Jonathan Bunt: Project finance skills are the foundation of running development schemes

Those who know me will be aware that one of my longest held beliefs is that the largest constraint on the delivery of major programmes is never money:  it is, in fact, the staffing capacity and skills to make the schemes actually happen. Good finance professionals are always able to find the money, but there are skill sets and, more importantly, a certain view of the world that they also need to have.

On development programmes, to get the money in place, we need to get slightly outside our years of professional training when conceiving and appraising opportunities.

I alluded to the challenge of staffing and resourcing and the potential scope that housing companies can have in addressing them in my last article for Room 151.  So, what are the resourcing challenges for finance departments?

Conditioning

As accountants and treasury managers, we have been conditioned, over a long period, to see through the prism of the code of practice, financial standards and the prudential code.

That is not to dismiss them in their entirety,  they remain the rules by which local authorities have to ultimately report. Nor is it intended to imply criticism of able teams, but it does suggest that a wider horizon is needed otherwise only a limited number of projects will get the green light from finance.

As an alternative, we need to think in terms of project finance and a focus on the importance of cash.  Seeing programmes as ring fenced cash flows and working the finances from within the confines of that ring fence enables a different perspective on the viability of, and returns from, developments.

It is here that we have to challenge our views of how interest is applied, amortisation occurs, sinking funds are created and so on.  Rather than entrench on traditional and prudent local authority accounting treatments, the need is to ensure that the developments spin-off positive cash flows.  This may mean flexing treatment and sacrificing a small amount of potential future return to get schemes over the starting line.

Part of the solution to the financial viability of schemes is how they are legally structured and how taxes, particularly stamp duty land tax (SDLT) and corporation tax, apply.  Whilst it would be helpful to know the key points of these issues, this requires, in my view, a level of knowledge that it is simply not economic to develop and retain at an individual council level.  The real task is knowing when to ask the question of how they impact and what can be done to mitigate the impact of tax.

Similarly, there is a mixed economy solution to the financial modelling of large programmes.  At the point of conception, a simple financial model should be able to be developed and applied in-house.  There will come a point when you want to model all the variables over the life of the scheme — typically thirty years as a starting point and probably significantly up — and bringing in specialist modelling expertise can help to identify the real risks to the programme. Contrary to popular belief, robust and detailed financial modelling does not have to cost vast sums.

Capabilities

So, do local authority finance teams have the potential capability to do all of this? Almost certainly as the issue is not one of technical skill.  The hurdle is about an ability or, perhaps more simply, a willingness to look through a different prism.

By focusing on cash and cash flows, whilst still accounting for everything over the life of the project, you are able to challenge more elements of the financial appraisal to find a viable solution.  The question is not, “how do I account for this?” But, rather: “How can I generate cash from this scheme?”.  That said, no matter how liberated you are from the prudential code, bad, unviable schemes are still bad, unviable schemes.

Finally, and of course I would say this, there is a role for specialist professionals and advisers to provide momentum to programmes in their infancy.

Through their knowledge and experience, they provide capacity in otherwise over stretched finance teams and significantly de-risk for organisations, particularly when exploring options for the first time.  This can be really important for that intangible part of these decisions — risk appetite and bravery.  This can not be easily developed but that additional expertise from someone who has been there before can provide that extra piece of assurance to move a finance director from “maybe” to “yes”.  One of the expectations, however, should be that they impart their knowledge and methodology/philosophy to the in-house teams as part of plans for building future capacity.

Jonathan Bunt advises local authorities on investment, development and funding opportunities, particularly in relation to housing and regeneration. He is a former strategic director at London Borough of Barking and Dagenham.