The Interim Head of Finance and S151 Officer submitted a report, the purpose of which, was  to present to Council alternative methods of calculating a prudent annual revenue charge to repay capital financing costs, which is known as the Minimum Revenue Provision, in accordance with the Local Authorities (Capital Finance and Accounting) (Wales) Regulations.

She advised that legislation does not define what constitutes as a ‘prudent provision’. Welsh Government Guidance outlines various acceptable methods with the aim being to ensure that debt is repaid over a period that is reasonably commensurate with that over which the capital expenditure provides benefit or the period which is implicit in the determination of the Revenue Support Grant.

Authorities are required to produce an Annual Statement on their Policy for charging the Minimum Revenue Provision, known as MRP, and this is approved by Full Council. Therefore any changes to the Policy also need Council approval. 

Appendix A to the report contained the Council approved Annual MRP Policy 2018-19. The current MRP charge 2018-19 for supported borrowing, based on a 4% reducing balance, is £4.884 million against a budget of £4.981 million. This is within Capital Financing in the Non-Directorate Revenue Budget.

The Reducing Balance approach allocates higher charges to earlier years and lower charges in later years. The 4% charge implies that the debt is paid off within 25 years. However, the reducing balance actual means that the debt is not fully extinguished until much later than this.

For example, in 45 years’ time which is akin to the average life of the Council’s assets, the current methodology would still leave £18.673 million of remaining debt with an annual charge of £778,000 to the revenue account. This does not seem to support the Well-being of Future Generations (Wales) Act 2015 and does not lend itself to be a prudent provision. Bridgend is one of a very small number of Authorities who still uses this method.

It was also worth noting that as well as the revenue provision for supported borrowing, the Council makes additional voluntary revenue provision. As at 31 March 2018, the cumulative figure of this is £14.743 million having been built up from 2004-05 and in 2018-19 the charge to revenue so far this year is £1.380 million which all goes towards reducing the outstanding capital financing requirement.

Appendix B of the report provided some options for changing MRP to a 3% Reducing Balance method and then on a straight line basis over 40 year, 45 years and 50 years. . It demonstrates that a more prudent methodology would be on a straight line basis which could be linked to asset lives as on a reducing balance methodology, the revenue charge still continues even at year 200. A straight line basis would result in:-

•           All users benefiting equally from the use of the assets over their lives;

•           Providing certainty of the annual revenue charge;

•           Ensuring that the debt is fully paid off over the life of the asset.

Therefore, changing the methodology is not an attempt to identify short-term savings but a way to protect the current and future users of the assets by making the revenue charge more prudent.

The asset lives within the Council’s asset register have been examined and an average asset life is 45 years. It would seem prudent to move to a straight line basis and charge the debt over 45 years. This would result in a new charge for the year of £2.713 million, £2.171 million less than the original charge of £4.884 million.

The report sought approval for the resultant under spend on the capital financing budget to be used to increase the Capital Programme Earmarked Reserve to support future capital schemes.

The Annual Minimum Revenue Provision Statement for 2018-19 was set out in Appendix C to the report.

The Interim Head of Finance and S151 Officer responded to a number of questions from Members, following which it was

RESOLVED:                   That Council approved

(1)       The revision of the MRP Policy 2018-19 for calculating MRP on capital expenditure funded from supported borrowing from a 4% reducing balance method to a straight-line over 45 years method, and a revised Minimum Revenue Provision Statement is approved (see Appendix C to the report)

(2)       That the resultant surplus on the capital financing budget for 2018-19 is used to increase the Capital Programme earmarked reserve, and

  Further consideration be given to the treatment of the base budget for MRP 2019-20 within the Term Financial Strategy.