REVISED PRUDENTIAL INDICATORS 2006/2007 TO 2008/2009
WDA/32/06 

Recommendation

The Authority is requested to:-

(i)	approve the Revised Prudential Indicators for 2006/2007 to 2008/2009 as set out in the report and detailed in Appendix 2;

.

REVISED PRUDENTIAL INDICATORS 2006/2007 TO 2008/2009
WDA/32/06

1.	Background

1.1	The Prudential Code for Capital Finance in Local Authorities came into effect on 1 April 2004 and is intended to play a key role by which the Authority determines its own programme of capital investment in fixed assets which are central to the service delivery of waste management.

1.2	It sets out a clear framework which demonstrates that the Authority's capital investment plans are affordable, prudent and sustainable.  If it does not the Authority needs to consider remedial action.

1.3	A further key objective is to ensure that Treasury Management decisions are taken in accordance with good professional practice and in a manner which supports prudence, affordability and sustainability.  The Authority's Treasury Management and Strategy function is carried out by St. Helens Council who have developed the requisite Prudential Indicators for this purpose and have clear governance procedures for monitoring and revision.

1.4	The Authority's own Indicators need to be set and revised by the body which takes decisions for the Budget (the Authority) and there is a  need for the establishment of procedures to monitor performance by which deviations from plan are identified.  

2.	The Need for a Review of the Authority's Prudential Indicators

2.1	The Authority was in the process of working with DEFRA on the development of its New Technology Demonstrator project with Fairport Engineering Limited but the timing, selection of site and its cost were unknown.  No provision was made in the Draft Capital Programme at that time and therefore no provision of borrowing capability through the Authority's Prudential Indicators was made.

2.2	First recognition of the Demonstrator project in the Authority's Capital Programme was reported at the meeting of 28 June 2006 (WDA/23/06) but was based on the project being sited at Gillmoss at a cost of £4.6M.

2.3	The Authority has now reached a clear indication of where the Demonstrator project is to be sited, at Huyton, with a new indication of what the acquisition cost will be and what expenditure is required in terms of modifications to the site.  As a result of this development, a revised Capital Programme has been drawn up and is included at Appendix 1 and revised Prudential Indicators are included at Appendix 2.  Detailed explanations of the Indicators are shown at Appendix 3.

CARL BEER					IAN ROBERTS
Director of Waste Disposal			Treasurer to the Authority

The Contact Officers for this report are Carl Beer, Director of Waste Disposal, North House, 17 North John Street, Liverpool, L2 5QY and John Webster, Business Support Manager, Town Hall, St. Helens, WA10 1HP 
Telephone 0151-224-1444 and 01744 456096 respectively

Merseyside Waste Disposal Authority 
17th November 2006

Background Papers

The following list of documents were used to complete this report and are available for public inspection for four years from the date of the meeting from the Contact Officer named above:

Budget Working Papers 2005/2006

                                                                                                                                                                                                 Appendix 1

			Revised Capital Programme 2006/2007
£000's		
			Approved Programme	Revised Programme		
Item No.	Location	Scheme	Works	Fees	Total	Land	Works	Fees	Total	Comments	
	New or Existing Waste Management Facilities									
1	Bidston Moss/ Gillmoss	Waste Management Facilities	4,742	50	4,792	0	4,742	50	4,792	Assumed as Approved Programme	
2	Development of New HWRCs	Renewal and refurbishment programme	800	0	800	0	500	0	500	Implementation conditional on planning approval which is now unlikely to be obtained until mid Jan 07.  Therefore, commencement of 20 week contract delayed.  Assume 60% completion	
3	Improvements to Existing HWRCs 	Renewal and refurbishment programme	700	50	750	0	700	50	750	Assumed as Approved Programme	
4	Huyton	New Technologies Demonstrator Project	4,500	100	4,600	6,000	2,900	100	9,000	Revised cost based on development at Huyton.  Approved Programme was based on Gillmoss	
	Closed Landfill Sites									
5	Billinge LFS	Site Works	430	10	440	0	430	10	440	Assumed as Approved Programme	
6	Various sites	Minor scheme improvements	140	10	150	0	140	10	150	Assumed as Approved Progrmame	
	TOTAL	11,312	220	11,532	6,000	9,412	220	15,632		

