Gloriana: MRP and the building blocks for housing development

At the recent Room151 FD Summit on housing finance, the minimum revenue provision (MRP) emerged for some as an obstacle to the financial viability of development projects. Sean Clark reveals the approach of Thurrock Council.

The MRP prescribes a minimum amount that had to be charged to revenue each year as a provision to meet the cost of repaying borrowing taken out to fund a council’s capital programme.

With the publication of regulations in 2003, the MRP system was revised under the Prudential Regime with detailed rules and formulae laid down for calculating MRP.

The main change was the move from using a credit ceiling to the capital financing requirement (CFR). The CFR is effectively the amount of the capital programme that remains to be funded in the future. The MRP charge was calculated at 4% of the CFR.

From 2007/08 the regulations were amended to offer more flexibility to local authorities but all were based on the overriding principle of a prudent approach.

At this time, Thurrock Council calculated the payment of MRP for new prudential borrowing using a straight line method over the life of the asset being funded. For existing and supported borrowing, the council calculated MRP using the “regulatory method” which continued to equate to 4% of the CFR.

Local authorities have faced a financially challenging time and so the council revisited the basis of the MRP calculations to understand if a prudent approach could be maintained while applying more relevant calculations for existing borrowing, new borrowing and one which reflected the nature of the capital projects undertaken.

Following a detailed review over the previous two financial years the council has changed the method of MRP calculation as follows:

• For existing and supported borrowing the council reprofiled the MRP charge over 50 years on a straight line basis. This ensured the full capital balance would be funded in a shorter timeframe overall but with a beneficial impact in the early years from the reprofiling of the MRP charge.
• For new prudential borrowing, the council changed from the calculation of the asset life method from a straight line basis to an annuity method, which also enabled some short-term MRP savings from the re-profiling of the charge.
• Strange but true – despite the word “revenue” in MRP it has become clearer in recent years that this provision can be met from capital receipts, and so the council has amended the policy to provide the flexibility to use capital receipts to fund the annual MRP charge. While this means the overall CFR will be higher over time, where new capital spend is not funded from capital receipts it provides the council with a further flexibility to deal with short-term revenue pressures.  We also consider this a short-term option as, certainly within Thurrock, capital receipts are not a sustainable approach over the medium to longer term.

This latter point leads us to a completely different approach when taking the need for prudence and the ability to use capital receipts together.

The model for Gloriana relies on the council advancing Gloriana project finance and this is split between both loan and equity. This counts as capital expenditure and, as such, needs to be financed.  Based on the need to set aside MRP we immediately faced an affordability issue.

It was actually early discussions with our external auditors that identified the solution.  As the financial model assumes that all properties would eventually be sold—up to twenty years in our programme—there would be no need to set aside any MRP until such time as the proceeds from those disposals started to come through. Those same receipts would be set aside for that purpose until such time as the “borrowing” has been cleared.

As the s151 officer, I just need to have the confidence that the required level of receipts would be realised— prudence—to instigate this approach. Thus the need for MRP in advance of the cash for repayment is removed and suddenly Gloriana became financially viable.

The future – there are many other examples where this approach is useful.  How many times have we heard that a regeneration project has stalled due to the carry cost of the upfront infrastructure – an opportunity for the local authority?  The next discussion for me is whether this approach of future receipts is limited, in the eyes of the auditors, to an individual scheme or whether a mix of schemes – capital generating, income generating and those schemes for the good of the community that make no financial return – can be used to cross subsidise each other.

If I’m prudent over the levels of return from the capital generators, I don’t see why not!

Sean Clark is s151 officer, director of finance and IT at Thurrock Council.