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Decision details
Investment Opportunities
Decision Maker: Cabinet.
Decision status: Recommendations Approved
Is Key decision?: Yes
Is subject to call in?: Yes
Purpose:
This report considers investment proposals for
the council to help improve income and achieve the Council's
priorities
Decision:
1.
That the three areas of investment be supported,
subject to the controls set out in the report of the Assistant
Director of Environment and Regulatory Services.
2. That a member advisory panel be established in accordance with the terms of reference set out in Appendix 2 to the report of the Assistant Director of Environment and Regulatory Services.
3.
That a Cabinet Committee be established, in
accordance with the terms set out in Appendix 2 to the report of
the Assistant Director of Environment and Regulatory Services, to
make decisions on possible acquisitions, having regard to the views
of the members advisory panel. The
committee to comprise of the Leader of the Council, the Cabinet
Member for Economic and Commercial Development and the Cabinet
Member for Corporate Services. The remaining Cabinet Members are
able to be appointed as substitute members of the
Committee.
4.
That an agent or agents be appointed on a commission
only basis, in accordance with the maximum sliding scale identified
in Appendix 1 to the report of the Assistant Director of
Environment and Regulatory Services, to bring forward potential
acquisitions on a confidential basis.
5. That the Audit Committee and the Council be recommended to authorise prudential borrowing of up to £6million within the current financial year 2012/13 and to set aside a fund of £500,000 from balances to cover any potential scheme failure.
Reasons for the decision:
The
current economic climate is causing significant financial pressures
on local authorities. Revenue provision
through government grant is reducing and will continue to
reduce. In order to achieve the
Council’s strategic goals and indeed to maintain services,
there is a need for the Council to be more business-like.
The
Government is actively encouraging local authorities to use
prudential borrowing to generate additional income, support
improved sustainability and provide encouragement for businesses to
invest and regenerate.
The Cabinet, at its meeting on 25 July,
considered the Council’s Capital Programme and in particular,
the possibility of prudential borrowing. This confirmed that the Council has
the power to borrow to finance capital expenditure, subject to the
guidance set out in the Code of Practice published by the Chartered
Institute of Public Finance and Accountancy. Compliance with the
code is a statutory requirement. In
summary, the key objectives of the Code are:
·
To ensure within a clear framework that capital
expenditure plans are affordable, prudent and
sustainable;
·
That treasury management decisions are taken in
accordance with good professional practice;
·
That local strategic planning, asset management
planning and proper option appraisal are supported; and
· To provide a clear and transparent framework to ensure accountability.
If the
Council were to consider prudential borrowing as a source of
funding for the capital programme, it would be required to evidence
that such funding is affordable, prudent and
sustainable. Given the current economic
circumstances and the expected future pressure on resources,
borrowing would place additional pressure on the savings
requirements of the Council At
this time, it would only be appropriate to consider borrowing where
the overall benefit of the schemes within the programme outweighs
the additional pressure on the general fund or the outcome is
self-supporting.
The Cabinet resolved:-
a)
That the proposed amendments to the capital strategy
including the prudential borrowing where this achieves commercial
development, outlined in Section 1.5 of the report of the Corporate
Leadership Team, be agreed.
b)
That officers
develop and present proposals that achieve the
Council’s objectives through commercial development, as set
out in Section 1.5 of the report.
c) That the evaluation of resources available and scheme proposals as set out in paragraph 1.6.5. of the report, identifying the appropriate use of the resources available, be approved.
Section
1.5 of the Cabinet report identifies the possible use of prudential
borrowing when the following criteria apply:
a)
Schemes (or proposals) are commercial in
nature
b)
The outcome returns a financial benefit at least
equal to the cost incurred by borrowing to fund the
schemes.
c)
After covering the cost of funding, a further
financial or non-financial benefit accrues to the Council that
directly or indirectly supports the strategic plans policy
outcomes.
The
report of the Assistant Director of Environment and Regulatory
Services considers three areas of prudential borrowing that will
meet the guidelines of the CIPFA Code of Conduct and the criteria
identified in the above decision of Cabinet on 25 July
2012.
Property Portfolio
Most
local authorities have property portfolios and this Council owns
assets with a value around £79 million. The major asset owned by the Council is the Park
Wood Industrial Estate which generates over £300k per annum
to the Council.
Property investment opportunities can become available which would require prudential borrowing, but would generate surplus income to support the Council’s strategic priorities. Such acquisitions would comply with the CIPFA code and the recent Cabinet report and must:-
· Have existing long-term good quality tenants
· Be in good condition with long term lease and suitable construction
· Make an annual rate of return beyond the capital repayment based on a maximum 50-year repayment.
·
Be available at an affordable price to meet the
requirements of best consideration.
Such property, including those outside the Borough but within the UK, do not often come to the open market and the Council, if it wishes to consider such acquisitions, will have to procure suitable professional advice.
