Draft borrowing and capital spending plan 2009/10 to 2015/16

Report: 08
Date: 20 November 2008
By: Director of Resources on behalf of the Commissioner and MPA Treasurer

Summary

This report provides information on progress achieved in the preparation of the draft seven-year borrowing and capital spending plan 2009/10 to 2015/16. It outlines the work undertaken to ensure an affordable capital programme is achieved. The proposals reflect the impact of the significant decline in the property market on the Authority’s ability to generate capital receipts. Account is also taken of investment requirements associated with the Olympic/Paralympic Games in 2012 and new counter-terrorism initiatives. The plan is required as part of the overall budget submission to the Mayor of London.

Detailed information is provided on expected funding available to finance capital investment projects.

A. Recommendations

1. the Committee agree the present position regarding financing of the draft borrowing and capital spending plan 2009/10 to 2015/16 (Appendix 1 refers);
2. agree a revenue contribution of £22m to an earmarked reserve in 2008/09 and from the Investment Board Fund (2009/10 £9.9m; 2010/11 £3.9m), to fund the proposed capital programme;
3. agree the use of capital reserves of £29.6m in 2009/10 and £13.4m in 2009/10 to support the proposed capital programme;
4. agree the annual statement regarding the 2009/10 minimum revenue provision payments and the key prudential indicators calculated from the draft borrowing and capital spending plan 2009/10 to 2015/16 (Appendix 2 refers);
5. subject to 1 to 4 above, agree the draft borrowing and capital spending plan 2009/10 to 2015/16, and inclusion of the latter within the Authority’s budget submission to the Mayor of London (Appendices 3A – 3D refers); and
6. note that the capital programme will be subject to further review.
    

B. Supporting information

Introduction

1. The Mayor’s budget guidance notes that a Borrowing and Capital Spending Plan be submitted to the Greater London Authority as part of the overall MPA budget submission by 27 November 2008.

2. The budget guidance requires that a borrowing and capital spending plan commencing with financial year 2009/10 and spanning at least three financial years is prepared. However, to enable efficient and effective planning of investment requirements for the Service the Authority has recognised that a more long-term perspective needs to be adopted. Therefore, the capital programme covers a period of seven years with a thorough review of investment needs and sources being undertaken on an annual basis.

Capital Strategy

3. The MPA Capital Strategy was approved by the Authority in July 2007 and is integral to the consideration of investment proposals against the business priorities of the Service and the resource constraints that must operate. It informs financial and business planning. It is essential that the Strategy be viewed in the context of available capital finance. It provides a focus to analyse the affordability, prudence and sustainability of investment proposals as required by the Prudential Code.

4. The Capital Strategy focuses on processes to take forward a strategically led, priority driven, capital programme. In this regard capital projects must be seen to contribute to one or more of the Service’s strategic priorities. In order that the capital programme can be prioritised according to the corporate needs of the organisation, individual projects have been analysed with reference to key criteria i.e.

• Projects that must be delivered. This covers statutory requirements, compliance with health and safety issues and the replacement or renewal of core infrastructure.
• Impact on delivery of the MPS Strategic Objectives
• Continuation or completion of a capital project where significant expenditure has already been incurred or where the MPS is already contractual committed;
• Where significant revenue or capital savings would result which could be reallocated elsewhere within the business or achieve an efficiency reduction in spend
• Business benefits of the project – with particular emphasis on performance improvement.

It is important to emphasise that these are not competing criteria, or listed in any order of importance.

Capacity

5. Detailed information has been sought from provisioning departments and business groups on capital investment needs in line with the approved Capital Strategy. In setting out the capital expenditure proposals it was requested that the capacity of each provisioning department to deliver proposed projects be recognised.

6. The impact of expenditure on the 2012 Games and counter terrorism initiatives also needed to be recognised. Provisioning departments have necessarily considered the impact of investment requirements on capacity for these key areas of activity. These will be finalised once final details are provided by the Government on the level of funding for the Olympics/Paralympics and counter-terrorism purposes.

