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Appendix I - The Capital Strategy

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Capital Strategy Report 2021/22

The capital strategy gives a high-level overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of local public services along with an overview of how associated risk is managed and the implications for future financial sustainability.

Capital Expenditure and Financing

Capital expenditure is where the Council spends money on assets, such as property or vehicles that will be used for more than one year. In local government this includes spending on assets owned by other bodies, and loans and grants to other bodies enabling them to buy assets.

The Council has some limited discretion on what counts as capital expenditure, for example assets costing below £20,000 are not capitalised and are charged to revenue in year.

In 2021/22, the Council is planning capital expenditure of £7.6m summarised below.

Prudential Indicator: Estimates of Capital Expenditure

The information below highlights spend in relation to the Council's key priorities.

Your Council

  • 2020/21 - £1.6 million
  • 2021/22 - £4.3 million
  • 2022/23 - £4.4 million
  • 2023/24 - £1.0 million
  • 2024/25 - £0.8 million
  • Total = £12.1 million

Your City

  • 2020/21 - £4.5 million
  • 2021/22 - £4.3 million
  • 2022/23 - £6.7 million
  • 2023/24 - £3.3 million
  • 2024/25 - £2.8 million
  • Total = £21.7 million

Fairness for You

  • 2020/21 - £1.5 million
  • 2021/22 - £0.8 million
  • 2022/23 - £1.6 million
  • 2023/24 - £0.5 million
  • 2024/25 - £0.5 million
  • Total = £4.9 million

Estimated Expenditure

  • 2020/21 - £7.6 million
  • 2021/22 - £9.4 million
  • 2022/23 - £12.7 million
  • 2023/24 - £4.8 million
  • 2024/25 - £4.1 million
  • Total = £38.7 million

Governance

A strategic review of the Capital Programme including a review of the Council's investment assets and operational assets is carried out annually.

The reviews take into consideration works identified from stock condition surveys (over a ten year time frame) and investments/capital expenditure as a result of the Efficiency Savings Plan. Bids are formulated based on the outcome of reviews and recommends projects for inclusion in the Council's capital programme. Bids are collated by Finance who calculate the financing cost (which can be nil if the project is fully externally financed).

The Budget Working Group consisting of Cabinet Members, backbenches and Corporate Management Team appraise all bids based on a comparison of service priorities against financing costs.

The final capital programme is then presented along with the Cabinet budget proposals in January and to Council in February each year.

For full details of the Council's capital programme please view Appendix G.

All capital expenditure must be financed, either from external sources (government grants and other contributions), the Council's own resources (revenue, reserves and capital receipts) or debt (borrowing or leasing).

The planned financing of the expenditure in Table 2 is as follows:

Table 2 Capital financing

Table 2 Capital financing

Prudential Borrowing is only a temporary source of finance, since loans and leases must be repaid, and this is therefore replaced over time by other financing, usually from revenue which is known as Minimum Revenue Provision (MRP).

Planned MRP repayments are as follows.

Table 3 Replacement of Debt Finance

Table 3 Replacement of Debt Finance

The Council's Minimum Revenue Provision statement is available in Appendix L.

The Council's cumulative outstanding amount of debt finance is measured by the capital financing requirement (CFR). This increases with new debt financed capital expenditure and reduces with MRP and capital receipts.

The CFR is expected to increase by £0.8m during 2020/21. Based on the above figures for expenditure and financing, the Council's estimated CFR is as follows:

Table 4: Prudential Indicator Estimates of Capital Financing Requirement

Prudential Indicator Estimates of Capital Financing Requirement

Asset management

To ensure that capital assets continue to be of long-term use, the Council has an asset management strategy.

This is currently being updated following the external review undertaken by specialist property advisors Cushman and Wakefield.

The review looked at the Councils investment property portfolio and performance of the Property Services section.

An action plan setting out recommendations has been agreed by Members and work is underway to implement all actions. Part of the initial brief was to investigate opportunities to dispose of property assets for development, and explore other opportunities to maximise the return on the investment property portfolio income or increase financial receipts.

Property advisors have been procured to investigate these opportunities and a report setting out the future investment strategy will be brought to Members later in the year.

Asset disposals: When a capital asset is no longer needed, it may be sold so that the proceeds, known as capital receipts, can be spent on new assets or to repay debt.

The Council plans to receive £0.5m of capital receipts in the coming financial year as follows:

Asset disposals

When a capital asset is no longer needed, it may be sold so that the proceeds, known as capital receipts, can be spent on new assets or to repay debt.

