Written - Prudential Borrowing and Minimum Revenue Provision

Local authorities are under a statutory requirement to make an annual calculation of an amount of Minimum Revenue Provision (MRP) that they consider prudent to offset against borrowings that they make under the Prudential Borrowing rules. The legislation –The Local Authorities (Capital Finance and Accounting) (Wales) (Amendment) Regulations 2008 made under the Local Government Act 2003 - does not define “prudent provision”. Local circumstances can be taken into account in determining this. The legislation enables Welsh Ministers to issue statutory guidance on accounting practices, which would include guidance on MRP.

One of the issues arising from the Assembly Government’s close dialogue with Local Government on alleviating the impact of the Recession has been the possibility of some form of MRP moratorium. This would have the potential for enabling Local Government to bring forward and maintain capital projects at a time of falling revenue and capital receipts.

The existing guidance on Prudential Borrowing accounting arrangements already allows for, if a local authority wishes, a deferral of the set aside of MRP on new infrastructure assets until the year following it coming into use rather than the financial year following any borrowing. Extending the scope of the MRP moratorium could still be beneficial in encouraging smaller capital schemes (for instance refurbishment projects) of a limited duration which could help maintain local employment.

In giving consideration to this I have been very conscious of the need to uphold the principle of making prudent provision for the repayment of debt that is at the core of the current legislative arrangements. My officials have considered the legal implications of any relaxation in the current arrangements and discussed the prudential aspect of any change to the current arrangements with the Wales Audit Office.

As a result of these discussions I have decided to make a limited change to the current guidance that will enable local authorities, only if prudent, to defer making MPR to offset new prudential borrowing incurred to fund capital projects started and completed between 1 the three financial years 2008-09; 2009-10 and 2010-11. The moratorium would not exclude the making of full MRP over the lifetime of an asset. It would just defer the need to budget for it until the 2011-12 financial year going forward. The moratorium would not apply to the generality of prudential borrowing incurred to fund projects outside the 3 year time-frame I have proposed above.

The duty to make prudent provision rests with local authorities. Judgements on what is prudent will differ in the light of individual authorities’ circumstances. The revised guidance I propose will require authorities to consult their Appointed Auditor before exercising the discretion over deferral. The guidance will also make clear that the moratorium will not be extended beyond 31 March 2011.