Affordability

7. Capital grants and third party contributions are not expected to vary significantly from present levels. However, the present downturn in the property market has resulted in a reduction in the level of capital receipts that will be available to finance the borrowing and capital spending plan. Previously available levels of finance could be achieved by increasing borrowing levels. However, the present economic climate, and pressure on the revenue budget, means that this would need careful consideration. The reduced receipts therefore impact on the size of the capital programme that is deemed affordable. The level of funds currently available would support a core capital programme of some £120m to £140m a year. To this can be added specific funds in respect of counter-terrorism initiatives and the 2012 Games, as well as third party contributions for named projects.

8. The review of the capital programme for 2008/09 as at the end of period 6 reveals that an underspend of some £25m is now forecast in the current year. This reflects slippage in certain projects i.e. safer neighbourhoods programme and this has now been taken into account in resource requirements for the 2009/10 to 2015/16 programme. However, the downturn in the property market is also seriously affecting the expected level of capital receipts that will be available to finance expenditure. From a budget estimate of £84.8m only £20m receipts from the disposal of property is now expected. Subject to Authority approval, it is proposed that the shortfall in funds will be made good by increased use of capital reserves. However, this limits the reserves available to support expenditure in year 2009/10 and beyond and increases the risks around realisation of future financing projections.

Borrowing

9. The Policing London 2008-11 Business Plan was approved by the Authority on 27 March 2008. The Borrowing and Capital Spending Plan 2008/09 to 2014/15 and the prudential indicators formed part of this approval process and supported annual borrowing to support the plan of some £40m a year. Late notification was received from the GLA (25 March) that the borrowing limits approved by the Mayor were significantly lower than the limits submitted to the Authority and would restrict the ability to fund the capital programme in future years. In subsequent discussions the GLA has accepted that the MPA’s borrowing limits for 2009/10 and beyond can be reviewed as part of the 2009/10 budget round.

10. Having regard to both the demands arising from existing investment decisions and to the inability of the Authority to generate the receipts previously anticipated, the proposed capital programme and budget assumes an increase in borrowing to £50m in 2009/10 and £40m a year thereafter. Over the longer term however the Service recognises the need to review the overall debt financing structures to ensure their sustainability. In the short term, without this level of borrowing, the proposed capital programme is not affordable.

Capital Receipts

11. The ability of the Authority to generate receipts has been significantly affected by the volatility of the property market. Estimates have therefore been reduced to £20m in 2009/10 and 2010/11 and to £40m a year thereafter. By 2011/12 there is expected to be some improvement in the general market. The estimates also recognise that some of the potential disposals will be attractive to specialist markets, which remain active.

12. Future receipts could also be affected by the outcome of the Authority’s Estate Strategy review, the results of which are expected to be agreed in spring 2009.

13. The position on receipts will therefore need to be closely monitored, and the capital programme managed to reflect any non-delivery of receipts.

Capital Reserves and Revenue Contribution to Capital

14. Capital Reserves have been built up over recent years due to a buoyant property sales market and from underspends on approved capital budgets. In order to manage the reduced capital programme over the next two years it is proposed that the existing reserves be reduced over 2009/10 (£29.6m) and 2010/11 (£13.4m). It is recognised that this is a one-off source of funding and will deplete the existing capital reserves and reduce future flexibility.

15. At month six for 2008/09 revenue underspend of £22m has been forecast to arise by year-end. It is proposed that this underspend is transferred to the earmarked reserve in order to support capital spend in 2009/10 (£13m) and 2010/11 (£9m). It is recognised that this is a one-off source of funding and will reduce future flexibility.

16. A number of relatively small projects (Events Management, Developing Resource Management, Virtual Courts and Language Programme) will support the delivery of key service efficiencies. These are reflected in the proposed 2009-12 revenue budget. It is therefore intended to fund these projects by way of revenue contribution from the Investment Fund budget. The proposed contributions will be £9.9m in 2009/10 and £3.9m in 2010/11.

Other Funding Sources

17. The other funding sources supporting the capital programme can be summarised as follows:

1. Police Capital Grant – this is general grant from Government and is expected to continue at some £38.4m a year.
2. Other Grants and Third Part Contributions – this includes grants provided for named purposes e.g. contributions towards the NSPIS project from the Home Office.
3. Partnership Funds – this reflects contributions from partnership arrangements/revenue budgets to bolster capital expenditure in key areas e.g. climate change action plan.
4. Specific Grants – The Authority receives support from Government for specific projects, particularly in respect of Counter Terrorism and Olympics activity, based on approval to business cases submitted. These funds are ringfenced to the approved budget and progress is dependent on funding approval.

