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Alternative Approaches To Capital FinancingAlan GeorgeCapita Asset ServicesTreasury solutions

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Prudential Code Introduced April 2012

Integration in the Corporate Planning Process

More effective asset management

Prudent medium term financial planning

More rigorous option appraisal

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Prudential Code Introduced April 2012Capital plans are affordable

Borrowing and liabilities are prudent and sustainable

Local authorities are accountable

Provide a framework forCapital expenditure plansExternal debtTreasury management

Avoid urgent remedial action

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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

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What does the Balance Sheet tell you about treasury position?

It is a position statement providing information of financial position at the year – endIt 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!

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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!

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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?

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

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Key Themes – Long-term Assets/LiabilitiesScotland as an Example

2011/12 2012/13Long-term Assets £37.7bn £38.3bnFinanced/PFI £25.6bn £25.7bn

Underlying need to borrow£12.1bn £12.6bn

External Borrowing £11.3bn £11.6bnUnder-Borrowing £0.8bn £1.0bn

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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

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Borrowing Positions – 2011/12

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

Borrowing in Advance/Under-borrowed - 2011/12

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Borrowing Positions – 2012/13

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%Borrowing in Advance/Under-borrowed - 2012/13

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Northern Ireland Council

2012/13 2011/12• 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)

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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 12/13Forecast Capex =£16.7m 13/14

=£14.8m 14/15

=£16.4m 15/16CFR expected to rise significantly over the next 3 years

risk management?

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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!

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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

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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?

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Type of Borrowing

£0

£200,000

£400,000

£600,000

£800,000

£1,000,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

EIP

MaturityAnnuity

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Borrow now or later?The maths

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Historic Interest Rate Movements

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Forecast Interest Rate Movements

22.32.62.93.23.53.84.14.44.7

55.3

10yr PWLB

PWLB Sector Target Sector Forecast CE Forecast UBS Forecast

3.2

3.5

3.8

4.1

4.4

4.7

5

5.3

5.6

5.925yr PWLB

PWLB Sector Target Sector Forecast CE Forecast UBS Forecast

3.5

3.8

4.1

4.4

4.7

5

5.3

5.650yr PWLB

PWLB Sector Target Sector Forecast CE Forecast UBS Forecast

1

1.3

1.6

1.9

2.2

2.5

2.8

3.1

3.4

3.7

4

5yr PWLB

PWLB Sector Target Sector Forecast CE Forecast

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Key Outputs – Borrow 10 Year Fixed PWLB

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Key Outputs – Borrow 25 Year Fixed PWLB25 year Fixed Borrowing currently against the forecast would cost in first 4.5 years £1,670,000

Postponing borrowing 4 years would cost over the 4.5 years £200,000Net Gain of £1,470,000

In order to make it neutral to borrow now, over the 4.5 years,investment rates would need to be higher by:At 2 years from now (based on investment period of cash) 3.880%At 3 years from now (based on investment period of cash) 3.883%At 4 years from now (based on investment period of cash) 4.000%

Alternatively the savings gained in the early years would underwritethe increased cost of the loan for:At 2 years from now 17.500 yrsAt 3 years from now 23.857 yrsAt 4 years from now 13.364 yrs

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Asset Finance

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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

managementMore new model

outsourcing

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English & Welsh Leasing VolumesClient Jan to Dec 2012 Jan to August

20132013 Estimate

Local Authority £21,015,385 £22,408,087 c £35 Million

Client Jan to August 2012

Jan to August 2013

% Increase

Local Authority £13,279,927 £22,408,087 + 68.74%

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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

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Vehicle Leasing ExampleActual Deal

Equipment = 2 x Wirtgen Super 1303-02Capital Cost = “Insured Value” £125,000Lease Period = 3 YearsPayments = AnnuallyRental = £24,687Total Rentals = £74,061

Interest Rate Assumed = 4%Residual Value = 48.37%

Great Deal!!

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Vehicle Leasing ExampleIssues

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

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Vehicle Leasing ExampleWhat the Authority Could have DoneEquipment = 2 x Wirtgen Super 1303-02Capital Cost = £100,000Lease Period = 3 YearsPayments = AnnuallyRental = £18,631Total Rentals = £55,893

Saving per Year = £6,056Total Saving = £18,168 (18.17% of Capital Cost)

Fleet Manager no longer allowed to “Do their own thing”!

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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

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Vehicle Leasing ExampleActual Proposed Deal

Equipment = 12 x MFD’sActual Capital Cost = £123,000Lease Period = 3 YearsPayments = QuarterlyRental = £11,996.93Total Rentals = £143,963.16

Interest Rate = 12%Residual Value = 0%

Not a Great Deal and a Finance Lease!!

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Print & Copier Leasing ExampleWhat the Authority Actually Did

Equipment = 12 x MFD’sCapital Cost = £123,000Lease Period = 3 YearsPayments = QuarterlyRental = £9,848.61Total Rentals = £118,183.32

Saving per Quarter = £2,148.32Total Saving = £25,779.84 (20.96% of Capital Cost)

Hurrah – An Operating Lease!

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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!

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Frameworks UpdateExisting FrameworksWalsall Council Operating and Finance Lease (New April 14)

Bath & North East Somerset Council Contract Hire of Buses (New Nov 13)

Bath & North East Somerset Council Procurement of Buses

Mid & West Wales Fire Authority Salary Sacrifice of Passenger Cars

City of York Council IT & General Equipment Leasing (New Dec 13)

City of York Council Schools Leasing (New Dec 13)

Halton Housing Trust Contract Hire of Passenger Cars & Light Commercial Vehicles

Procurement for Housing / TPP Procurement of Cars and LCV’s

Coming SoonHGV Procurement Procurement of HGV up to 44T (Q4 2013)HGV Contract Hire Contract Hire of HGV’s (Q4 2013)Leisure Trust Leasing Operating and Finance Lease (Q1 2014)

Grounds MaintenanceProcurement/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:

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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

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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

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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

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Longer Term Planning … And then we have …………………..

Local Government Review

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Questions?