Q&A with Milton Keynes’ Tim Hannam

Corporate director of resources at Milton Keynes Council Tim Hannam talks to Room151 about the city’s growing pains and why he needs more convincing over a collective bonds agency.

Room151: What are the main treasury issues you are facing at the moment?

Tim Hannam: The the biggest issue in our mind at the moment is we have a need to borrow £130m for a residual waste treatment facility in mid-2016. This poses a not inconsiderable risk on future rate movements. We have signed a financial agreement with Amey Cespa. It is building the plant at the moment using corporate finance. At the point it becomes operational and is signed off as working then we go out and borrow £130m to take out the corporate finance funding. The risk is what will the cost of borrowing be in just over two years? We are making a decision about whether it is better to take some of the borrowing now, with a cost of carry, as this might save us money over borrowing later at a higher rate.

The second major issue is that we have a large housing regeneration programme. We are just going to the market for partners or a partner to regenerate some of the council’s older housing estates. We are talking about several hundred million of development costs – refurbishment and remodelling, possibly including some private build and some build to rent. In treasury management terms we can fund within our existing HRA resources the basic refurbishment of the stock but this doesn’t give you the full benefits of regeneration. Whether we finance that directly, or whether it is a mix of funding through a joint venture is something we are examining. We should know by January the successful partner bidder. They will then start coming up with models for estates.

R151: Milton Keynes strikes us as a council unlikely to face being unable to provide services in the next couple of years. Is that a mistake?

TH: I see the most difficult years as being from 2016-17 onwards. The last three years of planned austerity will be extremely challenging. If the chancellor had stuck to his initial announcements of running it to 2015/16 it would have been tough but potentially doable.  Looking further ahead we have the twin evils of further reductions in government funding beyond 2015/16 but also increasing inflation. Council tax value is diminishing – it is frozen or increasing by a maximum of 1.95% each year, to keep it under the level where a referendum would be triggered. Up until now we have not faced major inflation but are now seeing increases in salaries for specialist roles, provider inflation for social care services, and capital build cost inflation.

We also face underlying demand problems. Not only has the government cut our grants but they have not taken account of the rise in numbers coming through social care (both children and adult social care) or population increases. We are facing all these things. It is a perfect storm.

R151: Is your planned growth a boon or a burden?

TH: We are one of the fastest growing areas in the UK, with 25,000 houses with planning permission unbuilt. Last year, our rate of completion was just over 1,000 homes. Next year completions could be as high as 2,500. We are supporting growth, but this is causing additional demand for services and infrastructure costs. Development is largely on greenfield sites – which means you need to make additional investment in infrastructure – roads, leisure facilities and schools. This type of growth is not fully funded from government grants or developer contributions.
We have calculated that this additional growth also causes a financial pressure for the council in terms of demand for services, even after you factor in the additional council tax we receive for each new house, there is still a shortfall of around £1,300 per home.
While the New Homes Bonus is helpful, we can only use it to meet the revenue consequences or to deliver the infrastructure. We keep going back to the government to explain this issue. If the government is committed to growth, new funding arrangements are required.

R151: How is the council coping with having to raise more money locally rather than from grants from central government?

TH: More generally, our investment rates of return are pretty poor – we are getting around half a per cent for our money. There has been a change to the business rates retention scheme, and the council will get to retain around 30p in every £1 of business rate growth. However, we have quite a volatile business rate yield. We have some large properties so large values going in and out. As part of the changes to legislation, we had to take on historic appeals – looking at around £20 million of historic appeals, and around £5 million of annual appeals.  This adds a further degree of complexity and risk around the council’s funding arrangements.

R151: What are the investment trends you are identifying and is your treasury management strategy this year different from last year.

TH: The only real change we have made is to enable us to use money market funds, which we haven’t done in the past. We are looking to find different routes for investment rather than our current list of bank counterparties. We are looking to diversify a bit. We have also given ourselves the scope to borrow from and lend to other councils. We’re also looking at options to fund things in advance. For example we are looking at anything we can do on our pension fund payments. We might get a better return by paying off some of our backdated liabilities.

Room151: What’s your take on the LGA’s proposed bond agency?

TH: I have had a look at it. My nervousness is that the council will be jointly and severally liable for the debts of others. I know it is a low risk but if you are taking on any risk then it has to be proportionate to the rate of return. Because it is difficult to quantify the risk in cash terms I feel a bit restricted in going to members and saying we would like to do this. If the liability could be limited it would enable you to work out the benefit. Essentially the LGA is saying it is low risk. But if it is low risk then why can’t they take out an insurance policy to cap councils’ exposure?

Room151: What is your view on outsourcing?

TH: We had one of the biggest outsourcing contracts for back office services with an external provider  – we spent the latter half of 2012 negotiating the buyout of that contract and bringing the services back in house. The days of the big outsourcing contract have probably gone. However, we have outsourced highways and transport and landscaping services. We are now picking and choosing things to outsource on an individual basis. There is a range of options from fully commercial services sold to other authorities to shared services that we would consider.