Local Government and Communities Committee

Meeting date: Wednesday, February 24, 2010

Official Report 397KB pdf

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Subordinate Legislation

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Local Government Investments (Scotland) Regulations 2010 (Draft)

Agenda item 2 is to take oral evidence on the draft Local Government Investments (Scotland) Regulations 2010, which is an affirmative instrument. I again welcome the Cabinet Secretary for Finance and Sustainable Growth, John Swinney MSP. He is accompanied by officials: Colin Brown, senior principal legal officer; and Hazel Black, head of local authority accounting.

I offer the cabinet secretary the opportunity to make some opening remarks before I invite questions from committee members.

Provision was made in the Local Government in Scotland Act 2003 to empower local authorities to invest money in accordance with regulations. The provision was included in response to representations from local authorities that previous legislation on the investment of money was too prescriptive and did not provide them with sufficient flexibility to achieve best value from their investments.

The draft Local Government Investments (Scotland) Regulations 2010 are the result of some two years of work with local authorities and other stakeholders to agree an appropriate framework. The new framework will provide local authorities with flexibility and self-governance, but it will also ensure that they give due regard to the risks associated with the investment of money.

The regulations will require local authorities to have regard to two codes of practice that have been developed by the Chartered Institute of Public Finance and Accountancy—CIPFA, which is the professional accountancy body for public services—in conjunction with a range of external bodies. For example, the treasury code sets out the treasury management practices that a local authority should adopt. Requiring local authorities to follow the codes forms an important part of the revised framework that the regulations will introduce.

The regulations also provide that a local authority may invest money only with the consent of Scottish ministers. The consent conditions do not require a local authority to get approval from ministers each time that it wants to invest. Rather, they require the local authority to prepare an annual investment strategy that identifies the types of investments that it will permit, any risks that are associated with those types of investment and the controls that will be in place to limit those risks. The local authority will also be required to produce an annual investment report at the end of each financial year.

The conditions are also the result of extensive consultation with authorities and other stakeholders. They complement the requirements of the CIPFA codes to which I referred. The conditions will be set out in a circular, which will extend to some 14 pages. We will issue the circular on 1 April, which is the date on which the regulations will come into force.

In summary, the draft regulations have been asked for and will be welcomed by local government. Together with the circular, they will bring more rigour to the way in which councils invest money. All of that has followed detailed engagement and discussion with councils and other stakeholders.

I would be delighted to answer any questions.

Paragraph 4 of the draft finance circular that you have kindly provided, which will be issued following approval of the regulations, says:

“The new regulatory framework introduced by regulations made by Scottish Ministers under section 40 powers provides greater autonomy for local authorities in their investment activities.”

Does that mean that council funds will be more or less likely to be invested in dodgy Icelandic banks?

At the moment, we have situations in which surplus land and buildings are falling between two stools. Is that not the case, cabinet secretary? There are several examples in my constituency. A school has closed, efforts to sell the building and land for development have fallen through, and a decision is now being taken, because of the decline in land values, to make no further attempt to sell the property. Instead, it will be held—some people might say, pejoratively, “hoarded”, but let us say “held” for the moment—by the local authority until it envisages a recovery in land values and therefore, it hopes, a greater future return to the council coffers from the sale.

I presume that the point at which the council decides to hold the land in anticipation of future capital appreciation rather than dispose of it immediately, which was its initial aim, is when it becomes an investment property, because it is being held for the purpose of capital appreciation. Is that correct?

No, because on plenty of occasions we dispose of public land at levels below the higher values that could be commanded if we either retained them or disposed of them to another party in order to enable affordable housing developments to take their course. That is perfectly permissible within Scottish public finance.

Or public bodies for which you are responsible.

Would Mr Brown like to comment on the point at which a non-investment property becomes an investment property?

But it can stay in a limbo. My question is: can it lie in the limbo of designation for two or three years?

No, I never do third ways. That is associated with another party.

