Agenda item

The Committee considered a report on the Council’s capital and investment strategy, which gave a high-level overview of how capital expenditure, capital financing and treasury management activity contributed to the provision of local public services along with an overview of how associated risk was managed and the implications for future financial sustainability.

The Committee noted that in order to achieve the ambitious targets within the Corporate Plan, the Council needed to invest in its assets, via capital expenditure.

The Council had a current underlying need to borrow for the general fund capital programme of £290 million.  Officers had put forward bids, with a net cost to the Council of £47.8 million, increasing the underlying need to borrow to £338 million should these proposals be approved for inclusion in the programme.

Some capital receipts or revenue streams could arise as a result of investment in particular schemes, but in most cases were currently uncertain and it was too early to make assumptions.  Some information had been included in the capital vision highlighting the potential income.  It was likely that there were cash-flow implications of the development schemes, where income would come in after the five-year time horizon and the expenditure would be incurred earlier in the programme.

All projects would be funded by general fund capital receipts, grants and contributions, reserves and, finally, borrowing.  It was not currently known how each scheme would be funded and, in the case of development projects, what the delivery model would be.  To ensure the Council demonstrated that its capital expenditure plans were affordable, sustainable and prudent, Prudential Indicators were set that must be monitored each year.

The capital programme included a number of significant regeneration schemes, which it was assumed would be financed from General Fund resources.  However, subject to detailed design of the schemes, there might be scope to fund them from HRA resources rather than General Fund resources in due course.  Detailed funding proposals for each scheme would be considered when the Outline Business Case for each scheme was presented to the Executive for approval.

The report included a summary of the new bids submitted, the position and profiling of the current capital programme (2019-20 to 2023-24) and the capital vision schemes.

The Corporate Management Team, the Lead Councillor for Finance and Assets, Customer Service, the Joint Executive Advisory Board Budget Task Group, and the Joint EAB had all reviewed the bids presented in the report.

The report had also included the Council’s Minimum Revenue Provision (MRP) policy and the Prudential Indicators.  The Committee noted the correction to the table in paragraph 5.6 of the report showing the budget for MRP for 2020-21 and future years, which was set out in the Supplementary Information Sheet circulated at the meeting.

The Committee was informed that officers carried out the treasury management function within the parameters set by the Council each year and in accordance with the approved treasury management practices. The Council was in a good financial position, with a strong asset base and a good level of reserves. 

The budget for investment income in 2020-21 was £1.684 million, based on an average investment portfolio of £79.8 million, at an average rate of 2.18%.  The budget for debt interest paid was £5.656 million, of which £5.06 million related to the HRA.

In relation to non-financial investments and investment strategy, the Executive was informed that councils could invest to support public services by lending to or buying shares in other organisations (service investments) or to earn investment income (commercial investments where this was the main purpose). 

The Council had £161.244 million of investment property on its balance sheet, generating a return of £9 million and a current yield of 6.3%.

The criteria for purchasing investment property, when originally approved were to achieve a minimum qualitative score and yield an internal rate of return (IRR) of at least 8%.  It was now recommended that the IRR be changed to 5.5% due to the change in the market forces and recognition of the move to investing for strategic purposes, for example economic growth and housing and regeneration. 

The Council had invested £12.251 million in its housing company – North Downs Housing (NDH), via 40% equity to Guildford Holdings Limited (£4.903 million) (who in turn passed the equity to NDH) and 60% loan direct to NDH (£7.348 million) at a rate of base plus 5% (currently 5.75%).  The loan was a repayment loan in line with the NDH business plan.   

In commending the Capital and Investment Strategy report to the Executive, the Committee made the following comments or sought clarification on the following matters:

·        The internal rate of return specifically related to investment property for which there was a separate strategy.  When the original strategy was set, borrowing rates were much higher.  The 5.5% represented debt repayment which would enable the Council to cover its debt costs if it were to purchase investment properties. 

·        In relation to the liability benchmark, it was noted that there were currently no LOBO loans and the Council was not intending to enter into such loans. 

·        In response to a question as to whether the Council would consider making investments outside of the borough, the Chief Finance Officer confirmed that, although other councils had done this and that the proposal had been considered, Government guidance discouraged such investment and the Council had not committed to do this and she would not recommend it. Some authorities had proposed investing within the area covered by their Local Enterprise Partnership boundary.

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·        In response to a request for an indication of the size of borrowing compared to the annual Council budget, the Chief Finance Officer confirmed that there was not an indicator that showed the total amount of borrowing compared to the revenue stream.  However, table 4.48 in the report showed the ratio of the financing costs as a percentage of the net revenue stream.  This ratio looked at the burden that the borrowing costs had placed on either the General Fund or the HRA. The overall borrowing amount on its own was not such a useful indicator unless it was compared, for example, to the asset base.

The Committee, having noted that the current review of the Council’s corporate priorities and corporate plan would have some implications for the capital and investment strategy

RESOLVED: That the recommendations to the Executive and Council in respect of the Capital and Investment Strategy, as set out in the report submitted to the Committee, be endorsed.

Reason:

To enable the Council at its budget meeting on 5 February 2020, to approve

·        the capital and investment strategy for 2020-21 to 2024-25; and

·        the funding required for the new capital investment proposals.