Stephen Sheen: MRP policy ripe for review

In the list of possible areas for revenue savings, an MRP (minimum revenue provision) review should be close to the top of the list, with its potential to make a substantial contribution to targets without any impact on services and staffing levels.

MRP is the amount set aside each year from revenue to finance historical capital expenditure that was not financed in the year it was incurred from grants, capital receipts or (more rarely these days) revenue contributions.  This outstanding unfinanced capital expenditure is measured by the capital financing requirement (CFR).  Things can get very complicated, but the base expectation has been that the General Fund will be charged with 4% of the CFR outstanding at the start of each year.

The statutory position for English authorities is straightforwardly that they are required to determine each year an amount of MRP which they consider to be prudent.  DCLG provides statutory guidance as to how it considers this duty should be met, but the guidance is not binding if alternative arrangements will result in a prudent outcome.

A review will focus on determining how robust an authority’s existing framework for calculating MRP is and what opportunities there are for improving it.

Review essentials

If you are going to have a review, the first question is whether to do it yourself or pay someone else to do it for you.  As the statutory duty rests with the authority to consider a charge prudent, there will be limits on the extent to which the work can be outsourced.  The subjectivity involved in assessing prudence also means that there are also few objective answers – your CFR is not simply awaiting the touch of the philosopher’s stone.  Furthermore, as judgements depend on the interpretation of legislation that has yet to be tested in the courts, there are actually no incontestable experts available for hire.

The statutory guidance provides a simple general challenge of spreading the cost of assets over the periods that they provide a service and lays out processes for you to consider and react against.   And as MRP strategies are in the public domain, it is relatively straightforward to find out what more progressive authorities are doing.

Whichever way you go, here are some issues to consider:

• Make sure that you have a clear basis for judging prudence (eg, the sustainability of the CFR outstanding after an MRP charge has been made for the year, or measures of the CFR divided by the weighted average useful life of the asset base).   Despite the impression that some may give, prudent in relation to MRP does not mean “as small as possible”.
• Be aware that a review could show that you are currently under-providing and should be charging more.  Is your CFR trending upwards for no obvious reason?
• Remember that reductions in MRP are not absolute savings but the pushing of financing into future years.  To what extent is it fair to do this and have the additional costs of maintaining a higher CFR been factored in (particularly the interest implications of a higher underlying need to borrow)?
• Beware anybody telling you that you can credit back to the General Fund MRP set aside in previous financial years without the support of a detailed legal analysis refuting the public law concept of the annual basis for local authority finance.
• … but do not be closed to the possibility that you might be able to reduce MRP in current and future years where it can be shown that the authority has over-provided in the past or has made sufficient provision in the year from other sources (particularly capital receipts).
• Make sure that your review is fully interdependent.  For instance, if you are taking longer life assets outside the scope of the 4% charge to spread MRP more equitably over their useful life, it will almost certainly be the case that a higher charge than 4% will be needed for the shorter life assets left within the scope.
• When making decisions about spreading costs, consideration of prudence also needs to take into account associations with grant funding.  For instance, the statutory guidance expects MRP to be charged for PFI schemes equal to the amount of the unitary payment that would not otherwise be charged to revenue, resulting in assets being fully financed over the contract term.  The potential therefore exists to spread MRP over the longer period of the assets’ useful lives.  But if the assets are effectively being financed by PFI credits over the contract term, telescoping the debits will send a shiver down prudence’s spine.
• Take care with the elements of the MRP arrangements that are included in the statutory guidance for policy reasons, particularly the acquisition of shares and the making of capital loans to other parties.  As these transactions do not involve expenditure in the accounting sense, a prudent case could be put that they do not justify MRP.  However, as they have the same impact on an authority’s need to borrow this case is overruled by the Government policy that they should be financed in the same way as regular capital expenditure.

Stephen Sheen is the managing director of Ichabod’s Industries, a consultancy providing technical accounting support to local government.

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