PAPER B2

Purpose : for Decision

REPORT TO THE EXECUTIVE

Date : 11 FEBRUARY 2004

Title : CAPITAL PROGRAMME 2004 - 7

REPORT OF THE PORTFOLIO HOLDER FOR RESOURCES

IMPLEMENTATION DATE: 1 April 2004

SUMMARY

1. To consider the Councils Capital Programme and Treasury Management Strategy for the 2004/7 period, including for the requirements of the new Prudential Code for Capital Finance.

2. The Local Government Act 2003 is now statute and has the effect of replacing the current system of Local Government Capital Finance with a new one, known as the ‘Prudential Regime’ from 1 April 2004. Under the Prudential Regime, instead of the historical practice of local authorities only being able to borrow in line with central government prescribed limits, each local authority must decide its own borrowing limits, taking account of its financial situation, medium term plans and in particular affordability.

3. CIPFA has developed a Prudential Code of Capital Finance in Local Authorities, which specifies indicators the Council must consider in determining how much it will borrow for capital purposes. The code requires the Council in determining its capital programme to set a range of indicators for the 2004/7 period, which form part of the budget setting process.

BACKGROUND

4. At present, the Local Government Capital Finance System is established by the Local Government & Housing Act 1989 (LGH Act), and the Capital Finance Regulations 1997. The LGH Act controls local authority capital expenditure by limiting new borrowing to levels set by the government, and these limits are issued in the form of credit approvals. The legislation also prescribes detailed rules about other forms of credit such as leases, which are known as Credit Arrangements. Through these measures the Government has been able to control local authority borrowing as part of its overall macro-economic strategy.

5. The present system allocates Credit Approvals to enable borrowing to occur, and also adds to the formula spending share (FSS) an appropriate allowance to meet the revenue costs associated with the borrowing. This is then reflected in the level of annual Revenue Support Grant that is received from the government. From 2004/5 revenue support will be provided in the form of Supported Capital Expenditure (Revenue) or SCE (R), which replaces credit approvals as the mechanism that will generate additional Revenue Support Grant entitlement.

6. The Chartered Institute of Public Finance and Accountancy (CIPFA) has developed a Prudential Code for Capital Finance in Local Authorities (the ‘Prudential Code’), at the request of the Office of the Deputy Prime Minister (ODPM), to underpin the system of capital financing introduced by the Local Government Act 2003, and to support authorities in taking decisions upon capital investment. Local authorities are required, by regulation, to comply with this Code when carrying out their duties under Part 1 of the Act.

7. The new system is intended to place a greater emphasis on accounting practices, and professional guidance. The advantage of this is that it is usually less prescriptive than legislation, and can be amended more easily in response to developments in local authority accounting. Furthermore, accounting guidance can often be more flexibly interpreted in the local context, whereas legislation is often inflexible. The Local Government Act 2003 requires local authorities to take account of CIPFA’s Prudential Code in setting borrowing limits, and it is expected that as the CPA process develops, part of the financial / use of resources assessment will examine the approach authorities have taken.

8. The code requires authorities to set a number of indicators and limits in respect of capital investment and borrowing. The CIPFA requirements of the code are set out in Appendix A, together with the limits proposed by the Chief Financial Officer for 2004-7. These limits are consistent with the recommended capital programme as contained within the body of this report.

STRATEGIC CONTEXT

9. The recommended capital programme has regard to the Council’s Capital Strategy, which details how the Council plans and applies its capital resources.

CONSULTATION

10. The overall capital programme provides for consultation with a wide range of parties and stakeholders, as detailed in the Council’s Capital Strategy and Asset Management Plan.

FINANCIAL/BUDGET IMPLICATIONS

11. The Supported Capital Expenditure (SCE) that is applicable to the 2004/5 financial year is allocated to services as detailed below. As in previous years the indication is that failure to spend at these levels in respective service areas will impact on future supported borrowing in those service areas. The service based SCE for 2004/5 are as follows:

£

Education 8,393,700

Highways 6,305,000

Housing 1,702,000

Social Services 111,000

Fire Service 122,000

16,633,700

In addition to the above are the additional Highways allocations specific to Ryde Interchange and the Undercliff drive.

12. The Directors Group have considered bids for capital expenditure and having regard to the continuation of revenue support through SCE, they recommend that as in past years allocations attracting revenue support are released to Education, Highways, Housing, Social Services and Fire Service for prioritisation. It is understood that Coast Protection Schemes will continue to receive supported borrowing and they will continue to be funded through DEFRA on a scheme by scheme basis. An estimated supported borrowing total of £1,069,000 has been assumed in respect of Coast Protection Schemes.

