BORROWING, LENDING AND INVESTMENT
Contents:
Scope
Key Points
Background
Borrowing by Local Authorities
Borrowing by Other Public Bodies
Lending
Lending Periods
Overdrafts
Guarantees
Investment
Scope
1. This section gives guidance on borrowing, lending and investment. The guidance is aimed primarily at the constituent parts of the Scottish Administration (including the core Scottish Government and Executive Agencies). However, other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable, including bodies sponsored by the Scottish Government, should ensure compliance with any relevant provisions.
Key Points
2. Scottish Ministers have no powers to raise extra resources by borrowing or sanctioning borrowing. Borrowing sanctioned by Scottish Ministers is included within the Scottish Administration's Assigned Budget and must be offset by reductions in other spending.
3. The borrowing and lending powers of statutory sponsored bodies should be set out in the relevant enabling legislation. There should be a presumption that all borrowing - excluding agreed overdrafts - should be from Scottish Ministers.
4. The rate of interest on loans from Scottish Ministers to statutory sponsored bodies cannot be at less than the lowest rate determined by HM Treasury in respect of similar loans made out of the NLF on the day the loan is made. There should be a presumption that this stipulation should apply to all lending by Scottish Ministers unless otherwise specified in relevant legislation.
5. Constituent parts of the Scottish Administration must not deliberately invest resources outside the public sector.
6. Arrangements covering the application of sponsored bodies' powers to borrow, lend or invest should be included in the necessary framework document e.g. a Management Statement / Financial Memoranda. These arrangements should exclude investments of a speculative nature.
Background
7. Scottish Ministers have no powers to raise extra resources by borrowing or sanctioning borrowing. They may borrow sums from the Secretary of State for Scotland in accordance with section 66 of the Scotland Act 1998 but only to meet temporary shortfalls of cash, or to provide a working balance in the Scottish Consolidated Fund (SCF). Scottish Ministers may borrow money only under this power or under powers conferred by separate Acts of the UK Parliament. Section 67 of the Scotland Act makes provision for HM Treasury to issue sums by way of a loan to the Secretary of State out of the National Loans Fund (NLF) in order to make loans to Scottish Ministers. Repayments from Scottish Ministers to the Secretary of State are a charge on the SCF and are not therefore subject to authorisation by the Parliament.
8. Under the Statement of Funding Policy, which defines the financial relationships between the devolved administrations and the UK Government, Scottish Ministers have the reserve power to set maximum capital expenditure for capital investment by local authorities. Borrowing by local authorities, excluding short-term borrowing (i.e. less than a year), counts towards the United Kingdom Public Sector Net Cash Requirement (PSNCR) and hence is included within the Scottish Administration's Assigned Budget each year as a control mechanism so that any increases in borrowing must be offset by reductions in other spending. At the UK level HM Treasury have reserve powers to control local authority borrowing by imposing a national limit on borrowing. Such a limit would be used to protect the country's economic interest if local borrowing, albeit prudent locally, were unaffordable nationally. The Scottish Government would be responsible for administering any limit applied to Scotland. Scottish Ministers also possess powers to lend money.
Borrowing by Local Authorities
9. Capital investment by local authorities is largely funded through capital grants and borrowing. The Scottish Government funds the debt servicing costs (i.e. principal and interest) of some of this borrowing, known as "supported borrowing", via revenue support grant whilst the unsupported borrowing element, arranged under the prudential regime, is financed through local authorities own general resources. In determining the levels of unsupported 'prudential' borrowing, local authorities must ensure that their plans are affordable, prudent and sustainable based on prudential indicators as set in the Prudential Code published by the Chartered Institute of Public Finance and Accountancy (CIPFA). (Additional information is contained in the section on Local Government Finance.)
Borrowing by Other Public Bodies10. The borrowing powers of statutory sponsored bodies should be set out in the relevant enabling legislation. (The powers to borrow may include borrowing from Scottish Ministers or any other person or body - subject to the consent of Scottish Ministers.) In addition the circumstances under which sponsored bodies may borrow money and the terms and conditions applicable, as agreed with portfolio Finance Teams, should be set out in the necessary framework document e.g. a Management Statement / Financial Memoranda. However, there should be a presumption that all borrowing - excluding agreed overdrafts - should be from Scottish Ministers via portfolio budgets authorised by Budget Act. Terms more costly than borrowing from Scottish Ministers would not be acceptable. The net borrowing limits, excluding short-term borrowing, for relevant sponsored bodies are set out in the annual Budget Act.
11. Section 68 of the Scotland Act stipulates that the rate of interest on loans from the Scottish Government to statutory sponsored bodies cannot be at less than the lowest rate determined by HM Treasury in respect of similar loans made out of the NLF on the day the loan is made. The relevant rates will include a commercial rate to be applied generally to bodies competing against the private sector for a significant proportion of their business or specifically where a body obtains a loan for a discrete activity that would be in competition with the private sector.
Lending
12. Lending by Scottish Ministers should be out of resources authorised by the Parliament by Budget Act and subject to the existence of specific statutory authority. (See the sections on Expenditure Without Parliamentary Authority and Expenditure Without Statutory Authority.) Where the relevant legislation provides discretion in setting terms and conditions the presumption should be that the stipulation on the rate of interest on borrowing by statutory sponsored bodies should apply to all lending by Scottish Ministers. Proposals for exceptions to this general rule may be considered by portfolio Finance Teams on a case by case basis. It should be noted that interest rates on loans are subject to the guidance on EC State Aid Rules.
13. The repayment of loan principal to Scottish Ministers may be used to support expenditure subject to authorisation by Budget Act. Interest charged on lending by Scottish Ministers must be surrendered to the Scottish Consolidated Fund for onward transmission to the Consolidated Fund (GB). (See the section on Income Receivable and Receipts.) Lending to public bodies in Scotland pre-devolution was from the NLF. Pre-devolution NLF loans, both capital and interest, continue to be repaid via the SCF and the Secretary of State to agreed timetables.
14. The lending powers of statutory sponsored bodies should be set out in the relevant enabling legislation. In addition the circumstances under which sponsored bodies may lend money and the terms and conditions applicable, as agreed with portfolio Finance Teams, should be set out in the relevant framework document.
Lending Periods
15. The loan period of any new fixed rate loans by Scottish Ministers should not, as a general rule, exceed 25 years. However, proposals for fixed rate loan periods of up to 50 years may be considered by portfolio Finance Teams on a case by case / scheme by scheme basis. Lending periods for any fixed rate loans provided by sponsored bodies should, where not specified in legislation, be set out in the relevant framework document.
Overdrafts
16. Statutory bodies with the power to borrow from any other person or body included in their enabling legislation may, with the consent of Scottish Ministers, borrow by way of bank overdraft in order to meet very short-term requirements.
Guarantees
17. Overdraft facilities for relevant sponsored bodies - and any other loans from other persons or bodies - should be explicitly guaranteed by Scottish Ministers where the borrower would secure finer terms as a result. Guarantees should not normally be given without specific statutory authority. See also the section on Contingent Liabilities.
Investment
18. Constituent parts of the Scottish Administration must not deliberately invest resources outside the public sector. Where sponsored bodies have powers to invest resources set out in their enabling legislation the sponsoring unit within the Scottish Government should ensure that appropriate arrangements covering the application of these powers are included in the relevant framework document. These arrangements should exclude investments of a speculative nature.
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Page Published/ Updated: December 2007