Agenda item

Capital Strategy and Treasury Management Strategy 2021/22


The Leader presented the report to Council.


The Capital and Treasury Management Strategies were presented to Audit Committee and their comments are included within the report.  Cabinet endorsed the strategies at its latest meeting, and Council were required to approve the strategies including the borrowing limits and prudential and treasury management indicators included within. 


This report included both the Capital and Treasury Management Strategies which, at their core (i) confirm 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 & investing activities, as part of the Treasury Management Strategy.


Both these strategies were a requirement of CIPFA’s Prudential Code which sets 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 can 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 which 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 thatneeded to be sustainable in terms of the Councils overall finances and its impact on that. 


Whilst Cabinet made decisions relating to what capital projects and spend to make, it was the full Council that approves the ‘borrowing limits’ that these were kept within. Many projects are 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’,


Capital programme

The Council’s capital programme went to 2024/25 (this was the original capital 5 year programme to 2022/23 which was extended by 2 years for projects whose completion spanned beyond the 5 years). It was a significant capital programme and 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 – brings 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 include:


§  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, including 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 increases 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 is 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 forecast to be c£284m. These were 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 have 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 remains broadly the same as now and the issue of potentially lower or low growth in funding was not a new risk and exists today. Therefore, from a sustainability viewpoint, the relative high cost of this budget was a challenge and was a risk but no higher or new than it is today. 


Council was requested to approve the capital strategy and the borrowing limits within.


Treasury Management Strategy

This deals 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 is 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.


On investing, 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.


Again the Council was requested to approve the Treasury Management strategy, including the investment strategy, treasury management indicators and limits and the Minimum Revenue Provision policy included within the strategy.


Cllr Jeavons seconded the report.


Comments from Councillors:


Councillor Al-Nuaimi referred to the seven-year capital programme and sought clarification on the cost of borrowing for Cardiff City Capital Region pending money from central government and what money would fund projects within Newport.  Councillor Al-Nuaimi was advised to put any questions in writing to Head of Finance.


Councillor Truman fully supported the proposals as forward thinking and they dealt with all the main issues, including housing and leisure facilities and was a boost to the city centre economy, this included the City Centre regeneration projects.  Councillor Truman also supported the funding for social services and the empty property fund.  The Transporter Bridge refurbishment was also a welcomed.


Councillor Hourahine took on board what Councillor Truman said and added that the Regeneration of the city centre would be beneficial for younger residents.  Newport City Council was a forward looking authority.  The regeneration would produce high quality high paid jobs for young people safeguarding their future, Councillor Hourahine therefore welcomed the report.



That Council -

·         Approved 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.

·         Approved 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:


o   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.


o   Noted the Head of Finance recommendation to Council, that borrowing needs to be limited to that included in the current capital programme and the recommended prudential indicators on borrowing limits do this


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


·         Noted comments made by Audit Committee on 28 January 2021 (paragraph 5 & 6).


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