1 / 40

Alternative Approaches To Capital Financing

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.

heath
Download Presentation

Alternative Approaches To Capital Financing

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Alternative Approaches To Capital Financing Alan George Capita Asset Services Treasury solutions

  2. Prudential Code Introduced April 2012 Integration in the Corporate Planning Process More effective asset management Prudent medium term financial planning More rigorous option appraisal

  3. 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

  4. 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

  5. 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!

  6. 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!

  7. 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?

  8. Draft Statement of Accounts 2012/13 Technical Team has reviewed 2012/13 Draft Statement of Accounts for over 180 Local Authorities across UK

  9. Key Themes – Long-term Assets/LiabilitiesScotland 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 £11.3bn £11.6bn Under-Borrowing £0.8bn £1.0bn

  10. 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 position 8% (7% in 2011/12) • Borrowing requirement fell in 6 authorities

  11. Borrowing Positions – 2011/12

  12. Borrowing Positions – 2012/13

  13. Northern Ireland Council 2012/13 2011/12 • Reserves & Balances = £31.9m (£36.1m) • District Fund Balances = £ 2.4m (£ 2.4m) • Earmarked revenue reserves = £ 2.4m (£ 2.5m) • Capital Fund = £ 6.9m (£10.1m) • Capital Grants/Receipts = £ 4.0m (£ 7.6m) • Provisions = £ 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)

  14. 2012/13 2011/12 • Capital Financing Requirement = £ 28.2m (£25.1m) • External Borrowing = £ 25.8m (£25.5m) • Under (Over) borrowed = £ 2.4m (£-0.4m) • Capital actual =£12.8m 12/13 • Forecast Capex =£16.7m 13/14 • =£14.8m 14/15 • =£16.4m 15/16 • CFR expected to rise significantly over the next 3 years • risk management?

  15. 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!

  16. 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

  17. 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?

  18. Type of Borrowing

  19. Borrow now or later?The maths

  20. Historic Interest Rate Movements

  21. Forecast Interest Rate Movements

  22. Key Outputs – Borrow 10 Year Fixed PWLB

  23. Key Outputs – Borrow 25 Year Fixed PWLB

  24. Asset Finance

  25. Market Position

  26. English & Welsh Leasing Volumes

  27. 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

  28. 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!!

  29. Vehicle Leasing Example Issues Insured value – not the Capital Cost! Actual Capital Cost = £100,000 T’s and C’s • 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

  30. 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”!

  31. 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

  32. Vehicle Leasing Example Actual Proposed Deal Equipment = 12 x MFD’s 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!!

  33. Print & Copier Leasing Example What the Authority Actually Did Equipment = 12 x MFD’s 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!

  34. Print & Copier Leasing • What you can do:- • Find out who is responsible for procurement • Don’t use the Managed Print Solution option • Don’t believe everything the supplier says • Alternative approach:- • Obtain purchase and maintenance quotes • Finance in house or lease properly • Record the savings!

  35. Frameworks Update Frameworks currently available to access, which Sector have established in conjunction with Public Sector clients:

  36. 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

  37. 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

  38. 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

  39. Longer Term Planning … • And then we have ………………….. • Local Government Review

  40. Questions?

More Related