Agenda item

The Leader presented the report to Cabinet informing colleagues that the annual Capital and Treasury Management strategies, was brought to this Cabinet meeting having been reviewed and commented upon by Governance and Audit Committee at their meeting which took place on 27th January.

 

Cabinet was required to endorse the strategies prior to them being presented to full Council for final approval and was also required to approve the detailed Capital Programme, which formed one of the appendices to this report.

 

The comments from the Governance and Audit Committee were included within this report and, where appropriate, the report was amended in line with these comments.

 

The two strategies were a requirement of CIPFA’s Prudential Code, form a critical part of short, medium and long term financial planning and are intrinsically linked with the revenue budget setting process.

 

The purpose of the Capital Strategy was to set out the Council’s approach to decision making regarding capital expenditure and, in the process, demonstrating that those decisions were made in line with service objectives, with consideration given to risk, reward and impact.

 

The Capital Strategy was inherently linked with the Treasury Management Strategy which, itself, was concerned with the Council’s approach to managing its cash, including, primarily, the approach to borrowing and investing activities.

 

A key aspect of the Treasury Management strategy was the borrowing limits, which were ultimately approved by Council, and form part of the suite of prudential indicators which govern the Council’s cash management activities. 

 

The Capital Strategy was a long-term focussed document, which considered the next 10 years as a minimum. Because of this long-term focus, it was critical that decisions made are reflective of the need for capital plans to be affordable, prudent and sustainable.  Essentially, this meant the following:

 

·        Debt-funded capital expenditure incurred today would result in a long-term commitment upon the Council to repay that borrowing and the interest that arises from it

·        That commitment to meet capital financing costs would form part of the revenue budget

·        Whilst that commitment might be affordable now, it must be possible to maintain this over the long term

·        Capital financing costs, once locked-in, could not be reduced or avoided, meaning that any future budgetary challenges would impact upon the level of funding available for other services and priorities, rather than the capital financing budget.

 

Due to the importance of these factors, the Head of Finance’s commentary within the report specifically addressed these. 

 

As outlined at the beginning, whilst Cabinet made decisions regarding the projects that comprise the Capital Programme, it was full Council that determined the borrowing limits that must be adhered to.

 

Whilst many projects were funded from sources such as grants, capital receipts and specific reserves, there would be a number that cannot be funded in this way and were ultimately funded via borrowing. The overall Capital Programme, therefore, needed to be set within these borrowing limits.

 

The forthcoming financial year (2022/23) represents the last year of the current five-year Capital Programme. However, two years were added to the programme to reflect those projects which started in this current programme but extended beyond it to completion.

 

It was a large and challenging programme to deliver, with the programme standing at £288.4m in totality and in excess of £100m in 2022/23 alone.

 

It included a number of our key capital priorities, as well as investments such as borrowing for the Cardiff Capital Regional City Deal and an element of borrowing headroom to allow flexibility for new schemes or additional costs to be funded.

 

Some of the larger schemes within the programme included:

·        £111.7m in relation to Education and schools, of which £75m is included in relation to the Council’s 21st Century Schools Band B plans, which saw a significant improvement in the quality of our school buildings

·        Over £25m of funding for the Cardiff Capital Regional City Deal which contributed towards a huge level of economic development across the region, benefitting Newport

·        Nearly £10m for the new footbridge at Newport Station

·        Over £12m in relation to the refurbishment and restoration of the Transporter Bridge

·        £19.7m for the new leisure centre which, in turn, would pave the way for the new Coleg Gwent development, which would contribute to the development of the Newport Knowledge Quarter

 

Of the £288.4m total programme, approximately £92m of the expenditure is to be funded via debt, thus increasing the need to borrow and resulting in the Council committing to being a net borrower over the medium to long term.

 

This commitment to being a net borrower is reflected in Table 2 of the report, which shows how much the anticipated cumulative level of borrowing is set to grow by, with actual borrowing anticipated to increase from the current level of £149m to an anticipated peak of £203m by 2023/24, based on the delivery of the current programme, as set out in the report.

 

The required borrowing can either take the form of actual external borrowing or can be managed via the use of existing cash resources, which is known as internal borrowing. The Council has historically been successful at maximising its internal borrowing capacity, in turn reducing the need to incur the costs associated with external borrowing.

 

As reflected in the outlook contained within this report, the level of internal borrowing, represented by the level of cash-backed reserves held, is expected to be circa £100m heading in to 2022/23.

 

In essence, this means that this is the historic value of debt-funded capital expenditure which has been funded via internal borrowing. However, the capacity for internal borrowing is now diminishing, as earmarked reserves are utilised. As a consequence, the need to externally borrow will increase to, in effect, fund this historic expenditure.

 

Then, in addition, any future capital expenditure, either in the existing programme or the future programme, will lead to a requirement to undertake further borrowing and will add to the overall capital financing requirement. This serves to remind us that decisions need to take into consideration affordability, prudence and sustainability.

 

Table 3 of the report shows the impact the need to borrow has upon the revenue budget. The costs associated with the borrowing required for the existing programme, known as the capital financing costs, are already fully funded, due to the better than expected funding settlement from 2021/22.

 

However, the development of a new capital programme from 2023/24 will potentially see the need to borrow grow further and it will be important that the costs arising from further borrowing can be met from within the revenue budget.

 

The proportion of the revenue budget dedicated to capital financing costs is already relatively high compared to comparable Welsh councils and, therefore, it will be important that the new programme is sustainable and does not disproportionately impact upon the revenue budget.

 

Treasury Management Strategy

 

The Treasury Management Strategy is primarily concerned with the Council’s approach to borrowing and investing and includes a number of key prudential indicators.

 

In terms of borrowing, as already stated, the Council is committed to being a net borrower over the medium to long term. The preferred strategy is to maximise the level of internal borrowing, although this capacity is expected to reduce year on year. Therefore, there will come a point where actual external borrowing is required to meet operational cashflow requirements.

 

However, although the Council will defer its need to borrow for as long as possible, it may consider undertaking borrowing early to secure favourable interest rates, providing this is affordable and within the agreed borrowing limits. This action would only be taken in conjunction with advice from our Treasury Advisors. 

 

In terms of investing, the objective when investing funds is to strike an appropriate balance between risk and return – that is minimising the risk of incurring losses from defaults and the risk of receiving unsuitably low investment income.

 

As outlined in last year’s strategy, the Council intends to diversify its investments into different asset classes, to maximise returns whilst mitigating against the risk and low yields from short-term unsecured bank investments. This change in approach was placed on hold due to the uncertain economic climate caused by the pandemic, however the intention is to explore this further during 2022/23.

 

Decision:

That Cabinet recommend to Council for approval:

i)                  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 programme.

 

ii)                 The Treasury Management Strategy and Treasury Management Indicators, the Investment Strategy and the Minimum Revenue Provision (MRP) for 2022/23. (Appendix 3)

 

iii)                As part of the above:

 

a.      To note 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 with regard to affordability, prudence and sustainability.

 

b.      To note 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 to achieve this.

 

c.      To note the requirement to limit and manage debt funded expenditure beyond the existing programme period, for sustainability purposes, with particular regard to the development of the new Capital Programme.

 

d.      To note the changes to the Prudential Code and Treasury Management Code, and the impact of those changes on the Council’s approach to capital investment and treasury management.

 

e.      Note comments made by Audit Committee on 27 January 2022 (paragraph 6).