PAPER A2

 

                                                                                                              Purpose : For Decision

                       

                        REPORT TO THE EXECUTIVE

 

Date :              22 FEBRUARY 2005

 

Title :               CAPITAL PROGRAMME 2005- 08

                       

REPORT OF THE PORTFOLIO HOLDER FOR RESOURCES

 

                         IMPLEMENTATION DATE:  1 April 2005

 

 


SUMMARY

 

1.                  To consider the Councils Capital Programme and Treasury Strategy for the 2005/8 period, including the requirements of the new Prudential Code for Capital Finance.

 

2.                  The CIPFA Prudential Code of Capital Finance in Local Authorities 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 2005/8 period, which form part of the budget setting process.

 

BACKGROUND

3.         The Chartered Institute of Public Finance & Accountancy (CIPFA) developed a Prudential Code for Capital Finance in Local Authorities (the Prudential Code), to underpin the system of Capital Financing introduced by the Local Government Act 2003. Local Authorities are required by regulation to comply with the code when carrying out their duties under Part 1 of the Act.

 

4.         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.

 

5.         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 2005-8.  These limits are consistent with the recommended capital programme as contained within the body of this report.

 

STRATEGIC CONTEXT

 

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

 

CONSULTATION

7.         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

8.         The Supported Capital Expenditure (SCE) that is applicable to the 2005/6 financial year is 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 equivalent figures for 2004/5 are also detailed for comparative purposes.

 

                                                                                          2005/06                2004/5

                                                                                               £000                   £000

                            Education                                                3,385                  8,393

                            Highways                                                 5,941                  6,305

                            Housing                                                    1,769                  1,702

                            Social Services                                          112                      111

                            Fire Services                                              123                      122

                            Ventnor Landslips Works                          275                           -       

                                                                                            11,605                16,633

 

These supported borrowing levels are contained in the proposed capital programme as detailed in Appendix B.

 

            The total level of SCE for the 2005/6 financial year is down by £5.3 million from the previous year, principally due to a large reduction in that available for Education.  This reduction is common to most Authorities and arises from national resources being placed into the “Building Schools for the Future” (BSF) plans.  Authorities such as the Isle of Wight who are not yet eligible for BSF have seen their proposed capital allocations for 2006/7 and 2007/8 restored to close to previous levels.

 

            Coast Protection Schemes are funded through a combination of SCE and Government Grant.  This supported borrowing and grant allocated on a scheme by scheme basis as operated by the Department of the Environment, Food and Regional Affairs (DEFRA)

 

            In addition to the above are the additional Highways allocations specific to Ryde Interchange and the Undercliff drive.  These provisional allocations have yet to be formalized but a total of £1.7m and £4.5m respectively for 2005/6, have been included in the Prudential Indicators as set out in Appendix A.

 

9.         Capital Investment in respect of service areas falling outside of SCE have been funded by the generation of capital receipts.  The programme for 2005/6 and 2006/7 as approved by Council in February 2004 in respect of such investment is contained in Appendix B.  It is anticipated that a total of new capital receipts of £2 million will be generated in 2005/6 and this would leave an uncommitted total of £560,000 after allowing for previous decisions and capitalised salaries.

 

10.       The Capital Working Group is reviewing current capital bids for prioritisation against the remaining available resources.  The Group will also be reporting to Directors regarding any further application of Prudential Borrowing to finance capital investment.  Any recommendations on such will be brought forward to the Executive with a full option appraisal.

 

11.       It had become increasingly difficult to realise capital receipts and the Council as part of its 2004/5 capital finance considerations approved a total of £2 million of unsupported borrowing (prudential) for that year.  This sum was for use in the event of planned capital receipts being delayed, or for projects that would be self-financing over the medium term (on an ‘Invest to Save’ principal) and which would be subject to a robust business case being approved by the Executive.

 

12.       No projects have been taken to the Executive for funding consideration through prudential borrowing.  Prudential borrowing could however be applied to the funding of the Respite Care Home opened in May 2004.  The Council agreed to make a financial contribution of £700,000 to the scheme when the cost of borrowing associated with a private investor was found to be high.  This investment produces annual savings from the avoidance of mainland placements and prudential borrowing could reduce the commitment on capital receipts arising from this project.

 

13.       It has been the Council’s practice for some years to acquire its plant and vehicles through an operating lease. Under the former capital finance regime this had the advantage that such acquisitions did not qualify as capital expenditure and so require scarce capital resources.  The annual revenue premiums associated with operating leases became a charge on the budget of the service receiving the asset.  Under the Prudential Code, an authority may choose to purchase rather than lease its vehicles, and an option appraisal would need to take place in order to decide as to whether leasing or purchase was the most cost effective method of financing.  The revenue cost of prudential borrowing in such instances would fall as a cost to the relevant service budget just as lease premiums had under the previous capital finance regime.

 

14.       No capital provision has been made at this stage in respect of a replacement for the County Records office.  Initial forecasts for a replacement are for an associated cost of £4.5 million.  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.

 

LEGAL IMPLICATIONS

 

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

 

OPTIONS

 

16.      (i)         To approve the recommended Capital programme for 2005/8 as contained in Appendix B.

 

            (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.

 

            (v)        To approve the annual Treasury Strategy as contained in Appendix C.

 

            (vi)       To amend the Treasury Strategy.

 

EVALUATION/RISK MANAGEMENT

 

17.      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. 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 Treasury Strategy for 2005/6 is in accordance with the Prudential Code and is attached as Appendix C.

 

 18  CAPITAL PROGRAMME RECOMMENDATIONS

(i)      That the capital programme as contained in Appendix B be approved and Supported Capital Expenditure (SCE) levels be 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 in the event of planned capital receipts not being received in the 2005/6 year, for Invest to Save/Prudential Schemes that are subsequently approved by the Executive and for the acquisition of vehicles and plant where an option appraisal demonstrates purchase to be financially beneficial compared to leasing.

 

(iii)    That the approved £2 million prudential borrowing in 2004/5 be applied to the Respite Care Home and, where financially beneficial, to the acquisition of vehicles and plant.

 

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

 

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

 

(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, as contained in Appendix A.

 

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

 

(viii) That the Treasury Strategy for 2005/06, as set out in Appendix C, be approved.

BACKGROUND PAPERS

19.         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]

 

 

 

PAUL WILKINSON

Chief Financial Officer

REG BARRY

Portfolio Holder for Resources