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Agenda Item No

The Vale of Glamorgan Council

 

Scrutiny Committee (Corporate Resources): 8th February 2013

 

Report of the Managing Director

 

Update on the Budget Review - Capital Programme 2013/14 - 2017/18

 

Purpose of the Report

1.             To update Committee on the progress of the Budget Review of the Capital Programme for the years 2013/14 to 2017/18. 

Recommendations

1.             That the Committee have regard to the contents of this report and provide any comments to Cabinet.

Reasons for the Recommendations

1.             To update Committee and provide for scrutiny of progress.

Background

2.             As part of the final budget proposals for 2012/13, Council on 7th March 2012 resolved that a Budget Review would be undertaken following the Council elections in May 2012 (minute no. 951).

3.             Details of the methodology for the Budget Review for the capital programme together with an update on progress at that time was reported as part of the initial capital programme budget proposals considered by Cabinet on 19th November 2012 (minute no. C1910).

4.             The results of the Budget Review will inform the final Capital Programme proposals 2013/14 to be considered by Cabinet on 25th February 2013 and Council on 6th March 2013.

Relevant Issues and Options

Purpose of the Budget Review

5.             One of the main tenets of the Budget Review process was to put in place a financial strategy for the Council to 2017. For capital this would require a different approach in that the traditional process of approving a programme which would be approved for the first year only (and indicative thereafter) would be replaced by a set programme spanning the period 2013/14 to 2017/18.

6.             In doing so, assumptions have necessarily been made as to the level of General Capital funding (GCF) that will be received in future years from WG. Given the prospect of continued austerity in public finances and a further spending review by Westminster Government this capital programme is predicated upon a 10% cut in GCF year-on-year from 2015/16. As part of the Budget Review, therefore, a major consideration was how the Council could look to:

·         mitigate the deteriorating situation in so far as it is able by reappraising all schemes and looking to progress only those which are deemed to be a key corporate priority, whilst also seeking to gain assurance that such schemes are delivered on time and within budget.

·         develop a strategy to maximise the availability of resources to address these priorities.

Prioritisation of Schemes 

7.             As a starting point in the budget review process, all services were required to submit bids for the 5-year period commencing 2013/14. These were then prioritised by the Corporate Asset Management Group of officers (CAMG) in the normal manner using the criteria shown below.

A

 

Health and Safety Legislation

B

 

Other Legislation / Statutory requirement

Ci

 

Economic Sense

Cii

 

Corporate Plan

Ciii

 

Sufficiency

D

 

Condition / Suitability

E

 

Welsh Government objectives

F

 

Low Priority

8.             The evaluation of the bids by the CAMG resulted in a high number of priority A and B bids. Such a high level of high priorities awarded does not assist in the allocation of the Council's scarce resources.

9.             Consequently, bids were further reviewed by the Budget Working Group (BWG) in terms of their corporate priority and the risk they pose to the Council if they are not pursued. This methodology broadly followed that outlined in the Initial Revenue Budget Proposals report for the Budget Review,  the risk assessment element of which was undertaken in line with the Council's Corporate Risk Management Strategy as follows:

Possible Impact or Magnitude of Risk

Catastrophic

Medium

Medium/High

High

Very High

High

Medium/High

Medium

Medium/High

High

Medium

 Low

Medium

Medium

Medium/High

Low

Very Low

Low

Medium/Low

Medium

 

 

Risk Matrix

 

 

Very Unlikely

 

Possible

 

Probable

 

Almost Certain

        Likelihood/Probability of Risk Occurring

 

10.        Taking into account the nature of capital schemes, the following criteria were applied to assess corporate priority:

Corporate Priority

Score

Commitments and areas where the Council has no control over the expenditure, e.g. contractual and legal commitments, absolute minimum statutory service, taxes, etc.

3

Very high priority (publicly announced commitment e.g. items included in the Community Strategy, Corporate Plan etc.)

2

“Invest to Save” expenditure

2

Statutory expenditure above the absolute minimum and other priorities

1

 

11.        In addition, to the above assessment, regard has been given to the priorities as set out in the Draft Corporate Plan 2013 – 2017 as well as the results of the consultation process undertaken on the draft Plan and Council’s Initial Budget proposals. This consultation was publicised via the Council’s website and sought the views of members of the public, Local Service Board partners, town and community councils and the business sector. The draft Corporate Plan had also been subject to review by Cabinet and all scrutiny committees prior to this. In terms of capital schemes, one of the responses received from the consultation made specific references to see 'the date for completion of the Barry Island relief road brought forward’ and that the Council ‘actively seek further regeneration funds for Barry from the Welsh Government.’

12.        Clearly, limited resources will allow only those schemes of higher corporate priority and/or risk from being pursued over the next 5 years. The exact extent of this will ultimately be determined not only by the amount of GCF allocated by WG but also the strategy adopted by the Council to maximise the resources available to it from other avenues.

Resources Available

13.        On 11th December 2012, the Welsh Government announced the final 2013/14 General Capital Funding settlement. There has been a 10.7% reduction in funding from 2012/13, which is marginally lower than had been assumed in the Initial Capital Programme Proposals report in November 2012 (£5.564M compared to £5.566M). Further cuts of 10% in 2015/16, and each year thereafter, have been assumed. On this basis, a table representing the capital funding from the Welsh Government is shown below:

Resources from Welsh Government

2013/14

2014/15

2015/16

2016/17

2017/18

 

£000

£000

£000

£000

£000

Supported Borrowing - General Fund

3,281

3,281

2,925

2,604

2,315

Supported Borrowing – HRA

   280

  280

  280

  280

  280

General Capital Grant

2,003

2,003

1,803

1,622

1,460

 Totals

5,564

5,564

5,008

4,506

4,055

14.        Another means of financing capital expenditure is through capital receipts resulting from the sale of assets. Receipts from the sale of Housing Revenue Account (HRA) assets can only be spent in the HRA and cannot be used to finance General Fund capital schemes. As at 31st March 2013, the forecast balance of useable General Fund capital receipts is £9.101M with a further £1.056M estimated to be generated between 2013/14 and 2017/18. It should be noted, however, that projected future capital receipts are not guaranteed.

15.        Capital expenditure can also be funded by revenue contributions or the utilisation of existing reserves. A reserve is a sum of money that has been set aside by the Council for a specific purpose. They are voluntary and can be made when the Council determines. Advances can be made from a reserve for the purchase of assets, which are then repayable over the life of the asset and the reserve is constantly replenished e.g. Vehicle Renewals Fund. Alternatively schemes can be funded from reserves with no repayment, however, once spent that source of funding is lost.

16.        One such reserve is the Project Fund which exists to finance capital and revenue projects.  The aim of the Fund is to initially finance a project with repayment of such advances (including interest), where possible, being credited back to the Fund. The estimated balance of the Fund as at 31st March 2013 is £5.009M.

17.        In a similar vein, the Council has an IT Fund estimated at £2.6M as at the end of 2012/13. The Council relies heavily on technology to deliver its services and the Fund allows investment in this infrastructure and also enables the Council to exploit opportunities to reduce the cost of services.

18.        Other means of generating income to fund capital projects is through monies forthcoming under S106 planning obligations and the new Community Infrastructure Levy.

19.        Outside of the above, the Council is heavily dependent on specific grant funding to supplement its own resources if certain capital schemes are to be progressed. Generally, this comes via Welsh Government, although contributions from other public sector organisations or associated bodies are also prevalent. It is estimated that over the next 5 years, the level of specific grant funding for General Fund schemes at just over £41.25M could be over two thirds more than the level of General Capital Funding for the same period (£24.7M). This does, however, assume that the priorities of the grant funding body are the same as those of the Council as many schemes require a match funding contribution to be made by the Authority to the cost of the scheme.

20.        When considering options for capital financing, the ability of the Council to finance the repayment of any loans it raises for the funding of capital schemes must be considered.  Part 1 of the Local Government Act 2003 requires local authorities to have regard to the Prudential Code, which has been developed by CIPFA (the Chartered Institute of Public Finance and Accountancy) as a professional code of practice. In setting the capital programme, the Council must ensure that the key objectives of the Prudential Code are complied with. The Council must ensure that its capital investment plans:

·         Are affordable, and that

·         All external borrowing and other long term liabilities are within a prudent and sustainable level.

·         The consequent treasury management decisions for Prudential Borrowing (also referred to as Unsupported Borrowing) are taken in accordance with good professional practice.

21.        The Code recognises that in making capital investment decisions the Council must have regard to option appraisal, asset management planning and strategic planning. However, given, the expected severity of cuts in future revenue resources, the potential for servicing debt not funded by WG as part of GCF or already provided for (e.g. Prudential Borrowing for the Schools Investment Programme, Local Government Borrowing Initiative for Highways and Housing Improvement Programme) is extremely limited as this will need to be funded through increases in council tax.

