both unrealistic and impractical to think they can be avoided entirely."

It also said that consideration should be given to local government reorganisation, warning that new councils could inherit significant investment assets and/or debt that could mean they appear to breach the risk metrics as soon as they are set up.

In such circumstances, initiating intervention would be premature, it said.

The role and views of the external auditor should also be considered before any intervention is launched, the response added.

It added: "For all the metrics, whenever a council is calculated to breach a threshold, it is vital that MHCLG further assess and take account of local context before initiating intervention. These points are expanded on in the answers to the individual questions."

Adam Carey