18. The Authority has recognised that given the uncertainties associated with resources, capacity issues, and the time required to plan major schemes, managing the capital programme represents a significant challenge. Tight control of the capital programme is required to ensure spend in any particular year does not exceed the resources available. It is also essential to limit ‘slippage’ in order that unused resources taken forward for completion of schemes will not raise concerns on the ability/capacity to deliver future projects.

19. Work continues on achieving the best match between investment needs and strategic objectives, with proposals for increasing capacity being assessed. However, concern over capital receipts and borrowing levels has meant that affordability of the programme in general terms, as well as its impact on the medium term budget has been a critical consideration.

20. In proposing this overall funding package the Service has recognised the need to reduce its capital demands to reflect the changing funding environment and the reduced resources available to support previously agreed priorities. In reviewing the overall programme many projects and programmes have to be delayed and/or delivered over more years than originally anticipated. The overall funding package now proposed therefore aims to minimise as far as possible the operational and contractual impact of slowing down the programme over the next two years. Excluding Olympics and Counter Terrorism activity a comparison between the proposed and existing capital budget can be summarised as follows:

21. The tables below summarises the current implications of the proposed capital programme and spending plans against likely funding sources.

Proposed programme

Capital Programme 2009/10 to 2015/16

22. Appendices 3A to 3E provide details of the revised seven-year capital programme. Appendix 3D and E are exempt)

• 3a. Expenditure by Provisioning Group
• 3b. Expenditure by Business Group
• 3c. Expenditure by Service Objective
• 3d. Detailed list of projects within proposed capital programme - Exempt
• 3e. Detailed list of projects presently not within proposed capital programme - Exempt

23. As the capital programme for 2009/10 to 2015/16 has been prepared over a seven-year period, it has not proved possible for all schemes to have been subject to detailed scrutiny regarding expenditure profiles, deliverable benefits, etc. In accordance with the Capital Strategy, all projects that have not previously been approved to proceed will need to be considered by the MPS Investment Board. All projects costed in excess of agreed devolved limits will also need to be forwarded to this committee for approval. The presented business case will need to identify all relevant capital and revenue costs associated with implementing the project, as well as any ongoing costs once the relevant asset(s) is in place. Each case will be assessed against corporate objectives, the Capital Strategy, and operational initiatives. Only if relevant criteria are fulfilled will authority to proceed be given and suitable financing identified. Inclusion of a project in the capital programme does not constitute approval to spend.

24. A review exercise was then undertaken to ensure:

• all listed projects fully met strategic objectives and/or operational needs; and
• all business groups had been given the opportunity of contributing to the formulation of the capital spending plan, and in particular the prioritisation process.

25. This review exercise allowed business groups the opportunity of critically examining the schemes nominated for implementation over the seven years of the capital programme. They were able to verify that key needs were addressed and confirm the prioritisation process was appropriate, with particular emphasis on the scores given to schemes under the approved scoring mechanism.

26. Given the swift decline in the property market, and the increasing uncertainty of future receipts towards the end of the planning process, the proposed capital programme and budget was subject to significant scrutiny by the MPS Management Board. The exercise aimed to defer/delete schemes whilst having regard to contractual commitments, business critical projects/programmes, service operational priorities and impact on the revenue budget. Given the time available to carry out this exercise, however, further work is being progressed to ensure major risks and dependencies are properly dealt with. Some flexibility is, therefore, required. In progressing projects included in the programme, changes may be required before the budget is finalised. Work is also underway to review and prioritise schemes no longer included in the programme so that they can be progressed should resources become available.

Property Based Schemes

27. The budget profile for property based schemes allows for the continued rollout of major initiatives such as patrol bases, custody clusters and the Safer Neighbourhoods Programme. As integral elements of the Estate Strategy these projects are essential in delivering operational bases that meet modern policing needs.

28. Discussions with Property Services have determined that with present resourcing levels a capital programme for property-related schemes of around £50m to £70m a year can be supported. Much depends on the number and scale of the projects under consideration.

29. A number of options were explored for the location of the new Strategic Command Complex. Given the limited funds available it has been decided that the most cost effective option is to site this facility at Empress State building. Approval to this proposal is sought elsewhere on this agenda.

