FPS FUNDING REPORT nov 2015

Funding routes for Asset Management Public Sector projects and programs

An FPS reportNovember 2015

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Thanks to David Bentley from cipfa and members of the RICS Public Sector

Executve Committee for their advice and support. Deloitte for the use of the

flow diagramme and Hampshire CC for the clear guide to accountancy terms.

Acknowledgements & Use

1SectionAn FPS report on funding

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1.0

2.0

3.0

4.0

5.0

6.0

04

05

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Introduction

Funding

Implementation

Examples

Schedule

Appendices

Contents


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1.0 Introduction

This outline has been produced by the Federation of Property Societies for use

by practitioners, who are tasked with realising the more complex property and growth aspects of their local authority’s forward plan. It is intended to be used to assist when putting forward business cases for assessment.

It explores in outline the traditional PWLB source of lending alongside alternative sources of capital investment.

Our approach is a light touch guide to illuminate the funding routes and will cover:

Note: All borrowing by a local authority is controlled by the prudential code for capital finance in local authorities in England and Wales as enabled by the Local Government Act 2003. Recently more freedom to innovate is added by the

General Power of Competence introduced in 2011 though the prudential code is the overarching fiduciary duty.

Please see the glossary of terms in appendix A for guidance on accountancy terms commonly used in local government.

1. What is funding?

2. What are the types of funding?

3. What is the need for different ways of funding?

4. How to chose the best funding mix for your project?

5. Implementation

Delivery approaches

Investment in tenanted non-residential property

6. Examples

7. Schedule of types

8. Appendices


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2.0 What is funding?

For our purposes this covers real estate projects and programmes of projects for the delivery of the local authority’s capital strategy and capital programme. Capital expenditure is incurred on purchasing, creation or enhancing new or existing assets.

It also covers the circumstances when the authority is investing in tenanted non-residential property investment assets to provide income, capital growth, or economic growth in accordance with its investment strategy and council plans. These may include ambitious town planning lead change proposals with complex timescales and many stakeholders.

The common area is that they all will require capital to implement, and the revenue expenditure consequences of that capital and any sales and revenue income generated will be factored in to the business case analysis.

Capital is provided traditionally through the auspices of a medium to longer term capital strategy and a linked 3 to 5 year rolling capital delivery programme annually approved and monitored by the local authority. There are detailed prescriptions

set out by cipfa and the government that cover process and content of a capital strategy, capital programme and the treasury process for borrowing and debt repayment. This is called the prudential code. This means that all council capital

funding has to be demonstrably affordable and the authority has to act in a prudent manner.

In 2011, local government in England held over £45 billion in long-term debt.

Of that, £34.3 billion (three-quarters of the total) was borrowed from the Public Works Loan Board (PWLB - the public lender to local government) with most of the remainder held by UK and foreign banks.


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2.1 What are the types of funding?

Broadly there are several approaches to fund local authority capital based

projects and programmes.

Note each may be mixed internally and externally to achieve the optimum, a

balance of cost and risks distributed between the parties.

1. Self fund from revenue or capital receipts or balances and account for the

opportunity cost - no borrowing

2. Non-residential net income from leased assets to external parties

3. Debt - traditional PWLB borrowing. PWLB requirements are not onerousand they are a form of debt which has the cheapest annual cost over typicalloan borrowing periods and carry little or no procurement cost. For an LEPthere is currently a discount of 40 base points off the standard rate wheninvesting in infrastructure, for any qualifying authority there are 20 basepoints off the standard rate when investing in infrastructure.

4. Grants from central government direct to the statutory service e.g.transportation

5. Finance pooling between local authorities eg Greater Manchester Authoritiesin order to leverage more debt and share the risks.

Internal

Fixed Term Typical standard %rate for PWLB as at

September 20151 Years 1.485 Years 1.8310 Years 2.33

15 Years 2.68

25 years 3.1030 years 3.26

40 Years 3.48

50 Years 3.55


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I. Bank Loans

A. Short term development loan for build

B. Mortgages

II. Other

A. Grants

B. Covenanted debt

C. Municipal bonds

D. Community based finance raised through lottery funds

III. Partnership finance

A. Equity shares

B. Loans short and long

C. Private finance initiative version 2.

IV. Local asset backed partnerships

V. Contractual obligation

6. Obligations - CIL or S106 type planning based- there are others. Theseusually come with conditions. These can be scheme, function, and timespecific. May be mixed in with 1, 2, 3, 4, and 5 above.

