Financial Transactions Capital (Budget 2015-16)

The Northern Ireland Executive’s Budget 2015-16 includes a relatively new category of spending called Financial Transactions Capital (FTC). So what is it and how does it work?

What is FTC?

FTC is sometimes referred to as ‘policy lending’ as it involves a loan to, or equity investment in, a private entity for capital projects which contribute to the government’s policy objectives. FTC is different from ‘conventional’ capital as it is a loan rather than expenditure, and it is the private sector rather than the public sector which ultimately owns the asset.

How does it work?

The Northern Ireland Executive repays a proportion of FTC to the UK Treasury (initially set at 60 per cent in 2012-13 but increasing to 80 per cent from 2013-14) and retains any remainder for use in future projects. DFP has also committed that any Northern Ireland department using FTC will be able to keep half of this retained portion, with the other half going to a central Northern Ireland fund: a 50:50 split.

For loans made to the private sector, a rate of interest below the market rate can be charged, although the rate must be above the EU’s reference rate not to breach ‘State Aid’ rules.

When was it introduced?

FTC was introduced in 2013 as a result of the Help to Buy scheme in England in which the UK government provided people seeking to buy a house with an equity loan of up to 20%. Under the Barnett Formula, Northern Ireland received a proportion of that finance, ring-fenced for FTC projects.

How has FTC been used in Northern Ireland?

Examples of projects financed through FTC in Northern Ireland include:

  • The Agri-food Business Loans Scheme – secured loans for small agricultural businesses.
  • The Empty Home Scheme - Housing Associations purchase vacant/repossessed homes to fix up and sell on the market at a discount.
  • The Ulster University Belfast campus redevelopment.
  • Fixed, low-interest rate loans to GPs and dental surgeries to purchase medical equipment and improve services.

How is FTC used under the 2015-16 Budget?

FTC forms part of the Draft Budget 2014-15, a summary of which by the Centre for Economic Empowerment is available here.

Between 2014-15 and Budget 2015-16, FTC increased from £46.8m to £129m. It is anticipated that the use of FTC will continue to rise.[1]

Of its £129m in FTC for 2015-16, the Budget document states £88.1m has been allocated to four Departments (DoE £50.5m, DETI £25.3m, DHSSPS £10m and DSD £2.3m). £115.6m had originally been allocated in the Draft Budget, however, DETI was unable to make use of £27.5m of its provision and returned it to the central fund.

The remaining £40.9m will provide an initial balance for a new Northern Ireland Investment Fund, which will fund infrastructure investment in areas such as energy production and efficiency, social and affordable housing, telecoms and urban regeneration, though no specific projects have yet been reported.

What are the advantages?

FTC can be used to secure projects that may otherwise not occur without financial backing. For instance, the Agri-food Loan Scheme came about due to the difficulties small agri-food businesses faced in borrowing from private banks. It could also be used to target support at economic sectors, such as the faltering local construction sector, and promote the expansion of the private sector in Northern Ireland while addressing the legacy of underinvestment in infrastructure.

FTC may also improve the appearance of the public finances as FTC is not counted as capital spending per se, nor does it add to public sector net borrowing (PSNB).[2] Whether this is a real benefit or merely creative accounting is unclear.

Are there any downsides?

It may be difficult to identify sufficient schemes which are suitable for FTC and departments may be hesitant to use FTC as it is unfamiliar, although the 50:50 split of surpluses may help incentivise departments to use the model. In the 2014-15 budget period, there is a threat that £35m of FTC will be lost to Northern Ireland with no plans for spending it in place, and only a proportion (10%) of that can be carried forwards into the next year. As use of FTC continues to rise, finding enough viable projects many become more problematic.

Another concern is if the private sector borrowers default on their loan or the share equity loses value, the responsible department will have to continue making repayments to the Treasury. This could reduce the money available for other public services.[3]

This article was updated on 9 February 2015 to reflect changes to FTC between the Draft and Final Budgets 2015-16.

[2] Though it does add to public sector net debt (PSND). Details of how financial transactions capital is treated is available from DFP (2013) Financial Transactions Capital: overview paper and Treasury (2013) Capital and financial transactions p15

[3] NI Assembly Research and Information Service (2014) Financial Transactions Capital p12

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