cipfa.org
Alternative Approaches To
Capital Financing
Alan George
Capita Asset Services
Treasury solutions
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
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
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
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!
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!
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?
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
cipfa.org
Key Themes – Long-term Assets/Liabilities
Scotland as an Example
2011/12
2012/13
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
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%
2011/12)
•
Borrowing requirement fell in 6 authorities
(7% in
cipfa.org
Borrowing Positions – 2011/12
Borrowing in Advance/Under-borrowed - 2011/12
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%
cipfa.org
Borrowing Positions – 2012/13
Borrowing in Advance/Under-borrowed - 2012/13
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%
cipfa.org
Northern Ireland Council
=
2012/13
£31.9m
2011/12
(£36.1m)
=
=
=
=
=
£ 2.4m
£ 2.4m
£ 6.9m
£ 4.0m
£ 16.2m
(£ 2.4m)
(£ 2.5m)
(£10.1m)
(£ 7.6m)
(£13.5m)
• Working capital deficit
• Reserves – Cash backed?
• Investments
=
=
=
£ - 3.7m
£ 28.2m
£ 25.8m
(£-11.8m)
(£ 24.3m)
(£ 24.7m)
• Cash Deficit/Surplus
=
£
• Reserves & Balances





District Fund Balances
Earmarked revenue reserves
Capital Fund
Capital Grants/Receipts
Provisions
2.4m
(£-0.4m)
cipfa.org
2012/13
2011/12
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?
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!
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
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?
cipfa.org
Type of Borrowing
£1,000,000
£800,000
EIP
£600,000
Annuity
Maturity
£400,000
£200,000
£0
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
cipfa.org
Borrow now or later?
The maths
cipfa.org
Historic Interest Rate Movements
cipfa.org
Forecast Interest Rate Movements
5yr PWLB
25yr PWLB
4
5.9
3.7
5.6
3.4
5.3
3.1
5
2.8
4.7
2.5
4.4
2.2
4.1
1.9
1.6
3.8
1.3
3.5
1
3.2
PWLB
Sector Forecast
Sector Target
10yr PWLB
5.3
5
4.7
4.4
4.1
3.8
3.5
3.2
2.9
2.6
2.3
2
PWLB
CE Forecast
Sector Target
Sector Forecast
CE Forecast
UBS Forecast
CE Forecast
UBS Forecast
50yr PWLB
5.6
5.3
5
4.7
4.4
4.1
3.8
3.5
PWLB
Sector Target
Sector Forecast
CE Forecast
UBS Forecast
PWLB
Sector Target
Sector Forecast
cipfa.org
Key Outputs – Borrow 10 Year Fixed PWLB
cipfa.org
Key Outputs – Borrow 25 Year Fixed PWLB
25 year Fixed
Borrowing currently against the forecast would cost in first 4.5 years
Postponing borrowing 4 years would cost over the 4.5 years
Net Gain of
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)
At 3 years from now (based on investment period of cash)
At 4 years from now (based on investment period of cash)
Alternatively the savings gained in the early years would underwrite
the increased cost of the loan for:
At 2 years from now
At 3 years from now
At 4 years from now
£1,670,000
£200,000
£1,470,000
3.880%
3.883%
4.000%
17.500 yrs
23.857 yrs
13.364 yrs
cipfa.org
Asset Finance
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
cipfa.org
English & Welsh Leasing Volumes
Client
Jan to Dec
2012
Jan to August
2013
2013
Estimate
Local Authority
£21,015,385
£22,408,087
c £35 Million
Client
Jan to August
2012
Jan to August
2013
% Increase
£13,279,927
£22,408,087
+ 68.74%
Local Authority
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
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!!
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
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”!
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
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!!
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!
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!
cipfa.org
Frameworks Update
Frameworks currently available to access, which Sector have established in
conjunction with Public Sector clients:
Existing Frameworks
Walsall 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 Soon
HGV 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 Maintenance
Procurement/Lease/Maintenance of GM
And Materials Handling Equipment
(Q1 2014)
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
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
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
cipfa.org
Longer Term Planning …

And then we have …………………..
Local
Government
Review
cipfa.org
Questions?