MAIDSTONE BOROUGH COUNCIL
CABINET
12 SEPTEMBER 2012
REPORT OF ASSISTANT DIRECTOR OF ENVIRONMENT
AND REGULATORY SERVICES
Report prepared by Steve Goulette
1. Investment Opportunities
1.1 Issue for Decision
1.1.1 To consider proposals which will generate additional income or support regeneration using prudential borrowing.
1.2 Recommendation of the Assistant Director of Environmental and Regulatory Services
It is recommended that:-
1.2.1
The
report be agreed and the three areas of investment be supported, subject to the
controls set out in the report.
1.2.2 A member advisory panel be established in accordance with the terms of reference set out in Appendix 2.
1.2.3
A
Cabinet Committee be established in accordance with the terms set out in
Appendix 2 to make decisions on possible acquisitions, having regard to the
views of the members advisory panel. The committee will comprise of the Leader
of the Council, 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.
1.2.4
An
agent or agents be appointed on a commission only basis, in accordance with the
maximum sliding scale identified in Appendix 1, to bring forward potential
acquisitions on a confidential basis.
1.2.5 The Audit Committee and The Council be recommended to authorise prudential borrowing 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.
1.3 Reasons for Recommendation
1.3.1
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 businesslike.
1.3.2
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.
1.3.3
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.
1.3.4
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.
1.3.5 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.
1.3.6
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.
1.3.7
This
report 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
1.3.8
Most
local authorities have property portfolios and this Council owns assets with a
value around £79million. The major asset owned by the Council is the Park Wood
Industrial Estate which generates over £300k per annum to the Council.
1.3.9 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.
1.3.10 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.
1.3.11 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 is show in Appendix 1. Such agents would bring forward suitable acquisitions on a confidential basis.
Property Portfolio Governance
1.3.12 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.
1.3.13 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 are provided in Appendix 2.
1.3.14 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.
1.3.15 It is 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.
1.3.16 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.
1.3.17 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.
1.3.18 Such reports
and recommendations would be comprehensive and capable of enabling a decision
to be made which meets the guidelines identified earlier in the report. This is
likely to include external independent advice regarding the elements of the
business case.
1.3.19
A
possible flow diagram is shown below:-
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1.3.20 The appointment of an agent would need to meet the requirements of the Council’s procurement policy
1.3.21 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
1.3.22 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.
1.3.23 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.
1.3.24 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 is 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.
1.3.25 These acquisitions should be made through the Property Investment Governance arrangements identified above.
1.3.26 Again, all
acquisitions will need to meet the CIPFA prudential code and guidelines
established by Cabinet.
Strategic Property Investment
1.3.27 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.
1.3.28 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
1.3.29 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.
1.3.30 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.
1.4
Alternative
Action and why not Recommended
1.4.1 The Cabinet could decide not to agree to the options but this would prevent any possible activity from the potential venture.
1.4.2 The
Cabinet could decide to propose different governance arrangements but the
arrangements suggested in the report provide for clear decision making and
transparency.
1.5
Impact
on Corporate Objectives
1.5.1 The
proposed prudential borrowing is focused on achieving the Council’s corporate
objectives, other strategic priorities and would be in accordance with the
Council’s asset management.
1.6
Risk
Management
1.6.1 Any potential
borrowing gives rise to some risk and therefore proper financial controls and
rigorous business case examination are essential. The report identifies a
series of controls aimed at minimising the risk to the Council.
1.6.2 All
acquisitions must meet the criteria identified before they will be agreed.
1.6.3 It is
accepted that these will be long term-investments and although a maximum 50-year
write off period is longer than normal, it is justified in such circumstances.
Again, the need to meet all requirements will reduce the risk to the Council.
1.6.4 There is potential, due to the risk associated with commercial enterprise for borrowing to occur and for the payback not to be available or sufficient to cover the cost of the schemes for which potential borrowing may be authorized. If Cabinet supports the report, it would be appropriate to allow for a level of scheme failure, even though the risk is low, by setting aside a reserve and by ensuring a diversified range of schemes are undertaken.
1.6.5 It should also be noted that the acquisitions will have an individual capital value which could go up or down, although in the long term, the value should increase.
1.6.6 The
council’s external auditors have been made aware of the contents of this
report.
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1. Financial
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X |
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2. Staffing
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X |
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3. Legal
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X |
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4. Equality Impact Needs Assessment
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X |
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5. Environmental/Sustainable Development
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X |
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6. Community Safety
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X |
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7. Human Rights Act
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8. Procurement
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X |
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9. Asset Management
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X |
1.7
Other
Implications
1.7.1
Financial
1.7.2 The
financial arrangements are identified in the report and will result in
prudential borrowing.
1.7.3 The £6million
limit of for prudential borrowing in 2012/13 is considered large enough to
enable acquisitions to be made. This will need Audit committee and full Council
approval.
Staffing
1.7.4 Staffing
resources will be needed for the acquisitions. This will be met from existing
staffing provision or if specialist or extra advice is needed, this will be
included in the business case.
Legal
1.7.5 Legal
agreements will be required for the agent and for each acquisition. Such costs
will be included in the business case.
Equality Impact Needs Assessment (EIA)
1.7.6 An EIA
will be required for each acquisition and will form part of the business case.
Environment/Sustainable Development
1.7.7 Restorations
of derelict and improvement to empty properties should meet best practice for
environment/sustainable development.
Community Safety
1.7.8 Community
safety and possible crime impact should be considered as part of any business
case.
Procurement
1.7.9 The
appointment of an agent will need to comply with the Council’s procurement
rules.
Asset Management
1.7.10 The proposals will impact on the Council’s Asset Management Plan.
1.8 Relevant Documents
1.8.1 The
report on the Capital Programme Cabinet on 25 July.
1.9 Appendices
Appendix 1 Sliding scale for agent commission
Appendix 2 Terms of Reference for members advisory panel and cabinet committee
1.10 Background Documents
The Prudential Code, published by the
Chartered Institute of Public Finance and Accountancy.
Report to cabinet on the capital programme July 2012
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IS THIS A KEY DECISION REPORT?
Yes No
If yes, when did it first appear in the Forward Plan?
…………………………July 2012……………………………………
This is a Key Decision because: it involves expenditure above £250k
Wards/Parishes affected: ALL
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