Do's & dont's

Do's & dont's Alternative Approaches To Capital Financing Alan George Capita Asset Services Treasury solutions Prudential Code Introduced April 2012 Integration in the Corporate Planning Process More effective asset management Prudent medium term financial planning More rigorous option appraisal 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 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 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! 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! 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? Draft Statement of Accounts 2012/13 Technical Team has reviewed 2012/13 Draft Statement of Accounts for over 180 Local Authorities across UK 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 11.6bn

Under-Borrowing 11.3bn 0.8bn 1.0bn 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 2011/12) Borrowing requirement fell in 6 authorities position 8% (7% in 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% Borrowing Positions 2012/13 Borrowing in Advance/Under-borrowed - 2012/13 20 10 0 -10

-20 -30 -40 Reserves & Balances = District Fund Balances Earmarked revenue reserves Capital Fund = Capital Grants/Receipts Provisions =

Northern Ireland Council 2012/13 2011/12 31.9m (36.1m) = 2.4m ( 2.4m) = 2.4m ( 2.5m) 6.9m (10.1m) = 4.0m ( 7.6m) 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) 2012/13 Capital Financing Requirement 2011/12 = 28.2m (25.1m) External Borrowing

= 25.8m Under (Over) borrowed = 2.4m (-0.4m) Capital actual Forecast Capex (25.5m) =12.8m 12/13 =16.7m 13/14 =14.8m 14/15 =16.4m 15/16 CFR expected to rise significantly over the next 3 years risk management? 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! 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 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? 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 Borrow now or later? The maths Historic Interest Rate Movements 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 Target Sector Forecast 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 Key Outputs Borrow 10 Year Fixed PWLB 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 Asset Finance 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 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 Local Authority 13,279,927 22,408,087 + 68.74% 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 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!! Vehicle Leasing Example Issues Insured value not the Capital Cost! Actual Capital Cost = 100,000 Ts and Cs

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 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! 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 Vehicle Leasing Example Actual Proposed Deal Equipment = 12 x MFDs 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!! Print & Copier Leasing Example What the Authority Actually Did Equipment = 12 x MFDs 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! Print & Copier Leasing

What you can do:- Find out who is responsible for procurement Dont use the Managed Print Solution option Dont believe everything the supplier says Alternative approach:- Obtain purchase and maintenance quotes

Finance in house or lease properly Record the savings! Frameworks Update Frameworks Frameworkscurrently currentlyavailable availableto toaccess, access,which whichSector Sectorhave haveestablished establishedin in conjunction with Public Sector

clients: 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 LCVs Coming Soon HGV Procurement HGV Contract Hire Leisure Trust Leasing Grounds Maintenance Procurement of HGV up to 44T Contract Hire of HGVs Operating and Finance Lease (Q4 2013) (Q4 2013) (Q1 2014)

Procurement/Lease/Maintenance of GM And Materials Handling Equipment (Q1 2014) 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 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 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 Longer Term Planning And then we have .. Local Government Review Questions?

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