13. The recommendations of the Directors Group in respect of Capital bids which are outside of SCE are set out in Appendix B. These items will need to be funded from capital receipts. Further priority items are detailed at Appendix C and these items should be considered further should additional capital receipts be forthcoming during the course of the year or as part of an invest to save strategy to unsupported borrowing.

14. No capital provision is recommended at this stage in respect of a replacement for the County Records office. Initial forecasts for a replacement are for an associated cost of £4.5million. It is currently anticipated that a grant funding of two thirds of this sum could be available from the Heritage and Lottery Fund. Initial works on a feasibility study for a replacement Records Office is to be undertaken during the next financial year.

15. The Directors Group’s view was that if any additional resources were available then the next priorities would be Cliff Stability or additional investment in Social Housing. Since December there has been a cliff fall close to the Winter Gardens in Ventnor and also at Shanklin around the Cliff lift. Recent weather conditions and rainfall are consistent with those applying in 2000/01 when the most recent Bellwin (emergency works) scheme was activated by the Government.

16. Capital expenditure other than that covered by capital allocations has in the past been funded by the generation of capital receipts. It has become increasingly difficult to realise such receipts, and although receipts to potentially fund the above programme have been identified, there is a risk that they may not be realised within the 2004/5 financial year. It is therefore recommended that a safety net of £2 million unsupported borrowing limit is approved in order to cover such risk and any temporary cash requirements arising from any delay in the realisation of capital receipts.

17. The Capital Programme could be increased through the use of borrowing under the Prudential Code but would represent unsupported borrowing with the associated health & safety workhjhjkhjkhhjjjjjjjjjjjj increase in revenue expenditure. Having regard to the fact that the rules and guidance are still being examined and tested, it is intended that further capital bids are analysed in order to identify a programme based on the ‘Invest to Save’ principle which would be financially self supporting in a medium term financial plan. Additional resources for housing should be a priority area for such consideration (see Appendix C).

18. The Council has for a number of years acquired vehicles and plant by operating lease, as a means of reducing the pressure on other capital resources. Under the Prudential Code the Council may now use both operating and finance leases as a means of acquiring assets. The Prudential Code requires these methods of finance to be examined along with other options available in order to ensure the most effective form of finance is used.

LEGAL IMPLICATIONS

19. CIPFA’s Prudential Code is regarded as mandatory guidance associated with the new Local Government Act 2003.

OPTIONS

20. (i) To approve the recommended Capital programme for 2004/5

(ii) To amend the proposed programme having regard to other budget pressures and/or capital priorities.

(iii) To approve the prudential indicators as detailed in Appendix A.

(iv) To amend the prudential indicators.

EVALUATION/RISK MANAGEMENT

21. All capital investment carries risk and available resources to finance such investment are increasingly limited; capital bids have been evaluated on a scoring mechanism in order to prioritise against available resources.

22. The CIPFA Code of Practice for Treasury Management and Treasury Strategy taken together are the instruments which provide for the identification, management and control of all risk associated with the Councils treasury management activity and the pursuit of optimum performance consistent with those risks. The proposed Capital Strategy for 2004/5 is in accordance with the Prudential Code and is attached as appendix D.

23. RECOMMENDATIONS

That the Council be asked to approve the following recommendations:-

(i)That the borrowing levels as contained in paragraph 11 be approved for capital investment and allocated to each respective Strategic Director for prioritisation, and subsequent approval by the Executive

(ii) That a contingency of £2million of unsupported capital borrowing be approved, for use only in the event of planned capital receipts not being received in the 2004/5 year

(iii)That the Council continue its programme of asset leasing, where it is economic to do so and where it can be supported through the Prudential Code

(iv)To approve the prudential indicators and limits as set out in Appendix A

(v)That the recommendations for capital investment to be funded from capital receipts, as contained in Appendix B be approved

(vi)That the Chief Financial Officer, be delegated responsibility for effecting changes between the ‘borrowing’ and ‘long-term liabilities’ elements of the authorised limit and operational boundaries for external debt

(vii)That the relevant Portfolio Holders be delegated authority to amend the Capital Programme as priorities may determine, in consultation the Portfolio Holder for Resources, relevant Directors and the Chief Financial Officer

(viii)That the Treasury Management Strategy for 2004/05, as set out in Appendix D, be approved

BACKGROUND PAPERS

24. Local Government Act 2003

CIPFA Prudential Code for Capital Finance in Local Authorities.

Capital working Papers and bids

Contact Point : Gareth Hughes - Financial Services Manager

( 01983 823604 [email protected]

P WILKINSON Chief Financial Officer

R BARRY Portfolio Holder For Resources