7. Tax incremental funding. Relatively new in the UK and used to borrowagainst future business tax revenues. A lead agency – a local authority,private sector partner or some combination – raises money upfront to payfor infrastructure, on the basis that the increased business rate

revenues generated by the scheme can be used to repay that initialinvestment. The upfront funding may be borrowed from public or privatesources, or it may be provided by the developer from capital available to it. If

the local authority is to initially fund the debt then the prudential codewould apply. Recent innovations in the use of Local Enterprise Partnerships

[LEP] and similar public and private partnership bodies do allow for theinjection of private funds, possibly against the business rate increasesexpected from the investments.

External


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2.2 What is the need for different ways of funding?

A council’s goal is to achieve the stated outcomes spread over the whole life of a project for the least cost and in an optimal way. Many factors in the business case will influence the optimum.

Financing the capital programme is about allocating scarce resources on a political priority order and will come from the available funding for the authority’s capital programme as stated in the medium term capital strategy.

As funding is a scarce resource, and is almost always too little to meet the identified projects and needs described in the medium term capital strategy, there is nearly always a funding gap.

Beyond the funded capital plan sit those programmes and projects with viable business cases that may only be afforded if different ways of generating solutions can be found or substituted within the capital programme. It is clear that when forming the more detailed business case for such schemes delivery options including financing the options beyond the current available resource need to be considered. Also:

• When available traditional prudential funding is committed, or

• When delivering the project is beyond the control of the local authorityand its finances, or

• When your local authority is working as a partner in a longer term venturethat may involve significant transformational changes with consequentproperty rationalisation and renewals.

Alternative funding solutions may be the only viable route.


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2.3 How to choose the best funding mix for your project?

Use a business case approach. The following illustrates a typical approach to a reasonably complicated case which may be either a large project or a series of projects.

So prior to choosing implementation routes a proposal will have details such as:

• Scope,

• Scale,

• Commercial risks,

• Complexity and

• Returns either in income or taxes or other quantifiable benefits

• Assumptions that enable estimation of the costs and set out the financingrequirements and affordability of the preferred solution.

The affordability of a scheme is done by carrying out an analysis of the available resources in the authority and their ability to afford the consequences of the particular scheme and any others in the capital programme’s budget.

A. Establish the business cases [strategic or outline level]

B. Business risk analysis [ resources, time, whole life]

C. Narrow down by appraisal the options

D. Carry out cost benefit tests including affordability

E. Assess risk and sensitivity to funding choices

F. Assess optimum solution

G. Establish the delivery options [ full business case ]


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This simple flow chart helps to illustrate financing choices between public and private financing:

2.1 From ‘The estate we’re In’ 2007


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The authority has to decide its appetite for risk and the priority of the scheme

as to whether options beyond the conventional approach to financing would be considered. If the scheme gets through initial political scrutiny of its outline business case then more options to deliver the outcome will be considered in the detailed business case. Within this the financial case is concerned with issues of affordability, and sources of budget financing covering the lifespan of the scheme and all attributable costs. The affordability argument needs to demonstrate that funding has been secured and that it falls within appropriate spending and settlement limits including any taxation that may arise.

Issues in addition to the proposal’s affordability are:

• Does the financial case identify and fill any funding gaps,

• Does it contain provision for dealing with the financing of any time or costoverruns,

• Does it fully explain and estimate any contingent liabilities that may resultfrom the proposal?

A broad comparison of types of financing and criteria for choosing is included in the attached schedule

Specific tools that may aid in assessing choices include:

• Business risk analysis

• Cost benefit analysis

• Option appraisal and Monte Carlo simulations

• Net present value analysis [NPV] using the treasury green book discountguide rate of 3.5%

• Internal return [IRR]

• Weighted return value analysis [ most often used in evaluating tenderreturns]

Each tool aids in choosing between options to get to a preferred solution including the best funding mix for the project.

There are several sources for the preparation and assessment of business cases including the FPS’ own free guide available on our web site.

A helpful checklist recommended by HM Treasury when preparing a business case is included in Appendix B.


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3.0 Implementation

In the detailed business case a delivery plan will be stated including its assumptions and likely sensitivity to changes in the business risks. This will drive the approach to the market if required and set the expected outputs to be delivered.

