Agenda item

The Leader presented the report and confirmed it contained the Capital Strategy and Treasury Management Strategy and that both strategies require approval by full Council.  The report confirmed:

(i)                    the capital programme, as part of the Capital Strategy and,

(ii)                   the various borrowing limits and other indicators as part of the Treasury Management Strategy.

The Capital Strategy sets out the long-term context (10 years) in which capital decisions are made and demonstrates that the local authority:

-       takes capital/investment decisions in line with service objectives;

-       gives consideration to both risk/reward and impact;

-       takes account of stewardship, value for money, prudence, sustainability and affordability. 

The capital plans of the Authority are inherently linked with treasury management activities it undertakes, hence the Treasury Management Strategy is included alongside the Capital Strategy report.  The report notes that the revenue impact of both strategies is included within the associated revenue budget report.  Appendices to the report included:

·         Appendix 1 – details of the current capital programme;

·         Appendix 2 - the longer-term Capital Strategy, and,

·         Appendix 3 - the Treasury Strategy and Management.

The Leader focused firstly on the Capital Strategy 2019/20 to 2028/29 that provides an update of the Council’s Capital Strategy and is in line with the requirement placed on Local Authorities by the Prudential Code for Capital Finance in Local Authorities (2017) to determine a Capital Strategy. 

The Leader reported that the CIPFA Code requires local authorities to determine their Treasury Management Strategy Statement (TMSS) and Prudential Indicators (PIs) on an annual basis; this requires approval by full Council following a recommendation from Cabinet.  The Leader confirmed this will be kept under review and updated and brought to Council as necessary.

Key areas include:

(i)                    current 5-year capital programme to 2022/23 extended to 2024/25 for those approved projects that span beyond the current programme and its cost of financing;

(ii)                   the longer-term projection for capital financing costs.

In terms of the 5 year capital programme – the Leader confirmed that in February 2018 Cabinet approved a new 5-year capital programme from 2018/19 to 2022/23 – paragraph 13 of the report refers.  The Leader explained the Capital Strategy outlines the process by which projects are approved onto the capital programme, ensuring they meet key service priorities and, in overall terms, keep within the affordability headroom. 

In 2020/21, the Council has capital schemes of £44.6m.  Over the 5 year programme ending 2024/25, the programme is ambitious with:

·         c£186m of already approved projects;

·         c£16m of further capital headroom for further projects, totalling £202m.

·         The Council is investing over c£70m in its schools, in its historical and cultural assets such as the Transporter Bridge, supporting city centre redevelopment, providing modern, fit for the future ‘neighbourhood hubs’ and creating capacity in its recycling and waste facilities.  Progress is being made in the delivery of these.

The capital financing costs are shown in table 2 of the report; the costs are included in the Council’s MTFP, which the Leader confirmed in the current funding climate/uncertainty and continued increase on service demands, is challenging.  The report noted that costs will continue to increase into the medium to long term.  Compared to comparative authorities, the percentage of the capital costs as a proportion to the Council’s total net revenue is very high, showing the need to maintain a sustainable level of spending on capital to keep the costs down.  Further work is planned by finance colleagues to inform this issue.

The report confirmed that capital expenditure funded by debt increases the need to undertake external borrowing.  The Council is committed and has a requirement to be a net borrower for the long term; to ensure this borrowing is affordable and sustainable, Council is required to set an affordable borrowing limit - shown in Table 3 of the report.  Factors included in arriving at these borrowing limits include:

-       Current external borrowing requirement coming from the capital programme and bringing forward a limited amount of early borrowing to replace internal borrowing where appropriate;

-       Ability to undertake borrowing for onward loans to third parties for regeneration purposes, clearly subject to strict due diligence;

-       Flexibility to borrow for investment/income generating/commercialisation opportunities (subject to governance arrangements).

Section 6 of the Capital Strategy details the commercial activities of the Council, including the approval of a £50m investment fund for investments in commercial properties, which is built into the borrowing limits set out in the report.  This fund has not yet been utilised and the future use of the fund requires review, primarily due to the interest rate increase in borrowing and recent guidance from CIPFA for Authorities pursuing property fund investments.

With regard to Treasury Strategy and Management, the Leader confirmed the Council is involved in two types of treasury activity which are controlled primarily via the Council’s Treasury Management Strategy and in line with the regulations associated with that Strategy, these are:

(i)             Borrowing long-term for capital purposes and short term for temporary cash flow;

(ii)            Investment of surplus cash. 

In terms of the Council’s borrowing strategy, the Leader confirmed the Council has significant long term borrowing requirements but in recent years the strategy has been able to fund its capital expenditure from reducing investments rather than undertaking more expensive additional borrowing. 

As of 31 March 2019, the Council had internal borrowing of c£84m; the Leader was pleased to confirm this gave a saving of c£2.5m in interest costs.

The Leader further confirmed the capacity for being internally borrowed has been reached and borrowing requirements will need to come from new external loans.  In addition, as the Council reduces its reserves, primarily by drawing down on its PFI reserves, it will need to replace this lower headroom for internal borrowing with new external borrowing too.  This is an important and significant issue and as recommended in the Capital Strategy, the Council needs to maintain a sustainable level of capital spending.

In terms of investments - both the CIPFA Code and Welsh Government Guidance require the Authority to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield.  The authority’s objective when investing money is to strike an appropriate balance between risk and return, minimising the risk of incurring losses. 

Given the increasing risk and very low returns from short-term unsecured bank investments, the Authority aims to diversify into higher yielding asset classes during 2020/21.  This is especially the case for the £10M that is available for longer term investment.  This diversification will represent a change in strategy over the coming year.

The Leader concluded by confirming the Strategies are very comprehensive and confirmed the report provides a useful summary of the key messages.

The Leader invited comments from her Cabinet colleagues:

The Deputy Leader (CM for City Services) referred to page 57 of the report - Interest rate forecast - and enquired if the base rate on borrowing forecast is likely to change.  The Head of Finance reported that no further information had been received since writing the report and it is generally forecast that rates will be lower for longer (although he stressed this cannot be construed as giving advice on this matter).

The CM for Social Services flagged up an early warning that schemes financed by the Disability Facilities Grant Scheme are becoming very expensive and the signs are the fund will not be able to cope with the extra costs. 

Decision:

Cabinet agreed to recommend to Council for approval:

i)              the Capital Strategy (Appendix 2), including the current capital programme within it (shown separately in Appendix 1), its associated Prudential Indicators and the borrowing requirements/limits needed to deliver the current capital programme, noting the increased revenue costs in the MTFP for the increased borrowing;

ii)             the Treasury Management Strategy and Treasury Management Indicators, the Investment Strategy and the Minimum Revenue Provision (MRP) for 2020/21 (Appendix 3);

iii)           note the comments made by Audit Committee on 29 January 2020 (paragraph 6 and 7).