Local Authority Lending & Prudential Borrowing

There are certain circumstances in which local authorities may want to use their powers and resources to make loans to CLH organisations, which might otherwise be unobtainable, in order to enable an initiative to go ahead. This section of the Toolkit examines their powers to make loans for housing and to borrow for that purpose.

Local Authority powers to make Loans

A local authority can make a loan in connection with housing provision using the following powers:

  • Chapter 1 Section 12 of the Local Government Act 2003 provides Local Authorities with the power to invest for any purpose relevant to its functions under any enactment, or for the purposes of the prudent management of its finances
  • Section 1 of The Localism Act 2011 The General Power of Competence enables a local authority to borrow and to make loans under this ActThis power is not to be relied upon as   a specific power to lend or invest but rather to supplement Section 12 of the Local Government Act 2003 or Section 24 of the Local Government Act 1988 when investing or lending

Borrowing Under The Prudential Code  

  • House of Commons Briefing (05797) deals with local authority capital funding. Under Part 1 Chapter 1 Section 1 of the Local Government Act 2003, a local authority may borrow for any purpose relevant to its functions or for “the prudent management of its financial affairs"
  • Local authorities are required by Regulation to have regard to The Prudential Code developed by CIPFA, when carrying out their duties in England and Wales under Part 1 of the Local Government Act 2003
  • In accordance with the principles of The Prudential Code, each authority must set a total borrowing limit for itself. The borrowing limit will be related to the revenue streams available to the local authority, with which it can repay the debt. Authorities are prevented by law from using their own property as collateral for loans The key objectives of the Prudential Code are to ensure that the capital investment plans of local authorities are affordable, prudent and sustainable. As part of this framework, the Prudential Code sets out the factors that must be used. These include forecasts of and actual figures for:
  • Capital expenditure
  • Capital financing requirement – a measure that reflects an authority’s underlying need to borrow
  • External debt – gross borrowing and other long-term liabilities
  • Operational boundary for external debt – based on an authority’s working estimate of the most likely position, ie prudent, but not worst-case scenario
  • Authorised limit for external debt – the intended absolute limit that has to be set by the full Council.
  • There is some flexibility in exactly how individual local authorities set these limits. The Prudential Code does not prescribe formulae allowing the exact calculation of prudential limits, relying instead on the judgement of the local authority chief finance officer, and on ‘generally accepted accounting practices’
  • Local authorities may borrow money from a number of different sources. These include:
  • borrowing on the markets
  • using the Public Works Loan Board  
  • municipal bonds
  • However, they cannot breach the overall limits on their borrowing set by the Prudential Code regime. Their choice of lender at any one time will depend on  where they can obtain the best terms and rates
  • The newest version of the Prudential Code was published in September 2018 and councils should consider the use of the Borrowing and Investment Powers in the context of that Prudential Code once released.  This new Code is intended to reflect the increasing commercialisation of local authorities, and to recognise that risk management and investment activity in the treasury function have evolved considerably in recent years

State Aid Implications

  • A local authority may be caught by State Aid if it makes loans available as above. Where loans are made for social housing, however, this shouldn’t be the case; the provision of social housing is deemed exempt from state aid regulation as a Service of General Economic Interest (SGEI). This means that the recipient of the subsidy must be placed under an obligation to provide the social housing with the subsidy
  • Also, if a Council provides a loan on market terms, it shouldn’t be treated as State Aid because the Council is acting in line with the Market Economy Investor Principle (the “MEIP”). When making such Ioans, Councils will need, amongst other things, to carry out prior due diligence to demonstrate that the loan is a prudent use of the Council’s resources and that any other lender (i.e. banks) could have a provided a loan on those terms

The Public Works Loan Board

  • The Public Works Loan Board (PWLB) is a statutory body that issues loans to local authorities, and other specified bodies, from the National Loans Fund. In practice, the PWLB function has been carried out by the United Kingdom Debt Management Office (DMO) since July 2002. The PWLB currently operates within a policy framework set by HM Treasury
  • The PWLB’s interest rates are determined by HM Treasury in accordance with section 5 of the National Loans Act 1968. Since 2004, major local authorities have been able to borrow (mainly for capital projects) without government consent, provided they can afford the borrowing costs. To this end, they are required by law to have regard to the Prudential Code
  • The PWLB does not require information on the purpose for a loan. Responsibility for local authority spending and borrowing decisions lies with the locally-elected members of the council, who are democratically accountable to their electorates

Relevant Resources

Case Study of Hull City Council's Support for CLH

Overview of Local Authority Capital Funding


Goodwin Trust and Hull City Council


Last updated in March 2020