Borrowing FAQ

Frequently Asked Questions

Borrowing

Introduction

This document has been prepared to help the public understand the reasons why the Council borrows money and the arrangements for that borrowing. The first section focuses on frequently asked questions.

In providing answers to questions relating to the Council's borrowing it is important that further background information is provided to explain what the Council is seeking to achieve in the context of its statutory duties and powers.

The later sections explain in more detail the background to the Council's financial arrangements.

Council borrowing - questions answered

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Why does the Council need to borrow money?

Projects such as housing schemes or the acquisition of Wolsey Place are long-term investments requiring large amounts of money and, just like when most individuals buy a house or a business, the Council needs to borrow money and pay it back over the life of the asset concerned.

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What does the Council borrow money for?

As indicated above the Council borrows money to meet the cost of long term investments not to finance day to day expenditure. A good illustration of this is shown by the actions taken last year to curb day to day expenditure as a result of projected shortfalls in income generation. The Council was not able to borrow to fund this shortfall instead we had to reduce costs and identify other sources of income. A small element of borrowing relates to managing cash flow.

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How can the Council afford to borrow large sums of money?

The Council is in a position to be able to borrow large sums of money at very competitive interest rates fixed for up to 50 years. Indeed, long-term borrowing costs the Council less than 5% per annum in interest costs.

The important question for the Council to consider when borrowing money is the same as for any individual seeking a mortgage: `Do I have enough income to pay back the amount that I am borrowing?' The majority of projects that the Council invests in generate additional income which exceeds the amount it has to pay in interest and in repaying the loan, so effectively, for such investments, the Council makes a profit.

Some investments are needed to ensure vital services for the community can be maintained. An example is the refurbishment and re-launch of Parkview, a centre for the community in Sheerwater. In making such investments, the Council considers carefully how much income it has available from its trading activities and how much it can reasonably expect Council Tax payers to contribute. This means, that for such investments, the Council never has enough money to do all the things the community would like because they have a net cost to finance and operate. However it can still do the major income generating projects because they make a profit.

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Is the Council saddling future generations with debt?

The short answer is, no. The Council ensures that the smooth running of services is paid for in each year and no borrowing is undertaken to cover day-to-day operations or consumption - its all `pay as you go'. For long-term projects, it is future generations that will benefit the most from these investments and it is right that they should pay for the service benefits they will get. This is not saddling them with debt, but is an approach that ensures everyone pays their fair share of the wider community benefit.

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Who regulates the Council's borrowing?

The Government has set out a framework within which all councils must operate. This framework limits the Council to only borrow the amount which it can afford to repay. Each year, when setting its budget, the Council has to consider what projects it proposes to invest in and how it expects to pay for them. Its decisions are reviewed by external auditors who have been appointed by the Audit Commission, the public sector watchdog.

A recent objective assessment of the Council's financial management and performance arrangements by the Audit Commission concluded that Woking Borough Council scored 3 out of a maximum of 4 and is "an organisation that exceeds minimum requirements" and "performs well".

In addition, the Council uses Standard and Poor's, the credit rating agency, to review its credit worthiness and the Council achieves an AA standard (with AAA being the best rating possible).

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Why does the Council borrow more than other similar local authorities?

The Council has ambitious plans for the community of Woking. In order to fund these long term projects the Council needs to borrow money because it does not have sufficient resources to meet the capital cost. Other local authorities of a similar nature have not utilised prudential borrowing to the same extent as Woking because their planned spend is lower and/or they have other resources from which to meet those planned costs.

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Why does the Council spend money providing energy in Milton Keynes?

The Council established Thameswey Limited in 1998/99 to make long term energy and environmental investments in support of the Council's Climate Change Strategy.

Subsidiary companies have been formed including Thameswey Central Milton Keynes (TCMK) to provided embedded energy generation both within and outside of the Borough. The Council's investment in TCMK has enabled the generating capacity to be built. In the short to medium term the return for the Council is provided by the repayments made to the Council by TCMK. In the longer term as the company builds its customer base, profits will be generated which can be reinvested.