Internally funded or PWLB debt schemes carry no scheme specific conditions. Many practitioners will be familiar with this approach as it is the usual method for implementing the capital programme schemes nationally in 75% of all cases. This is broadly a tax free approach. Most authorities include in their financial and contract regulations guidance to delivery best practices to follow many of which are regulated by the professions and supported or mandated by government departments.

In contrast all forms of privately raised loans will come with contractual conditions that must be met and failure can incur increases in risk and costs to the authority

and as such paying close attention to managing commercial risks including taxation, project slippage, and cost overruns is a key skill authorities should have at the outset. VAT and other taxes may apply when more than just the authority are involved and close attention to the tax position of the scheme is essential.

Types of delivery vehicles typically in use:

• Mortgages - traditional, interest only, deferred

• Loans - varying repayment periods and varying with amounts

• Sale and leaseback linked to loans

• Lease and leaseback linked to loans

• Special purpose vehicle companies set up to deliver the programmeor purpose intended funded by one of the parties. Public Services PLC

partnerships are a current example of how a consortium of local authoritiescan leverage in private sector and European Investment funds to deliverlocal schemes. See Appendix C and the examples of this approach.

• Partnerships with 50/50 limited liability set up so they can borrowindependently to the authority

• Local authority asset backed vehicles

• PFI IV

• PPP V

Delivery methods


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In addition to the internal business risks to the authority the funding body will usually require detailed contractual conditions tying to the purpose of the loan, and the primacy of the loan if difficulties are encountered implementing the scheme. Unless otherwise stated the lender will get paid first, no matter what the risk and usually the local authority will be required to underwrite the risk.

Exceptions to this assumption are in PFI / PPP contracts where the risks are transferred to the private sector for the initial debt. However, the local authority will pay the unitary charge for the period of the PFI and it will include for the private sector borrowing cost and any risk and uncertainty. In all cases the business case must argue that the best value for money has been achieved through the investment benefits and savings that the community will realise.

3.1 Procurement

Implementing works projects over the EU limits will require an EU compliant procurement process. Check with your procurement experts and legal service. There may be already approved government tendered shortlists for the delivery model that may work in your case. Use of these already procured frameworks is highly recommended and may save both cost and time when implementing schemes.

Examples of Government framework delivery models that local councils can use include:

• PFI

• Leasing contracts

• Partnership contracting

• National construction framework

• Various local and national professional consultancy frameworks


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3.2 Investment in tenanted non-residential property

This area of investment deals with the acquisition of real estate assets for investment purposes. It is distinct from investments in tenanted property for

operational reasons such as industrial starter units for growth and regeneration. It is a monetary policy approach and as such is judged solely on the investment criteria.

Funding for this acquisitive route would be business case specific. The percentage of cash or loan debt funds to speculate in this way will require careful analysis and guidance is available from the RICS .

Examples of this approach recently have shown councils buying commercial freeholds and leaseholds with good retail covenants and initial commercial rental returns that yield returns on investment of 9% or 10%.

Care must be taken to advise that rental returns and capital growth are subject to market conditions and that property investment is not without its risks. Furthermore operating as a property investment company would require a trading approach from the authority with the ability to acquire and dispose over time to maintain the average rate of return commonly expected from this class of investment.

An extract from an article describing a examples of recent diversification into property investments is attached at Appendix D.

It is only recently that tenanted non-residential property has performed better

on average as an investment compared to government bonds. Best practice is to benchmark the returns and compare them to the organisations alternative investment options.


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4.0 Examples

Recent examples of innovative funding. See Appendix E for more background.

European Investment Bank vice president Jonathan Taylor said he expected to

announce further support for UK schools in the coming months.

• Warrington Council has issued a £150m bond deal to help finance itstown centre regeneration plans. CPI inflation-linked bond (£50m issued,£100m retained) to fund town centre regeneration

• Timeframe: 40 years

• Believed to be the first local authority outside London to enter bondmarket in the last 10 years.

• Council will retain £100m through deal to access future funding and hassold £50m to a UK insurance company.

• Warrington estimates it will save £12m in interest costs through the initial£50m bond sale.

