Borrowing, lending and 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 (i.e. the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies and non-ministerial departments) and bodies sponsored by the SG. However, other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable should, where appropriate, follow procedures consistent with the guidance.
Key points
2. Scottish Ministers currently have no powers to raise extra resources by borrowing or sanctioning borrowing.* Scottish Ministers possess specific and general powers to lend money but any lending should be out of resources authorised by the Parliament by Budget Act and subject, normally, to the existence of specific statutory authority.
3. The circumstances under which a sponsored body may borrow money, and the terms and conditions applicable, should be set out in the body's framework document. However, there should be a presumption that all borrowing - excluding agreed overdrafts - should be from Scottish Ministers.
4. Proportionate due diligence should be undertaken with regard to any proposed loan to the private sector culminating in a formal assessment of the borrower's financial standing and whether or not the borrower is likely to be in a position to satisfy the terms of the loan.
5. Constituent parts of the Scottish Administration must not deliberately invest resources outside the public sector. SG sponsored bodies must not make any investments of a speculative nature.
Background
6. Scottish Ministers currently* 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.
7. Scottish Ministers possess specific and general powers to lend money but any lending should be out of resources authorised by the Parliament by Budget Act and subject, normally, to the existence of specific statutory authority. (See the sections on Expenditure Without Parliamentary Authority and Expenditure Without Statutory Authority.)
Borrowing by local authorities
8. Local authorities may borrow to finance capital expenditure. Under the Statement of Funding Policy, which defines the financial relationships between the devolved administrations and the UK Government, Scottish Ministers have the statutory power, through the issue of orders or directions, to set maximum capital expenditure limits for capital expenditure of local authorities. Prudential borrowing regimes for local authorities in England, Scotland and Wales (and for the Northern Ireland Executive in the case of Northern Ireland) were introduced in 2004-05. Increases in supported local authority borrowing (which replaced credit approvals) score against the SG's departmental expenditure limit while increases in self financed unsupported borrowing is classified as annually managed expenditure within the SG's total budget. Appropriate borrowing limits for increases in unsupported borrowing may be introduced if necessary in the light of the overall fiscal position. The SG would be responsible for administering any limit applied to Scotland. (See also the section on Local Government Finance.).
Borrowing by other public bodies
9. 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 a sponsored body may borrow money, and the terms and conditions applicable, should be set out in the body's framework document. 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. Borrowing by bodies within the SG budgeting boundary scores against the SG's departmental expenditure limit. The net borrowing limits, excluding short-term borrowing, for certain sponsored bodies are set out in the annual Budget Act.
10. Section 68 of the Scotland Act stipulates that the rate of interest on loans from the 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. 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.
11. Overdraft facilities for sponsored bodies - and any approved loans from other persons or bodies - should be explicitly guaranteed by the Scottish Ministers where the borrower would secure finer terms as a result. See also the section on Contingent Liabilities. The relevant SG Finance Business Partner (or equivalent) should be consulted on a case by case basis.
Lending by Scottish Ministers
12. Where the Scottish Ministers have discretion in setting terms and conditions an appropriate rate of interest should be agreed with the relevant SG Finance Business Partner (or equivalent). Interest rates on loans are subject to the guidance on Subsidy control. 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 the SG Finance Directorate on a case by case / scheme by scheme basis. The repayment of loan principal to Scottish Ministers may be used to support expenditure subject to authorisation by Budget Act. Interest charged on direct lending by Scottish Ministers must be surrendered to the SCF for onward transmission to the UK Consolidated Fund. (See the section on Income Receivable and Receipts.)
Lending by other public bodies
13. The lending powers of statutory sponsored bodies should be set out in the relevant enabling legislation. In addition the circumstances under which a sponsored body may lend money, and the terms and conditions applicable, should be set out in the body's framework document.
Due diligence and security
14. Proportionate due diligence should be undertaken with regard to any proposed loan to the private sector culminating in a formal assessment of the borrower's financial standing and whether or not the borrower is likely to be in a position to satisfy the terms of the loan. Due diligence should include obtaining the views of, and any relevant information held by, any public sector partners or stakeholders. A public sector lender should, where it would be prudent and practical to do so, seek to establish a security (e.g. a floating charge) covering a loan to the private sector.
Investment
15. Other than where they are have been given a specific remit constituent parts of the Scottish Administration must not deliberately invest resources outside the public sector and SG sponsored bodies should not make any investments of a speculative nature. Where Scottish Ministers decide to make investments directly through the core Scottish Government or associated bodies, Accountable Officers must ensure that appropriate diligence and consideration is carried out before any commitment is made to invest, detailed guidance on this is included in Annex A: Business Investment Framework
*Following the Scotland Acts 2012 and 2016, the Scottish Government has the power to undertake capital borrowing of up to £3 billion (with an annual limit of £450m) and resource borrowing of up to £1.75 billion (with an annual limit of £600m). Resource borrowing can only be undertaken in very specific circumstances, as set out in the Fiscal Framework agreed by the Scottish and UK Governments. Decisions on the use of borrowing powers are set out by the Cabinet Secretary for Finance, Economy and Fair Work in the annual Budget, Medium-term Financial Strategy, and Spending Review documents.
Page updated: November 2018