1. cipfa.org Alternative Approaches To Capital Financing Alan George Capita Asset Services Treasury solutions

2. cipfa.org Prudential Code Introduced April 2012 Integration in the Corporate Planning Process More effective asset management Prudent medium term financial planning More rigorous option appraisal

3. cipfa.org Prudential Code Introduced April 2012 Capital plans are affordable Borrowing and liabilities are prudent and sustainable Local authorities are accountable Provide a framework for Capital expenditure plans External debt Treasury management Avoid urgent remedial action

4. cipfa.org The Balance Sheet – Useful Tool? Understanding Balance Sheet should be key to the role of Finance and Treasury Management Officers. Assists in:-  Reviewing/understanding overall financial position  Identifying trends and movements between years  Identifying potential treasury risks  Identifying options for future treasury strategy

5. cipfa.org What does the Balance Sheet tell you about treasury position? It is a position statement providing information of financial position at the year – end It includes:  Reserves and Balances  Cash investments  Capital (indebtedness)……… and related treasury position (borrowings)  Working capital (debtors and creditors) But, it can also tell you a lot more!

6. cipfa.org Links to Corporate Strategies? Balance Sheet is just a snapshot in time but….. Needs to be linked to future plans and strategies:-  Corporate Aims and Objectives  Medium-Term Financial Plans  Capital Plans and Strategies  Asset Management Plans  Reserves Strategy Effective treasury management will support revenue savings going forwards!

7. cipfa.org Balance Sheet Review - Benefits Independent calculation of Capital Financing Requirement How is the CFR being financed? Under-borrowed/borrowing in advance of need? Level of investments & source of funds supporting this activity Is this utilising treasury resources effectively? Identification of potential risks? Drive revenue savings?

8. cipfa.org Draft Statement of Accounts 2012/13 Technical Team has reviewed 2012/13 Draft Statement of Accounts for over 180 Local Authorities across UK

9. cipfa.org Key Themes – Long-term Assets/Liabilities Scotland as an Example 2011/122012/13 Long-term Assets£37.7bn£38.3bn Financed/PFI£25.6bn£25.7bn Underlying need to borrow£12.1bn£12.6bn External Borrowing£11.3bn£11.6bn Under-Borrowing £0.8bn £1.0bn

10. cipfa.org Key Issues - Borrowing  Collectively:-  Borrowing Requirement rose by £573m  External borrowing rose by £397m  Therefore, increase of £176m in under-borrowing Level of under-borrowing now totals over £1bn ………. and increased in 20 authorities in 12/13 Average under-borrowed position 8% (7% in 2011/12) Borrowing requirement fell in 6 authorities

11. cipfa.org Borrowing Positions – 2011/12

12. cipfa.org Borrowing Positions – 2012/13

13. cipfa.org Northern Ireland Council 2012/132011/12 Reserves & Balances = £31.9m (£36.1m)  District Fund Balances= £ 2.4m (£ 2.4m)  Earmarked revenue reserves=£ 2.4m (£ 2.5m)  Capital Fund= £ 6.9m (£10.1m)  Capital Grants/Receipts=£ 4.0m (£ 7.6m)  Provisions=£ 16.2m (£13.5m) Working capital deficit=£ - 3.7m (£-11.8m) Reserves – Cash backed? =£ 28.2m (£ 24.3m) Investments =£ 25.8m (£ 24.7m) Cash Deficit/Surplus=£ 2.4m (£-0.4m)

14. cipfa.org 2012/132011/12 Capital Financing Requirement = £ 28.2m(£25.1m) External Borrowing = £ 25.8m(£25.5m) Under (Over) borrowed = £ 2.4m(£-0.4m) Capital actual =£12.8m 12/13 Forecast Capex=£16.7m 13/14 =£14.8m 14/15 =£16.4m 15/16 CFR expected to rise significantly over the next 3 years risk management?

15. cipfa.org Treasury Considerations and Risks? Defer borrowing in current interest rate environment? What if rates rise further? Impact of utilising reserves – Investment balances fall? Helps to reduce credit risk? …….But when will cash run out? Where will interest rates be when need to borrow? Impact of CFR falling, where capital plans are reduced? Affordability!

16. cipfa.org Key Variables/Risks MPC forward guidance - investment returns low for 3 years  Strengthens case to postpone borrowing Investment returns above forecast will skew towards earlier borrowing Rising fixed interest rates will skew towards earlier borrowing Pessimists will borrow Optimists will postpone AFFORDABILITY v CERTAINTY

17. cipfa.org Current Borrowing Process Typically Annuity Loans Matched to cost of individual asset Matched to asset life Repayment as per annuity profile Prudential Code Minimum Revenue Provision No account of interest rates? Borrow for cash flow purposes Optimal Funding?

