Agenda item

The purpose of this report was to gather the Committee’s views and responses to the Council’s draft Capital and Treasury Management Strategies. These views and responses would then be reported to both Cabinet and Council, to inform their respective considerations of these documents.

The report was presented to the committee by the Assistant Head of Finance, and it was explained that this was the last year of the Capital Strategy Programme and there would be a more fundamental review next year as the new programme was developed.

Main Points:

• There were 2 additional years added to cover schemes that extended beyond 2023 such as the 21st century schools Band B programme which was a multi-year programme that extended beyond the next financial year.
• The report was brought to the Governance and Audit Committee for consideration and comment and then Cabinet and full Council for sign off which was the process followed.
• This was a long-term document covering a 10-year period and beyond in some cases and it was required of the team to underpin all considerations with the 3 main objectives of affordability, prudence, and sustainability, and they were critical within the decisions that were taken in conjunction with this report.
• In the Head of Finance comments, it was noted that one of the main aims was to limit the growth and debt funded Capital Expenditure e.g., expenditure funded by borrowing. Internal borrowing capacity would reduce over time and the way that the MRP policy worked, the charges would increase over time.
• On page 3 there were two sections that gave an overview of the two strategies, what their main purpose was and how they were set out within the prudential code.
• In terms of the main highlights, the 7 years in total was £288 million which included £2.4 million of currently uncommitted borrowing headroom and in 2022-2023 we were looking at a spend in excess of £100 million which was a significant challenge for the Council to achieve.
• £77.5 million was anticipated to be funded through borrowing with £43.1 million was still to be incurred.
• Within the report, the prudential indicators- the two critical ones were the external borrowing limits and the authorised limit in the operational boundary. They were derived from the Capital Programme and at £271 million and £192 million respectively, excluding PFI’s and leases. This reflected an increase on the limits that were currently in place in this financial year and that just underlies our position as a net borrower going forward.
• Table 3 contained the capital financing costs that we have budgeted for within the Council's revenue budget which were still relatively high and were reduced in proportion of the Councils overall revenue budget going forward. This was mainly due to the positive settlement that's being received this year, and the indicative settlements that we've had from the next two years, but it ultimately showed the ultimate impact debt funded Capital Expenditure had on an authority’s finances.
• The Council needed to develop a new Capital programme where the CFR did not grow overall.
• There were two scenarios as part of this work, one with an annual borrow debt fund expenditure of £5.5 million a year and one scenario of £7.5 million a year and these both showed that they either reduce or stabilised the CFR.
• However even with these two scenarios the capital financing cost would continue to rise for reasons already noted.
• Part of developing the new programme would be to review the governance structure around how schemes get added to the programmes, making it more robust and limit the amount of slippage being reported.
• In terms of the Capital Strategy there have been changes to the prudential code and the Treasury Management code, both of which were being finalized and published at the moment. There was one specific requirement in relation to the Prudential Code, which is that local authorities would now be precluded from undertaking borrowing where the sole aim of that borrowing is to yield from that. There was no real impact on Newport and there were no plans of that nature at the moment but if there were plans, they would not be able to be taken forward.
• There were sections in the report on the borrowing strategy and investment strategy where net borrowing requirement over the medium-term was the preferred strategy to maximize internal borrowing, deferring the need to undertake actual borrowing for as long as possible, but where relevant, borrowing in advance of need would be considered, with the aim to secure low interest rates and balance that against the risk of borrowing too early and incurring unnecessary interest costs. We also needed to consider the current interest rates on short term borrowing, which were low at the moment, to ensure a balanced portfolio.
• In terms of investments, it was needed to maintain an investment balance of £10 million to retain our professional client status, with the overall aim to strike a balance between risk and reward with consideration given to a diversification of investments to try and ensure that balance was achieved.