• Borrowing: £200m CPI inflation- linked bond to fund Northern Lineextension

• Timeframe: 25 years

• Estimated savings: £40m

• Croydon is set to receive £102m from the European Investment Bank toimprove schools across the council

• First time that an EIB loan has been agreed for this purpose

• Estimated saving: £500,000- £1m annually

• 25-year loan upgrading 38 schools to provide 5,182 primary school places& 2,100 secondary places that is estimated are needed over next 3 years

• 6 new primary schools & upgrade/extension of 25 others

• 6 new secondary schools

• 1 new school for children with special needs

WARRINGTON

GREATER LONDON AUTHORITY

CROYDON


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5.0 Schedule

5Less important

Less important

Qualification and experience

Fees

Risk taking

Interest rate

Affordability

Knowledge of local government

Loan Period

References


Fees

Risk taking

Interest rate

Affordability


Loan Period

References

Most important

Most important

Criteria for choosing

1 2 3 4


1 2 3 4 5

• To obtain the best local rates the loan willusually be linked to specific risk assessedschemes

• Will require detailed business cases toassess commercial risks and overcome

the affordability gap by making savingsand or income greater than comparativeWLB loans

• Can be structured to be on or off balancesheet [ie avoid the capital amount countingagainst the capital programme though inall circumstances the annual cost will beagainst the councils revenue expenditureand therefore limit the councils ability

through the prudential code

• Careful assessment of risks and

commercial aspects required

• Can be useful where the lender is seekingsynergy in adding value to its other realestate projects in your area

• Can be very experienced in specificpolicy areas and offer procurement andintelligent client advantages as part of thepackage eg

a. Green investments bank

b. Social and community development

Bank Lending

Institutional lending from funds


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1 2 3 4

5

5

Less important

Less important


Fees

Risk taking

Interest rate

Affordability


Loan Period

References


Fees

Risk taking

Interest rate

Affordability


Loan Period

References

Most important

Most important


1 2 3 4


• Based on the notion that local business

income through taxation will be generatedand offset the funding costs to the council

• Requires government approval for thekeeping of half of the extra tax to beraised

• Examples on large scale growthinfrastructure projects in Cities and LEPareas

• Complex as the residual risk falls on the

Council

• Commonly used when part of a realestate transaction otherwise the receiptsare added to the corporate finance pool

• There is an opportunity cost of lost

capacity and investment income whensued offset by the benefits of the schemein either income generated or savingsmade

• Compared to the cost of borrowing

Tax Incremental Funding

Internal use of capital receipts

instead of borrowing


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1

5

5

Less important

Less important


Fees

Risk taking

Interest rate

Affordability


Loan Period

References


Fees

Risk taking

Interest rate

Affordability


Loan Period

References

Most important

Most important


1 2 3 4


2 3 4

• Usually will be scheme specific and mayrequire council to rejig capital programmepriorities in its favour or loose the

opportunity

• Can skew the capital programme fromlocal priorities

• There are EU Jessica funded grantsavailable to some UK areas. These areconstrained tightly to the names areas.A bid process is precedes allocation of

grant.

• Can be effective on small schemesthough it is less likely when resourcesare constrained and pressures to growrevenue spending are high

Government Grant

Internal use of revenue expenditure

instead of borrowing


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1

1 2 3 4

5

5

Less important

Less important


Fees

Risk taking

Interest rate

Affordability


Loan Period

References


Fees

Risk taking

Interest rate

Affordability


Loan Period

References

Most important

Most important


2 3 4


• 75% plus of all local council borrowing isthrough the PWLB

• Can be fixed or variable interest [rates arepublished daily] and there is a discount

of 20 base points for infrastructure risingto 40 base points for local enterprise

partnership

• The loan period for fixed loans may beup to 50 years

• Commonly used when part of a realestate transaction otherwise the receiptsare added to the corporate finance pool

• There is an opportunity cost of lost

capacity and investment income whensued offset by the benefits of the schemein either income generated or savingsmade

• Compared to the cost of borrowing

Lending from Public Works Loan Board

Contribution funding from income streams such as community infrastructure levy; planning obligations and similar legislation


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6.0 Appendix A

CAPITAL EXPENDITUREExpenditure on the acquisition or creation of a tangible fixed asset or expenditure which adds to and not merely maintains the value of an existing tangible fixed asset.

CAPITAL EXPENDITURE RECEIPTS AND RETURNS (COR)This set of statistical returns analyse out-turn capital investment by each authority (the original name for these statistics was the Capital Out-turn Return and this is still reflected in the short-code description).

