Additional borrowing to support the capital programme

Report: 9
Date: 18 June 2009
By: Treasurer

Summary

This report considers additional financing for the capital programme by way of borrowing.

A. Recommendation

That members

1. Approve, in principle, additional borrowing over the three years 2009/10 to 2011/12 in the sum of £60M to support additional capital infrastructure and/or deferral of police property disposal,
2. Review appropriate new capital schemes to advance at its July meeting, and
3. Agree to finance the additional revenue costs of borrowing in 2009/10 from balance sheet reserves, and to include additional costs for 2010/11 and future years in the medium term financial plan.

B. Supporting information

Introduction

1. At the March 2009 meeting of this committee, the possibility of additional borrowing to support the capital programme was considered. Members were advised that because of reduced resources to support the programme, although the Authority had agreed to minimise as far as possible the operational and contractual impact of slowing down the programme, there was a reduction between the new capital programme and that which had previously been agreed of £26.4m in 2009/10, £39.4m in 2010/11 and £35.1m in 2011/12. The paper identified that it was possible to borrow prudentially as long as the borrowing was affordable, that net borrowing was for a capital purpose and that the approved borrowing was within the borrowing limits approved by the Mayor.

2. Consideration was also given to new borrowing to replace the possible deferment of capital receipts from disposals. Any new borrowing would be for a short term period until such time as the property market had been identified as recovering and a larger capital receipt generated, and the short term borrowing then repaid. In this connection members will be aware of the possible Johnson House disposal on the current agenda, with the option to agree a disposal or to consider deferment of the sale. The level of capital receipts is vital in determining the size of the capital programme and represents a significant, though sharply declining, element of funding. The proposed receipts for 2009/10 are estimated at £20M, wheras in the past the level of receipts were much higher, for example there was a budget estimate of £84M in 2008/09. Receipts are crucial, as failure to materialise will result in the MPA having to find alternative sources of finance. As members will be aware, the downturn in the property market is seriously affecting the level of capital receipts that will be available to finance expenditure.

3. The fundamental objective in the consideration of the affordability of the capital programme is to ensure that the total capital investment of the MPA/MPS remains within sustainable limits, and in particular to consider the revenue impact on the “bottom line”. That is, affordability is determined by a judgement about the acceptable impact on the level of the Authority’s net expenditure (ultimately determining the MPA precept), or, if additional investment is now being considered, a view on the alternative savings that would have to be made to finance the capital financing charges (Minimum Revenue Provision, interest and any other net running costs arising from the capital investment) within the existing financial envelope.

Additional Capital Borrowing

4. At the last meeting of this committee, members were advised that the MPA could increase the current level of borrowing to finance additional capital expenditure and/or delay property disposal under the Prudential Code rules. This can be done through increasing unsupported borrowing. Any additional borrowing would involve additional revenue costs. These costs comprise (i) the annual charge to the revenue account which effectively makes annual provision for the repayment of the loan – the Minimum Revenue Provision (ii) annual interest payments on the loan (these can vary with the type of loan taken out – including equal instalmennts of principal, annuity or maturity) and (iii) there may be some residual effect from interest earned on cash balances if the loan is received before the additional capital expenditure is actually spent.

5. There is a distinction between borrowing to replace the existing capital receipts assumptions and borrowing to provide additional spending capacity. Substituting capital receipts with borrowing will give no increased spending ability, but if members support deferral of property disposals, when the market recovers any capital receipts then generated can either be used to supplement future years’ capital programmes or reduce the unsupported borrowing requirement. Borrowing to provide additional spending capacity would allow either new schemes to be added to the programme, or to bring forward existing schemes. The new borrowing will attract both the annual cost of capital (MRP and interest) together with the net running cost arising from the investment.

6. An example was provided of additional borrowing of £30m in 2009/10, £20m in 2010/11 and £10m in 2011/12, a total increase of £60M over the three years. The annual additional revenue costs were estimated to be £0.7m in 2009/10, £2.5M in 2010/11, £3.7M in 2011/12 and £5.2M in 2012/13.

Savings/Budget Reductions

7. Extra revenue costs would place an additional burden on the revenue account with a need to find additional savings/budget reductions. If members support these indicative levels of additional borrowing, then to maintain a balanced budget it would be necessary to find additional savings/budget reductions immediately in 2009-10. It is proposed that the use of reserves would be an appropriate solution in 2009/10. There would also be a need to add the additional savings requirement post 2009/10 and it is proposed that the requirement be added to the medium term financial plan, effectively adding to the savings targets required in these years. It is important to note that the savings target for future years currently stands at £100m in 2010/11, £160m in 2011/12 and £200m in 2012/13. However, there is the possibility that if the additional borrowing were to finance new, more modern building works, there could be cashable savings on running costs, repairs etc, to offset some of these costs. The Authority would need to be mindful that it would also be incurring costs for the maintenance and upkeep of properties, declared surplus in terms of operational need, pending any future sale. Using Johnson House as an example we would be looking at a minimum at additional maintenance costs of £175K p.a.

Formal Approval of Amended Borrowing Limits

8. External borrowing limits are considered likely to have enough headroom to accommodate additional borrowing of £30M in 2009/10 without further recourse to the Mayor . However, this would need careful monitoring during the year. Any in year amendment to external borrowing limits will need the Mayor’s approval.

Capital Project Prioritisation

9. If members are supportive of increasing the amount of the borrowing for new investment and/or deferral of property disposal then members will need to consider, in conjunction with the MPS, the prioritisation of the capital programme for the new works. The MPS are bringing the detailed capital programme review to the July Finance and Resources Committee and there will be an opportunity to commence this review at this time.

Property Disposal

10. If members are minded to consider deferral of some property disposals, then it will be necessary to receive regular updates from MPS Property Services Department to indicate when the property market is recovering and when marketing should recommence.

C. Race and equality impact

None specific to this report.

D. Financial implications

Contained in the report above.

E. Background papers

• Budget Submission 2009-10

F. Contact details

Report author: Ken Hunt, MPA

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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