The Head of Finance mentioned that next year a local indicator was being introduced which was debt funded capital expenditure which was set at £2.4 million to take us to the end of the Capital Programme. This would mean a limit next year on new borrowing commitments. In terms of the new programme the intention was to set commitments next year where two scenarios were modelled which stabilised borrowing revenues. However, they did not stabilise revenue costs which would continue to increase. Limits would be set to stabilise the CFR. As previously indicated, there were two scenarios of £5.5 million a year and £7.5 million a year and the Head of Finance stated that it was their intention to recommend that a limit was set for the programme period somewhere in that area.

Questions:

Councillor Hourahine asked about the extension of 2 years on the Capital Expenditure Programme and was this brought about because this was planned or had it happened due to underperformance within the Council of these programmes.

The Head of Finance explained that the 21st Century schools programme ran in a slightly different period than the Council’s own Capital Programme but there had been slippage as well.

Councillor Hourahine felt that this needed to be addressed by tighter programme management.

The Chair referred to the budgeted spend of £100 million and that there was a risk that this would not be spent and that over the last 5-7 years we always underspend our Capital Programme by about 20-30% every year. The Chair noted that following on from the last statement, if we were struggling to hit our expected spend again this year what was happening with programme management around capital cost as it was a continuous problem and it was affecting what the strategy would be for this document.

The Chair asked what the Council was doing to get better project management in this area.

The Assistant Head of Finance (RG) stated that there was a recognition that there needed to be a review of the governance arrangements and that in some cases there were capacity challenges, staff numbers etc and this was a challenge that was given consideration and was discussed recently. With the senior management restructure that's being undertaken and the Executive Board now being in place there were stronger structures around the management and the oversight of the Capital Programme. It was therefore anticipated that the risk would be reduced going forward with a more robust process in place to try to avoid a placeholder approach to putting schemes into the programme, so the schemes were ready and deliverable, and the profile was accurate and realistic.

The Head of Finance added that the governance arrangements were being reviewed over the whole piece and across the Authority as management structures were being filled. The Capital Programme and delivery were part of this review and would need to be strengthened.

The Chair suggested that if there was slippage, the capacity issue would need to be referred to in the accounts at that stage as the slippage was being recorded again and from the readers point of view it gave more context.

The Chair commented that the paper was a reactive rather than a proactive document where it was a strategy and method of funding. The Chair stated that they felt that a strategy should be how much debt do we want to carry. For example, the authorised limit was around the £300 million mark which was our maximum borrowing. The Chair stated that it seemed to imply that we wanted to be below £220 million but on the other hand our Capital Programme was £100 million so the strategy should be saying we could go up to £220 million but as a Council we don’t want to exceed whatever the appropriate level was. Therefore, the Chair stated that we should be driving what the capital plan should be set at and not the other way around.

The Chair commented that in the report itself that on page 73-paragraph 12 they questioned the first sentence and what it meant; “It should be noted that the two limits described above only place a theoretical limit on borrowing that can be undertaken to fund new capital expenditure, if there is evidence of slippage occurring across the programme.”

The Assistant Head of Finance stated that they were trying to say that the way that we currently calculate both the authorised limit, and the operational boundary was based on the Capital Programme that they were looking to deliver but slippage was a common occurrence, and it can be significant at times. Due to slippage the authorised limit was not achieved, and it was felt that was a lot of latitude for additional borrowing that exceeded the programme. Another measure of control was required in terms of borrowing and that the borrowing headroom was itself an indicator so if the amount of debt funded expenditure was increased then this itself needed to be approved.

The Chair recommended that this paragraph needed to be reworded.

Councillor Giles noted that it was an interesting discussion and that their experience with Plan B Capital Expenditure was match funded which caused great difficulties as it was funded to what we could afford. Councillor Giles noted that there were developers who added unexpected large costs which were not always planned for. Councillor Giles added their thanks to the team for the report. 

Actions:

For the Assistant Head of Finance to amend page 73-paragraph 12 as advised by the Chair.

Agreed:

The Governance and Audit Committee noted the report.