The Prudential Code The English Perspective

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The Prudential Code The English Perspective
Michael Tomlinson Capital, Performance and
Treasury Manager Walsall Council
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Aim of session

• Prudential Code
• English Experience
• Walsalls Approach
• Investments
• Issues

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Walsall
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Walsall Council

• Metropolitan Authority
• West Midlands
• Population 252,000
• Revenue Budget 05/06 340 million
• Capital Budget 05/06 95 million
• Long Term Borrowing 203 million

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Walsall famous for

• M6 Motorway
• Pop stars
• Manufacturing Locks
• Saddles
• REGENERATION
• Fast improving Council
• 2002 Ungradeable to 2005 3 star Improving council
• 2004/5 average rate external debt
• 4.5 or 4.76 inc OLA

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1. Prudential Code

• To provide a framework that ensures

• Capital expenditure plans are affordable
• All external borrowing and other long term
  liabilities are Prudent and within Sustainable
  levels
• Treasury management decisions Professional good
  practice
• Decisions clear and transparent framework
  Accountability.

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Risk versus Reward
Reward
Risk
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Pre Prudential Code
Reward
Risk
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Post Prudential Code - Poor
Reward
Risk
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Post Prudential Code - Good
Reward
Risk
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Decision making on capital investment

• The code does not specify how .
• elements of good practice for which guidance is
  already available ..
• Code concentrates on the means by which the
  authority will demonstrate thats its proposals
  are

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External Debt Borrowing limits

• Authorised
• Based on estimates 3 years
• Prudent but not worse case
• Operational
• Removes headroom from authorised
• Monitored within the year
• Set trigger points

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Process and Governance

• Setting and revising prudential indicators should
  take the same route as the budget
• Where the CFO feels that the authorised limit for
  external debt is likely to be breached a report
  to full council will be required
• Regular breaches of the operational boundary
  would require further investigation and action.

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Application

• General Support to Capital Programme
• Specific Schemes

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General Support - USB

• Draft Capital Programme
• Assess resources revenue effect of new
  borrowing
• Can capital expenditure plans be afforded over 3
  years
• Determine projected maximum borrowing
• Go back to 1.

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Specific Scheme

• in making its capital investment decisions the
  authority must have explicit regard to
• Option appraisal
• Asset management
• Strategic planning
• Achievability of the forward plan

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2. English Experience
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Impact of prudential

• 37 of authorities planned to use prudential
  borrowing in 2004-05
• 50 planned to use prudential borrowing over a
  three year period
• Estimated 900m in 2004/05 6 of total spend
• Good spread across services Diversity and
  spending

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Key messages from English LGA

• Encouraging Start
• Generally welcomed
• Helpful in delivering joint agenda
• Opportunities for innovation
• But uncertainties about the future.

LGA publication Using prudential borrowing one
year on
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Examples -

• Bournemouth- International Business Centre
• Brent Schools loan system Guidance issued.
• Calderdale - Homelessness hostel revenue saving
  reduced expensive BB provision.
• Camden Business units
• Cambridgeshire assisted Waste PFI scheme

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Examples -

• Hillingdon New leisure centre New school
  maintenance backlog tackled link with Asset
  Management plan.
• Lancashire residential homes and other major
  projects
• Leeds Digital pens, vehicle wash.
• Lincoln Car parking, E Gov targets
• Manchester Community Safety

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Birmingham Lesson

• It has been necessary to reinforce the
  understanding within services that prudential
  borrowings has responsibilities, in that the
  interest and minimum revenue provision must be
  covered. This message has been conveyed by
  requiring services to meet these costs from their
  own budgets.

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3. Walsalls Approach

• Changing Culture
• Capital Receipts
• Debt Capacity
• Specific Schemes

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Walsall Change in CulturePrinciple of
Governance
Move from bureaucratic government rules to
self regulation, transparent decision making and
taking responsibility
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New Capital Finance Regulations

• Local Government Act 2003
• Capital Finance Accounting Regulations
• CIPFA prudential code

• Simpler Regulations
• Old system 163 Regs
• New system 34 Regs
• Sign post to good practice

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Old process
New process
Inputs
Process
Outputs
Outcome
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• Walsall - Capital Receipts
• Planned use of receipts over 5 years
• Interest rates / investments /

• Walsall - Debt Capacity
• Supported Borrowing allocation 10m
• Assumed rate 6
• Actual Rate 4.5
• 2.5 million additional resources

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Walsall Specific Schemes

• Highways Maintenance backlog
• Regeneration schemes to generate capital receipts
  
• School building
• Move a Social Services Establishment

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Challenges

• Capital
• Option appraisal of schemes
• Business case of projects
• Payback

• Revenue
• Effect on budgets repayment periods
• Review opportunities for use of USB
• Depreciation, Asset Rentals

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Challenges

• Senior Officers
• Manage expectations
• Evaluate readiness to have USB
• Update council processes

• Loans Team
• More robust cash flow
• Monitor operational and authorised debt
• Expectations raised on investment returns

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4. Investments

• CIPFA code of Practice - 1996
• In balancing risk against return, local
  authorities should be more concerned to avoid
  risks than to maximise return

Prudential Code Guidance notes for
Practitioners 2004 The guidance emphasises that
priority is to be given to security and
liquidity, rather than yield. However, that does
not mean that authorities should ignore yield.
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Investments Risk / Reward Balance

• It would be reasonable to seek the highest rate
  of interest consistent with the proper levels of
  security and liquidity.

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Investment Approach under the Prudential Code

• Major change in the approach
• Move from prescription to guidance based upon
  principles
• Greater freedom in choice of how to invest
• Ambiguous in areas Judgement
• Invest greater than 12 months
• Investment Strategy approved by council

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Experience - Walsall

• Core Cash invest longer than 12 months
• Consider more instruments of investment
• Profile and expectation raised
• Some Borrowing in Advance

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Experience - Cornwall

• 2004/5 - 5.7 rate of return on investments
• At 31.3.05
• 38 gt365days
• 38 Certificates of Deposit,
• 20 other
• 4 lt365 days

By using new freedoms of prudential regime to
invest differently Using structured deposits
higher returns maintaining low risk
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5. Issues

• Risk / Reward where do you want to be
• Option appraisal
• Planning
• Integrate further with Capital programme
• Role of services and centre
• Procedures and protocols
• Best method of funding
• Revenue accounting

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Learning points

• Robust business cases
• Highlights capital not free resources
• Match asset life repayment period
• Flexibility Funding over time spans
• Connect with asset management
• Temptation to fund too many schemes slippage
• Expectations managed if no ceiling on borrowing
  limit.
• Enables consideration of whether Capital or
  Revenue intensive approach is best
• Expectation of higher investment returns

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Thank You and Questions