															
																		Appendix 2

MWDA PRUDENTIAL INDICATORS - REVISED

	Prudential Code Para.
Reference	Summary of Indicator/Limit Rationale		2006/2007
£M (unless
stated otherwise)

	2007/2008
£M (unless
 stated otherwise)
	2008/2009
£M (unless 
stated otherwise)

	

Comment	
Indicator 1	3.1	Estimated capital expenditure for the forthcoming year	Capital Expenditure		15.64		1.72		1.72		
			Financing of Capital Expenditure
- Grants
- Capital Receipts
- Earmarked Reserves
- Borrowing

0.00
0.00
0.00
15.64

15.64	

0.00
0.00
0.00
1.72	

1.72	

0.00
0.00
0.00
1.72

1.72		
			Additional In-year Capital Financing (Borrowing) requirement
- Borrowing  (as above)
- Less MRP/Set aside	

15.64
-0.56	

15.08	

1.72
-0.81	

0.91	

1.72
-0.85	

0.87		
Indicator 2	3.2	Intended to measure an Authority's underlying need to borrow to fund capital expenditure.  There should be a clear linkage between this and the Authority's actual levels of external borrowing.  The Code aims to ensure that over the medium term an Authority's net borrowing is only for a capital purpose and this Indicator (alongside Indicator 3) serves to ensure that this is demonstrable	End of Year Capital Financing (Borrowing) requirement
- Requirement b/f
- In-year requirement (from
  above)	

15.84
15.08	

30.92	

30.92
  0.91	

31.83	

31.83
  0.87	

32.70		
			Estimated/actual external borrowing
- Estimated/actual b/f
- In-year requirement (from
  above	

13.34
15.08	

28.42	

28.42
  0.91	

29.33

29.33
  0.87	

30.20		
Indicator 3	3.3	See Indicator 2 above	Estimated/actual net borrowing
- External borrowing (from
  above)
- Less investments held	

28.42
  0.00	

28.42	

29.33
  0.00	

29.33	

30.20
  0.00

30.20		
Indicator 4	3.4	This Indicator shows the impact that the revenue costs of capital financing decisions will have on the Authority's General Fund budget over time.  If the ratio of these costs is increasing over time this highlights that a larger part of revenue resource is being taken by capital financing costs.  These sums could be used for other elements of a Local Authority budget	Estimate of Financing Costs to Net Revenue Stream
- Debt Management Costs
- Investment Interest (net
  of costs)
- Minimum Revenue
  Provision (MRP)
- Estimated Financing Costs   as a proportion of
- Net Revenue Stream 
  
  Ratio 	

2.56
0.00

0.56	

3.12
divided by
47.52

6.57%	

2.64
0.00

0.81	

3.45
divided by
51.50

6.70%	

2.72
0.00

0.85	

3.57
divided by
55.85

6.39%		
Indicator 5	3.5	Arguably the ultimate consideration of the affordability of the Authority's capital investment plans is the impact of those plans on Council Tax levels.  The Council's strategy with regards to unsupported borrowing is such that there is no incremental impact	Estimate of Impact of Capital Investment Decisions on Council Tax		NIL		NIL		NIL		
Indicator 6	3.6	This represents an absolute limit of borrowing at any one point in time.  It is not, nor is intended to be a sustainable level of borrowing, but more so an approved level of maximum debt that may arise due to timing issues around new borrowings, maturities, significant cashflow transactions and rescheduling activity	Authorised Limit for External Debt
- Estimated external                borrowing (from above)
- Allowance for 
  unanticipated cashflow          items calculated as 5% of
  Net Revenue Stream
- Maturing borrowing 
  refinanced prior to                 maturity of existing loans
- Allowance for                        restructuring of loan debt 
  where new borrowing
  taken in advance of
  associated repayment
- Allowance for borrowing
  in respect of subsequent
  2 years requirements,
  where rates are rising 	

28.42

2.38

0.30

1.00

  1.00

33.10	

29.33

2.58

0.30

1.00

  1.00	

34.21

	

30.20

2.79

0.30

1.00

  1.00	

35.29		
Indicator 7	3.7	This represents a lower level boundary of debt levels that should trigger investigation or review once it is exceeded	Operational Boundary for External Debt
- Estimated external
  borrowing (from above)
- Allowance for 
  unanticipated cashflow
  items calculated as 2.5%
  of Net Revenue Stream
- Maturing borrowing 
  refinanced prior to 
  maturity of existing loans	

28.42

1.19

  0.30	

29.91	

29.33

1.29

  0.30	

30.92	

30.20

1.40

  0.30	

31.90		
Indicator 8	3.8	These limits seek to ensure that the Authority does not expose itself to an inappropriate level of interest rate risk, and has a suitable proportion of its debt secured at certain, fixed rates	Interest Rate Exposures
- Upper limit for fixed rate
  exposure on net principal
  outstanding sums
- Lower limit  for fixed rate
  exposure on net principal
  outstanding sums		
100%

60%		
100%

60%		
100%

60%		
Indicator 9	3.9	These limits also seek to ensure that the Authority does not expose itself to an inappropriate level of interest rate and refinancing risk by ensuring that significant proportions of its debt are not scheduled to mature at similar times	Maturing Structure  of Borrowing
- Upper limit on amount of
  projected borrowing that
  is fixed rate maturing in
  each period
  Under 12 months
  12 months - 24 months
  24 months - 5 years
  5 years - 10 years
  10 years and above

- Lower limit on amount of
  projected borrowing that
  is fixed rate maturing in
  each period
  Under 12 months
  12 months - 24 months
  24 months - 5 years
  5 years - 10 years
  10 years and above

20%
20%
40%
60%
100%

0%
0%
0%
0%
0%

	

20%
20%
40%
60%
100%

0%
0%
0%
0%
0%		

20%
20%
40%
60%
100%

0%
0%
0%
0%
0%		
Indicator 10	3.1	These limits seek to ensure liquidity and reduce the likelihood of any inherent or associated risk	Total principal sums invested for periods longer than 364 days		25%		25%		25%		

										Appendix 3

EXPLANATION OF PRUDENTIAL INDICATORS

1.	Matters to be taken intoo Account in Setting the Prudential Indicators

1.1	

	In setting the Prudential Indicators the Authority is required to have regard to the following matters:-

•		affordability, the impact on the Levy for each of the District Councils in order that they can assess the implications for Council Tax and Council housing rents;

•	prudence and sustainability e.g. implications for external borrowing;

•	value for money e.g. option appraisal;

•	stewardship of assets e.g. asset management planning;

•	service objectives e.g. strategic planning for the Authority;

•	practicality e.g. achievability of the Forward Plan.

2.	The Prudential Indicators for Capital Investment

2.1	The main objective in considering the affordability of the Authority's capital investment plans is to ensure that the level of investment is within sustainable limits by considering the impact on budgetary requirements.

2.2	The Authority needs to assess all resources available to it and estimated for the future against the totality of capital investment plans and net revenue forecasts.

2.3	The Prudential Indicators are:-

•		estimates of capital expenditure;

•	estimates of capital financing requirement;

•	net borrowing and capital financing requirements;

•	ratio of financing costs to net revenue stream;

•	impact of capital investment on the Levy;

•	authorised limit for external debt;

•	      operational boundary for external debt.

3.	The Specific Indicators

3.1	The Revised Prudential Indicators for 2006/2007 to 2008/2009 are shown at Appendix 2 but are summarised as follows.

3.2	Estimates of Capital Expenditure

	The Authority is preparing itself for the provision of a long term solution to waste management and under that process is not yet decided on the type of assets it may require in the longer term.  In the meantime, it is working on an evolving shorter term capital investment programme which needs to consider the organisation of the supply of waste, equality of asset provision across Districts, external funding and operational changes in waste disposal.  In the short term, therefore, the identification of the programme continues to be carried out on an annual basis and will be deemed affordable after considering the effect on the Levy.  

				  £M
		2006/2007	15.64
		2007/2008	  1.72
		2008/2009	  1.72

3.3	Estimates of Capital Financing Requirements

	The Capital Financing Requirement is an Indicator which seeks to measure the underlying need of the Authority to borrow for a capital purpose i.e. it is an aggregation of historic and cumulative capital expenditure not financed by other means  (capital receipts, grants, revenue contribution, other earmarked reserves, etc.) less the sums statutorily having to be set aside to repay debt (Minimum Revenue Provision and reserved receipts).