30. It is proposed to extend the roll out of the Safer Neighbourhood Programme into 2010/11 compared to the original completion date of December 2009. Detailed work is currently in hand to minimise potential contractual costs and to manage the supply chain as effectively as possible. This is expected to reflect:

1. continuing and completing the programme of acquisition of bases is continued and completed in line with the current contract. This will minimise abortive costs and allow the delivery of bases to be scheduled during 2009 and 2010 albeit the bases will be kept empty for a period
2. rescheduling the construction of bases over three years by reducing the number of bases under construction at any one time taking account of operational priorities. This will increase supervision and overhead costs.

This proposed rescheduling is expected to increase the overall cost of the programme by some £2.25m, which will be reflected in the final capital programme submitted to the Authority in February and is likely to involve the rephasing of expenditure currently planned for 2008/09.

31. The rephasing of the custody and patrol base projects reflects the operational priorities agreed with TP.

32. Further information is included in the exempt agenda regarding property issues relating to the proposed capital programme.

Information Technology Based Schemes

33. The proposed budget for information technology schemes as provided by the Directorate of Information takes account of all known developmental needs as expressed by Business Groups. This includes ongoing projects, areas where technological innovation is required and areas where replacement of existing systems is needed. The level of expenditure noted for each of the financial years covered by the capital programme represents the underlying need for capital investment in information technology.

34. The underlying level of demand for investment is significantly in excess of the sums that can be made available for allocation. The Director of Information Technology has initiated detailed discussion with business groups to ensure that core infrastructure is delivered upon which the development of a number of key operational systems depend. Priorities for other projects have then been determined upon the support provided to Service objectives and the operational benefits delivered.

35. Discussions with the Directorate of Information have ascertained that under present resourcing levels a capital programme for information technology projects of £50m to £70m can be supported. .

36. The costs of the Olympics and CT will put further demands on DoI and this may require some re-profiling of core projects into later years within the seven year programme.

Transport Based Schemes

37. Vehicles (cars, vans and motor cycles) and boats are essential assets in the efficient and effective policing of London. Therefore, a considerable element of the capital budget continues to be devoted to the replacement of these items once they reach the end of their economic life. A number of vehicles have also been purchased for specific operational initiatives using funds provided from third party sources. Demand for these vehicles remains high and replacement has therefore been incorporated into the capital programme.

Olympics & Paralympics

38. The staging of the Olympics and Paralympics in London in 2012 will require major investment in security infrastructure and equipment to enable the Metropolitan Police to provide effective policing of all events. A detailed schedule of requirements has been prepared and this continues to be the subject of detailed discussion with the Home Office and HM Inspectorate of Constabularies. The buildings and equipment provided for effective policing of the games will remain available thereafter. These legacy issues are the subject of discussion with Government, which will influence how items should be procured, financed and subsequently maintained. Decisions will also have to be taken on how these projects will integrate with long-term service activity post-2012.

39. The funding assumption at present is that additional capital and revenue grant will come from the Government to support the 2012 investment. This position will be kept under review and the capital and revenue budgets adjusted as and when agreement is reached with the Government on the legacy benefit to the MPS from the approved programme of works.

40. Projects supporting the Olympics/Paralympics are shown separately at this time due to ongoing discussions regarding legacy and funding issues. However, it is recognised that they will need to be integrated with the main capital programme at the earliest opportunity. This will ensure continuity of approach and also reflects that timescales for the delivery of key schemes are uncompromising and demand early start dates.

41. In order to optimise delivery capacity in respect of Olympics projects, discussions are taking place with other police forces to determine the extent to which they could deliver some projects on behalf of the MPA/MPS.

Counter-Terrorism Measures

42. Bids against the additional funds made available nationally for counter-terrorism purposes have been submitted to the Home Office. It will not be known until later in the year whether the bids will be successful. In similar manner to the proposals for accommodation and equipment needed in respect of the 2012 Games, the bids for counter-terrorism equipment and facilities will need to be fully discussed with respective provisioning departments to consider their impact in terms of project management and how it may affect delivery of the core Service investment programme. The funding assumption is additional capital and revenue grant will come from the Government to support the counter-terrorism investment

Prioritisation of Capital Programme

43. Following the prioritisation of the capital programme and having allowed for a small element of over programming the proposed capital programme is summarised in Appendix 3. More detail is provided on the exempt agenda. Details are also provided of the projects/programmes, which it is not possible to accommodate within the resources currently anticipated to be available to support the capital programme.

