Purpose: For Decision PAPER B Committee PROPERTY DISPOSAL AND CAPITAL PROGRAMME SUB COMMITTEE Date TUESDAY, 13 JANUARY 2015 Title CAPITAL PROGRAMME 2015/16 Report of/to LEADER OF THE COUNCIL EXECUTIVE SUMMARY 1. In the context of the latest overall budget and financial position for the council, and the development of the administration s priorities, this report sets out a capital programme for 2015/16 and current capital expenditure proposals for 2016/17 to 2019/20. 2. The appendix to this report provides an analysis of capital projects which are funded from capital grants and contributions, revenue contributions and capital receipts; projects which are contractually committed with borrowing already assumed within the revenue budget; and an analysis of projects which are not funded. 3. Given the revenue savings targets the council is facing, one of the key considerations in developing the capital programme is the affordability of any prudential borrowing required to fund the programme. One approach to address the affordability issue is to base the capital programme around projects that can be funded from capital grants and capital receipts, and to consider deferring or limiting projects that would require prudential borrowing. However, if they are considered to be a priority and are to proceed, a decision will have to be taken to fund the projects from additional prudential borrowing. 4. This report asks the sub committee to consider and recommend to the Executive and Full Council, the capital programme for 2015/16, and provisional capital expenditure proposals for 2016/17 to 2019/20, as part of the budget approval process. BACKGROUND 5. The definition of capital expenditure is set out in Section 16 of the Local Government Act 2003 and comprises three descriptions of expenditure: B - 1
(a) Expenditure that results in the acquisition of, construction of, or the addition of subsequent costs to non-current assets (tangible and non-tangible) in accordance with proper practices (b) Expenditure that meets one of the definitions specified in regulations made under the 2003 Act (c) The Secretary of State makes a direction that the expenditure can be treated as capital expenditure. 6. For the purposes of the above definition, proper practices are defined to include compliance with the Code of Practice on Local Authority Accounting in the United Kingdom. The code is published annually and its provisions relating to capitalisation are based on International Accounting Standard 16 Property, Plant and Equipment. 7. For our purposes, capital expenditure can be defined as relating to spend on assets that have a life longer than one year, such as land, buildings, plant and equipment, vehicles and major repairs and maintenance which extend the life of an asset. Intangible assets tend to be those that have no physical substance but that are of benefit to the authority for longer than a year, for example computer software programs. Capital expenditure must always be treated as such, how it is funded is a different issue set out in the following paragraph. 8. Traditionally capital expenditure on assets is funded from a number of different sources, capital grants and contributions, capital receipts, revenue contributions and prudential borrowing. More detailed explanations are as follows: a) Capital grants and contributions will be received from a number of external organisations, mainly central government, to deliver specific projects. In most cases they are applied to the purpose for which they are intended, or they will be reclaimed by the sponsoring government department. Capital grants and contributions cannot normally be used to fund revenue expenditure. b) Capital receipts arise when capital assets such as land, buildings and equipment are disposed of. These receipts cannot be used directly to fund revenue expenditure, but can be applied to fund capital expenditure, thereby reducing the need for borrowing, or to redeem long-term debt thus reducing the impact of borrowing on the revenue budget. However it should be noted that up to four per cent of the gross value of the receipt can be used to fund the costs of its disposal. The council s asset management strategy will need to balance the relative benefits of using surplus assets to assist local communities against the need to generate sufficient capital receipts to help fund capital spend. c) Revenue contributions can be used to fund capital spend where there are sufficient revenue resources to do so, however by contrast capital resources cannot be used to fund revenue costs. d) On the basis that capital expenditure extends beyond one year, and the asset is normally available to the community for an extended period, such as a school building, it is normal practice to spread the cost over the expected life of the asset by borrowing to fund the capital costs and then making repayments from revenue B - 2
