New regulations are to be put in place for loans from Northumberland County Council to its development company Arch, which are expected to total £275million by the end of this financial year.
A report to councillors sets out a revised decision-making and governance procedure, which would be approved by the cabinet next month, and comes as Arch is being replaced by a new company, Advance Northumberland.
It says: ‘The council is projected to have awarded £275million of loans to Arch by March 31, 2019, and key risks need to be managed.
‘The current governance arrangements are not robust enough and the council is not assessing the risk of the loans adequately.’
A new process is to be put in place, which provides the council far more control and oversight, and includes the creation of an external loans board.
A number of core principles will apply too, including the council not being willing to offer a loan facility over 100 per cent of the asset value to cover various fees or charges.
Plus, not all loans will be interest-only moving forward, while interest rates may be floating rather than fixed where the rate risk is judged to be high.
The report explains that the base rate for loans to Arch was set at 5.75 per cent, but various loan rates have been used historically for different developments or sectors, ranging from one per cent to 4.5 per cent.
‘These rates were personally agreed by senior officers within the council, but were never formally approved or reported upon,’ it adds, highlighting that when the Arch board approves a scheme, the interest rate would be set by the board at that point.
Best practice sets out four risks which should be assessed in relation to each loan – liquidity (when someone cannot meet short-term debt obligations), interest rates, market and State Aid.
But the report, which will be discussed by the corporate services committee on Monday, says: ‘The assessment of these risks has not occurred in the past and there are clear examples of where these risks have materialised.’
For example, the ‘financing of £278million debt on a short-term basis with the need to refinance over the next five years has introduced significant rate risk as interest rates rise.
‘The fact that Arch does not repay principal, with an expectation that the interest rate will cover the council’s interest and principal liabilities has also produced rate risk.’
Ben O'Connell, Local Democracy Reporting Service