REVIEW OF THE LEGISLATIVE PROVISIONS FOR LOCAL AUTHORITY BORROWING
MINUTES OF THE MEETING – 12 June 2015, Verity House, COSLA, Edinburgh
Attendees: Scottish Government (SG)
Hazel Black, Local Government Division - Chair
Louise Hester, Local Government Division - Minutes
COSLA
Jonathan Sharma
Directors of Finance
Derek Yule – Highland Council
Alan Puckrin – Inverclyde Council
Alistair Crichton – North Lanarkshire Council
David Robertson – Scottish Borders Council
Treasury Managers
Innes Edwards – City of Edinburgh Council
Joe Quinn – North Lanarkshire Council
Tracey Russell – Dundee City Council
Apologies: Scottish Government (SG)
Robin Campbell, Planning and Architecture Division
Directors of Finance
Robert Emmott – Eilean Siar
CIPFA
Gareth Davies
Audit Scotland (AS)
Russell Frith
MINUTES OF THE REVIEW GROUP MEETING HELD 6 March 2015
1. Agreed.
UPDATE ON ACTIONS ARISING FROM PREVIOUS MEETINGS
Action: Directors to write up the business case for permitting local authorities to
borrow to on-lend to their subsidiary bodies.
Update on action: Proposal / business case on Agenda - Item 3 – Paper 6.
Action: CIPFA to investigate the reliance in England on the argument set out in
CIPFA guidance on the use of annuity.
Update on action: CIPFA investigated the reliance in England on the argument
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set out in CIPFA guidance on the use of annuity – this information has been
provided to the group.
Action: The Scottish government to redraft the guidance to mirror the English
guidance as it relates to the use of annuity for calculating the repayment of loan
fund advances.
Update on action: Redrafted guidance on Agenda - Item 4 – Paper 7.
AGENDA ITEM 3
Paper 6 - Borrowing to on-lend to a local authority subsidiary - paper from
Directors of Finance
2. The group had no comments to offer on the paper presented by Directors, and
the Scottish Government advised the paper would be used to present the case
to Scottish Ministers.
3. The SG raised the question as to what represented a prudent provision for the
repayment of these loans. The English guidance identified as prudent either EIP
or annuity but did not mention maturity loans. The group discussed maturity
loans both from the perspective of whether this was likely/ prudent and whether,
if a maturity loan was advanced, whether it was prudent for the repayment to
match the profile of the repayment (a single lump sum). The group considered it
unlikely that a maturity loan would be offered but considered this to be a matter
for each local authority. In such cases a prudent provision could be to match the
single repayment. It should be for each local authority to determine the type of
loan and its repayment based on prudent principles. Its annual statement should
set out why the loan arrangement and repayment is considered prudent. The
guidance will be framed in this way but will make it clear that these loans cannot
be renewed at the maturity date, and that a local authority will be required to
monitor the ability of the subsidiary to repay the loan and, if necessary, make
prudent provision themselves as required.
Actions:
 SG to present the case made by Directors of Finance to Scottish Ministers.
 SG to include use of maturity loans in the guidance
 SG to include a question on loans to a local authority subsidiary body in the
consultation paper to be drafted.
AGENDA ITEM 4
Paper 7 - Draft Regulations (Annex A) and Draft Guidance (Annex B)
Draft regulations
4. Written comments had already been received from CIPFA in advance of the
meeting and these were considered by the group.
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5. It was agreed the definition of capital expenditure at section 1 was sufficient.
[post minute note: the same definition is used in the Local Government in
Scotland Act 2003 – section 39]
6. The group discussed the definition of credit arrangements with reference to long
term liabilities. The current drafting mirrors the English legislation. However, the
Prudential Code references the English legislation definition and not the
Accounting Code. The Accounting Code does not define [other] long term
liabilities. The Accounting Code does however set out the accounting for leases
(finance and operating) and service concession arrangements (PPP/PFI or
similar) which the term ‘credit arrangement’ is seeking to identify. A Director
advised that the accounting for leases was due to change and the drafting
should ensure that only those leases with associated liabilities were treated as
borrowing under the regulations. Subject to this it was agreed that the
regulations should define credit arrangements by reference to leases and
service concession arrangements with the associated liability being borrowing
for the purpose of the regulations. The consultation will ask local authorities to
confirm that there were no other liabilities that need to be recognised as
borrowing.
Actions:
 SG to change definition in the regulations for credit arrangements to provide
a direct link to leases and service concession arrangements.
 SG to include a question on the definition of credit arrangements in the
consultation.
7. The group noted that SG had already advised that changes were required to the
drafting of the regulations to allow the authorised limit to be changed during a
financial year and that there was flexibility for the CFO to change the individual
borrowing and credit limits subject to this not breaching the authorised limit - as
permitted by the Prudential Code. Further discussion on a temporary breach of
the authorised limit due to refinancing of borrowing was discussed later in the
meeting when discussing the guidance. This later discussion is reflected in the
minutes for the guidance (Annex B) below.
8. CIPFA queried the use of the word ‘revenue’ in regulation 9 of the draft
regulations, and whether this excluded capital receipts. The group discussed
and agreed that it was generally understood to mean all the income of the
authority.
9. Directors advised that loan fund advances were actually made after the year
end as part of the closure of the accounts. The amendment suggested was to
delete ‘Before the end’ and substitute ‘For’ ‘each financial year.’ The group
agreed to this amendment.
Action: SG to request solicitors amend the regulations.