over the same period. Obviously this method of funding incurs an ongoing impact in the revenue budget whilst the asset still has a value. 9. Details of the capital programme for 2015/16 and capital expenditure proposals for future years are set out in the appendix to the report which provides an analysis of capital projects which are funded and/or contractually committed, and the borrowing requirement associated with these projects is assumed within the revenue budget. 10. The appendix also provides an analysis of projects which are not funded from capital grants and contributions or from revenue contributions. If they are to proceed a decision will have to be taken to fund the projects from additional prudential borrowing or from the generation of additional capital receipts. STRATEGIC CONTEXT 11. The key priorities set out in the Corporate Plan provide a framework for setting the council s budget and identifying where resources should be prioritised, including the capital programme. However, there is a need for regular reviews of the corporate priorities, and financial strategies and spend programmes, to ensure the key priorities remain deliverable within the reduced resources available to the council. 12. In particular, the budget strategy supports prioritising opportunities for capital investment that support the implementation of the policies that emerge from the revised Corporate Plan, and make the council s capital asset base more sustainable. CONSULTATION 13. Corporate Management Team and service managers receive regular budget monitoring reports during the year providing up to date financial information, including reports on progress with capital projects and spend against profile. There are also capital challenge sessions twice each year to review projects, reprofile budgets as necessary, and make arrangements to slip budgets into subsequent years if necessary. 14. As part of the agreed process for developing the capital programme, heads of service have the opportunity to make bids for capital resources at an early stage in the process, normally July each year. This allows time for the proposals to be considered, compared to funding options, and included in the programme to be reviewed by members, where appropriate. 15. The Scrutiny Committee is focussing on the budget as part of its work programme and will have the opportunity to make comment on the capital programme recommendations as part of the scrutiny arrangements of Executive reports. The Service and Budget Review Steering Group also receive regular budget monitoring reports during the year. FINANCIAL / BUDGET IMPLICATIONS 16. This report is entirely about the overall financial and budgetary position of the council with specific reference to the capital programme and capital expenditure proposals. The budget gap over the next three years relates to the revenue budget of the council. To the extent that capital expenditure not funded from grants and contributions, receipts or revenue contributions, is funded from prudential borrowing, it will have an impact on the B - 3
revenue budget and such proposals for borrowing need to be viewed from the perspective that they are prudent, affordable and sustainable. 17. As an example, expenditure of 1million on a building project with an expected useful life of 20 years, funded by a Public Works Loan Board loan with an interest rate of four per cent, would result in an annual charge to revenue for the principal repayment, and assuming an average charge for interest throughout the period of the loan the total charge to revenue would be some 70,000 per annum. However, spending 1million each year for a period of five years to be funded from prudential borrowing would give rise to a cumulative revenue cost of 350,000 per annum from year 5. LEGAL IMPLICATIONS 18. The council needs to set a lawful and balanced budget and council tax for 2015/16 at the council meeting on 25 February 2015, including having regard to the report of the chief financial officer on the robustness of the estimates and the adequacy of reserves to support the budget. In developing any proposals the necessary equality impact assessments and consultation processes must be followed. 19. The ability to implement savings that deliver a full year effect in 2015/16 depends on taking the necessary action in time to have effect from 1 April 2015. It is necessary to identify areas that are likely to be the subject of savings proposals now so that the impact can be worked through to allow for a full year effect in 2015/16. Any decision to fund the capital programme in 2015/16 solely from capital grants and capital receipts would have a positive impact on the revenue budget in 2015/16 and future years in terms of reduced capital financing costs. 20. The Local Government Act 2003 specifies the definition of capital expenditure and limits it to expenditure that results in the acquisition, construction or addition of subsequent costs to non-current assets (both tangible and intangible) in accordance with proper practices; expenditure that meets one of the definitions specified in regulations made under the 2003 Act; and where the Secretary of State makes a direction that the expenditure can be treated as capital expenditure. 21. The Prudential Framework is an umbrella term for a number of statutory provisions and professional requirements that allow local authorities largely to determine their own arrangements for capital investment, subject to the authority following due process in agreeing their capital expenditure plans and being able to provide assurance that they are prudent, affordable and sustainable. EQUALITY AND DIVERSITY 22. The council has a legal duty under the Equality Act 2010 to have due regard for issues of equality and diversity. Section 149 of the act provides that decision makers must have due regard to the elimination of discrimination, victimisation and harassment, advancing equalities, and the protected characteristics (race, disability, gender, age, sexual orientation, gender reassignment, religion/belief and marriage/civil partnership). Equality impact assessments will be completed in respect of relevant proposals as part of the budget approval process to enable members to take into account, and if necessary mitigate, any impacts as part of the decision making process. An updated equalities impact assessment on the overall Medium Term Financial Strategy, including the capital programme, will be completed for the budget considerations in February 2015. B - 4
PROPERTY IMPLICATIONS 23. The report does have property implications to the extent that the council s property portfolio represents a capital asset that will be improved, enhanced (to help the council meet its strategic, statutory and health and safety obligations) and to a certain extent maintained through the capital programme. 24. In addition, the ability to finance the broader capital programme is dependent in part on the ability to dispose of surplus assets and generate an assumed level of capital receipts. 25. The delivery of the Strategic Asset Management Strategy is also essential in identifying the property assets the council wishes to retain, and those it wishes to dispose of which helps to drive down ongoing revenue costs. OPTIONS 26. Options have been considered in respect of the capital programme as follows: (a) (b) To recommend to the Executive and Full Council the capital programme for 2015/16, including current capital expenditure proposals for 2016/17 to 2019/20, as set out in the Appendix, as part of the budget approval process To not agree the overall approach to the capital programme set out in this report and ask that an alternative version is developed for consideration by members at the next meeting of the sub-committee RISK MANAGEMENT 27. The council is facing significant reductions in funding from central government over the next three years and that, combined with increased cost pressures in particular in social care budgets, means there is an increasing budget gap to be managed. The need to introduce a range of cost saving measures over the three year period to bridge the gap is a significant challenge for the council. 28. Capital expenditure proposals can be funded from a range of different sources including capital grants, capital receipts, revenue contributions and prudential borrowing. While the first three funding sources provide opportunities for capital investment without ongoing revenue budget implications, use of prudential borrowing to fund capital projects does have ongoing implications in terms of both interest costs and loan repayments. Given the budget gap facing the council over the next three years one of the options to consider is whether to continue with a capital programme which includes assumptions about relatively modest sums of prudential borrowing or whether to restrict the capital programme to projects funded from capital grants and capital receipts. 29. However, one of the key risks arising from this approach is that a number of capital expenditure proposals, traditionally funded from prudential borrowing, will be unable to proceed, which could impact on the ability to achieve the council s priorities. 30. This report assumes a modest level of capital receipts will be achieved from the disposal of assets, and there is also a risk that the council will generate insufficient capital receipts to support the capital programme. B - 5
31. Currently interest rates are low and no new long-term external borrowing has taken place since January 2005. The council s reserves and surplus cash flow balances have been used to fund capital investment instead of long-term borrowing and this policy has led directly to significant savings on capital financing costs, largely due to the fact that short term investment of surplus funds would generate interest of some 0.5 per cent whereas long term borrowing would have cost in excess of four per cent. Ultimately the Council will have to consider long-term borrowing to replace existing loans and interest rates will increase which may result in additional revenue costs of 2 million per annum. EVALUATION 32. For 2015/16 and beyond the council is facing a significant financial challenge and all options need to be considered when developing a budget strategy to deal with the budget gap and allow time for effective implementation of savings proposals. This needs to include options that cover the full three year period rather than just 2015/16, and the capital programme needs to be subject to the same process of review as the revenue budget. RECOMMENDATION 33. That the committee adopts Option (a) as follows: (a) To recommend to the Executive and Full Council the capital programme for 2015/16, including current capital expenditure proposals for 2016/17 to 2019/20, as set out in the Appendix, as part of the budget approval process. APPENDICES ATTACHED 34. Appendix Capital projects and funding Contact Point: Stuart Fraser, Head of Financial Management 01983 821000 e-mail stuart.fraser@iow.gov.uk STUART FRASER Head of Finance & S151 Officer COUNCILLOR IAN STEPHENS Leader of the Council B - 6
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