Agenda item

Treasury Strategy Statement & Capital Strategy 2019/20

Report of the Cabinet Member Finance.


The Cabinet Member Finance reported that the Treasury Strategy had been approved by full Council in March 2019. She emphasised that she was not revisiting the entire strategy, just requesting Members to approve small changes made since then. CBC had been focussing to a greater degree on investing in property within its boundary to generate a commercial yield in order to compensate for central government spending cuts.

She emphasised that Cabinet felt that the longer term approach to finding efficiencies to close the funding gap was fundamentally through economic growth and investment and the efficient utilisation of our assets; linking our Place and Commercial Strategies to ‘Invest in Cheltenham, for Cheltenham’. This has seen a place focused investment approach offering long term investment, income through rents as well as other social and financial benefits.

She welcomed the fact that this authority was proposing to become the first council to lend via the award winning local business to business lender FOLK2FOLK, to help local small to medium size enterprises with straightforward access to finance to support their business growth. FOLK2FOLK matches local businesses looking for finance to grow, with investors looking to receive a return on their investment. By becoming a FOLK2FOLK lender, the council would be able to invest money locally whilst also benefitting local businesses.

She explained that more than £300 million of investor funds have been injected, via the Folk2Folk platform, into local businesses across a variety of sectors. There was often a flow-on of benefits to the wider community resulting from local investment, for example in the form of job creation, retention of local talent and the shoring up of local supply chains, but it could also attract visitors to the area, and result in improvements to local facilities and services; all of which contribute to the sustainability of healthy local economies which are essential for Britain’s future success.

The Cabinet wished to provide investment of up to £75,000 with FOLK2FOLK Interest rate returns of between 4.5% and up to 9% per annum could be achieved, but the aim was to help the businesses to start, grow or diversify, buy an asset or boost working capital. In return for investment, security against the asset would be provided.

She explained that if proposed investments were to be made other than on market terms, there would be state aid considerations, about which advice would be sought from One Legal before making the investment.

In addition, Cheltenham Borough Homes were currently pursuing a wide range of opportunities to deliver additional affordable housing within the Housing Revenue Account, as agreed by Full Council in October last year, Cheltenham Borough Homes were seeking to borrow from the Council up to £100m drawn down over the next 10 years.

The Cabinet Member Finance explained that modelling of the Private Rented Sector Initiative was carried out using a range of assumptions and, following further legal advice on state aid issues, it became clear that loan support from the Council needed to be restricted to 90% of acquisition costs and 75% of development costs. Officers from both the Council and CBH, working with their legal advisors, have recommended an innovative solution whereby the balance of required funding is provided by the Council through equity investment in the form of an unsecured loan note. Specialist legal advice has been received that the proposed equity funding agreement constitutes "Financial Assistance". She outlined the proposed terms for the Equity Funding Agreement as follows:

·         Investment to be made in tranches accompanying loan advances as required.

·         Return on investment to be calculated as 5% of turnover (after voids), equivalent to initial 2.5% p.a. This would rise marginally each year in line with rent increases.

·         Repayment of investment triggered by disposal of property – CBC to receive premium on repayment, calculated as 25% of capital gain.

·         Option to refinance through loans in the future should the capital appreciation of the property be sufficient to keep total loan below 90% of value.

She explained that a new venture in a competitive market, and it was essential that early results were closely monitored to ensure that acquisitions are meeting targets set in the investment template. The cash flow position would determine the pace of investment and this would be reviewed regularly to inform annual investment plans

The Cabinet Member then went to explain that the current HRA capital programme for 2019/20 and projections for 2020-22 were approved by Council on 18th February this year. These included the budgets for new supply. She explained that estimates were only based on schemes that were currently in progress. The report also confirmed that additional schemes would be brought forward during the period as new sites were identified. Contingency sums for market acquisitions and the purchase of new affordable units provided through Section 106 planning agreements were included in the overall budgets.

She stated that following the removal of the HRA debt cap last year it was anticipated that the Council would be able to significantly increase the scale of new build subject to the identification of appropriate sites and financial viability.

