Question 1: Do you agree with the government’s proposal to amend the 2003 Regulations to prevent the omission of debt from the MRP calculation?
10. We agree that it is right that prudent provision is made. But there may be consequences that are hard to manage. As mentioned in the general points made above, the consultation document itself identifies a cost of £700 million which will need to be addressed.
11. One of the main aims of changes made when the current guidance was introduced in 2018 was to ensure that MRP would be made for all debt relating to commercial investments and particularly investments in property primarily for financial return, and as an aim this is generally supported across the sector.
12. However, there are other areas of debt where councils do not make MRP but still argue that they are acting prudently. In particular, there are examples of councils that make secure capital loans to wholly owned or closely associated companies and do not make annual MRP but instead use repayments from the company to repay the loan, either on an annual basis or as a lump sum at the end of the term. This particularly relates to companies engaged in delivering key objectives such as provision of housing mainly or transport.
13. In such cases, a strong argument is made that MRP is unnecessary as the loan is secure and regular repayments can be closely monitored. It is correct under the current regulations which require that the section 151 officer to “have regard” to the guidance which acknowledges that alternative MRP treatments are appropriate. Being forced to make a MRP for such debts could result in over provision from revenue over time. This could result in taxpayers being over-taxed public services being cut, or a combination of both for limited benefit where assets such as housing for market / affordable rent are being constructed and an immediate uplift in value upon completion (equivalent to a developers profit) can be evidenced as well as long term capital appreciation being a very realistic expectation and evidenced by the significant equity held within the accounts of wholly owned council housing companies. As a minimum there will be a transfer from revenue to capital as the repayment of a loan from the company counts as a capital receipt to the council, limiting its use and will only be possible if the council cuts back on services to its community or increases its council tax. That said, we are aware that there are some councils that do make MRP for such loans where rent levels and construction costs enable schemes to be viable which unfortunately will not be the case in all parts of the country. It does not get away from the fact that housing values will increase, there is equity built in upon completion as referenced above and therefore MRP has cover in equity and ongoing value. In simple terms, the significant percentage of buy to let properties nationally are financed based upon equity and capital growth with rental levels covering the borrowing cost. To challenge full provision in MRP in all cases associated with housing does not hold as a rationale.
Question 2: Does the draft statutory instrument achieve the Government’s objectives as outlined in this document? Are there any unintended consequences arising from the statutory instrument?
14. We believe the proposal will achieve government’s objective of placing the MRP guidance on a statutory footing. The proposal may also have the effect of placing additional controls on council borrowing, including borrowing that is currently assessed as being prudent; it is not clear whether this is an intended or unintended consequence. There will also be significant immediate revenue consequences that need to be addressed. As is outlined in the consultation document there is a potential revenue cost of £700 million across the sector. We believe the simplest way to avoid this cost being an excessive burden on councils which could impact negatively on services would be to only apply them to new debt funded assets for which new debt was taken out and for which MRP would apply after 1 April 2023 (including projects that are already contractually committed before the final regulations are issued even though some expenditure may slip in to 2023/24) rather than applying the regulations retrospectively. Councils can then set up any new arrangements on the basis that they will have to include provision for MRP. It is likely, however, that like for like replacements for some schemes currently undertaken to deliver key objectives such as housing will no longer be viable. As covered previously, we believe the full MRP provision for housing is not required in all cases.
Question 3: Is it clear from the wording of the statutory instrument, as drafted, that authorities may still postpone the MRP charge as per paragraphs 40 and 41 of the MRP guidance?
15. Paragraphs 40/41 of the guidance allow for MRP to be made from the year after a loan is taken out or after the asset represented becomes operational. We believe this is clear and that there is no specific impact on this through the wording of the statutory instrument. We also understand no change is being proposed by this. However, if there is a possible issue with the wording, which is not obvious to us, it would seem more sensible to take legal advice on this point rather than rely on responses to a public consultation?
Question 4: Are these changes consistent with the current MRP guidance? If not, what is unclear or inconsistent in the guidance?
16. We believe that the changes are consistent with the guidance. Currently, however, councils have discretion not to make MRP, provided that this is done prudently and provided that the guidance has been properly considered. The changes will take away this discretion and in future MRP will have to made for all debt using the methodology outlined in the guidance.