Agenda item

Treasury Management, Investment and Capital Strategies 2019/20


Mr John Owen, Finance Manager, introduced his report setting out the draft Treasury Management, Investment and Capital Strategies for 2019/20.  Mr Owen explained that:


·  The Council had adopted the Treasury Management in Public Services: Code of Practice 2011 Edition (the Code) issued by the Chartered Institute of Public Finance and Accountancy (CIPFA).


·  CIPFA had revised the 2011 edition of the Code in 2017 to ensure that local authorities also take into account the risks involved with non-treasury investments.  The revised Code which would take effect in 2019/20 required local authorities to develop and approve an Investment Strategy and a Capital Strategy setting out the Council’s risk appetite and specific policies and arrangements for non-treasury investments.


·  Treasury Management was concerned with keeping sufficient cash for the authority’s day to day running whilst the other Strategies focused on non-treasury investments and the Capital Programme with regard to the risks and funding.  The Treasury Management Strategy had not changed from the previous year; the approach was to utilise cash balances rather than loan debt to finance the Capital Programme until such time that borrowing was required due to low investment returns and high counterparty risk in the current economic climate.  The Capital Programme would be presented to the Policy and Resources Committee on 23 January 2019, and might be subject to amendments that would, in turn, change the funding profile.


·  The Investment Strategy focused on how the authority assessed risks in relation to non-treasury investments including service loans to support local services and commercial investments (property investment to generate a profit).


·  The Capital Strategy was a high level document linking the Medium Term Financial Strategy, the Treasury Management Strategy and the Investment Strategy together.  It set out the long term context in which capital expenditure and investment decisions were made and considered risk, reward and impact on the achievement of the Council’s priority outcomes identified within the Strategic Plan.


In response to questions, the Officers explained that:


·  The figures set out in the report for capital expenditure were based on the latest bids for capital funding.  As described in the Capital Strategy, a process had been followed over the last few months which had resulted in the previous five year Capital Programme being updated.


·  To summarise, Service Managers submitted proposals in October to include projects in the Capital Programme.  Bids were collated by the Corporate Finance Team which calculated the financing cost.  Each Service Committee then appraised the proposals based on a comparison of corporate priorities.  The Policy and Resources Committee would then consider and recommend the Capital Programme to the Council in February.


·  Oversight of the Capital Programme was through the Policy and Resources Committee, and a report would be submitted to that Committee the following week developing the outline of the Capital Programme set out in the Medium Term Financial Strategy agreed by the Council in December 2018, reconfirming the principles behind the Council’s Capital Strategy, explaining how the Capital Programme would be funded and describing the individual projects included in the Programme.


·  The report would say that Capital Programme proposals had been developed reflecting the strategic priorities agreed by the Council and would show how they would be financed, whether from external sources, the Council’s own resources or debt.


·  Each investment was looked at individually to assess its affordability and the level of risk.  In most cases capital investments had to pay for themselves and it was necessary to be satisfied that the investment would generate a sufficient return or there were sufficient revenue resources in place to justify the borrowing.


·  Generally speaking, the larger capital investments like the developments under way at Brunswick Street and Union Street would pay for themselves in terms of expected sales or generating rent.  However, there were some exceptions such as works required for health and safety reasons where there would be no financial return such as the Mote Park Dam works.  In these circumstances, it was necessary to be satisfied that there was sufficient capacity in the revenue budget to pay for that investment.  Having looked at each element of the Capital Programme in this light, it was necessary to look at the overall size of the Capital Programme.  Last year a Capital Programme of just over £75m over five years was agreed which was considered to be reasonable and appropriate given what the Council was trying to achieve.


·  There were strong internal controls in place to make sure that the risk of money being spent outside budgetary controls was very low.


·  Capital expenditure did tend to slip, and the Council would not borrow money that was not needed because of the Capital Programme slipping.  Budget monitoring reports were submitted to the Policy and Resources Committee on a quarterly basis and spending plans were updated regularly so that if the Capital Programme was slipping, the Council would not embark on borrowing unnecessarily; instead, implementation of the Treasury Management Strategy would be adjusted accordingly.


·  The operational boundary was the limit which external debt was not normally expected to exceed.  The operational limit did not take into account temporary cash flow borrowing during the year.  The authorised limit for external debt represented the limit beyond which external debt was prohibited and was no higher than the Capital Financing Requirement which was the most the Council would borrow at any one point in time if necessary.


·  In terms of the funding of the Capital Programme, it was fairly straightforward to organise funding through the Public Works Loan Board (PWLB).  The current 50 year PWLB rate was in the order of 3% which was quite reasonable.


·  It was considered that, so long as there was no risk of interest rates rising quickly, the Council should not borrow until it needed to as the cost of borrowing was more than the cash would be earning and there were counterparty risks as well.  The situation would be kept under review having regard to advice and guidance from the Council’s Treasury Management Advisers, but it was unlikely that interest rates would rise in the short term.


·  The Council had some limited discretion on what counted as capital expenditure; for example, assets costing below £10k were not capitalised and were charged to revenue in year.  It made sense to have a de minimis figure, and this was kept under review.


During the discussion, the Director of Finance and Business Improvement confirmed that when this report was presented to the Committee in future, consideration would be given to including a summary and explanation of terms to assist Members in their understanding of the documentation.


RESOLVED to RECOMMEND to COUNCIL:  That subject to any potential amendments arising from the Policy and Resources Committee’s consideration of the Capital Programme at its meeting on 23 January 2019, the Treasury Management Strategy for 2019/20, the Investment Strategy for 2019/20 and the Capital Strategy for 2019/20, attached as Appendices A, B and C respectively to the report of the Director of Finance and Business Improvement, be adopted.


Supporting documents: