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Capital Finance . Capital funding – how it works. Borrowing to pay for capital schemes operates under what is known as “prudential borrowing regime” (Local Govt. Act 2003)

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capital funding how it works
Capital funding – how it works

Borrowing to pay for capital schemes operates under what is known as “prudential borrowing regime” (Local Govt. Act 2003)

Under PBR, councils decide how much they can afford to pay, taking into account how much they need to repay (impact on council taxpayers)

Borrowing agreements must accord with Cipfa (Chartered Institute of Public Finance and Accountancy) code

Money may be borrowed from various sources

prudential funding
Prudential funding

Govt. has reserve power to impose “ceilings” limiting how much can be spent

System encourages responsibility – how much can we (& taxpayers) afford?

Allows councils greater freedom to decide priorities

Viable alternative to PFI

Could be self-financing (eg adding facility to leisure centre that pays for itself)

the private finance initiative pfi
The Private Finance Initiative - PFI

Private consortium pays upfront for project in a contract with council

Building/facility is leased back to council

Costs paid off by council over period of between 20-30 years (plus interest) after which council retains ownership

pfi ii
PFI ii
  • Delays or bad management usually penalised
  • Interest payments can mean costs rise above actual costs
  • PFI contracts often include arrangements for company to maintain and manage asset over relevant period
pfi advantages disadvantages
PFI – advantages/disadvantages


  • Risks taken by private contractor
  • Enables council to get scheme built more quickly

Less good:

  • Risk of contractors underbidding for contracts and then folding
  • Interest costs hike up eventual overall bill
  • Council ends up after agreement period with relatively old asset
public works loan board
Public Works Loan Board

Executive arm of the Treasury

Independent, unpaid statutory body

Enables councils to borrow money more cheaply than if they went to the City or banking institutions

Board approves loans only if satisfied loans can be repaid

Collects the repayments, which include interest (usually lower than elsewhere)

Money drawn from National Loans Fund

Overseen by 12 commissioners appointed by the Crown

Each holds office for four years

capital receipts
Capital receipts

Sale of assets, eg land, buildings, housing

One-off money: once spent, it’s gone!

Some money from any sale must be “pooled” – given to the government, which redistributes it

How much is pooled varies according to how much is raised

capital receipts ii
Capital receipts ii

Since 2004, Govt has set limits on how much can be used for projects – “usable” sum

Some of the money from sale must be “pooled” – given to Government and then redistributed

Can prove controversial (eg playing fields, allotments to developers)

other capital sources
Other capital sources

Money from income raised by rents, fees and charges (eg leisure centres; library charges; fees for planning applications; parking; school meals)

Councils raised £10.8billion from charges in 2006-07 – equal to £210 per person

Income from fees/charges usually relatively small when compared with other sources

other capital grants
Other capital grants

Central govt - through national schemes, such as Single Regeneration Budget, Sure Start

European Union – via structural funds (usually to deprived/disadvantaged regions) –Objective One and Objective Two status

National Lottery