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Guidance (Annex B)
Treasury management and loans to third parties
10. CIPFA queried whether treasury management should be defined and whether, if
the definition in the CIPFA Treasury Management Code were adopted, whether
this was tight enough. This was in particular reference to on-lending. The
regulations do not define ‘treasury management activities’ but do require local
authorities to have regard to recognised codes when borrowing money. As such
there is a link to a definition which the guidance could make clear. The group
agreed that treasury management included more than cash flow management
as it encompassed the refinancing of debt, and included borrowing in advance
of actual capital expenditure. The regulations specifically exclude any borrowing
for treasury management from being the subject of a loan fund advance.
Therefore only those loans funded from borrowing will be the subject of a loan
fund advance. The group agreed that all loans made under powers in Part 3 will
be treated as funded from borrowing and be the subject of a loan fund advance.
All other loans are not funded from borrowing are to be treated as a
loan/investment from cash backed reserves. The guidance is to reflect this
approach. It was considered that these arrangements were sufficient to control
borrowing to on-lend.
Authorised limit
11. Treasury Managers raised the question whether provision needed to be made in
the regulations to allow the authorised limit to be temporarily breached if this
was due to a refinancing of borrowing. The new borrowing may be taken before
the old debt is repaid which may mean the authorised limit is breached
temporarily. This scenario should only exist for a few days at the most. It was
clear from the review group discussion that individual local authorities will take
different approaches to refinancing. Some will take this to the authority at the
time of the proposed refinancing seeking specific approval to both the
refinancing and for a temporary increase in the authorised limit if required.
Other authorities will include the potential to refinance, if conditions are
favourable, in their annual treasury management strategy (which is approved by
the authority) including authorising the s95 officer to take the refinancing
decision if an opportunity arises. The two different approaches are both
considered valid.
12. The group noted this scenario was not covered in the Prudential Code. They
agreed that they did not consider that an authority should increase its
authorised limit to accommodate a potential refinancing but should continue to
reflect the authority’s known plans for capital expenditure and treasury
management. It was agreed that SG should approach CIPFA asking them to
consider this scenario in terms of the Prudential Code.
Actions
 SG to approach CIPFA for their view on temporary breaches in the
authorised limit due to refinancing and whether this needs to be covered in
the Prudential Code.
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
SG to include a suitable provision in the regulations that refinancing will not
breach the authorised limit for the purposes of the regulations.
Prudent provision
13. As drafted Option 1, the Historic Method, is only available for the repayment of
loans fund advances already made in prior years. Reflecting discussion at
previous meetings on the annuity option Directors recognised that, going
forward, each authority would need to consider prudent provision. Recognising
that current capital plans have been approved based on repaying loan fund
advances under Schedule 3 Directors considered that a transitional provision
was required. The transition period sought was 5 years, commencing 2016-17.
The SG agreed this was a reasonable request and the guidance would be
changed to reflect this. No changes were required to the regulations.
14. The SG asked if any other transition arrangements were considered necessary.
This led to a discussion as to when the regulations should commence. The SG
advised it was planning to bring them into force during 2015-16 to respond to
the ask of the City Deal. Directors representing the City Deal advised that it was
unlikely any loan fund advances would be required for 2015-16 and therefore
the regulations could be commenced 1 April 2016, i.e. at the start of the
financial year. It was agreed that this represented a better approach and
simplified matters regarding setting the authorised limit before a financial year
and the annual statement on prudent provision. Directors agreed to check and
confirm that setting the commencement date as 1 April 2016 did not create any
problems for the City Deal.
15. The SG sought the group’s thoughts on whether, for the depreciation method,
the depreciation should not be reversed, but stands in lieu of the ‘statutory
repayment of debt’. The group agreed with CIPFA that this complicates existing
arrangements. It was agreed the guidance will continue to require reversal of
the depreciation and a separate transaction for the statutory repayment of debt.
Action: Directors of Finance to confirm they are content for the regulations come
into force 1 April 2016.
Annual Statement
16. The group agreed that guidance based on principles should be provided on
what the annual statement on the authority’s policy for repayment of loans fund
advances should cover. Direct reference to the Audit Scotland’s Borrowing
report should not be made. The group’s preference, reflecting that all countries
will be making prudent provision, was for the Prudential Code to set out the
principles for an annual statement.
Action: SG to approach CIPFA on the possible inclusion of the principles for the
annual statement to be included in the Prudential Code.
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Other items
17. The group noted the drafting note at paragraph 27 that further work to identify
the powers of statutory bodies to borrow was being undertaken and would be
included in the next draft of the guidance.
18. The group noted the drafting note at paragraph 28 on the definition of subsidiary
body. SG advised this was likely to be based on proper accounting practices.
19. The group noted the drafting note at paragraph 31 regarding the LASAAC
review on the loans fund and agreed the approach.
20. Directors commented on paragraph 30, that the guidance should reflect the
regulations that ‘All borrowing should be part of the loans fund, excluding money
borrowed for pension funds…’ The group agreed.
21. CIPFA suggested that the definition of prudent provision set out in paragraph 35
could be replaced with an accounting definition e.g. FRS102. The group
agreed.
Action: SG to make the agreed changes to the guidance.
NEXT STEPS
1. The SG advised that a submission will need be made to Scottish Ministers
based on the review groups work. The submission will set out the changes
being proposed and, subject to Ministers’ agreement to those changes, will seek
Ministers’ approval to consult on the draft regulations. SG advised the
submission is planned to be made before the end of June.
2. The regulations and guidance will be redrafted to reflect changes agreed at this
meeting and will be circulated to the group for final comments. SG advised that
the new drafts should be available for comment in July.
3. The consultation document will also need to be drafted. The drafting of this
would commence August.
4. Subject to Ministers agreement, the group will meet to agree the draft
regulations, guidance and consultation document prior to them being issued.
DATE OF NEXT MEETING
5. The group agreed the next meeting will take place on Friday 21 August at
COSLA offices.
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