CAPITAL EXPENDITURE (FROM) REVENUE ACCOUNT (CERA)Also known as Revenue Contributions to Capital Outlay (RCCO). The mechanism by which items of capital expenditure can be financed by budgeted transfers from the General Fund or from earmarked reserves.

CAPITAL FINANCING ACCOUNTAn account that reflects the extent to which fixed assets have been financed from revenue contributions or capital receipts and the provision for the repayment of external

loans.

CAPITAL FINANCING COSTS

A charge to the Revenue Account for:(1) interest on loans raised to finance capital expenditure and(2) A provision of x% of the capital financing requirement for the repayment of loans.These must not be confused with capital charges to services.

CAPITAL FINANCING REQUIREMENTThe difference between the value of Total Fixed Assets in the balance sheet and the Revaluation and Capital Financing Accounts. This represents the propensity of the authority to borrow for capital purposes and is the basis for the minimum revenue provision charge to the revenue account.

CAPITAL GUIDELINESThere are separate definitions of this according to the context.i) The relevant Central Government Departments issue annual capital guidelines(ACGs) for 5 main groups of local authority services incurring capital expenditure(Education, Transport, Personal Social Services, Housing and Other Services). ACGsare the government’s measure of local authority need to incur capital expenditure andrepresent the sum of an authority’s basic credit approval less an assumed level of capitalreceipts available to finance capital expenditure.ii) At your council capital guidelines are the totals, set by the equivalent of Policy andResources Committee, within which Committees are asked to prepare their capitalprogrammes for consideration by the Policy and Resources Committee and the Council.

CAPITAL PROGRAMMEA list of projects or block votes, approved to start in the year of the programme, which involve capital expenditure.

Glossary of terms


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CAPITAL RECEIPT

Proceeds from the sale of capital assets (e.g. land, buildings and equipment).

CAPITAL STARTS

Value of schemes in the capital programme committed to start in a financial year through the signing of contracts or the placing of orders. Control over capital expenditure is exercised by controlling starts in each year. See cash limit(capital).

CAPITALISATION

Treatment of expenditure as capital rather than as revenue

DIRECT REVENUE FUNDINGCapital expenditure may be funded from revenue budgets. This method of funding is known by a variety of acronyms - RCCO (Revenue Contributions to Capital Outlay), DRF (Direct Revenue Funding), CERA (Capital Expenditure, Revenue Account), etc.

FINANCE LEASE

Under this type of lease, the organisation paying the lease is treated as if it owns the goods. It gains the profits that would come with ownership but it also suffers the losses

FIXED ASSET

An asset that yields benefits to the local authority and the services it provides for a period of more than one year.

GOVERNMENT GRANT AND DEFERRED CONTRIBUTIONS ACCOUNTAn account that contains specific Government capital grants or external contributions remaining to be written out to revenue over the life of the assets they are financing.

GOVERNMENT GRANT RELEASEDThe credit to revenue from Deferred contributions and Government grants when the corresponding fixed asset is depreciated or disposed of.

GOVERNMENT GRANTS (CAPITAL ACCOUNTING)Grants from the Government and Government agencies towards individual capital schemes or more general Service capital expenditure. They are credited to the government grants and deferred contributions account as the relevant expenditure is financed. See also Government grant released.

GRANTS

Sums of money given to a charity, organisation or individual, usually from some kind of grant making body such as a charitable foundation or government department. A grant is different to a donation in that it is usually applied for along strict criteria drawn up by the grant make that the applicant must adhere to in order to receive the money.


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HOUSING REVENUE ACCOUNT (HRA)An account of expenditure and income that every local housing authority must keep. The account is kept separate or ring-fenced from other council activities.

INFRASTRUCTURE ASSETSFixed assets that cannot be taken away or transferred, and whose benefits can only be obtained by continued use of the asset created. Examples of infrastructure assets are

highways and footpaths.

INVESTMENT PROPERTIESInterest in land and/or buildings; in respect of which construction work and development have been completed, and which is held for its investment potential, any rental income being negotiated at arm’s length.

JOINT FUNDINGWhere two or more agencies, for example, health and social services, agree to share the cost of running a project or service.