In order to achieve the best opportunities for the Council, expert advice would be needed and the Council would appoint an agent or agents who would work on a commission only basis, to be based on a sliding scale according to the value of the acquisition. This was shown in Appendix 1 to the report of the Assistant Director of Environment and Regulatory Services. Such agents would bring forward suitable acquisitions on a confidential basis.
Property Portfolio Governance
This is
a new area of activity for the Council and the governance of such
arrangements is critical to ensure the processes and
responsibilities are clear and transparent.
It is
proposed that the Council establishes an informal members advisory panel to review the business cases
brought forward and advise the decision makers. The proposed terms of reference of the panel were
provided in Appendix 2 to the report of the Assistant Director of
Environment and Regulatory Services.
It is also proposed that due to the ad hoc and sometimes urgent way that proposals are brought forward, that decisions are made by a committee of cabinet, the members of which, if needed, could meet quickly to consider an urgent proposition.
It was recommended that the committee would comprise of the Leader of the Council, Cabinet Member for Economic and Commercial Development and the Cabinet Member for Corporate Services. Substitute Cabinet members would be permitted. The terms of reference are also provided in Appendix 2 to the report of the Assistant Director of Environment and Regulatory Services.
It would be the agents’ responsibility to ensure that all costs are identified in the detailed business case. In this way, the Council would bear no additional costs, its exposure being limited to pre-agreed commission for each transaction as it arises.
It would be the relevant officers, supported by the agents, responsibility to present prospective acquisitions to the members panel, supported by a full report to include third party valuation, financial assessment, title report, etc. In turn, any recommended proposals would be presented to the cabinet committee for approval.
Such reports and recommendations would be comprehensive and capable of enabling a decision to be made which meets the guidelines identified above. This is likely to include external independent advice regarding the elements of the business case.
A
possible flow diagram is shown below:-
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The appointment of an agent would need to meet the requirements of the Council’s procurement policy
It is considered prudent that a limit on acquisitions be set each year in accordance with the Council’s treasury management arrangements and that for the present year, 2012/13, this be set at £6million. This will need Audit Committee and full Council approval.
Derelict Residential Properties
The
Government is encouraging Councils to use prudential borrowing to
bring back derelict residential properties to habitable
use. This could include long-term empty
properties.
The
Council’s Housing service has already secured government
funding to support the restoration of 10 properties but surveys
have identified that there are in the region of 50 properties in
the borough that are derelict and 500 that have been empty for more
than two years.
In
addition, the Council is facing, due to the current economic
downturn, ever increasing costs to provide homeless individuals and
families with temporary accommodation.
It was suggested that, if restored, these derelict and long-term empty properties could be used to provide that temporary accommodation, which would be cheaper than the current costs of bed and breakfast and provide a regular income to repay the purchase costs.
These acquisitions should be made through the Property Investment Governance arrangements identified above.
Again,
all acquisitions will need to meet the CIPFA prudential code and
guidelines established by Cabinet.
Strategic Property Investment
Given the current economic position, there may be certain circumstances where development, within the borough, is not progressing in a way that the “market” would enable without intervention. It could be that bringing forward that development would assist the Council in achieving its strategic objectives. An example might be where a significant number of new jobs would be created.
In
order to see the development come forward, the Council may decide
to intervene and provide financial or technical
support. Each case would be subject to
a detailed report by the appointed agent and a detailed business
case in accordance with the Property Investment Governance
arrangements identified above.
Again,
all the criteria set out above would need to be met, although in
such cases, the Council could accept a proposal which would only
return the original outlay and not necessarily provide an
additional yield.
Possible Business Failure
It is
inevitable that in investing in these properties, there are risks
and possible failure, although unlikely given the controls, could
occur. It is therefore proposed to
establish a fund of £500k to cover any potential scheme
failure. This is also relevant for the
report on commercial opportunities, also on the Cabinet
agenda.
These
are the only circumstances in which the Council will consider
prudential borrowing at the present time.
Other capital projects will have to be funded from surplus received and through other funding sources.
Alternative options considered:
The Cabinet could have decided not to agree to the options but this would prevent any possible activity from the potential venture.
The Cabinet could have decided to propose different governance arrangements but the arrangements suggested in the report of the Assistant Director of Environment and Regulatory Services provide for clear decision making and transparency.
Reason Key: Expenditure > £250,000;
Wards Affected: (All Wards);
Details of the Committee: The Prudential Code, published by the Chartered Institute of Public Finance and Accountancy. Report to cabinet on the capital programme July 2012
Representations should be made by: Contact Steve Goulette
Other reasons / organisations consulted
Discussion with devlopers and
Investors
Consultees
Developers and Investors
Contact: Steve Goulette Email: Stevegoulette@maidstone.gov.uk.
Report author: Steve Goulette
Publication date: 13/09/2012
Date of decision: 12/09/2012
Decided: 12/09/2012 - Cabinet.
Effective from: 21/09/2012
Accompanying Documents: