HEFCE Circular 6/96
Financial Memorandum between the HEFCE and Institutions: Requests for Consent and the Use of Delegated Decision-making Powers
To Heads of HEFCE-funded Institutions
Heads of DENI-funded Universities
Summary This Circular deals with the application of the sections of the model Financial Memorandum between the HEFCE and institutions which deal with estate management, disposals of Exchequer-funded assets and borrowing.
Reference 6/96
Response No formal responses to this Circular are required; however institutions will need to act within its terms
Publication Date March 1996
Enquiries to Regional Financial Advisers or Regional Financial Officers
1. The revised model Financial Memorandum (5/96) gives institutions increased responsibility for decision-making in several areas where Council approval was previously required. However, institutions are required to provide information about these decisions to enable the Council to monitor the operation of the decision-making powers delegated to institutions and to satisfy the accountability requirements placed on it.
2. This Circular sets out:
- The information to be submitted to the Council when consent is required.
- The information to be submitted to the Council when reporting the use of a delegated decision-making power, as required by the Financial Memorandum.
- The information which the Council requires institutions to have available to demonstrate that they have exercised their delegated responsibility in line with the Financial Memorandum.
- The information which the Council expects institutions to have available to demonstrate that they have exercised their delegated responsibility in line with the Council's guidance.
3. The accompanying flow charts show when Council consent is required and when responsibility for decision-making is delegated to institutions, and indicate which paragraphs of the Financial Memorandum and the circular apply in each case.
4. The Council will monitor compliance with the Financial Memorandum and this Circular across the sector, and reserves the right to revisit the Financial Memorandum or this Circular in the light of such monitoring. The Council will consult institutions on amendments to the Financial Memorandum, in accordance with paragraph 70 of the Financial Memorandum.
Disposal of an Exchequer-funded asset
The diagram in the printed circular is not available in the electronic version.
Borrowing
The diagram in the printed circular is not available in the electronic version.
Areas Where Prior Council Consent is Required
5. Under the terms of the Financial Memorandum, the Council's prior written consent is required if an institution wishes to:
a. Transfer its title to, or grant an interest in, an Exchequer-funded asset, where the transfer is neither a sale or lease for full value and is not to a subsidiary undertaking (paragraph 54).
b. To undertake such a level of borrowing that the annualised servicing costs of all long-term borrowing exceed a threshold of 4 per cent of total income (paragraph 57).
c. To allow its negative net cash or cash equivalents to exceed a threshold of the lower of 5 per cent of total income or #2 million (paragraph 58).
6. The Council will endeavour to respond to a request for consent, which must be signed by the Director of Finance or equivalent officer, within 15 working days of receiving all the relevant information as listed in this Circular. Institutions should take account of this timescale in planning those activities where Council consent is required. However the Council recognises that exceptional circumstances may arise which would require a response to 5c above in a shorter timescale.
Transfer of an Exchequer-funded Asset
7. Paragraph 54 of the Financial Memorandum allows an institution to transfer its title to, or grant any interest in, Exchequer-funded land and buildings where the transfer is neither a sale or lease for full value and is not to a subsidiary undertaking, provided that the institution has the prior written consent of the Council to the transfer or grant. Paragraph 54 also states that the Council may attach conditions to such consent.
8. In considering requests for consent to transfer an Exchequer-funded asset, the Council's main aim is to ensure that the Exchequer interest in the asset is not put at risk.
9. In considering requests for consent to transfer an Exchequer-funded asset, the Council will require:
a. Identification and valuation(1) of the Exchequer-funded asset transferred.
b. Calculation of the Exchequer interest in the asset.
c. A justification of the decision to transfer the asset to a third party. If the transfer is part of a larger arrangement then details of this arrangement and how it will operate must be included, with a statement of associated risks and how they have been mitigated.
d. Details of legal arrangements to be put in place by the institution to ensure that the Exchequer interest will be protected; and why the institution believes that these arrangements will be effective.
e. Written acceptance by the institution of the condition that if the Exchequer interest in the asset is lost or reduced (other than because of movements in market values), then the Council will be entitled to withhold grant until a sum equal to the value of the Exchequer interest lost has been repaid.
f. Details of the decision-making body which took the decision to transfer the Exchequer-funded asset to the third party, and the date of the relevant meeting.
