The Local Authorities (Capital Finance) Regulations 1997

Explanatory Note

(This note is not part of the Regulations)

These Regulations, which are made under Part IV of the Local Government and Housing Act 1989 (“the Act”), consolidate with amendments the Local Authorities (Capital Finance) Regulations 1990 and subsequent amending instruments, and are concerned with the capital finance system for local authorities which has been in operation since 1st April 1990. The Regulations apply to England and Wales, and apart from regulations 120 and 121 (which provide for the adjustment of certain authorities' credit ceilings), and regulation 162 (which provides for the revocation of the 1990 Regulations as amended), come into force on 1st April 1997.

Part II of the Regulations amends the definition of expenditure for capital purposes provided in section 40 of the Act. The main change made by the Regulations is that it is provided that all expenditure under a transaction which is entered into by a local authority for the purposes of the Private Finance Initiative and has the features specified in regulation 17 (a “private finance transaction”) shall be expenditure for capital purposes.

The main features of a private finance transaction are that—

(a) the transaction is for the provision of land, other than land which is for use for housing purposes, or of any other asset (including works), and of services in relation to the authority’s use of the land or the asset;

(b) the authority begin to pay fees by instalments after they have begun to use the land or the asset; and

(c) the amount of fees payable depends on standards attained in the performance of the services or the extent, rate or intensity of use of the asset for its intended purpose.

Part IV of the Regulations makes provision in respect of credit arrangements, which under section 48(1) of the Act comprise any lease, any contract under which a local authority are to give the consideration which is due from them after they have received the consideration which is due to them, and any transaction of a description prescribed in regulations. Private finance transactions are prescribed in regulation 17. Regulations 18 to 25 specify descriptions of leases and contracts which are not to be credit arrangements.

Local authorities are required under Part IV of the Act to have available an amount of credit cover when they enter into or vary a credit arrangement. Such an amount may be obtained by using a credit approval or by setting aside an amount as provision for credit liabilities. Regulations 26 to 51 make special provision for calculating the amount required as credit cover in respect of leases and certain other transactions.

The main changes made by the Regulations in respect of the requirement for credit cover for credit arrangements are as follows—

(1) A lease entered into under the provisions of a private finance transaction has a nil initial cost.

(2) The lease of a dwelling-house which is for use as accommodation for homeless persons has a nil initial cost if the term of the lease does not exceed ten years.

(3) Certain leases acquired by the National Park authorities established under the National Park Authorities (England) Order 1996 and by the councils which formerly exercised the functions of those authorities have a nil initial cost.

(4) A private finance transaction which has the features specified in regulation 40 has a nil initial cost.

(5) The initial cost of a private finance transaction is reduced if it is for the replacement or enhancement of a building and the provision of heating services or for the provision of a building and heating services.

Part V of the Regulations specifies contributions and subsidies (“specified capital grants”) which, under section 57 of the Act, are to result in the reduction or extinguishment of credit approvals issued to a local authority. Credit approvals, which are issued to local authorities under sections 53 and 54 of the Act, enable an authority to enter into or vary credit arrangements and not to charge expenditure to a revenue account. Changes are made by the Regulations to the contributions and subsidies which are to be specified capital grants. Different provision is made for local authorities in England and local authorities in Wales.

Parts VI, VII and VIII of the Regulations relate to capital receipts. Section 58 of the Act specifies sums which, when received by a local authority, are capital receipts. Part VI of the Regulations specifies further sums which are to be capital receipts and sums which are not to be capital receipts.

Section 59 of the Act requires a local authority to set aside part of a capital receipt (“the reserved part”) as provision to meet credit liabilities. Part VII of the Regulations specifies the percentage which is the reserved part in the case of different descriptions of capital receipts and disposals.

Part VIII of the Regulations provides for different descriptions of capital receipts to be treated as reduced for the purposes of determining the reserved part. The main changes made in this Part to the treatment of capital receipts are as follows—

(1) Regulations 86 to 93 make provision for treating as reduced certain capital receipts derived from disposals of land made to assist regeneration in areas of need.

(2) Regulations 94 and 95 make provision for treating as reduced certain capital receipts derived from disposals of land improved out of moneys provided by Parliament or the Urban Regeneration Agency.

Section 61 of the Act requires a local authority to set aside (as provision to meet credit liabilities) part of a capital receipt not wholly in money paid to them. Part IX of the Regulations makes further provision for determining the amount falling to be set aside in respect of notional capital receipts. Regulation 106 provides that notional capital receipts are to be treated in broadly the same way as capital receipts. Regulations 107 to 114 specify descriptions of non-monetary consideration in respect of which the amount falling to be set aside is to be nil.

Part X of the Regulations makes provision in respect of a local authority’s credit ceiling, which is one of the components of the aggregate credit limit and is determined, subject to prescribed modifications, in accordance with paragraphs 11 to 14 of Schedule 3 to the Act. Modifications are prescribed in regulations 115 to 121. By virtue of regulations 122 and 123, no account is to be taken of certain credit arrangements in determining the credit ceiling.

The main changes made by the Regulations in respect of credit ceilings are as follows—

(1) If a local authority fulfil specified conditions relating to the level of debt, their credit ceiling is not to be increased when they use a credit approval to meet expenditure out of amounts set aside to meet credit liabilities.

(2) The credit ceilings of the National Park authorities in England and of the councils which formerly exercised the functions of those authorities are modified.

Part XI of the Regulations makes provision for the adjustment of the credit ceiling for the purpose of determining the minimum amount to be set aside by a local authority from their revenue account or accounts as provision to meet credit liabilities (minimum revenue provision).

Part XII of the Regulations makes provision for determining a local authority’s minimum revenue provision. Regulation 138 and Schedule 2 to the Regulations provide for minimum revenue provision to be adjusted to take account of the commutation of periodic payments under section 157 of the Act. Regulations 139 to 150 make provision for determining the housing and non-housing amounts which are relevant to the determination of minimum revenue provision for local housing authorities. Regulations 151, 152 and 153 make provision for determining the relevant amount which is relevant to the determination of minimum revenue provision for other local authorities.

Part XIII of the Regulations makes provision for the use under section 64 of the Act of amounts set aside as provision to meet credit liabilites. Such amounts may be applied for specified purposes or transferred to specified bodies by local authorities which fulfil specified conditions relating to the level of debt. Different provision is made for different cases and different descriptions of authority. Regulation 159 specifies conditions with which an authority must comply in transferring such amounts.

Part XIV of the Regulations makes provision for supplementary matters, including the application of Part IV of the Act to borrowing by authorities where the liability for the borrowing has been transferred by statute from one authority to another.