18. cipfa.org Type of Borrowing

19. cipfa.org Borrow now or later? The maths

20. cipfa.org Historic Interest Rate Movements

21. cipfa.org Forecast Interest Rate Movements

22. cipfa.org Key Outputs – Borrow 10 Year Fixed PWLB

23. cipfa.org Key Outputs – Borrow 25 Year Fixed PWLB

24. cipfa.org Asset Finance

25. cipfa.org Market Position SWAP rates still lower than PWLB (up to 7 Years) Increase in options appraisal over last 18 months A mixture of borrowing and leasing being used More assets being acquired More pro-active portfolio management More new model outsourcing

26. cipfa.org English & Welsh Leasing Volumes ClientJan to Dec 2012 Jan to August 2013 2013 Estimate Local Authority£21,015,385£22,408,087c £35 Million ClientJan to August 2012 Jan to August 2013 % Increase Local Authority£13,279,927£22,408,087+ 68.74%

27. cipfa.org Vehicle Leasing Example 2 Paving Machines on short term hire Hired for 3 years! Fleet Manager sourced a lease direct Finance NOT involved Local supplier Saved c £45k

28. cipfa.org Vehicle Leasing Example Actual Deal Equipment = 2 x Wirtgen Super 1303-02 Capital Cost = “Insured Value” £125,000 Lease Period = 3 Years Payments = Annually Rental = £24,687 Total Rentals = £74,061 Interest Rate Assumed = 4% Residual Value = 48.37% Great Deal!!

29. cipfa.org Vehicle Leasing Example Issues Insured value – not the Capital Cost! Actual Capital Cost = £100,000 T’s and C’s  Tyres 100% depth  Manual missing – cost of replacement + £200 admin fee  6 Months notice  180 Days storage  Authority has to help remarket the assets  + Many more

30. cipfa.org Vehicle Leasing Example What the Authority Could have Done Equipment = 2 x Wirtgen Super 1303-02 Capital Cost = £100,000 Lease Period = 3 Years Payments = Annually Rental = £18,631 Total Rentals = £55,893 Saving per Year = £6,056 Total Saving = £18,168 (18.17% of Capital Cost) Fleet Manager no longer allowed to “Do their own thing”!

31. cipfa.org IT / Print & Copier Leasing  £100m leased in 2012 in Public Sector (FLA)!  Copier Leasing problems:-  Cost per click  One easy solution  Significantly overpriced  Terms and conditions onerus  Long lease periods  Year end issues

32. cipfa.org Vehicle Leasing Example Actual Proposed Deal Equipment = 12 x MFD’s Actual Capital Cost = £123,000 Lease Period = 3 Years Payments = Quarterly Rental = £11,996.93 Total Rentals = £143,963.16 Interest Rate = 12% Residual Value = 0% Not a Great Deal and a Finance Lease!!

33. cipfa.org Print & Copier Leasing Example What the Authority Actually Did Equipment = 12 x MFD’s Capital Cost = £123,000 Lease Period = 3 Years Payments = Quarterly Rental = £9,848.61 Total Rentals = £118,183.32 Saving per Quarter = £2,148.32 Total Saving = £25,779.84 (20.96% of Capital Cost) Hurrah – An Operating Lease!

34. cipfa.org Print & Copier Leasing  What you can do:- Find out who is responsible for procurement Don’t use the Managed Print Solution option Don’t believe everything the supplier says  Alternative approach:- Obtain purchase and maintenance quotes Finance in house or lease properly Record the savings!

35. cipfa.org Frameworks Update Existing Frameworks Walsall CouncilOperating and Finance Lease (New April 14) Bath & North East Somerset CouncilContract Hire of Buses (New Nov 13) Bath & North East Somerset CouncilProcurement of Buses Mid & West Wales Fire AuthoritySalary Sacrifice of Passenger Cars City of York CouncilIT & General Equipment Leasing (New Dec 13) City of York CouncilSchools Leasing (New Dec 13) Halton Housing TrustContract Hire of Passenger Cars & Light Commercial Vehicles Procurement for Housing / TPPProcurement of Cars and LCV’s Coming Soon HGV ProcurementProcurement of HGV up to 44T (Q4 2013) HGV Contract HireContract Hire of HGV’s (Q4 2013) Leisure Trust LeasingOperating and Finance Lease (Q1 2014) Grounds Maintenance Procurement/Lease/Maintenance of GM And Materials Handling Equipment (Q1 2014) Frameworks currently available to access, which Sector have established in conjunction with Public Sector clients:

36. cipfa.org Longer term planning and investment challenges….. Shorter term horizon for capital planning Clamp down on Capital Programme and focused on year 1 Significant slippage in the Capital Programme Cap on borrowing and seeking shorter term savings from existing borrowing Capital divorced from the revenue position Under spend against budget, increase in reserves

37. cipfa.org Enabling Investment … Create room in revenue position for investment Invest through partnerships with shared responsibility Use reserves strategically to pump prime Use reserves on a pay back basis for future sustainability Examine all investment, asset and funding models

38. cipfa.org Longer Term Planning …  Plan for capital investment over 5 – 10 years  Model the impact of capital ambition:  Growth – new businesses, new jobs, housing  Funding streams?  Income streams – revenue and capital  Service cost reduction – part of transformation  Service increase – infrastructure etc

39. cipfa.org Longer Term Planning …  And then we have …………………..  Local Government Review

40. cipfa.org Questions?