Consent to Exceed the Threshold for Long-term Annualised Servicing Costs
10. Paragraph 56 of the Financial Memorandum specifies the conditions which the Council requires institutions to satisfy when undertaking any borrowing.
11. Paragraph 57 states the circumstances in which prior written Council consent is required before an institution undertakes long-term borrowing. The requirements of paragraph 57 will only operate when an institution intends to take out additional borrowing or to refinance existing borrowing, such that the annualised servicing costs of total borrowings exceed the threshold of 4 per cent of total income. (This also applies to any threshold other than 4 per cent for which an institution has the Council's prior written consent.) Where the only cause of an institution exceeding the 4 per cent threshold is an increase in the rate(s) of interest rate on variable rate borrowings, or a reduction in the institution's income, there is no need to seek Council consent.
12. In this context, borrowing includes finance leases but not operating leases, as defined in SSAP 21 Accounting for leases and hire purchase contracts, and other schemes where borrowing is the substance of the transaction, in line with FRS 5 Reporting the substance of transactions.
13. For the avoidance of doubt, borrowing includes:
- all borrowing, whether self-financing or not
- all inherited debt which is not fully reimbursed by the Council
- any Business Expansion Scheme (BES)
- PFI arrangements which are accounted for as loans or finance leases in accordance with the requirements of SSAP 21 or FRS 5.
14. In considering requests for consent to exceed the threshold for long-term annualised servicing costs, the Council's main concerns will be the financial health of the institution and the institution's continuing ability to deliver quality teaching and research, in both the short and long term, and value for money.
15. In considering such requests, the Council will require the institution to satisfy it, by submitting the information specified below. This information is similar to that which the Council would expect to be provided to an institution's own decision-making body.
The institution must satisfy the Council that:
i. There is a rationale for the financing, and that other forms of financing or procurement have been considered.
The institution must submit to the Council:
a. The reasons why additional long-term finance, or refinancing, is necessary.
b. The forms of finance or procurement which have been considered.
c. Reasons why the proposed form of finance has been selected.
ii. The institution can afford the borrowing, and that its ability to maintain financial and academic viability will not be impaired.
The institution must submit to the Council:
a. Revised five year financial forecasts, where the borrowing and the financial impact of the activities to be undertaken are not already included in the latest financial forecasts provided to the Council. The revised forecasts to include Income and Expenditure Account, Balance Sheet and Cash Flow Statement, plus supporting notes to explain revisions from previous forecasts.
b. Details of any deferred repayment arrangements and the impact on the financial forecasts when these are no longer available.
c. Details of any bullet payments at the end of the loan period, how these are to be financed and what impact these may have on the financial position of the institution.
iii. How the financing is to be applied; that the activity to which the financing is to be applied forms part of the institution's strategic plan and estate strategy, where appropriate; and that the Council's guidance on value for money has been followed.
The institution must submit to the Council:
a. Details of the activities to be financed by the borrowing.
b. An indication of where such activities fit into the institution's strategic plan and estate strategy.
c. Details of how the institution has satisfied itself that the activities to be supported by the borrowing provide good value for money. One way of demonstrating this would be to show how the institution has complied with the relevant parts of the Council's estate procedures(2).
iv. The financing method chosen represents the best value for money.
The institution must submit to the Council:
a. Discounted cash flow forecasts for the alternative financing options.
b. Details of how the institution has satisfied itself that the chosen option represents the best value for money.
v. The terms of the financing are not onerous; and that any Exchequer-funded assets used as security have been identified.
The institution must submit to the Council:
a. Details of the form of the borrowing, including the name of the lender, the principal sum to be borrowed, the period of the borrowing and the basis of repayment.
b. The terms and conditions of the borrowing; provision of a copy of the term sheet would satisfy this requirement.
c. Identification and valuation of any Exchequer-funded assets to be used as security.
vi. The risks and uncertainties surrounding the financing and its application have been properly considered and analysed.
The institution must submit to the Council:
a. A list and evaluation of the risks and uncertainties surrounding the borrowing and the activities to be financed from the borrowing.
b. Evaluation of the sensitivities surrounding the assumptions made for the income and costs of the activities and the borrowing in the financial forecasts.
vii. The institution's decision-making body has taken an informed decision.
The institution must submit to the Council:
a. The decision-making body involved and the date the decision was made.
b. The basis on which it reached its decision.
viii. The requested increase in the threshold is justified for the period requested by the information provided.
