Archived decisions

Appendix 1

Policy on Minimum Revenue Provision to repay debt

1.1 New capital financing regulations - The Local Authorities ( Capital Finance and Accounting ) (England) (Amendment) Regulations 2008 - came into force on 31 March 2008 and affect 2007/08 retrospectively. Previous regulations required local authorities to make a statutory minimum revenue provision for the repayment of debt ( known as MRP), generally based on 4% of the Authority's outstanding capital financing requirement, but subject to some detailed rules. The new regulations repeal the detailed rules and replace them with statutory guidance, while requiring local authorities to make 'prudent' provision for the repayment of debt. The statutory guidance recommends that before the start of each financial year, a local authority prepares a statement of its policy on making MRP for the approval of the full Council or equivalent. In this transitional year, it has been recommended that a statement for 2007/08 and 2008/09 should be approved as soon as practicable in 2008/09.

1.2 The guidance identifies four options for calculating MRP, but two of them are technical variants on the main options, so there are two main approaches identified:

· to continue to calculate MRP as if the former regulations remained in place. The Government intends to continue allowing for the cost of financing supported borrowing through the relative needs block of the formula grant on this basis. For this reason, the guidance suggests that this continues to represent a prudent approach to calculating MRP in respect of all capital expenditure incurred before 1 April 2008 and all supported capital expenditure from that date onwards.

· to base MRP on the life of the asset created by the capital expenditure. Authorities may choose to adopt this approach in respect of all their borrowing for capital purposes, but are advised that they should adopt this approach in respect of any unsupported borrowing taking place after 1 April 2008. Applied to all borrowing this approach would have some significant administrative implications, as it has not been necessary since MRP was introduced in 1990 to attribute borrowing for capital purposes to specific assets. The guidance suggests that MRP should either be calculated on an equal instalment basis over the life of the asset or on an annuity basis based on equal overall payments of principal and interest over the life of the asset, with the latter put forward as an option that is particularly appropriate for projects where the benefits expressed on an annual basis are likely to build up over time and be greater in the later years of the project.

1.3 Based on this guidance, the County Council's proposed policy for 2007/08 and 2008/09 is as follows:

· 2007/08 - to calculate MRP in accordance with the previous regulations in respect of all capital expenditure incurred prior to 1 April 2008

· 2008/09 - to continue to calculate MRP in respect of supported capital expenditure, incurred both before and after 1 April 2008, in accordance with the previous regulations (though in respect of new capital expenditure the County Council currently derives no immediate benefit from the Government's support). In respect of unsupported borrowing whether relating to capital expenditure incurred before or after 1 April 2008, it is proposed to calculate MRP on the basis of asset life, using the equal instalment basis and adopting asset lives that are no greater than those used to calculate the depreciation provision for the relevant assets.

1.4 The 2008/09 policy in respect of unsupported borrowing does represent a change of policy which could have a budgetary impact in either direction but is not expected to have a material impact on the level of capital financing charges in the three year budget.