That is where you are trying to create the third way, Mr McLetchie—

So some investments are held for capital appreciation and some are not.

Actually, I would call that being held for capital appreciation. Is that not what common sense suggests?

I stand to be corrected, but I think that I would be unable to do that.

I thank the cabinet secretary and the witnesses for their attendance and evidence.

That is a different matter. If Mr McLetchie wants to marshal before me the scenario that he is concerned about, I will certainly consider it, but there are many circumstances in which public land is disposed of to facilitate affordable housing development at a level that is beneficial to that development. That is an understandable objective.

If an authority has land that it resolves not to dispose of because it believes that it will appreciate in value, albeit over two, three or four years, that surplus land becomes an investment. The reason for retaining it is to generate capital appreciation. Is that not the case?

With respect, cabinet secretary, there is. You say that it is a matter of designation by the local authority. Let us use the good example of the school that I gave earlier. If the council does not designate it as an investment property but is deliberately not proceeding with disposal because it anticipates that the value of the land will appreciate, the school has de facto become an investment property even if it is not designated as such. Is that not correct?

You are in danger of trying to create a third way—

I never thought that you would be a man for the third way, and there is no third category in this case. The property is designated either as forming part of a portfolio of investments or as an asset to be disposed of. Whether the disposal takes place today, tomorrow, in a month’s time or in a year’s time is a feature of the market—

And what if a feature of the market is a recovery period of two, three or four years, and not a day, week or month? That is my point.

I am sorry to interrupt this conversation, but we need some rules of engagement.

Sorry. I just want to point out that I am not trying to create a third way; I am trying to suggest that when an authority decides deliberately, as an act of policy, not to proceed with a disposal, that is the point at which it should make a designation under the regulations to say that the property has become an investment property.

With respect, cabinet secretary, I believe that your position creates a third way, because it permits authorities to have a limbo land, in which the property is not disposed of immediately and is held for several years. I am the man who is trying to achieve clarity on the nature of the holding, and you, cabinet secretary, are the man who is permitting confusion, because you are allowing people to leave land in a limbo between land for disposal and land held for investment.

An important aspect, which touches on the previous point, is the intention of the local authority when it purchases the asset in the first place—whether it buys the land as an investment. It can subsequently become an investment, but nothing in the finance circular suggests that a property becomes an investment property just because it becomes surplus and an authority does not dispose of it immediately. It is not unreasonable for a local authority to hold a property and wait for the market to recover.

There will be a point when the market recovers and there is enough activity for the authority to sell the property. If the authority then chooses not to sell it, Mr McLetchie is right that at some point it will become an investment, but the fact that a property is held as surplus does not automatically make it an investment.

There is a difference between an asset being held for capital appreciation and its being held because this is not the right market to sell it in.

The point has been made and we have had quite a long exchange on it. I do not think that we are going to make any more progress on the matter.

That is helpful.

As has been said, the rules are being tightened to make it less likely that authorities will get caught up with dodgy banks, and you have made it clear, cabinet secretary, that robust codes will be introduced. I also presume that you will have to sign all this off. What if after all the codes have been complied with, everything has been scrutinised and the Government has signed it all off, lo and behold something completely unexpected goes wrong? Does the fact that the Government has signed it off imply any transfer of responsibility or liability to it?

We must be clear about how the process will operate. If, subject to parliamentary consent, the order comes into force, we will issue the finance circular, a copy of which we have given to the committee, which sets out the basis on which investment activity will attract ministerial consent. Before a local authority makes any investment, it will have to ensure that it is complying fully with the circular, which means that it will have to evaluate the risks and reliability of the investment. As a result, the onus is on the local authority to make the decisions. Therefore, if the authority is taking its own decisions on investments, surely it is only appropriate for it to take the liability for any risk that it might assume.

If local authorities wish to take the proposed approach and to secure Scottish ministers’ consent, they will have to follow two rigorous codes that CIPFA has developed. Those codes set out for local authorities the necessary considerations before they invest public money. Therefore, local authorities will be able to make effective choices about how they make investments.