She reported that CBH was currently pursuing a wide range of opportunities to deliver additional affordable housing within the HRA. These included :

·         Further development of Council owned sites, Acquisition of land for development,  Acquisition and refurbishment of market properties, Purchase of Section 106 units from developers & Regeneration of existing sites

As a result of progress to date it was now recommended that Council approve a significant increase in new supply budgets as follows: 

2019/20 £8,700,000

 2020/21 £20,000,000

2021/22 £30,000,000

2022/23 £25,000,000

It was anticipated that this investment could provide up to 500 new homes, but the timing of delivery would be dependent on issues such as the success of competitive bids, negotiating deals, obtaining planning approvals and the availability of Homes England grant.

This exciting programme would be complemented by the imminent start of the CBH private rented initiative which was being supported by Council finance.

The updated Treasury Management Strategy Statement and Capital Strategy have been recommended for approval by the Treasury Management Panel at its meeting on 23rd September 2019 to Council.

The Treasury Management Panel met regularly in order to monitor the performance of investments which need to be matched with performance against the corporate strategy action plan to ensure that resources are used to best effect and prioritised.

The Cabinet Member reported that in addition, treasury management activity and performance was reported quarterly to Cabinet as part of the budget monitoring report which was scrutinised by the Budget Scrutiny Working Group.


Members made the following comments:

·         The strategy was supported, suggesting that it offered both a return on investment and strong support for the local community. It was asked whether it might be wise to attach conditions for investment: for example, that possible partners are required to meet certain environmental goals in order to qualify. He praised the continually increasing amounts of money invested.

·         Reference was made to the trading losses suffered by Folk2Folk in the last few years and asked what would happen to the platform as a whole if the organisation were to continue to struggle. The Cabinet Member Finance responded that the partnership would be continually evaluated.

  • A question was raised as to whether there was a risk involved in getting around the 90% lending limit. The Executive Director Finance and Assets, responded that the Council had consulted its legal advisors, and assured Members that the solution did meet legal requirements. The council could not offer a 100% loan because it would be considered state aid. Therefore a 90% loan and 10% investment was considered instead, or alternatively a 75% loan and 25% investment. He added that housing was generally regarded as one of the most secure forms of investment.

·         A Member welcomed the investment in social housing. He suggested that the report should have had a greater focus on indirect environmental consequences of council policy, though he acknowledged its referral to direct consequences.

·         A Member queried the Folk2Folk connection, asking how the assets would be valued. He asked whether the 1% increase in the Public Works Loan would apply to the deal. The Cabinet Member Finance reported that it would, and that she had been surprised by news of the loan increase. She reported that CBH were looking at the figures and considering their position.

·         A Member asked whether the strategy of building more homes might be reconsidered, in light of the climate emergency. The Cabinet Member Housing stated that the wider benefits outweighed the costs.

  • It was asked whether the report was targeted as accurately as possible at the private rental sector. He asked whether there was any flexibility with regards to the 5 mile limit for FOLK2FOLK investment as detailed at paragraph 2.3 of the report and proposed an amendment to state that the limit would be within an approximately 5 mile radius. . The Head of Law advised that that a change could made. The alteration of the recommendation regarding the 5 mile radius was unanimously approved.

·         Clarification was sought as to how the increase in the interest rate on the Public Works Loan was made, making it more expensive to invest. The Cabinet Member Finance responded that this was the decision of the Treasury.

RESOLVED (unanimously) THAT

  1. The updated Treasury Management Strategy Statement 2019/20 as shown at Appendix 2 to include £10m equity funding to Cheltenham Borough Homes and £75k investment through Folk2Folk for a peer to peer lending scheme be approved.
  2. The Authority enter into an equity funding agreement with Cheltenham Borough Homes.
  3. The authorised borrowing limit and operational boundary limit be increased to the new levels as shown in Appendix 2 – table 7.
  4. the revised HRA capital programme for 2019/20 to 2021/22 as shown at Appendix 4 be approved.

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