Report Number C/19/23 which goes before Folkestone & Hythe District Council Cabinet on the 20th Nov 2019, makes the case that cabinet should recommend to Council that additional capital funding of one hundred million pounds (£100M) be made available to enable the project, namely the development of Otterpool Park as a garden town to be delivered. It will then move onto full Council at 7pm to be voted on. However it should be appreciated that this money we will drawn down over a period of up to five years. A rough estimate is that a maximum of £40 million will be required in this or the next financial year, with the remainder over the next four or five years. The amount actually drawn down may change and be dependant, amongst other factors, on contributions from third parties.
Since December 2015 the Council has approved capital budgets of £19m for the acquisition of land and property for the Otterpool Park development, including the original purchase of the farm. The capital expenditure is being met fromprudential borrowing.
Following the introduction of the Prudential Code in 2003, prudential borrowing by English local authorities grew as a percentage of total borrowing, from some 13% of local government capital spending in 2005-6 to some 23% in 2009-10.6 In 2015-16 it was 21%, before rising sharply to 40% in 2017-18.7
Local authorities may borrow money from a number of different sources. These include borrowing on the markets; using the Public Works Loan Board; or municipal bonds. However, they cannot breach the overall limits on their borrowing set by the Prudential Code regime.
To date approximately £11.1m has been spent with further planned expenditure estimated to be about £4.2m due over the next year, leaving an uncommitted budget of £3.7m to support the project. The expenditure to date is analysed below:
The Council as joint promoter of the scheme with Cozumel Estates Ltd is forecast to incur total expenditure of almost £7m on the masterplanning phase of the development over a four year period to 31 March 2020. The cost is being met from the following sources:
The Otterpool Park development is a long – term project. Delivery of it will be complex and it is unlikely that it could be successfully delivered through the Council’s usual decision-making processes. It is probable therefore that delivery will be via an arm’s length body in which the council will have shares (East Kent Housing is an arm’s length body) . Accordingly it has been agreed in principle that the delivery vehicle will be through a corporate joint venture (Cabinet 31 January 2018, minute 80). Clearly Members will be advised as more detail is prepared and this will be subject to a separate decision.
WHY £100 MILLION?
The figure is an estimate to allow the project to progress over the medium term. The capital programme does not operate on an annual cycle as the revenue budget determination does. Instead the capital programme spans a rolling five year cycle as this decision will earmark funds available for draw-down over the term of the medium term capital programme. The decision taken through this paper will enable the project to progress to the next stage, but specific decisions will still be required to draw down the funds by Cabinet, or relevant decisionmaker, at appropriate milestones. Members will also want to receive updates as the project develops and regular reporting is anticipated.
FINANCING THE £100 MILLION
The financial analysis undertaken focuses on the project as a whole, with the Council acting as master developer. It assumes the Council would acquire the whole site and sell serviced plots to house builders. The scheme will be funded through prudential borrowing. The Council would not borrow in advance of need, and therefore it is not proposed that the council would borrow £100m immediately. The decision provides the ability to add the facility to the medium term capital programme and for decisions to be taken regarding its use at the appropriate time, and for the Council to plan and manage its funds proactively over the term of the programme. Taking the decision to add the facility to the programme also enable work to start on adjusting the authorised borrowing limits and prudential indicators set as well as developing a borrowing strategy in good time.
The Code of Practice on Local Authority Accounting permits the capitalisation of borrowing costs for qualifying assets during the acquisition and construction phase of a scheme to get them ready for their intended use. The Code recognises this may be a ‘substantial period’ of time. To do so the Council will need to adopt a capitalisation policy. If the decision is taken to proceed with the scheme further work will be undertaken on this. Local Authorities are also required to consider MRP (Minimum Revenue Provision). The financial modelling undertaken does not factor this, as the delivery model remains undetermined. However MRP is only applicable from the financial year after the asset met from borrowing becomes operational. The coming phase of Otterpool Park is anticipated to be classified as an Asset under Construction and therefore it is felt that until the infrastructure work of phase 1 is substantially completed no MRP provision is required to be made. Therefore it is anticipated that, there would not be at this stage for this initial phase of work a capital financing impact to the General Fund Revenue position. However in time as the project progresses financial benefits will need to be extracted from the scheme to pay down the cost of borrowing and contribute to the MRP provision. The Council will need to obtain specific advice when considering the delivery model in the future to ensure it meets the financial objectives of the project.
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