The Council plans to receive £0.5m of capital receipts in the coming financial year as follows:

Capital Receipts

Asset Sales

  • 2020/21 - £0 (Estimate - £ million)
  • 2021/22 - £0 (Estimate - £ million)
  • 2022/23 - £0 (Estimate - £ million)
  • 2023/24 - £0 (Estimate - £ million)
  • 2024/25 - £0 (Estimate - £ million)
  • Total Estimate - £0 (£m)

Right to Buy Receipts

  • 2020/21 - £0.1 (Estimate - £ million)
  • 2021/22 - £0.1 (Estimate - £ million)
  • 2022/23 - £0.1 (Estimate - £ million)
  • 2023/24 - £0.1 (Estimate - £ million)
  • 2024/25 - £0.1 (Estimate - £ million)
  • Total Estimate - £0.5 (£m)

Further details of planned asset disposals are included within the capital programme in Icon for pdf Appendix G. [80.16KB]

The Council has formally agreed to the flexible use of capital receipts however there are no specific plans to use capital receipts to fund the efficiency plan revenue expenditure during 2021/22.

The Council is developing a new policy to set aside capital receipts received from the sale of land and investment property for re-investment within the investment property portfolio. This policy once developed will be approved by the Councils Cabinet.

Treasury Management

Treasury management is concerned with keeping sufficient but not excessive cash available to meet the Council's spending needs, while managing the risks involved. Surplus cash is invested until required, while a shortage of cash will be met by borrowing, to avoid excessive credit balances or overdrafts in the bank current account.

Borrowing strategy

The Council's main objectives when borrowing are to achieve a low but certain cost of finance while retaining flexibility should plans change in future. Due to decisions taken in the past, the Council currently has £12.3m borrowing at an average interest rate of 4.8%.

Projected levels of the Council's total outstanding debt are shown below, compared with the capital financing requirement.

Table 6: Prudential Indicator Gross Debt and the Capital Financing Requirement

Prudential Indicator Gross Debt and the Capital Financing Requirement

Statutory guidance is that debt should remain below the capital financing requirement, except in the short-term.

As can be seen from table 6, the Council expects to comply with this in the medium term.

Affordable borrowing limit

The Council is legally obliged to set an affordable borrowing limit (also termed the authorised limit for external debt) each year. In line with statutory guidance, a lower "operational boundary" is also set as a warning level should debt approach the limit.

Table 7: Prudential Indicators: Authorised limit and Operational Boundary for External Debt

Prudential Indicators - Authorised limit and Operational Boundary for External Debt

Further details on borrowing are in the treasury management strategy (Appendix J).

Investment strategy

Treasury investments arise from receiving cash before it is paid out again. Investments made for service reasons or for pure financial gain are not generally considered to be part of treasury management.

The Council's policy on treasury investments is to prioritise security and liquidity over yield. That is to focus on minimising risk rather than maximising returns. Cash that is likely to be spent in the near term is invested securely, for example with the government, other local authorities or selected high-quality banks, to minimise the risk of loss.

Money that will be held for longer terms is invested more widely, including in bonds, shares and property, to balance the risk of loss against the risk of receiving returns below inflation. Both near-term and longer-term investments may be held in pooled funds, where an external fund manager makes decisions on which particular investments to buy and the Council may request its money back at short notice.

Table 8: Treasury Management Investments

Treasury Management Investments

Further details on treasury investments are in the Treasury Management Strategy (see Appendix J).

Governance - Decisions on treasury management investment and borrowing are made daily and are therefore delegated to the Section 151 Officer (City Treasurer) who must act in line with the treasury management strategy approved by Council.

Quarterly reports on treasury management activity are presented to the Cabinet Member for Resources and Performance.

The Audit Committee is responsible for scrutinising treasury management decisions.

Investments for Service Purposes

The Council is currently undertaking business appraisal options for a potential investment into a Community Bank project and has included £1m within the Capital Programme in 2021/2022 and 2022/2023.

The outcome of the options appraisal will be considered and will require approval by full Council.

Governance

Decisions on service investments are made by the relevant service manager in consultation with the City Treasurer and must meet the criteria and limits laid down in the investment fund strategy. Most loans and shares are capital expenditure and purchases will therefore also be approved as part of the capital programme.

Commercial Activities

With central government financial support for local public services declining, the Council invests in commercial property mainly for the aim of regeneration of the Preston Area whilst seeking to achieve financial gain in order to produce a balanced overall financial budget and to minimise the charges to Council Tax payers.

The commercial investments are currently valued at £40.5m and providing a net return after all costs of 5.35%.