	The Capital Financing Requirement is as follows:-

						  £M
		31 March 2006		15.84
		31 March 2007		30.92
		31 March 2008		31.83
		31 March 2009		32.70	

3.4	Estimates of Net Borrowing

	The Capital Financing Requirement needs to be considered alongside the actual levels of external borrowing.  This will show the relationship between the underlying need to borrow and actual borrowings which are made, demonstrating that long term borrowing is only undertaken for capital purposes and is in accordance with the approved Capital Programme financing requirements:-
	
	Capital Financing
Requirement
£M	External Gross
Borrowing
£M	
+/-
£M	
31 March 2007
31 March 2008
31 March 2009	30.92
31.83
32.70	28.42
29.33
30.20	-2.50
-2.50
-2.50	

	The fact that the difference is planned to remain static shows that additional in year borrowing will be in respect of the Capital Financing Requirement only.

	The 'net borrowing' position represents the net of the Authority's gross external borrowing, shown above, and the sum of investments held.  Investments for the Authority represent cash balances held in the joint bank account with St. Helens and not is shareholding in Mersey Waste Holdings Limited or Bidston Methane Limited.  The Authority is not expected to have any cash balances for the period covered by this report.

	The estimated net borrowing for the respective financial years are:-

					  £M
		2006/2007		28.42
		2007/2008		29.33	  	
		2008/2009		30.20

3.5	Estimates of the Ratio of Financing Costs to Net Revenue Stream

	The Estimate of the Ratio of Financing Costs to the Net Revenue Stream is a measure which indicates the relative effect of capital financing costs, arising from capital plans and Treasury Management decisions, as a proportion of the Authority's overall projected budget requirement.

	Based on estimates of net borrowing, the likely prevailing interest rates and future budget projections, the Ratio of Financing Costs to Net Revenue Stream are as follows:-
					  %
		2006/2007		 6.57		
		2007/2008	  	 6.70
		2008/2009	  	 6.39

3.6	Estimate of Impact on Capital Decisions on the Levy

	The effects of Capital Decisions on Council Tax will differ on a District by District basis, the main impact is felt by the effect on the Levy payable.  As the Levy is equivalent to Net Revenue Stream, the effect on the Levy is the same as shown in 3.5 above.  The distribution amongst Districts will depend on the methodology to be used.

3.7	Authorised Limit for External Debt

	The Authorised Limit is a Prudential Code requirement which reflects an estimate of the most likely, prudent but not worst case scenario level of external debt, with additional and sufficient headroom over and above this to allow for operational management issues.

	That is to say that it is an absolute limit for potential borrowing on any one particular day.  The reasons for this limit being significantly in excess of any projected year end borrowing requirement is due to the potential profile of new borrowings, maturities and rescheduling activity during the year.  It is not, nor is it intended to be, a sustainable level of borrowing but represents a maxima snapshot position due to these possible timing issues.

	The level needs to be consistent with the Authority's current commitments, existing plans and the proposals in the Budget report and with the proposed Treasury Management practices.
	Based on an assessment of such factors the limits recommended for Authority approval are as follows:-
	
	Borrowing

£M	Other Long Term
Liabilities
£M	
2006/2007
2007/2008
2008/2009	33.10
34.21
35.29	0.0
0.0
0.0	

	These limits separately identify borrowing from other long term liabilities such as finance leases.  Delegation is sought to the Treasurer to the Authority, within the total limit for each individual year, to effect movements between the separately agreed limits in accordance with option appraisal and best value for money for the Authority.

3.8	Operational Boundary for External Debt

	The Operational Boundary is similar in principle to the Authorised Limit, differing only to the extent of the fact that it excludes the additional headroom included within the Authorised Limit to allow for example, for unusual cash movements and borrowing in advance of related repayments when refinancing or restructuring loan debt.

	The Prudential Code states that "it will probably not be significant if the operational boundary is breached temporarily on occasions due to variations in cashflow.  However, a sustained or regular trend above it would be significant and should lead to further investigation and action as appropriate".

	The boundary figures proposed for approval are:-
	
	Borrowing

£M	Other Long Term
Liabilities
£M	
2006/2007
2007/2008
2008/2009	29.91
30.92
31.90	0.0
0.0
0.0	

	As with the Authorised Limits, delegation is sought in relation to the authority to effect movements between the Borrowing and Other Long Term Liabilities sums.