LEASES

A lease is a contract for the hire of a specific asset. The lessor owns the asset but conveys the right to use the asset to the lessee for an agreed period of time in return for the payment of specified rentals. Leases may be either operating leases or finance leases.

LOANS POOL

Maintained by a local authority to manage its external borrowing on an overall basis, rather than borrowing for individual capital projects. Advances are made to service committees to fund capital expenditure and are repaid to the pool with interest over a period of years.

MINIMUM REVENUE PROVISION (MRP)The minimum amount which must be charged to the revenue account each year and set aside as provision for repaying external loans and meeting other credit liabilities.

NON-OPERATIONAL ASSETS

Tangible fixed assets held by a local authority but not directly occupied, used or consumed in the delivery of services. Examples of non-operational assets are investment

properties and assets that are under construction or surplus to requirements.

OPERATIONAL ASSETS

Fixed assets held and occupied, used or consumed by the local authority in the direct

delivery of those services for which it has either a statutory or discretionary responsibility.

OPERATING LEASES

A lease other than a finance lease. An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis.


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PRIVATE EQUITYMainly specialist pooled partnerships that invest in private companies not normally traded on public stock markets – these are often illiquid (i.e. not easily turned into cash) and higher-risk investments that should provide high returns over the long term.

PRIVATE FINANCE INITIATIVE (PFI)Contracts typically involving a private sector entity (the operator) constructing or enhancing property used in the provision of a public service, and operating and maintaining that property for a specified period of time. The operator is paid for its services over the period of the arrangement through a unitary charge.

PROCUREMENTThe process of buying in goods or services from an external provider. Covers everything from determining the need for new goods to buying, delivering and storing them.

PRUDENTIAL BORROWINGThe regime for council borrowing that has replaced central government deciding how much debt a local authority can run up. The scheme provides councils with much more freedom to decide how much they can afford to borrow.

PRUDENTIAL CAPITAL FINANCE SYSTEMThis is the informal name for the system introduced on 1 April 2004 by Part 1 of the Local Government Act 2003. It allows local authorities to borrow without Government consent, provided that they can afford to service the debt from their own resources.

PRUDENTIAL CODE (THE)A code of practice issued by CIPFA/LASAAC under the Local Government Act 2003 that enables local authorities to regulate their capital programmes by means of a set of Prudential Indicators.

PUBLIC WORKS LOAN BOARD (PWLB)This is a central government agency that provides loans to local authorities at a slightly higher rate than the Government is able to borrow. In most cases, the interest rates offered are lower than local authorities can achieve in the open market. The amounts and purposes for which PWLB loans can be obtained are tightly controlled by the Government.

PUBLIC PRIVATE PARTNERSHIP (PPP)A joint venture where the private sector partner agrees to provide a service to a public sector organisation. The PFI is one form of a PPP.

REALISED CAPITAL RESOURCESUsable capital resources arising mainly from the disposal of fixed assets.


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RECEIPTS TAKEN INTO ACCOUNT (RTIA)The RTIA deduction represents the amount of capital expenditure that the Government

considers reasonable for the local authority to finance from accumulated capital receipts.

RELATED PARTY DURING THE FINANCIAL PERIODTwo or more parties are related when:- one party has direct or indirect control over the other party

- the parties are subject to common control from the same source- one party has influence over the financial and operational policies of the other party to the extent that the other party may not be able to pursue its own interests at all times- influence from the same source results in one of the parties entering into a transaction that is against its own separate interests.

REVENUE ACCOUNTAn accounting record of the revenue expenditure and income (from fees, charges and government grants) of the authority. It does NOT include capital financing expenditure or transfers to/from reserves.

REVENUE CONTRIBUTIONS TO CAPITALUse of revenue funds to finance capital expenditure. It is not subject to central government controls on capital and so permits higher capital spending levels but it does count against capping limits on the County Council’s PRECEPT. Also known as Revenue Contributions to Capital Outlay (RCCO) and Capital Expenditure charged to the Revenue Account (CERA).

REVENUE CONTRIBUTIONS TO CAPITAL EXPENDITUREUse of revenue funds to finance capital expenditure.

REVENUE CONTRIBUTIONS TO CAPITAL OUTLAY (RCCO)See Direct Revenue Funding.

REVENUE EXPENDITUREThe operating costs incurred by the authority during the financial year in providing its day to day services. Distinct from capital expenditure on projects which benefit the authority over a period of more than one financial year.