The institution must submit to the Council:
a. A justification for the increased threshold.
b. The level of the existing threshold and how much of this relates to assets used primarily for research contracts; residences, catering and conferences; or services to external customers, including consultancy.
c. The revised threshold sought and the period for which the increased threshold is required.
Consent to Exceed the Threshold for Short-term Borrowing
16. Paragraph 58 of the Financial Memorandum states the circumstances in which prior written Council consent is required for short-term borrowing. In considering requests for consent, the Council's main concerns are the financial health of the institution and that its short-term financial arrangements should be geared to short-term financial needs.
17. In considering such requests, the Council will require the institution to satisfy it, by submitting the information specified below. This information is similar to that which the Council would expect to be provided to an institution's own decision-making body.
The institution must satisfy the Council that:
i. There is a rationale for the increased short-term finance; and that other financing options have been considered.
The institution must submit to the Council:
a. The reasons for the increased need for short-term finance.
b. The forms of finance which have been considered.
c. Reasons why the proposed short-term solution has been selected.
ii. The arrangements are short-term and that any long-term financing requirements have been addressed.
The institution must submit to the Council:
a. The reasons behind the request for an increased threshold, showing clearly that these are short-term.
b. An assurance that any long-term financing requirements arising from the short-term need are being addressed by long-term solutions.
c. The period of time for which the increased threshold is required.
iii. The terms of the borrowing are not onerous; and that any Exchequer-funded assets used as security have been identified.
The institution must submit to the Council:
a. Details of the form of the borrowing, including the name of the lender, the principal sum to be borrowed, the period of the borrowing and basis of repayment.
b. The terms and conditions of the borrowing; provision of a copy of the term sheet would satisfy this requirement
c. Identification and valuation of any Exchequer-funded assets to be used as security.
iv. The short-term financing arrangements represent the best value for money.
The institution must submit to the Council:
a. Details of how the institution has satisfied itself that the financing arrangements represent the best value for money.
v. The institution's decision-making body has taken an informed decision.
The institution must submit to the Council:
a. The decision-making body involved and the date the decision was made.
b. The basis on which it reached its decision.
vi. The requested increase in the threshold for the period requested is justified by the information provided.
The institution must submit to the Council:
a. A justification for the increased threshold.
b. The level of the existing threshold and how much of this relates to assets used primarily for research contracts; residences, catering and conferences; or services to external customers, including consultancy.
c. The revised threshold sought and the period for which the increased threshold is required.
Decision-Making Delegated to Institutions
18. The Financial Memorandum delegates responsibility for certain decisions to institutions. In exercising this responsibility, institutions must comply with the Financial Memorandum and have regard to any relevant Council guidance.
19. Where stated in the Financial Memorandum, institutions must inform the Council in writing when such decisions have been taken. This must be done by the Director of Finance or equivalent officer.
20. The Council will assess how institutions have exercised their delegated decision-making powers, probably on a sample basis. Therefore institutions are expected to have sufficient information available to demonstrate that they have taken decisions in compliance with the Financial Memorandum and this Circular.
21. The Council has delegated to institutions the ability to:
a. Sell an Exchequer-funded asset (paragraph 47).
b. Retain the proceeds from the sale of an Exchequer-funded asset (paragraph 48).
c. Grant a lease or licence over an Exchequer-funded asset (paragraph 50).
d. Retain the rental proceeds from the grant of a lease or licence over an Exchequer-funded asset (paragraphs 51-52).
e. Transfer an Exchequer-funded asset to a subsidiary undertaking (paragraph 54b).
f. Borrow or refinance existing long-term borrowings where the annualised servicing costs are below the threshold (paragraph 56).
g. Borrow on a short-term basis below short-term borrowing thresholds (paragraph 56).
Sale of an Exchequer-funded Asset
22. Paragraph 44 of the Financial Memorandum states a general responsibility on institutions for estate management.
23. Paragraph 47 delegates to institutions the ability to sell an Exchequer-funded asset, provided that all the conditions in that paragraph are satisfied.
24. The information which the institution must submit in writing within 15 working days of the exchange of contracts for the sale of an Exchequer-funded asset consists of:
a. Identification of the Exchequer-funded asset sold.
b. Calculation of the Exchequer interest in the asset sold.
c. The sale price.
d. Confirmation that the proceeds will be spent within three years of the earlier of the receipt of the sales proceeds or 3 months after the exchange of contracts for the sale.