With regeneration and financial return being the main objective, the Council accepts higher risk on commercial investment than with treasury investments.

The principal risk exposures include increased vacancies and potential fall in capital values. These risks are managed by Property Services team monitoring and actively seeking to lease vacant premises and effective monitoring of performance of investment portfolio including reports to the Cabinet Member for Performance and Resources.

The Cushman and Wakefield report identified an Action Plan that is currently in the process of being adopted. This action plan sets a direction of travel towards a more commercial approach in the Councils asset management incorporating holding fewer, higher return assets; the reuse of capital receipts from asset disposals for future investment; identifying opportunities to grow the portfolio through investments in the Preston area and diversification of the portfolio to achieve performance and reduce risk.

A programme of works has been developed which have achieved a review of the managed workshops, undertaking of rent reviews and identifying surplus areas of land and freeholds to maximise the rental returns and achieve future capital receipt.

Further portfolio update reports will be presented to Cabinet during 2021/22.

Governance

Decisions relating to capital expenditure for all purposes, including for the acquisition of property assets, are made in accordance with the Financial Regulations of the Council, this requiring the approval of Full Council/Cabinet or Cabinet Member for Resources and Performance as appropriate.

Property and most other commercial investments are also capital expenditure and purchases will therefore also be approved as part of the capital programme.

Further details on commercial investments and limits on their use are in the Investment Strategy (see Appendix K).

Liabilities

In addition to debt of £12.3m detailed above, the Council is committed to making future payments to cover its pension fund deficit (valued at £78m at 31 March 2020).

It has also set aside £6m (as at 31 March 2020) in a Business Rates Appeal Provision to cover risks arising from the costs of Business Rates appeals as a consequence of the transference of such risks under the localisation of business rates arrangements introduced in 2013.

Provisions are made where an event has taken place that gives the Authority a legal or constructive obligation that probably requires settlement by a transfer of economic benefits or service potential, and a reliable estimate can be made of the amount of the obligation.

The Council also faces a number of contingent liabilities for which it has not set aside a specific sum.

A contingent liability arises where an event has taken place that gives the authority a possible obligation whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within the control of the authority.

Contingent liabilities also arise in circumstances where a provision would otherwise be made but either it is not probable that an outflow of resources will be required or the amount of the obligation cannot be measured reliably.

Governance

Decisions on incurring new discretional liabilities are taken in consultation with the Section 151 Officer (City Treasurer).

Further details on liabilities and guarantees are available to view through the 2018/19 statement of accounts.

Revenue Budget Implications

Although capital expenditure is not charged directly to the revenue budget, interest payable on loans and MRP are charged to revenue, offset by any investment income receivable.

The net annual charge is known as financing costs; this is compared to the net revenue stream i.e. the amount funded from Council Tax, business rates and general government grants.

Table 9: Prudential Indicator: Proportion of Financing Costs to Net Revenue Stream

Financing Costs (£m)

  • 2020/21 budget - £1.2 million - Proportion of net revenue stream 5.9%
  • 2021/22 - budget - £1.4 million - Proportion of net revenue stream 7.3%
  • 2022/23 - budget - £2.0 million - Proportion of net revenue stream 10.6%
  • 2023/24 - budget - £2.6 million - Proportion of net revenue stream 13.7%

Further details on the revenue implications of capital expenditure are included within the Icon for pdf Capital Programme Appendix G [80.16KB].

Sustainability

Due to the very long-term nature of capital expenditure and financing, the revenue budget implications of expenditure incurred in the next few years may extend for up to 50 years into the future.

The Director of Resources is satisfied that the proposed capital programme is prudent, affordable and sustainable.

Knowledge and Skills

The Council employs professionally qualified and experienced staff in senior positions with responsibility for making capital expenditure, borrowing and investment decisions. For example, the Director of Resources is a qualified accountant with over 30 years' of Local Government experience.

The Council pays for accountancy staff to study towards relevant professional accountancy qualifications and the staff within the treasury team, whom are all qualified accountants, attend treasury seminars and workshops provided by CIPFA and other external service providers.

Training is provided to Councillors as part of the financial management training delivered by the Section 151 Officer and more detailed treasury management training to Councillors on the Audit Committee by treasury management advisors Arlingclose Limited.

The Councils appoints external advisers and consultants that are specialists in their field.

The Council currently employs Arlingclose Limited as treasury management advisers, Cushman and Wakefield as property consultants, Jonas Lang LeSalle (JLL) as property consultants on a major City development scheme. This approach is more cost effective than employing such staff directly, and ensures that the Council has access to knowledge and skills commensurate with its risk appetite.

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