Total Prudential Borrowing over the next 5 years is estimated at £40.98M of which £31.1M relates to the Housing Improvement Programme.

Matching Priorities with Resources

22.        Given the restrictions on resources available to fund capital schemes, not all of the capital bids put forward would be successful. When matching the results of the prioritisation exercise with the resources available, funding was present to meet only those schemes assessed as either corporate priority 1 or above or medium risk or higher. Details of these schemes are attached at Appendix A. This appendix includes schemes which are termed as committed as these generally will score higher in terms of the risks associated with the failure to fulfil contractual obligations. Committed projects include the schemes which form part of the School Investment Programme and investment required to meet the Welsh Housing Quality Standard. Those schemes which are of a lower corporate priority and lower than medium in terms of risk are detailed at Appendix B.

23.        Since the Initial Capital Proposals were prepared, a small number of additional bids were received and are included in the appendices to this report. In addition to the assessment of corporate priority and risk, the values and timings of bids have also been reviewed.

24.        Furthermore, it should be noted that the £1.2M budget for Disabled Facility Grants for 2013/14 (Dev1) includes proposed ‘one off’ slippage of £200k brought forward from 2012/13 (see Appendix A).

The schemes at Appendix A include a number of significant projects as follows:

School Investment Programme

25.        The 21st Century Schools Programme is the Welsh Government’s funding initiative for investment in schools. The first tranche of schemes, Band A, were submitted to the WG by November 2011 (as reported to Cabinet on the 16th November 2011). Band A schemes run from 2014/15 to 2019/20 and WG funding is for 50% of the costs. Penarth Learning Community is being funded under separate transitional arrangements at a total estimated cost of £42.47M between 2013/14 and its planned completion in 2015/16.

26.        In December 2012, the Welsh Government announced that the bid had been successful in outline. The next stage is for the submission of more detailed business cases for the schemes.

27.        The School Investment Programme incorporates not only the 21st Century Schools projects but also other investment needed in Education. Including Penarth Learning Community, capital expenditure on the School Investment Programme in the period 2013/14 to 2017/18 is estimated at £68.66M and includes schemes relating to Nant Talwg (£2.739M), Dewi Sant (£2.496M), Barry Cluster (£3.7M), Llantwit Learning Community (£12.476M) and Barry Art Block (£0.325M). Asset renewal accounts for £0.65M each year, school ICT £0.15M annually with other schemes totalling £0.45M over the period.

28.        In order to achieve all of this, it is anticipated that capital receipts of £4M from sales of school land will be received. The Programme assumes £1.44M Prudential Borrowing with up to a possible further £4M on a temporary basis pending realisation of the land sales receipts. A sum of £1.33M has now been committed by a neighbouring authority as a capital contribution towards the Penarth Learning Community. Where councils have not made a capital contribution, their ‘share’ of investment costs will be recouped through increased charges for school places.  There is a potential risk that these revenue contributions could reduce should pupil places taken up by those Councils fall.

29.        Consequently, there may be a need for Prudential Borrowing to be undertaken up to a maximum of £5.44M. Should the capital receipts be delayed or not materialise, the repayment of this debt will be met by Education revenue budgets. This would, however, very severely constrain the Council's ability to fund any future schemes. This is a concern, due to the poor state of repair of some school buildings in the Vale.

30.        The Education revenue budget could support circa £600k for capital charges on unsupported (prudential) borrowing and so the unsupported borrowing outlined above can be afforded.  However, this level of debt incurs significant interest repayments and limits the service’s ability to respond to future pressures on both revenue and capital budgets. It is essential, therefore, that every effort is made to realise capital receipts from the sale of land.

31.        It is intended that the proposals outlined for funding of the School Investment Programme replace those under the former School Investment Strategy approved in 2005.

Housing Improvement Programme

32.        The Welsh Government requires all local authorities who retain their housing stock to submit an acceptable Housing Business Plan annually that incorporates a detailed financial forecast in the form of a 30 year financial model. The Business Plan is the primary tool for a local authority’s housing landlord service and includes all assets within the Council’s Housing Revenue Account (HRA).

33.        The latest annual Plan was submitted to WG in December, 2012, and forms the basis of the Major Repairs Allowance (MRA) grant application, a pivotal financing component for the Housing Improvement Programme (to meet the Welsh Housing Quality Standard).

34.        The MRA for 2013/14 has not yet been announced by the Welsh Government but the assumed budget in Appendix A remains at £2.8M p.a., as received in 2012/13.