25. The institution must have the following information available to demonstrate that it has complied with the Financial Memorandum:
To demonstrate compliance with the following paragraphs of the Financial Memorandum:
i. Paragraph 47
The institution must have available:
a. A copy of the independent professional advice.
b. A justification of the decision that the terms and conditions under which the sale is proposed are the best that can reasonably be obtained for the Institution at that time. The Council would normally expect this condition to be satisfied by provision of the papers submitted to the institution's decision-making body.
ii. Paragraph 44
The institution must have available:
a. An explanation of how the institution has had regard to the relevant parts of the Council's estate procedures.
Retention of the Proceeds from the Sale of an Exchequer-funded Asset
26. Paragraph 48 of the Financial Memorandum delegates to institutions the ability to retain the proceeds from the sale of an Exchequer-funded asset, provided that all the conditions in that paragraph are satisfied. Paragraph 49 of the Financial Memorandum states the amounts to be paid to the Council where the conditions under paragraph 48 are not satisfied.
27. When an Exchequer-funded asset is sold, the institution is required to reinvest both the proceeds and the accrued interest in line with paragraph 48 of the Financial Memorandum.
28. The information which the institution must submit in writing within 15 working days of the date the proceeds were reinvested consists of:
a. The amount of the proceeds reinvested
b. Identification of the Exchequer-funded asset whose sale generated the proceeds.
c. Confirmation that the sales proceeds have been reinvested within three years of the earlier of the receipt of the sales proceeds or 3 months after the exchange of contracts for the sale.
29. The institution must have the following information available to demonstrate that it has complied with the Financial Memorandum:
To demonstrate compliance with the following paragraphs of the Financial Memorandum:
i. Paragraph 48
The institution must have available:
a. Details of the asset or assets into which the proceeds have been reinvested showing that the proceeds have not been reinvested into assets that are used primarily for:
- research contracts
- residences, catering and conferences
- services to external customers, including consultancy
b. Where the expenditure is on an estates project, an explanation of how the activity fits with the institution's estate strategy, and how the institution has regard to Council guidance on appraising property options.
The Council would normally expect conditions a and b to be satisfied by provision of the papers submitted to the institution's decision-making body.
ii. Paragraph 44
The institution must have available:
a. An explanation of how the institution has had regard to the other relevant parts of the Council's estate procedures.
30. Where an institution wishes to apply the proceeds from the sale of an Exchequer-funded asset on servicing payments under a PFI activity, and this would not result in the reinvestment being made within three years or would not recreate an Exchequer interest in another asset, the institution should contact the Council to discuss how to proceed.
Grant of a Lease or Licence over an Exchequer-funded Asset
31. Paragraph 50 of the Financial Memorandum delegates to institutions the ability to grant a lease or licence over an Exchequer-funded asset, provided that all the conditions in that paragraph are satisfied.
32. The information which the institution must submit in writing within 15 working days of the execution of the lease or licence consists of:
a. Identification and valuation of the Exchequer-funded asset over which a lease or licence has been granted.
b. Calculation of the Exchequer interest in the asset.
33. The institution must have the following information available to demonstrate that it has complied with the Financial Memorandum:
To demonstrate compliance with the following paragraphs of the Financial Memorandum:
i. Paragraph 50
The institution must have available:
a. A copy of the independent professional advice.
b. A justification of the decision that the terms and conditions under which the lease is proposed are the best that can reasonably be obtained for the Institution at that time. The Council would normally expect this condition to be satisfied by provision of the papers submitted to the institution's decision-making body.
ii. Paragraph 44
The institution must have available:
a. An explanation of how the institution has had regard to the relevant parts of the Council's estate procedures.
Retention of the Rental Income from a Lease or Licence over an Exchequer-funded Asset
34. Paragraph 52 of the Financial Memorandum allows institutions to retain the income from the lease of an Exchequer-funded asset provided that both the conditions in that paragraph are satisfied.
35. Paragraph 51 of the Financial Memorandum states that where the consideration for the granting of the lease or licence includes the payment of a premium, that premium shall be treated as sale proceeds and the institution must apply the requirements of paragraph 48 (detailed above) to its reinvestment. If the consideration also includes periodic payments of rent during the life of the lease or licence, these shall be treated as rental income and paragraph 52 of the Financial Memorandum shall apply to their use by the institution.
