PURPOSE OF REPORT

A requirement of the CIPFA Prudential Code for Capital Finance is that Prudential Indicators are monitored on a regular basis and any significant changes approved. Similarly, under the CIPFA Code of Practice on Treasury Management, any changes in long term borrowing and changes to the Authority’s counterparty investments are required to be reported to Members.

EXECUTIVE SUMMARY

The Capital and Treasury Management Strategy for 2020/21 were in the meeting papers circulated to members for the Fire and Rescue Authority meeting of the 16 March 2020. Since that time the prudential indicators have been revised and are included within this report for approval.

RECOMMENDATION

Members are asked to approve the amended Prudential Indicators set out in Appendix A.

OBSERVATIONS FROM THE EXECUTIVE PANEL/AUDIT COMMITTEE

The report would usually be reviewed by the Audit Committee prior to submission to the FRA but due to Covid this has not been possible this time.

BACKGROUND

Treasury management is the management of the Authority’s cash flows, borrowing and investments, and the associated risks. The Authority has borrowed and invested substantial sums of money and is therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of financial risk are therefore central to the Authority’s prudent financial management.

Treasury risk management at the Authority is conducted within the framework of the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2017 Edition (the CIPFA Code) which requires the Authority to approve a treasury management strategy before the start of each financial year and report any major variances.

INFORMATION

Prudential Indicators 2020/21

The Prudential Indicators (PIs) are set each year using the estimated outturn for the current year and the estimated capital programme for the forthcoming year. Due to slippage in the capital programme for 2019/20 and revision of the 2020/21 capital programme due to
Covid-19 it has been necessary to revise the PIs to reflect current estimates.

The reduced capital programme for 2019/20 has meant that the Minimum Revenue Provision requirement for 2020/21 is less than the original estimate. The original requirement was based on a capital spend of £1.5m in 2019/20 but as the actual expenditure was lower at £0.775m the revenue budget saving in year on the repayment of capital debt is £0.06m. The original budget set was £2.27m and this has now been revised to £2.21m

The reduced capital programme for 2019/20 and 2020/21 has meant that all the indicators approved at the start of the year have been revised to reflect the changes. Specifically the ‘ratio of financing costs to the net revenue stream’ has been revised downwards to reflect the reduced costs to the revenue budget for capital debt.

An explanation of what each PI represents is detailed below:

• Capital Financing Requirement is a measure of the long term debt needed to support the Authority’s capital programme;
• Operational Boundary is a measure of the possible maximum external debt allowing for peaks and troughs in cashflows; and
• Authorised Limit is an estimate of the maximum amount the Authority could borrow based on an assessment of operational requirements and external risks.

Appendix A lists the indicators reported within the Capital and Treasury Management Strategy 2020/21and the revised indicators.

Loans

The table below summarises the loans held by the Authority as at 30 September 2020:

Short term loans are currently renewed on maturity with other local authorities depending on the interest rates available at that time. There is currently sufficient liquidity in the market to renew or replace maturing loans with local authorities. Current interest rates on short term borrowing are between 0.01% and 0.20%.

No new PWLB loans have been taken out this year. The current PWLB rates start from 1.95% for 1 year loans. At this time they are not cost effective when compared to the rates on short term borrowing.

The Authority has approved an upper limit of 55% of the loan portfolio for the amount of loans maturing within 12 months. The current position is that the local authority loans will mature within 12 months and based on the current portfolio the Authority is within the limit set.

Investments

To maintain adequate liquidity ratios the Authority retains sufficient cash funds to ensure payment of all obligations as they become due. Cash held for this purpose is invested for short periods of time.

The primary principle governing the Authority’s investment criteria is the security of its investments. Currently any investments held are for cash flow purposes and any surplus cash is used to replace short term loans that would have been required to fund the capital programme.

The investment strategy for 2020/21 included approval of the following criteria for counterparties:

(1) Debt Management Office of the Treasury: limit £5m

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

(3) All UK and Irish banks and their subsidiaries that have good ratings (Fitch or equivalent): limit £5m.
This is currently defined as:

Short term F1
Long term A
Viability Rating bbb

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 of £2m.

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

The surplus cash is invested in two call accounts, Barclays and the Bank of Scotland, which allow instant access to funds. The investments held as at 30 September are detailed below.

Interest Rates

The interest rates on the call accounts have reduced in line with the fall in the base rate. The table below tracks the interest rate changes from the start of the pandemic.

Treasury Management advisors, Arlingclose, are predicting that the base rate will remain at 0.10% for the foreseeable future. On the investment side there is the risk of negative rates which means that financial institutions will charge for holding cash investments. Currently the Debt Management Office (DMO) are charging -0.03% for monies deposited up to 1 week. Fortunately the Authority has no requirement at this time to use the DMO for depositing funds.

On the borrowing side the Authority is in a net borrowing position and utilises short term borrowing to fund a significant part of the capital programme. Currently there is sufficient liquidity in the market to renew short term loans on maturity. Due to the fall in the base rate the rates offered are significantly lower than the rates paid in March. There is sufficient budget provision for interest payable and with the reduction in rates it is estimated that the outturn position will be lower than the budget set at the start of the year.

In order to mitigate against credit risk, liquidity risk and market risk the authority undertakes the following:

Analyses the authority’s cashflow on a daily basis in order to address any borrowing or investment needs.

TM advisors (Arlingclose) monitor counterparties (organisations we currently invest with or potentially will invest with) on a daily basis as to their creditworthiness and the likelihood of the institution failing.

Surplus funds are kept to a minimum and currently held in call accounts for cash flow purposes.

Any shortage of Market Loans (currently borrowing from other Local Authorities) means the Authority can switch to PWLB if required (additional costs).

Other risks

The outbreak of Covid-19 has already had an impact on the delivery of the capital programme and whilst this is monitored closely there is a risk that the authority will experience further disruption and therefore capital expenditure may fluctuate. This will have an effect on the prudential indicators. The information used to produce this report is based on the best available information and projections currently available.

Brexit is still an unknown factor and whilst there are no indications that there will be an impact on interest rates and the treasury management function there could be an impact on the cost of goods and services, which could result in increased costs to the capital programme. The risk is currently unknown and the situation will continue to be monitored.

IMPLICATIONS

Wellbeing Objectives - This report links to NWFRA’s long-term well-being objectives. Ensures 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 1.
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