Are you satisfied that the regulations put in place measures to avoid a repetition of the situation in which councils and other public bodies imperilled millions of pounds by investing funds imprudently in such banks?

The codes that CIPFA has developed, which have been subject to extensive consultation and preparation, create a rigorous environment in which local authorities must make choices about investment activities, so I am confident that a robust framework is in place. The provisions have been reconsidered in the light of circumstances in the past two years and will therefore give local authorities the decision-making basis on which to invest public money.

I am pleased to hear that.

Paragraph 11 of the finance circular says:

“Investment properties form part of the local authority portfolio of investments.”

Their purpose is

“to earn rentals and /or capital appreciation”

and they are

“not used by an Authority for service delivery or administrative purpose.”

At what point does an asset—such as a building and its accompanying land—that was formerly used for service delivery become an investment property that a local authority might hold for an investment purpose? For example, if a council closes a school with a surrounding playground and play area, at what point does that become either an investment property or a surplus asset that is awaiting redeployment or disposal?

An asset becomes an investment property when a local authority defines it to be so. A local authority is not obliged to retain all its former public service facilities as investment vehicles.

The example of a school is good. When an authority decides that a school is no longer to function, it has a choice—can the asset be used as an investment property for the purposes that are set out in paragraph 11 or is it surplus to requirements, which means that it should be considered for disposal in accordance with the “Scottish Public Finance Manual” guidance on the disposal of assets? The local authority determines the purpose for which it wishes to use a facility.

11:30

Colin Brown might want to give a particular legal consideration, but that certainly strikes me as being a possibility in that scenario. I think that Mr McLetchie said that some sources might say that local authorities were hoarding such assets. I would certainly not associate myself with that language. Local authorities, like the Government, have to be careful about disposing of property in the current financial climate because there might be opportunities to realise more for the public purse as a consequence of holding on to assets. That is not to say that we cannot sell any properties—clearly we can, and we do. However, it is important to the public finances to maximise the value that we achieve from doing that.

The key point in paragraph 11 is the opportunity for local authorities to define particular properties as forming part of their portfolio of investments, provided that they follow the details of the code.

So, in your view, retention with a view to capital appreciation is desirable, even if it might conflict with a further policy objective of facilitating the development of affordable housing.

So you would not approve of land hoarding by public bodies that frustrates the development of affordable housing programmes, for example.

I suspect that Mr McLetchie is tempting me into second-guessing operational decisions by individual local authorities.

I cannot say that it is a point that I have considered in detail. I would imagine that there will be guidance on such treatment in accounting codes. Any council will end up with land that it is not using at a particular time but which it is not especially holding for the purpose of investment. Equally, there will be occasions when councils acquire land specifically with a view to investment.

That is exactly what I said to Mr McLetchie some moments ago, when I said that a local authority would be able to make a choice about the designation of such a property—whether it considered it to be part of its portfolio of investments or an asset awaiting disposal.

There is no limbo here.

No, I am not trying to create a third way. With respect, cabinet secretary—

I do not think that I could have been clearer that the local authority will have the option to designate the property either as part of its portfolio of investments or as an asset to be disposed of. That is clear, although Hazel Black may want to add to that.

Some are held for rental income.

Yes, I understand that, but I am not talking about assets that generate an income. I am talking about an asset that is deliberately held for the purposes of capital appreciation.

I want to give the cabinet secretary an opportunity to put on record a point about these investments. I am quite willing to accept his initial point that our local authorities sought out and very much welcome this information about the investments that they can make. Given the particularly tight budgets that our local authorities are dealing with, is he able to assure us that any accruals that they manage to make on these and any future investments will not be clawed back by the Scottish Government?

As there are no other questions, we move to the debate on the motion.

Motion moved,

That the Local Government and Communities Committee recommends that the draft Local Government Investments (Scotland) Regulations 2010 be approved.—[John Swinney.]

Motion agreed to.