35.        The latest Business Plan projections were reported to Cabinet on 17th December 2012 (minute no. C1943) and approved at the Council meeting of 23rd January 2013.  The Plan outlines a reduction in the total amount of Prudential Borrowing required than was previously assumed from £32.9M to £32.4M. However, the date anticipated that all prudential debt could be repaid is now 2031/32 (previously 2029/30).

Other Schemes

36.        As with the Schools Asset Renewal schemes, the outcome of the resource and prioritisation matching process has revealed a considerable number of schemes relating to public buildings and infrastructure assets not all of which can be funded e.g. the inclusion of £800k per annum to address Visible Services assets and infrastructure will only meet the higher priority/risk schemes.

37.        In terms of regeneration, £300k has been allocated annually in relation to the Barry Regeneration Partnership. As well as being used for preparatory work (e.g. feasibility studies, site investigations), this may also be applied as a match funding to lever additional sources of grant funding.

38.        Having regard to issues associated with the environment and sustainability, £110k per annum has been set aside for inspection and works relating to coastal protection and drainage whilst £100k annually is allotted to prioritised energy schemes associated with street lighting.

39.        In line with the ICT Strategy, allocations for 2015/16 onwards of £300k pa will be predicated on schemes being primarily on an ‘invest to save’ and business critical basis.

Issues for Consideration

40.        When undertaking the Budget Review, given the extreme financial constraints currently facing the Council, it is of fundamental importance that the best use is made of its resources in order to meet its aspirations and priorities for the capital programme and mitigate the risks associated with it. However, there will still remain a number of issues, both burgeoning and extant, to which further consideration must be given that could affect the life of the next Capital Programme and/or beyond. These include:

·         The increase in risk posed by schemes which have currently been assessed low or medium/low but which are likely to increase in future years if not addressed.

·         The appearance of new high priority schemes not anticipated when drawing up the Capital Programme (e.g. as a result of unanticipated demand, changes in legislation etc.) 

·         The possibility of increased demands upon flooding, coastal protection and the environment generally (including an accelerated deterioration of the highways infrastructure).

·         The general shortfall of funding available to address the Council’s asset renewal requirements- both public buildings and highways (total values estimated at £65M and £49.8M respectively in the latest iteration of these Asset Management Plans).

·         The Council’s ambitions for regeneration and how they can be realised (including those in the draft Corporate Plan e.g. Penarth Esplanade).

·         The continued expansion over time of the Schools Investment Programme;

·         Funding of Renewal Areas;

·         The need to increase capital receipts (particularly those associated with the Schools Investment Programme).

·         The establishment of collaborative partnerships with other public bodies and the independent/third sector as potential levers/sources of funding.

Resource Implications (Financial and Employment)

41.        Reduced resources will restrict the number and size of capital schemes that the Council is able to fund. The value of schemes assessed as lower corporate priority and risk totals £24.86M. There will also be significant pressures on spending post 2017/18 which are not yet funded. These include the backlog of school, highway and buildings repairs.

42.        In order to provide some resilience, it has been assumed that a balance of £2M will be held both in terms of both unallocated capital receipts and the Project Fund.

Sustainability and Climate Change Implications

43.        One of the purposes of the Sustainable Development Working Group is to review the sustainability of major capital schemes. Wherever possible, the Council strives to reduce carbon emissions and improve energy efficiency and positively encourages waste reduction initiatives.

Legal Implications (to Include Human Rights Implications)

44.        The Council is required to show that capital expenditure is covered by identified resources when developing its Final Capital Programme proposals.

Crime and Disorder Implications

45.        The obligations of the Council with regard to Section 17 need to be fully considered in the budget decision making process.

Equal Opportunities Implications (to include Welsh Language issues)

46.        Additional finance improves the Council’s opportunities for assisting disadvantaged members of society.

Corporate/Service Objectives

47.        Contributes to the corporate priority of Corporate Resources by the provision of sound financial management

Policy Framework and Budget

48.        The results of the Budget Review will inform the Final Capital Programme proposals 2013/14 to 2017/18 which will require the approval of Council.

Consultation (including Ward Member Consultation)

49.        The Corporate Management Team has been consulted on the proposals.

Relevant Scrutiny Committee

50.        Corporate Resources

Background Papers

Bids received from departments

Correspondence received from the Welsh Government

 

Contact Officer

Laura Davis Tel. No. 01446 709249

 

Officers Consulted

The following Officers have been consulted on the contents of this report:-

Corporate Management Team

 

Responsible Officer:

Sian Davies, Managing Director

 

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