Appendix 6

Prudential indicators

1 Introduction

1.1 At its meeting on 24 November 2003, the Cabinet noted that the new prudential system for capital finance was to take effect from 1 April 2004 and approved a policy framework for the County Council. The new system is underpinned by a Prudential Code published by the Chartered Institute of Public Finance and Accountancy (CIPFA).

1.2 The Code provides a framework for local authority capital finance designed to ensure that:

· Capital programmes are affordable

· External borrowing and other long-term liabilities are within prudent and sustainable levels

· Treasury management decisions are taken in line with professional good practice.

1.3 At its meeting on 12 February 2004, the Cabinet recommended to the County Council a schedule of the prudential indicators prescribed by the Code. These were based on the revised and forward revenue budgets and capital programme submitted to the Cabinet.

1.4 This report summarises any changes to the approved indicators. In particular, it updates those previously based on the estimated position as at 31 March 2004 where actuals are now available, as required by the Code.

2 Prudential indicators

Actual and estimated capital expenditure

2.1 Actual capital expenditure incurred in 2002/03 and 2003/04, and estimated capital expenditure in the current and future years to March 2007 are set out in the table below.

2.2 The actual capital expenditure in 2003/04 of £155.7m is £3.9m lower than the revised estimate reported in February of £159.6m, mainly as a result of slippage in the capital programme. This could have implications for estimated capital expenditure in this and subsequent years. It is suggested that it would be inappropriate to review these estimates now as the impact is not likely to be material and there are many other factors which could affect the position. These estimates will be the subject of close monitoring over the course of this year and will need to be reviewed following the mid-year review of the capital programme in July.

Capital financing requirement

2.3 The capital financing requirement represents capital expenditure other than that met directly from capital receipts, the revenue budget, capital grants or contributions. This can be financed from external borrowing or by borrowing from internal balances. The variation from year to year in the capital financing requirement represents the impact of new capital expenditure financed by borrowing offset by the provision made in the revenue budget and the use of capital receipts to repay debt. The actual capital financing requirements at 31 March 2003 and 2004 and adjusted estimates for 31 March 2005, 2006, and 2007 are set out in the table below.

2.4 The changes above are relatively small. The estimates for the current and following years have simply been adjusted to reflect the £5.6m increase in the actual requirement at 31 March 2004. The increase results from additional credit approvals received in 2003/04 and a higher level of capital creditors at the year end than assumed. No changes have been made to unsupported borrowing other than to reflect slippage in the use of £0.7m of local PSA unsupported borrowing from 2003/04 to 2004/05.

Ratio of capital financing costs to net revenue stream

2.5 The ratio of financing costs to the net revenue stream shows the estimated annual revenue costs of borrowing (interest payable on debt plus the minimum revenue provision for repaying the principal less interest on balances) as a percentage of the amount in the draft revenue budget to be met from central government grant and by local taxpayers. Actual figures for 2002/03 and 2003/04 are set out in the table below, along with adjusted estimates for 2004/05, 2005/06 and 2006/07.

2.6 The ratio in 2003/04 is marginally lower than the estimated 2.65% because of lower net financing costs due to higher interest on balances. The ratios in 2004/05 to 2006/07 are very marginally higher than originally forecast as a result of the financing costs arising from additional supported borrowing in 2003/04.

Actual external debt

2.7 Actual external debt at 31 March 2003 was £271.4m, higher than the figure of £265.1m reported in February. This is the result of a review of the classification of temporary loans and creditors in the balance sheet, with a compensating reduction in creditors. Actual external debt at 31 March 2004 was £317.2m. The reasons for the increase in external borrowing of £45.8m over the year are set out in paragraph 2 of Appendix 5 to this report.

Recommendation

1 That the Cabinet approve the updated prudential indicators set out in this report.