The Director of Finance presented a report on Capital Strategy. The Capital Strategy 2022/2023 Mid Year Update Report provided a high-level overview of how capital expenditure, capital financing and treasury management activities contributed to the provision of local public services at the Council. In addition, an overview of how the associated risks involved were managed and the implications for future financial sustainability were provided.
The Capital Strategy report for the Council covered the following areas:
• How the Investment Strategy was funded.
• The relevant Prudential Indicators to monitor the performance, affordability and sustainability of the capital expenditure being proposed in line with the requirements of the prudential code.
• Treasury Management arrangements in place for investing surplus funds and borrowing to fund capital expenditure.
• The types of investments the Council made as part of managing its cash balances – the Annual Investment Strategy.
• Minimum Revenue Provision policy – including outlining how much the Council set aside to re-pay debt built up to fund prior year’s capital expenditure in the Borough.
The Director drew the Committee’s attention to the following:
The table at paragraph 8 of the submitted report showed the Council’s capital expenditure, how this was financed and the amount of borrowing. There had been a significant amount of slippage in this year’s programme and therefore approximately £20 million less borrowing compared to the budget. The cost as a percentage of revenue budget was 8.9% which was below the guideline of 10% and allowed some headroom if any emergency works were required.
The forecast overall total long term external debt at the end of 2022/23 was expected to be around £250 million. This should be compared with the estimated Capital Financing Requirement (the underlying value which the Council needed to borrow to fund capital activities) of £283 million. The Council therefore had an expected under-borrowed position of circa £33 million or 12%, which had provided some annual savings in interest payments, as other revenue and capital cash had been used in lieu of borrowing.
On local authority borrowing, there had been much interest from both regulators and the media in recent months around individual councils taking significant amounts of long-term debt from the Public Works Loan Board (PWLB) for the sole purposes of commercial activity – generally property investment. Under the Prudential Code, local authorities had lots of freedom to conduct and self-regulate their own borrowing and investment activities. The Director confirmed that Middlesbrough did not use PWLB funding for property investment.
Increasingly local authorities were moving to an annuity basis of Minimum Revenue Provision (MRP) provision which catered for lower debt repayments in earlier years, with the consequence of greater amounts in later years, recognising that interest paid was higher in the earlier years. It was proposed that the Council moved to an annuity basis of MRP provision on unsupported debt from 2008. This was the significant part of the Council’s capital financing requirement.
The impact of the MRP change would be to improve the management of the revenue budget for capital financing and to smooth the total cost of capital financing over many years. Under regulation the Council was unable to backdate the policy for prior financial years and would continue to hold MRP already provided on the balance sheet. Only future charges would be influenced by the new policy. The Director confirmed that the decision could be reversed if required.
In response to a question about the Council’s level of debt in comparison to other Local Authorities, it was clarified that Middlesbrough was in the bottom quartile of the CIPFA financial sustainability index that was referenced annually.
AGREED as follows that:
1. The report was received and noted.
2. The proposed change on Minimum Revenue Provision was endorsed by the Committee.