44. Work will continue on developing and prioritising these projects so that they can be progressed in the event that further resources become available. It should however be noted that the inability to progress these schemes will impact on operational delivery and on the ability of the Service to rationalise services and deliver revenue efficiencies.

45. The Service is currently exploring possible options for delivering some of these projects without putting further pressure on capital.

Prudential indicators

46. Based on the funds available to finance the draft Borrowing and Capital Spending Plan 2009/10 to 2015/16, an updated set of key Prudential Indicators has been prepared. These are attached at Appendix 2. These indicators take account of the proposed funding decisions as outlined at Appendix 1 and Appendices 3A to 3D.

47. The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 came into force on 31 March 2008. They require the Authority to approve an annual statement regarding the amount of money to be set aside from revenue funds to meet the repayment of borrowing undertaken to support capital investment. This is known as Minimum Revenue Provision (MRP). As agreed within report on this topic seen by the Finance and Resource Committee report on 23 October the required annual statement has been included at Appendix 3 and will form part of the budget submission.

Next steps

48. The capital programme 2009/10 to 2015/16 once approved by the Committee will form part of the overall MPA budget submission to the Mayor of London. Provisioning departments and business groups will, however, need to start the necessary planning and procurement preliminaries before the final budget is agreed. All schemes will be subject to the normal project approval processes.

49. The majority of projects within the programme can be re-profiled to deliver against strategic priorities earlier or later than planned. Also new projects not identified within the programme can be added at a later date via the internal approval process of Capital Programme Review Board and Investment Board and then onto the MPA. This affords the programme a high degree of flexibility and allows the best use to made of available resources.

50. A further review of the capital programme will be necessary following confirmation of grant settlement figures by the Home Office and the setting of the precept by the Mayor. Also, further discussion is required on capacity issues for future years. In view of this it is envisaged that a final capital programme for 2009/10 to 20015/16 will be submitted for approval to the MPA Finance Committee in February/March 2009.

C. Race and equality impact

There are no direct equality and diversity implications arising from this report. However, Committee will note the inclusion of sustainability, diversity and environmental objectives within the Capital Strategy. These aim to promote the sustainable procurement agenda across all areas of capital expenditure in line with the GLA Statement on Sustainable Procurement approved by the MPA in June 2006.

D. Financial implications

1. The current volatility of the property market is placing significant pressure on the capital programme. As indicated in Section B the proposed capital programme requires higher than previously anticipated support from:

• Borrowing
• Capital reserves
• Revenue contributions

2. In approving the proposed capital programme and related funding the Authority will wish to have regard to:

• The operational impact of further reductions on the programme, and
• The reduction in financial flexibility from the increased use of reserves and revenue contribution to support the programme and the need to replenish these reserves over future years.

3. In respect of reducing revenue flexibility the Authority will be mindful of the uncertainty regarding the recovery of £30m deposits, which are currently frozen in Landsbanki Bank. If unrecovered this sum would at some point, or over a period, have to be written off to the revenue account. For this reason, in considering the position on the capital programme, no proposal has been made for support from the general fund balance, which currently exceeds the Authority’s minimum policy limit, or earmarked revenue reserves available to offset revenue pressures.

4. The Service is also considering whether the option of leasing rather than buying outright might be considered for some vehicles in future years. This would release capital resources but would be subject to procurement arrangements and put more pressure on revenue budgets.

5. The Service has prepared a balanced 2009/10 revenue budget, which is considered elsewhere on the agenda. The issues emerging on the capital programme, and reflected in this report, could adversely impact on the revenue budget in terms of:

• Reduced ability to capitalise staff costs.
• Delays in delivering savings already built into the revenue budget.
• Increased revenue support to maintaining assets.

These costs may, in part, be offset by a reduction in growth required to support an expanding capital programme. Work is underway to assess the revenue impact of the revised capital programme and will be reflected in the final budget, which will be considered by the Authority in March, once the overall budget has been determined by the Mayor of London.

E. Background papers

• Capital Strategy report to the MPA Finance Committee – 19 July 2007

F. Contact details

Report author(s): Anne McMeel – Director of Resources, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Send an e-mail linking to this page

Feedback