The Treasury is to allow local authorities to borrow from the Public Works Loan Board (PWLB) to refinance debt even when this has been incurred on commercial property projects now ineligible for the board’s support.
New guidance from the Treasury’s Debt Management Office (DMO) stated: “The government recognises the benefits of [local authorities] having ready access to the PWLB for refinancing.
“The PWLB will therefore lend for this purpose even if the local authority is planning activity that makes them otherwise ineligible for PWLB support.”
But the DMO warned that councils “must not pursue a deliberate strategy of using private borrowing or internal borrowing to support investment in an asset that the PWLB would not support and then refinancing or externalising this with PWLB loans”.
The guidance followed a ruling by the Treasury last November that councils could no longer borrow from the PWLB simply to support property purchases made “primarily for yield”.
It said: “This supplements the existing principle in the prudential [borrowing] code that local authorities should not enter into financial arrangements which serve no direct policy or treasury management purpose.”
Buying property to raise income fell into neither of these permitted categories, the DMO said.
It emphasised: “The government and CIPFA are clear that borrowing to invest for yield is not permitted under the prudential framework.”
Local authorities may still invest to improve or change the use of an asset that they do not own “where it serves a direct policy purpose” or where policies are being delivered through a third party such as a housing authority, joint vehicle or joint venture.