Agenda item

The Audit and Standards Advisory Committee is asked to consider the borrowing strategy set out in Appendix A.

Daniel Omisore (Head of Finance at Brent Council) introduced the paper and explained that in order to deliver its capital programme, it was likely that the Council would be required to borrow up to £230 million by 2020/21 and potentially more thereafter.

He also noted that the proposals set out in the paper are all within the operating boundaries already approved by Cabinet when setting the Treasury Management Strategy and Prudential Indicators for 2018/19 as part of the budget setting process.

Mr Omisore set out some of the reasons for this borrowing requirement, including  historical capital spend, the current c£800m capital programme and the previous borrowing strategy which has been to utilise cash reserves, cash balances and cash flow in lieu of borrowing in order to avoid interest costs. However the operating environment is changing. The council has an ambitious capital programme to deliver and over time cash balances are expected to reduce as reserves are drawn down to pay for earmarked and other projects. Having carefully considered these factors and projecting forward the balance sheet as set out in section 5 (page 101) the analysis points to a significant borrowing requirement by 2019/20.

Alongside this, given that interest rates are predicted to rise (para 6.8 – page 104) it makes sense to utilise a forward borrowing option as part of a wider borrowing strategy. The benefit of such an arrangement is that it allows the Council to agree a fixed rate in advance (that is broadly comparable with PWLB rates) for delivery in the future which would be in parallel to our capital commitments as profiled in the 3 year budget. As interest payments do not commence until the loan starts the Council is able to hedge against interest rate exposure.

The scale of the sums involved means this would be one of the biggest transactions the Council will have undertaken in many years so it was important to consider a number of funding options such bank debts, the Public Works Loan Board (PWLB), Local Authorities, the Municipal Bond Agency, Pension Funds and Cash Balances.  

Mr Omisore outlined the advantages and disadvantages of each alternative (paragraph 4.6 of Appendix A to the report (pages 98-100 of the Agenda pack)) and reiterated that all options would be considered as part of a diverse borrowing strategy.

He said that borrowing money from the PWLB might not be a preferred option at this time as it did not offer what the Council was looking for – i.e. fixing the interest rate at the present levels and drawing the money in the next two/three years. As far as borrowing from the Municipal Bonds Agency was concerned, it was noted that this will also be considered at the time but will be dependent on economic and other market factors.

Mr Omisore went on to say that a forward borrowing option allowed Brent to arrange money for the future, but the Council had to draw the sum down on the pre agreed date even if they did not use it. However, given the scale of the capital programme, it was very unlikely that the funds would not be needed. It is also possible to agree a guaranteed interest rate which would not be charged until the money was withdrawn and could be fixed for a period varying from 20 to 40 years. Members heard that under this arrangement the interest rate offered by banks to the Council was comparable to the PWLB and it would be possible to conduct several transactions with various banks which would minimise the risk.

Mr Omisore noted that the preferred approach was to initially borrow a much smaller sum, say up to £40m and to directly engage with potential lenders bringing in the necessary expertise as and when required. This would not only be cost effective, but it would help the Council to build up internal capacity which would allow the treasury function to undertake similar deals in future should opportunities arose.

The Committee welcomed the report and thanked Mr Omisore and his team. The Committee also noted that ultimately whatever approach was pursued all would come with an element of risk.

A Member who was in attendance at the meeting enquired whether it could be possible to use cash reserves to fund capital projects. Mr Omisore explained that various options (including cash reserves) had been considered in the preparation of the report and that the Council have historically used cash to fund capital projects recently thereby avoiding interest costs, however the Councils cash reserves are forecasted to decline in the future. Therefore, using cash to meet Brent’s borrowing requirement would not be sustainable in the long term. In addition, the Council’s Borrowing Strategy will be implemented in such a way so it will fund capital demands as they arise based on known capital commitments in the capital programme, without having to borrow the full value of the capital programme up front.  

RESOLVED that:

(i)            The contents of the Brent Council Borrowing Strategy 2018/19 – 2020/21 Cover Report, be noted.

(ii)          The borrowing strategy set out in Appendix A to the report be endorsed, including:

·         The role the Treasury Management Strategy had played in recent years in contributing to revenue savings

·         The competing forces that meant this strategy would not be sustainable in the coming years (i.e. rising interest rates, reducing cash balances, major capital investment commitments, expanding pipeline, revenue savings)

·         The options Brent had with regard to borrowing externally

·         The estimated borrowing requirement from 2019/20 onwards (c£230m)

·         The direct engagement with potential lenders and buying in the necessary expertise as and when required which would allow the Council to develop internal capacity

(iii)         Appendix A to the report be presented to Cabinet for approval in September 2018.