Report of the Deputy Chief Executive and City Treasurer.

This report provides an update on the impact of recent changes in financial and construction markets on the capital programme and provides an update on the proposed capital budget process for 2024/25. The report also highlights the increased Government and public scrutiny of council capital programmes and borrowing approaches, following the issuing of several Section 114 notices as a result of poor capital investment decisions.

The committee considered a report of the Deputy Chief Executive and City Treasurer which provided anupdate on the impact of recent changes in financial and construction markets on the capital programme and an update on the proposed capital budget process for 2024/25. It also highlighted the increased Government and public scrutiny of Council capital programmes and borrowing approaches, following the issuing of several Section 114 notices as a result of poor capital investment decisions.

Key points and themes within the report included:

• Providing an introduction and background to the capital budget update;
• The Council’s current balance sheet position, including external debt and capital financing requirement;
• A renewed focus across the local government sector on financial sustainability;
• The current approved Capital Programme and its capacity;
• How the Programme was being financed; and
• The proposed financing and budget approaches.

Some of the key points and queries that arose from the committee’s discussions included:

• If the increased scrutiny of local authorities was driven by the publication of Section 114 notices by some local councils;
• The support provided by the Office for Local Government (OFLOG);
• The probability of having to end capital programme projects and how this is monitored;
• How the drawdown of reserves and being cautious would impact the CRF and future capital investment;
• Whether the current forecast for the approved capital programme table would be updated to reflect budget increases for the Town Hall refurbishment and any other programme;and
• The approach to the Minimum Revenue Provision (MRP) and how this would sustain unforeseen increases in borrowing.

The Deputy Chief Executive and City Treasurer introduced the report and highlighted the increased scrutiny of local authorities’ borrowing activity and that this would be looked at in more detail following the establishment of OFLOG. She also assured the committee that work was underway on the shape of the capital programme for the next 5 years and how this would balance investment in infrastructure, external funding and the scope for new investment priorities.

In response to a query from the Chair, the Deputy Chief Executive and City Treasurer stated that the increased scrutiny of local government recognised concerns over the high levels of borrowing and Joint Ventures in some local authorities which did not necessarily have the resources or expertise to correctly manage risk.

The committee was advised that OFLOG was still developing their approach and capacity to provide support, but it would try to encourage a culture of early intervention to identify warning signs and signpost authorities to expertise and support. OFLOG would identify a suite of metrics, such as levels of borrowing, to highlight areas for further discussion.

The Deputy Chief Executive and City Treasurer stated that the Council would only take on new borrowing if it was clear and strategically aligned to a Council priority and an invest-to-save approach was currently being assessed. She provided assurances that none of the capital programme projects would be cancelled currently as all schemes were affordable and officers continued to review the capital programme.

It was stated that the relationship between reserves and borrowing was two-fold, and that the capital financing requirement remained the same irrespective of internal borrowing against reserves. It was recognised that significant additional borrowing was required for programmes such as the Town Hall refurbishment and provision within reserves to cover this had been ensured. The Deputy Chief Executive and City Treasurer acknowledged that additional borrowing would need to result in additional increases in the capital financing budget.

The Deputy Chief Executive and City Treasurer explained that the 2022/23 capital programme was continuously changing and updated on a quarterly basis when new schemes were added. She noted that projections also changed and that the most up-to-date forecast would include the latest approved funding increases.

Members were also informed that the MRP was in lieu of accounting for depreciation or repayment of principle in the same way as the private sector. The Commercial Finance Lead explained that, under the CIPFA Financial Management Code, the Council had to repay debt through revenue budget. He stated that the use of reserves did not impact the capital financing requirement but resulted in the Council incurring extra borrowing costs as this externalised debt which had been previously internalised through using reserves and not keeping these cash backed. He explained that quarterly reviews of the capital and revenue budgets modelled the use of reserves and what this meant for the Council’s balance sheet, levels of reserves and required borrowing to assess whether the capital financing budget was sufficient.

The Executive Member for Finance and Resources stated that Manchester was an aspirational and growing city with an important pipeline of schemes in the capital programme. He recognised that the construction market had experienced inflation at levels which had not been seen in decades and stated that the government under Liz Truss had caused a spike in interest rates, rising mortgage costs and impacted the council’s capacity for borrowing.

Decision:

That the report be noted.