Agenda item

The Leader advised Council that the Capital and Treasury Management Strategies, brought to Council was reviewed and commented upon by Governance & Audit Committee at their meeting which took place on 27 January, these were included within the report.

Cabinet also endorsed both strategies, at their meeting of 18 February, and approved the detailed capital programme.

Council was required to approve both strategies and the prudential indicators and limits contained

The two strategies, which were a requirement of CIPFA’s Prudential Code, formed a critical part of short, medium and long term financial planning and were 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, whilst giving consideration 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, to be approved today, which formed part of the suite of prudential indicators which governed 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 were reflective of the need for capital plans to be affordable, prudent and sustainable.

Whilst Cabinet made decisions regarding the projects that comprised the Capital Programme, it was full Council that determined the borrowing limits that must be adhered to. Many projects were funded from sources such as grants, capital receipts and specific reserves, however there was a number that could not be funded in this way and were ultimately funded via borrowing. The overall Capital Programme, therefore needed to be set within these borrowing limits.

Capital Programme

The forthcoming financial year (2022/23) represented the last year of the current five-year Capital Programme. However, two years have been added to the programme to reflect those projects which started in this current programme and extend 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.

This 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 for Education and schools, of which £75m was included in relation to the Council’s 21^st Century Schools Band B plans, which would see a significant improvement in the quality of school buildings

§  Over £25m of funding for the Cardiff Capital Region City Deal which contributed towards a huge level of economic development across the region, including for the benefit of Newport

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

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

§  £19.7m for the new leisure centre which, paving the way for the new Coleg Gwent development, forming part of the Newport Knowledge Quarter

Of the £288.4m total programme, approximately £92m of the expenditure was to be funded via debt, increasing the need to borrow resulting in the Council committing to being a net borrower over the medium to long term. This commitment to being a net borrower was reflected in Table 2 of the report and showed the anticipated level of growth of cumulative level of borrowing, 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, set out in the report.

The required borrowing could either take the form of actual external borrowing or be managed via the use of existing cash resources, known as internal borrowing. The Council had historically been successful at maximising its internal borrowing capacity, in turn reducing the need to incur the costs associated with external borrowing. The level of internal borrowing represented by the level of cash-backed reserves held, was expected to be circa £100m heading in to 2022/23.  This meant that this was the historic value of debt-funded capital expenditure which was funded via internal borrowing. The capacity for internal borrowing however, was diminishing, as earmarked reserves were utilised. As a result, the need to externally borrow would increase to fund this historic expenditure.

In addition, any future capital expenditure, either in the existing programme or the future programme, would lead to a requirement to undertake further borrowing and add to the overall capital financing requirement. This served to remind us why decisions needed to take into consideration affordability, prudence, and sustainability. 

The costs associated with the borrowing required for the existing programme, known as the capital financing costs, were already fully funded, due to the better than expected funding settlement from 2021/22. This was shown in Table 3.

The development of a new capital programme from 2023/24 however, would potentially see the need to borrow grow further and it was important that the costs arising from further borrowing could be met from within the revenue budget. The proportion of the revenue budget dedicated to capital financing costs was already relatively high compared to comparable Welsh councils and, therefore, it was important that the new programme did not disproportionately impact upon the revenue budget and was sustainable.

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

The Council is committed to being a net borrower over the medium to long term. The preferred strategy was to maximise the level of internal borrowing, although this capacity was expected to reduce year on year.  External borrowing may be required in future in order to meet operational cashflow requirements. The Council would defer its need to borrow for as long as possible, it may consider undertaking borrowing early, to secure favourable interest rates, providing this was affordable and within the agreed borrowing limits. This action would only be taken in conjunction with advice from Treasury Advisors. 

In terms of investing, the objective when investing funds 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. The Council intended 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.

The Leader moved the approval of the Capital Strategy, as set out in the Report.  This was duly seconded and put to the vote. There were no amendments or comments.

Resolved:

That Council

§  Approve the Capital Strategy (Appendix 2), which incorporated the current approved capital programme, and the borrowing requirements/limits needed to deliver the current capital programme.

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

As part of the above:

·          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 with regard to affordability, prudence and sustainability.

·          Noted the Head of Finance 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 to achieve this.

·          Noted 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.

·          Noted 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.

·          Noted comments made by Audit Committee on 27 January 2022 (paragraph 6).