As regular readers of our Insights will be aware, Minimum Revenue Provision (MRP) (or in Scotland Loans Fund Repayments) refers to the accounting practice employed by local authorities to set aside funds for the future replacement or renewal of certain assets, a sort of proxy for depreciation, but more commonly is the way in which unfinanced capital expenditure is financed. It's essentially a way for councils to ensure they have adequate financial resources when the time comes to replace or upgrade capital assets, such as infrastructure, buildings, or equipment.
The rationale behind MRP is to match the cost of these long-term assets with the periods they provide services or benefits to their local residents. By setting aside funds annually, local authorities aim to avoid sudden financial strain when major replacements or renewals are necessary. This helps ensure the long-term sustainability of public services and infrastructure and is a cornerstone of the Prudential regime.
Guidance on MRP is set by the Department of Levelling Up, Housing and Communities (DLUHC) in England and the devolved governments in other regions of the UK. The current guidance stresses the importance of responsible financial management, or prudence, and the need for local authorities to plan for the future. MRP can be calculated based on a number of assumptions including estimates of the useful economic life of assets, inflation, and the cost of borrowing. We are expecting changes to the MRP landscape in England over the coming weeks, but it is expected that the fundamental principles will remain in place with any changes resulting in the tightening of some 'loopholes'.
Adhering to the principles of MRP helps local authorities demonstrate transparency and accountability in their financial management. It also provides a systematic approach to financial planning, enabling them to make informed decisions about resource allocation and prioritise essential services. However, in these current times of increased borrowing costs, high inflation and reduced government grants the basis of calculating MRP is an area that can be revisited with a view to reducing financial pressures whilst remaining within the guidance.
Not all reductions in future MRP charges need to be the result of changing the method of calculation. It is also good practice to ensure that the records used for your MRP calculation are accurate and free from previous errors, also can your CFR (Capital Financing Requirement) be reconciled to the balance sheet and the assets that are unfinanced and the subject of future MRP charges? Our experience has shown that these are the kind of areas where errors have been identified resulting in reduced MRP charges.
Whilst MRP is one of the bedrocks of the local authority capital financing system, its calculation requires careful consideration and a periodic review should be carried out to ensure it aligns with changing economic conditions and the evolving needs of the organisation, if you need to reduce your annual expenditure a review of your MRP could be an easy win.
At Arlingclose we believe, as we get into 2024/25 budget setting, there has never been a better time to review your current and future MRP policy. We have a number of ideas that we feel will benefit our clients so if you would like us to undertake a review of your MRP policy please contact us at treasury@arlingclose.com or through your usual Arlingclose contact.
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