Maidstone Borough Council
The Authority invests its money for three broad purposes:
· because it has surplus cash as a result of its day-to-day activities, for example when income is received in advance of expenditure (known as treasury management investments),
· to support local public services by lending to or buying shares in other organisations (service investments), and
· to earn investment income (known as commercial investments where this is the main purpose).
This investment strategy is new for 2020/21, meeting the requirements of statutory guidance issued by the government in January 2018, and focuses on the second and third of these categories.
Treasury Management Investments
The Authority typically receives its income in cash (e.g. from taxes and grants) before it pays for its expenditure in cash (e.g. through payroll and invoices). It also holds reserves for future expenditure and collects local taxes on behalf of other local authorities and central government. These activities, plus the timing of borrowing decisions, lead to a cash surplus which is invested in accordance with guidance from the Chartered Institute of Public Finance and Accountancy. The balance of treasury management investments is expected to fluctuate between £10.8m and £30m during the 2020/21 financial year.
Contribution: The contribution that these investments make to the objectives of the Authority is to support effective treasury management activities.
Further details: Full details of the Authority’s policies and its plan for 2020/21 for treasury management investments are covered in a separate document, the treasury management strategy.
Service Investments: Loans
Contribution: The Council lends money to its subsidiaries, its suppliers, local businesses, local charities, housing associations, local residents and its employees to support local public services and stimulate local economic growth. The Council has made loans to Kent Savers for £25k in 2017/18 which is repayable in 2022/23 at an interest rate of 1% and an interest free loan to One Maidstone CIC Limited with a current amount owing of £48,000. A loan to Cobtree Manor Estates Trust has been agreed in 2019/20 for an amount of £323,000 repayment over 5 years at an annual interest rate of 3%. However, a loan to Maidstone Property Holdings Limited may also be made in the near future for which the interest rate applicable would be at commercial rates. There is a provision for this service loans of £1 million.
Security: The main risk when making service loans is that the borrower will be unable to repay the principal lent and/or the interest due. In order to limit this risk, and ensure that total exposure to service loans remains proportionate to the size of the Authority, upper limits on the outstanding loans to each category of borrower have been set as follows:
Table 1: Loans for service purposes in £ millions
Accounting standards require the Authority to set aside loss allowance for loans, reflecting the likelihood of non-payment. The figures for loans in the Authority’s statement of accounts from 2018/19 onwards will be shown net of this loss allowance. However, the Authority makes every reasonable effort to collect the full sum lent and has appropriate credit control arrangements in place to recover overdue repayments.
Risk assessment: The Authority assesses the risk of loss before entering into and whilst holding service loans by assessing the borrower’s ability to repay the loan, based on past financial performance. This is monitored over the period of the loan in line with the agreed repayment terms.
Commercial Investments: Property
Contribution: The Council does not currently have any investments in property that are considered to be purely commercial in nature. Acquisitions are limited to properties situated within the borough, with the intention of supporting the local community, housing and regeneration objectives rather than for the exclusive purpose of generating profits. All property investments are therefore classified as general fund capital projects.
Third Party Loan Commitments and Financial Guarantees
The Authority has contractually committed to repay the loan on behalf of Serco Paisa for works to the leisure Centre which has a balance as at 31st March 2019 of £2.527m.
Capacity, Skills and Culture
Elected members and statutory officers: The Section 151 Officer has ultimate decision making powers on investment decisions and has a number of key officers with the necessary skills to assess such projects, including the Corporate Property Manager, Head of Finance, as well as the use of external consultants.
Each project is evaluated on its affordability and prudence to bear additional future revenue cost associated with each investment. It is established if the use of new or existing revenue resources to finance capital investment over competing needs for revenue expenditure and the scope for capital investment to generate future revenue savings or income, taking into account the risks associated with each proposal.
Commercial deals: The Section 151 Officer is involved with all decision making for capital projects and is aware of the core principles of the prudential framework in regard to the following:
· service objectives, eg strategic planning for the authority
· stewardship of assets, eg asset management planning
· value for money, eg option appraisal
· prudence and sustainability, eg implications for external debt and whole life costing
· affordability, eg implications for council tax
· practicality, eg achievability of the forward plan.
Corporate governance: The investment strategy is reviewed by Audit, Governance and Standards Committee prior to approval by full Council. Investment opportunities will be considered on a case by case basis with reference to the strategy, and a mid-year report will be provided during the year to ensure that the strategy remains fit for purpose.
The Authority has set the following quantitative indicators to allow elected members and the public to assess the Authority’s total risk exposure as a result of its investment decisions.
Total risk exposure: The first indicator shows the Authority’s total exposure to potential investment losses. This includes amounts the Authority is contractually committed to lend but have yet to be drawn down and guarantees the Authority has issued over third party loans.
Table 5: Total investment exposure in £millions
How investments are funded: Government guidance is that these indicators should include how investments are funded. Since the Authority does not normally associate particular assets with particular liabilities, this guidance is difficult to comply with. However, the following investments could be described as being funded by borrowing. The remainder of the Authority’s investments are funded by usable reserves and income received in advance of expenditure.
Table 6: Investments funded by borrowing in £millions
The above table does not include investments funded by borrowing which form part of the Council’s capital programme. Details of this expenditure are included within the Capital Strategy.
Rate of return received: This indicator shows the investment income received less the associated costs, including the cost of borrowing where appropriate, as a proportion of the sum initially invested. Maidstone Borough Council’s treasury management loans interest will outweigh investments, hence is why there is a negative figure forecasted for 2020/21.
Table 7: Investment rate of return (net of all costs)