Agenda item

The Leader presented the report to Cabinet on the Capital and Treasury Management Strategies. These had already been reviewed by the Council’s Audit Committee and their comments and responses were included in the report.

The report included both the Capital and Treasury Management Strategies which, at their core (i) confirmed the capital programme, as part of the Capital Strategy and (ii) the various borrowing limits and other indicators which governed the management of the Councils borrowing and investing activities, as part of the Treasury Management Strategy.

The Leader advised that whilst the Cabinet made decisions relating to what could be spent on capital projects, it was the full Council that approved the ‘borrowing limits’.  Many projects were funded from capital grants, capital receipts and specific reserves which did not impact on borrowing levels, but where borrowing was required, the programme was required to be set within those limits. This was an important area of overall financial management governance in that borrowing levels, once taken up, lock in the Council to a long term lability for revenue costs in relation to the provision of the repayment of those loans (MRP costs) and external loan interest costs; together known as ‘capital financing costs’,

Both these strategies were a requirement of CIPFA’s Prudential Code which set out the requirement for them and ensured, within the frameworks which these document set, that capital expenditure plans were:

·         Affordable - capital spend and programmes were within sustainable limits and could be accommodated within current and forecast future funding levels.

·         Prudent – Councils needed to set borrowing limits called ‘operational’ and ‘authorised limits’ which reflected the Councils plan for affordable capital plans and their financing costs. On investing activities, Councils needed to consider the balance between security, liquidity and yieldwhich reflected their own risk appetite but prioritised security and liquidity over yield. 

·         Sustainable – Council’s capital plans and the revenue cost of financing the current and future forecast borrowing/debt taken out for thatneeds to be sustainable in terms of the Councils overall finances and its impact on that. 

These issues were reviewed and the Head of Finance comments were included in his section in paragraph 31 onwards. 

Treasury Strategy and the capital programme

The Council’s capital programme extended to 2024/25 (this was the original capital five year programme to 2022/23 which was extended by two years for projects whose completion spanned beyond the five years). It was a significant capital programme. The capital programme included £211.4m of already approved projects and alongside new investments such as the borrowing for Cardiff City Capital Region spend at £17.3m, £19.7m for the new leisure scheme and £4.5m for further uncommitted borrowing for future projects, which brought a total investment of £252.9m for the programme ending 2024/25.

This was a large investment for the City’s key infrastructure. Key projects included:

·         Our new leisure scheme in the city centre -£19.7m.   This would also pave the way for the new Coleg Gwent College. Both would bring much needed footfall and vibrancy to the city centre.

·         Investment in the refurbishment and restoration of the City’s Transporter Bridge; nearly £13m.

·         A significant expansion, modernisation and maintenance of our school buildings, making up the majority of our £101m investment in this programme in education and schools.

·         Over £25m of funding for the Cardiff City Capital Region which was enabling a huge level of economic development across our region which would benefit Newport and the wider region.

·         Over £7m in our city centre and regeneration projects and we’ve included further funding in our revenue budget to continue and expand on that as we ‘build better’ from the past 12 months.

Capital Expenditure funded by debt increased the need to undertake external borrowing.  A further driver for the need to undertake external borrowing was the capacity to be ‘internally borrowed’ reducing as earmarked reserves were utilised, which in turn needed to be replaced with external borrowing. This was the case particularly for this Council which had a high level of ‘internal borrowing‘; which was now reducing over the medium-long term. The Council was therefore committed and had a requirement to be a net borrower for the long term.

For the remaining three years of the current capital programme until 2024/25, the level of borrowing to facilitate the current capital programme was substantial with external borrowing increasing from an estimated £164m at the end of this financial year to £234m in 2024/25, an increase of over £70m. The total committed requirement for external borrowing was forecasted to be c£284m. This was shown in table 2 of the report.

The commitment to increase external borrowing led to increasing capital financing costs as shown in table 3 of the report, and show a significant increase in capital financing costs from 2020/21.  These costs were included in the Council’s MTFP.  Costs would continue to increase into the medium to long term.  Compared to comparative authorities, the percentage of the capital financing costs as a proportion to the Councils total net revenue was high.  We had fully funded the capital financing costs required to complete this current capital programme and this was a key issue around showing affordability. As the Council’s net budget was increasing significantly too, the proportion of the Councils net budget allocated to this remained broadly the same as now and the issue of potentially lower or low growth in funding was not a new risk and existed today.  Therefore, from a sustainability viewpoint, the relative high cost of this budget was a challenge and was a risk but no higher or newer than it was today.   

Treasury Strategy

This dealt with plans for the Councils borrowing and investing activities on borrowing, the capacity to be internally borrowed would reduce over the medium to long term.  In 2021/22 the Council was expected to undertake external borrowing both for the refinancing of maturing loans and to fund increasing capital spend in the existing capital programme; it would remain as much ‘internally borrowed’ as was possible and increase actual external borrowing only when needed to manage its cash requirements.  However, the Council may, where it felt necessary to mitigate the risk of interest rate rises, undertake borrowing early to secure interest rates within agreed revenue budgets. This would be done in line with advice from our Treasury Advisors.

The Authority’s objective when investing money was to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving unsuitably low investment income.  Given the increasing risk and very low returns from short-term unsecured bank investments, the Authority aimed to diversify into higher yielding asset classes during 2021/22, and this was delayed due to the current economic climate as a result of the pandemic.  This was especially the case for the estimated £10 million that was available for longer-term investment.  All of the Authority’s surplus cash was currently invested in short-term unsecured bank deposits and local authorities. The strategy to diversify into higher yield asset classes would be implemented in the coming year.

Comments from Cabinet Members:

Councillor Rahman noted that committing to the capital expenditure was a sustainable way of minimising the risk, considering Covid and Brexit.  As Cabinet Member for Assets, this was not just an investment in the current infrastructure but future of the city, including the new Leisure Centre.  Councillor Rahman encouraged colleagues to look at where the money was being spent; schools in particular had significant investment.  The transport facility within the city and the footbridge over Newport Train Station meant that the Council was taking action to deliver to the community by keeping promises and working towards this.  A commitment to reducing carbon foot print, investment in Velodrome Light System to make it more sustainable, and being carbon neutral for the future was part of the budget consideration.

Councillor Truman considered the report good news regarding road mapping the council to move us forward. The investment outlined in the report covered everything.  Councillor Truman also mentioned the hard work, which had gone into this and thanked all officers and colleagues for their contribution in the report.

Councillor Cockeram thanked the Leader for an excellent presentation.  The investment of £4M in children’s residential homes, allowed the council not to rely on out-of-county placements in the private sector, this had a major impact on the health of the children, by bringing them home.

Resolved:

That Cabinet recommended to Council for approval:

§  The Capital Strategy (Appendix 2), including the current capital programme within it (shown separately in Appendix 1) and the borrowing requirements/limits needed to deliver the current capital programme.

§  The Treasury Management Strategy and Treasury Management Indicators, the Investment Strategy and the Minimum Revenue Provision (MRP) for 2021/22. (Appendix 3).

As part of the above, Cabinet noted:

§  The increased debt and corresponding revenue cost of this in delivering the current capital programme, and the implications of this over both the short and medium-long term in terms of affordability, prudence and sustainability.

§  The Head of Finance’s recommendation to Council, that borrowing needed to be limited to that included in the current capital programme and the recommended prudential indicators on borrowing limits do this.

§  Beyond the current capital programme period, there were potential financial challenges around on-going affordability and sustainability but these would be reviewed closer to the start of the new programme within the context of funding levels and the Councils budget position.