36. The information which the institution must submit in writing within 15 working days of the date the proceeds were first reinvested consists of:
a. The amount of the rental income to be reinvested.
b. Identification of the Exchequer-funded asset over which a lease or licence was granted.
37. The institution must have the following information available to demonstrate that it has complied with the Financial Memorandum:
To demonstrate compliance with the following paragraphs of the Financial Memorandum:
i. Paragraph 51
The institution must have available:
a. A copy of the rental agreement, showing whether part or all of the consideration for the granting of the lease or licence is the payment of a premium.
ii. Paragraph 52
The institution must have available:
a. Details of the activities into which the rental income has been reinvested showing that the investment is not primarily into the following activities:
- research contracts
- residences, catering and conferences
- services to external customers, including consultancy.
iii. Paragraph 44
The institution must have available:
a. An explanation of how the institution has had regard to the relevant parts of the Council's estate procedures.
38. Where the consideration for the granting of the lease or licence includes the payment of a premium, and the institution wishes to apply this to servicing payments under a PFI activity, the institution should contact the Council to discuss how to proceed.
Transfer of an Exchequer-funded Asset to a Subsidiary Undertaking
39. Paragraph 54b of the Financial Memorandum allows an institution to transfer an Exchequer-funded asset to a subsidiary undertaking, provided that the transfer contains a direct covenant by the transferee with the Council that the transferee will observe and perform the certain conditions in the Financial Memorandum, and that covenant is guaranteed by the institution.
40. The information which the institution must submit in writing within 15 working days of the transfer consists of:
a. Identification and valuation of the Exchequer-funded asset to be transferred.
b. Calculation of the Exchequer interest in the asset.
c. Confirmation that the transfer is to a subsidiary undertaking and the name of that subsidiary undertaking.
d. Confirmation that the transfer contains the covenant and guarantee required by the Financial Memorandum.
41. The institution must have the following information available to demonstrate that it has complied with the Financial Memorandum:
To demonstrate compliance with the following paragraphs of the Financial Memorandum:
i. Paragraph 54
The institution must have available:
a. A copy of the covenant ensuring that the subsidiary undertaking will observe and perform the conditions in paragraphs 47 to 54 of the Financial Memorandum.
b. A copy of the guarantee from the institution that it will remain liable to the Council for the Exchequer interest in the asset transferred.
c. The Council would normally expect that the papers submitted to the institution's decision-making body, including a justification of the decision to transfer the asset to a subsidiary undertaking would also be available.
ii. Paragraph 44
The institution must have available:
a. An explanation of how the institution has had regard to the relevant parts of the Council's estate procedures.
Borrowing or Refinancing Below the Thresholds for Long-term or Short-term borrowing
42. Paragraph 56 of the Financial Memorandum specifies the conditions which the Council requires institutions to satisfy when undertaking any borrowing. It will also apply when an institution is refinancing previous borrowings.
43. If any borrowing is secured on an Exchequer-funded asset, the institution must submit the following information within 15 working days of the signing of the contracts for the borrowing:
a. Identification and valuation of any Exchequer-funded asset used as security.
b. Calculation of the Exchequer interest in that asset.
44. When it has undertaken long-term borrowing or refinancing, the institution must be able to satisfy the Council that it has acted in accordance with paragraph 56 of the Financial Memorandum. One way of satisfying the Council of this is to have all the information listed in paragraph 15 available.
45. When it has undertaken short-term borrowing or refinancing, the institution must be able to satisfy the Council that it has acted in accordance with paragraph 56 of the Financial Memorandum. One way of satisfying the Council of this is to have all the information listed in paragraph 17 available.
Footnotes:
(1) Throughout the circular, all references to `valuation' mean a valuation in accordance with the 'RICS Appraisal and Valuation Manual'
(2) Throughout this circular, all references to the Council's estate procedures mean the existing guidance Strategic Estate Management (1/93), Funding for Backlog Maintenance Work in 1993-94 and 1994-95 (Circular 12/93),Appraising Property Options: guidance on techniques (November 1993), Draft Estate Procedures (44/93), Backlog Maintenance Priority II Work Circular 22/94), The Private Finance Initiative and Council Policy (Circular letter 4/96), and subsequent guidance as issued by the Council from time to time.