Purpose of Report

To inform Members of the treasury management activity and prudential indicators for North Wales Fire and Rescue Authority (the Authority) during the 2019/20 financial year. This report is a requirement of the Prudential Code (the Code).

Executive Summary

The Authority’s treasury management activities are regulated by professional codes, statutes and guidance. The borrowing position at 31 March 20020 was £30.9m which is within the limit approved by members. The value of short term loans was £16m which is within the limit set within the strategy. No variable rate loans were held during the financial year.

Recommendation

Members are requested to:

• note the treasury management activity; and
• approve the final prudential indicators for 2019/20.

OBSERVATIONS FROM EXECUTIVE PANEL/AUDIT COMMITTEE

This report has not been previously been considered by Members.

Background

The Authority’s treasury management activity is regulated by professional codes, statues and relevant guidance. The key requirements include the production of a Treasury Management Strategy and prudential indicators to demonstrate affordability of capital and borrowing decisions. These documents must be approved by the Authority prior to the commencement of the financial year. Arrangements should also be in place to monitor and report the prudential indicators during the financial year and report the outturn position to the Authority.

The Treasury Management Strategy for 2019/20 was approved by the Authority at its meeting of 18 March 2019. The prudential indicators were revised in year due to the re-profiling of the capital programme which resulted in reduced in year borrowing. These revisions were approved by the Authority at its meeting of the 16 September 2019. This is the final report for 2019/20 which sets out the actual prudential indicators for the year and the Treasury Management position. The report is in line with the CIPFA Code of Practice on Treasury Management and the CIPFA Prudential Code.

Information

TREASURY MANAGEMENT ACTIVITY 2019/20

Agreed Strategy for 2019/20

The day to day decisions on borrowing are delegated to the Treasurer, who is required to ensure the most appropriate form of borrowing depending on the prevailing interest rates at the time. This includes the use of shorter term fixed rates which may provide lower cost opportunities in the short/medium term.

A cautious approach is taken to the investment of surplus funds. Cash deposits required to maintain working capital are with banks or building societies. Other vehicles are only used for longer term investments.

Borrowing Activity

The outstanding loan debt as at 31 March 2020 was £30.9m. Loans are taken out to finance the Authority’s capital programme. A further analysis of maturity profiles is provided in Appendix A.

The Public Works Loans Board loans held as at 31 March 2020 are detailed below and amounted to £14.9m:

During the year, one new PWLB loan was taken out for £2.5m. The loan had a fixed term of 3 years at an interest rate of 1.6%. The loan portfolio includes EIP loans (Equal Instalment of Principal) and of these loans the principal repayment in year was £3.066m. Overall the loans held by the Authority fell by £0.566m compared to the previous year. Any additional borrowing need in year was met by short term borrowing which is at a lower cost.

The Authority had £16.0m in short term loans taken out with other local authorities at year end, as detailed below:

These loans provided a low cost option for the Authority with an average interest rate of 0.86% which compares favourably with the rate of 1.95% being offered by the PWLB for one year loans.

The Authority approved an upper limit of 55% for loans maturing within 12 months. The position at 31 March 2020 was that 52% of loans were deemed short term loans.

The Treasury Management Strategy confirms that the borrowing portfolio should have a maximum of 35% of debt in variable loans with up to 100% of loans having fixed terms. During 2019/20 the Authority only borrowed on fixed rate terms due to prevailing interest rates and to allow certainty.

The actual borrowing for 2019/20 was £0.835m below the approved capital financing requirement (CFR) due to further reductions in the capital programme. Total interest of £0.514m was paid compared to the budget of £0.535m. The average short term borrowing rate for the year was 0.86% and the average long term rate was 2.27%.

Investments

The principles governing the Authority’s investment policy are contained in the National Assembly for Wales Guidance in 2003. The investment activity during the year conformed to these principles and the Authority had no liquidity difficulties.