REVENUE IMPLICATIONS OF THE CAPITAL PROGRAMMEDefined as the impact on revenue expenditure of capital expenditure. This falls into two categories:i) Current expenditure, which includes revenue items resulting directly from the capital scheme, such as staffing and premises running costs.ii) Capital financing costs,which result if a scheme is financed by loans or finance leases.


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SINGLE REGENERATION BUDGETThe Single Regeneration Budget is a major grant programme which supports a wide variety of economic, environmental and social schemes. The SRB was created in 1994 by consolidating several different grant programmes into one.

SPECIFIC AND SPECIAL GRANTS

Specific formula grants, targeted or ring-fenced grants are sometimes referred to as specific or special grants. A specific grant is paid under a specific legislative power whereas a special grant uses a general power to pay grants to councils.

SUSTAINABLE INVESTMENT RULEThis is a fiscal rule which requires that public sector net debt, as a proportion of Gross Domestic Product (GDP) will be held, over the economic cycle, at a stable and prudent level.

TEMPORARY CAPITAL BORROWING LIMIT (TCBL)The Temporary Capital Borrowing is part of the Government’s capital control regime over local authorities. The TCBL allows local authorities to borrow to finance capital expenditure which is due to be reimbursed by grant or contributions from outside bodies (although not the EU), but which has not yet been reimbursed. This temporary borrowing is limited to no more than 18 months.

ULTRA VIRESAll activities local authorities undertake must be supported by specific legal powers or duties. Acts undertaken which are not supported by such legal powers are referred to as “ultra vires” (Latin for “beyond powers”).

UNREALISED CAPITAL RESOURCESCapital resources that are not available for use because they are employed in supporting the ownership of fixed assets.

USEFUL LIFEThe period over which the local authority will derive benefits from the use of a fixed asset.


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6.1 Appendix B

Checklist from HM Treasury on Business Cases


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6.2 Appendix C


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6.3 Appendix D

Extract from: Public property: concrete assets by: Mark Sullivan 24 Sep 15

…”Guests staying at a Travelodge hotel in Edinburgh’s picturesque Learmonth Terrace might be slightly surprised to learn that it is the property of Mansfield District Council, a local authority based some 260-odd miles to the south in the Midlands. Similarly, staff working at an insurance broker in Chatham, Kent, may not be aware that their landlord, a 90-minute drive away via the M25, is Luton Borough Council.

Public bodies need to find money where they can today, and think in innovative ways. If property yields better returns than traditional investments such as equities and bonds, why not grasp that opportunity? And if the public sector can pool its resources to use its estate more efficiently and sell surplus sites, why not do so?

Local authorities need no special powers to invest in property, beyond the power of general competence. But success naturally requires skill in assessing values and projecting future rental income. It is unfamiliar territory for most local authorities, and few are yet taking this chance.

Ian Carruthers, CIPFA’s executive director for policy and standards, says: “Councils are cautious because, before the era of the power of general competence, they could only do things they were allowed to, rather than do anything they were not forbidden to, and that attitude means there is still caution about things like commercial property investment. People don’t tend to think they can do it.”

Mansfield Council is now the proud owner of not just the Edinburgh Travelodge but also another Travelodge with associated commercial premises in Doncaster, a leisure centre in Manchester, and a combined office and residential building in London. Mick Andrews, the director of finance, revenues and property, explains: “To ensure that we do not get too reliant on one sector or one area we want a spread of sectors and places for our property investment strategy. We are in two different parts of the leisure sector and are now moving into offices.”

Andrews confirms that Mansfield is “borrowing and investing using the power of general competence”, and adds that the council’s auditor is happy with the move into property. The council has allocated £26m to property investment, of which £20m has so far been spent.

“As finance director as well as property director, I have to set a robust budget with reliable rental income, so that income is something you have to build into any risk analysis. Having high quality leases and tenants mitigates that risk,” Andrews says. “Like a lot of councils, we’ve always had a property portfolio in our own area and for historic reasons a lot of it has been 1980s and 1990s industrial units now reaching the end of their useful life. The idea has been to sell off those and replace them with fewer and higher quality buildings, not necessarily in the district.”