The investment strategy for 2019/20 approved by the Authority on 18 March 2019 included approval of the following criteria for counterparties:

(1) Debt Management Office of the Treasury: limit £5.0m

(2) Local Authorities (except rate-capped): limit £2.0m

(3) All UK and Irish banks and their subsidiaries that have good ratings (Fitch or equivalent). – limit: £5m

Banks whose ratings fall below those in the table above will be used if wholesale deposits are covered by a government guarantee, and the deposits fall within the terms of the guarantee.

(4) Building Societies with a rating (as for the banking sector) all have a lending: limit £2.0m.

(5) Building societies without a rating but with assets of £1 billion or more: limit of £2m with a maximum time limit of 9 months.

All surplus monies were invested by Conwy County Borough Council on behalf of the Fire and Rescue Authority. The balance of investments as at 31 March 2020 was £1.73m compared to £0.55m, as at
31 March 2019. The year end investment balance was high due to the need to maintain liquidity due to uncertainties arising from the Covid-19 pandemic. In order to maintain the Authority’s liquidity position, the money was mostly held within instant access call accounts. The average rate achieved on investments was 0.28%.

The budget for investment interest was nil and the actual interest achieved was £0.02m.

Prudential Indicators

The Authority is required by the Prudential Code to approve the actual prudential indicators after the year end. Appendix A provides a schedule of all the mandatory prudential indicators. The table below confirms the key limits approved by the Authority and the outturn for 2019/20:

The Capital Financing Requirement (CFR) shows the Authority’s underlying need to borrow for a capital purpose. In the short term the borrowing requirement may exceed the capital financing requirement due to the effect of cash and investments. The table above shows the gross borrowing position was lower than the CFR for 2019/20 by £0.835m.

The Authorised Limit is the affordable borrowing limit required by section 3 of the Local Government Act 2003. The table below demonstrates that during 2019/20 the Authority has maintained its gross borrowing within its Authorised Limit.

The Operational Boundary is the expected borrowing position of the Authority during the year, and periods where the actual position is either below or over the Boundary is acceptable subject to the Authorised Limit not being breached.

REGULATORY FRAMEWORK, RISK AND PERFORMANCE

The Authority’s treasury management activities are regulated by professional codes, statutes and guidance:

The Local Government Act 2003 (the Act), provides the powers to borrow and invest as well as providing controls and limits on this activity. The Act permits the National Assembly for Wales to set limits either on the Authority or nationally on all local authorities restricting the amount of borrowing which may be undertaken (although no restrictions were made in 2019/20). Under the Act the National Assembly for Wales has issued Investment Guidance to structure and regulate the Authority’s investment activities

Statutory Instrument (SI) 3239 (W319) 2003, as amended, develops the controls and powers within the Act. This requires the Authority to undertake any borrowing activity with regard to the CIPFA Prudential Code for Capital Finance in Local Authorities and requires the Authority to operate the overall treasury function with regard to the CIPFA Code of Practice for Treasury Management in the Public Services;The Authority has complied with all of the above relevant statutory and regulatory requirements which limit the levels of risk associated with its treasury management activities. In particular its adoption and implementation of both the Prudential Code and the Code of Practice for Treasury Management means both that its capital expenditure is prudent, affordable and sustainable, and its treasury practices demonstrate a low risk approach.

IMPLICATIONS

Wellbeing Objectives - This report links to NWFRA’s long-term well-being objectives. SEnsures that the purchase of assets to support front line service delivery is prudent, affordable and sustainable. Ensures there is sufficient investment in infrastructure to enable the Service to provide emergency responses and prevention work well in to the future.
Budget - Budget is set annually for capital financing in line with the Treasury report.
Legal - The regulatory framework is set out in paragraph 18.
Staffing - None
Equalities/ Human Rights/ Welsh Language - None
Risks - Investment of surplus funds – there is a risk that the financial institution in which the service’s funds are invested could fail with a loss of part of the principal invested. However, one of the purposes of the report is to mitigate this risk.

Appendix A

Prudential Indicators