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Opportunities brought to the council by an estate agent are assessed against a matrix that tests location, tenants, lease, income and sector. Mansfield’s staff developed the matrix and close the deals, and Andrews has seen no need to employ extra expertise. “In London and Edinburgh we expect property prices to be rising so... we would hope that if we sell the buildings they will generate receipts well in excess of the borrowing costs,” Andrews says…”

…” In addition to its Chatham property and an office building in Milton Keynes, Luton

is about to complete the purchase of a commercial property in Stevenage. Porter seeks properties with tenants on a full repairing lease so that they, not the council, are responsible for managing the building day- to-day. The great advantage of commercial property investment, he says, is its contribution to “keeping the lights on” in the borough. “Luton had 63% of its revenue come from grants in 2011 and by 2019 that will be less than 17%, so the property dealing we started in 2013 will make a difference.”

http://www.publicfinance.co.uk/home


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6.4 Appendix E

“..The implications of tight funding are leading to innovation in how councils raise capital, with a determination to keep costs low being cited as the reason for some groundbreaking borrowing deals.

Three local authorities have recently agreed capital-raising programmes that save them money compared to the Public Works Loan Board. The PWLB lends money to most

authorities at a rate 80 basis points above government gilts.

On 25 August, Warrington Borough Council became the first local authority outside London to enter the bond market for more than 10 years with an issue that will eventually be worth £150m.

Then, on 3 September, the European Investment Bank announced it would loan £102m to the London Borough of Croydon. In a UK first, the loan will pay for construction of six primary schools and six secondaries, as well as a school for children with special needs and the expansion of 25 existing schools.

Add to this a £200m bond issued by the Greater London Authority in May to fund the Northern Line extension, and a shift in approach can be seen.

Lynton Green, director of finance and information services at Warrington Borough Council, said local government is no longer automatically looking to the PWLB for capital funding.

“We are all becoming much more commercial in our approach to delivering things, and part of that involves looking at a wide series of options,” he said. “In the past, picking up the phone to the PWLB was seen as a very easy way of getting additional funding. But when you’re very pressed to deliver savings, if there’s anything we can do to squeeze a few more million out through a more creative way of funding then we have to do it.” Warrington has so far issued only £50m of the bond, with the other £100m retained for future use.

The money will fund town centre regeneration and is forecast to save up to £12m over 40 years compared to borrowing via the PWLB.

The decision to move away from the PWLB was simply made by looking at the savings, Green added. “We have a large capital programme in Warrington and we wanted to fund that with some certainty. Although you get very good certainty with the PWLB, we were being made aware that we might be able to get a better deal than PWLB by going out for a bond.”

Similar concerns motivated Croydon’s deal with the EIB. Nigel Cook, the borough’s head of pensions and treasury, said the authority had been considering using the EIB for two years.

Extract from Capital ideas for town hall borrowing by: Richard Johnstone 2 Oct 15


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“The idea of packaging together a capital programme to a sum that was large enough to fit in with their criteria for loan funding was first posited then,” he said. “We went away and looked at what we had in the capital programme, and I think the school programme was an obvious choice for exploring that approach.”

The EIB loan is competitive with PWLB funding, said Cook. “We have been given a very clear indication that this will be cheaper than the PWLB’s appropriate rate when we ask for the first drawdown. Clearly on a loan of £102m, any interest reduction is welcome. Although we won’t actually know what it is until the day we make the drawdown, the potential savings are significant over 25 years.”

Municipalities in continental Europe use the EIB routinely, and Cook said he anticipated more UK councils will soon do so.

CIPFA technical manager Mandy Bretherton welcomed the emerging range of funding sources. “This enables authorities to have choice and make value for money choices,”

she told PF.

Bretherton said significantly more work needed to be done to secure these deals, compared to the PWLB. Extra steps can include going through the EIB approval process or securing a credit rating needed to issue a bond. This is likely to put some authorities off…”

http://www.publicfinance.co.uk/home

Banking on Growth: Trends in local government funding and finance Zach Wilcox, Joe Sarling & Ewan Wright July 2012

Publication by 4P’s and Deloitte now out of print

RICS ‘LAABV guide 2012’

See note 3 and the UK Treasury web site

Local partnerships formerly the 4ps organisation have extensive advice on their website http://localpartnerships.org.uk

RICS ‘ local authority asset management best practice 06: tenanted non-residential

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FPS FUNDING REPORT nov 2015

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Transcript of FPS FUNDING REPORT nov 2015