Borrowing and capital spending plan 2010/11 to 2016/17

Report: 6
Joint Strategic & Operational Policing and Finance & Resources Committee
Date: 18 March 2010
By: Director of Resources on behalf of the Commissioner

Summary

This report provides members with an update on the Borrowing and Capital Spending Plan 2010/11 to 2016/17: notably revisions arising from 2009/10 reprogramming and the addition of property provisions for later years.

A. Recommendation

that Members

1. Approve the Borrowing and Capital Spending Plan 2010/11 to 2016/17 as included in the draft Policing London Business Plan 2010-13 and the proposed funding framework
2. note the work underway to ensure future capital programmes and budgets reflect the resources available to fund them.

B. Supporting information

Background

1. The draft of the Borrowing and Capital Spending Plan for 2010/11 to 2016/17 was approved at a joint meeting of the MPA Finance and Resources and SOP Committee held on 19 November 2009. It is now necessary to review the content of the Plan to recognise the delays that have occurred in the delivery of projects during this financial year, and the impact this has had on expected levels of expenditure for 2010/11 and future years. The opportunity has also been taken to review the expenditure profiles for named projects yet to commence.

2. The Capital Programme continues to be based on the Capital Strategy as approved by the MPA. The Strategy remains a dynamic statement of intent, integral to financial and business planning. The Strategy is in turn supported by the Property, IT and Transport Strategies and relevant Asset Management Plans.

Stewardship of the Capital Programme

3. It has previously been noted that greater stewardship regarding the development and monitoring of the Capital Programme is required. The Capital Programme Steering Group (CPSG) has been established to provide this focus. CPSG members have provided the information for this review. The aim has been to finalise an affordable, prudent and sustainable Capital Programme for inclusion with the Policing London Business Plan 2010-13, whilst meeting statutory requirements as noted with the Prudential Code. This work is ongoing and will result in further revisions to the seven year plan in June/July following the closure of the 2009/10 accounts.

Capital Settlement 2010/11

4. Details of the capital settlement for police forces in England and Wales were provided by the Home Office on 6 January 2010. Police capital grant of £38.442m and supported borrowing of £19.635m were notified to the MPA/MPS. These figures are in line with sums used in the draft Capital Programme prepared in November.

Funding Issues

5. As part of the review of the capital programme the opportunity to identify any additional funding sources has been taken. Capital receipts in excess of the budgeted sum of £23.6m for 2009/10 will be secured. The forecast receipts for the year indicate that an additional £5.6m will be received. A proposal on how this money can be utilised is shown later in this report. Other adjustments noted in available funding over financial years are (i) those schemes with dedicated funding whose expenditure profile has changed; (ii) projects which have been delayed, in total or in part, from 2009/10 and seek to be reprofiled between financial years in excess of over programming issues; and (iii) funded additions to the Capital Programme.

6. Consideration will continue to be given to finding new funding opportunities as without them it will not be possible to increase the annual level of investment. Police grant is likely to remain static over coming years and given recent Government announcements may reduce. Internal use of capital and revenue reserves provides some relief but once used they are gone. The best prospects lie in closely examining our present asset disposal and borrowing policies. It is desirable that they can be adjusted at short notice thereby ensuring that investment opportunities can be maximised.

7. The current disposal programme for obsolete and redundant buildings recognises the downturn in the property market caused by the present economic conditions. Capital receipts of £20m in 2010/11 and £40m in the years thereafter have been forecast. However, indications are that the ‘green shoots of recovery’ may be appearing and also that the downturn in the London market was not as severe as first thought. The property market is regularly monitored and reported to the MPA through Estates update reports. Officers continue to work with the Estates Panel to develop the principles against which disposals options will be judged and to facilitate the timely sale of surplus properties. This will help free up more properties for disposal and result in revenue savings through empty/underused sites no longer incurring maintenance and security costs.

8. The amount of borrowing financing capital expenditure has been set at a level that is deemed affordable and prudent. This includes the additional £60m approved by the MPA Finances and Resources Committee in June 2009, which has subsequently been agreed to be used to finance £50m of investment in 2010/11 and £10m in 2011/12. However, the overall level of borrowing will still not be particularly high. Borrowing has ongoing revenue implications in that principal and interest payments have to be factored into the revenue budget. Borrowing limits are set by the Mayor. Present limits allow for all of the stated borrowing needs as shown in the draft Capital Programme. However, because of held reserves and provisions it has not always proved necessary for the Authority to negotiate external loans, choosing, for cash flow and interest reasons, to borrow ‘internally’ rather than go to the external market. This has left a considerable element of ‘headroom’ between the actual level of debt held by the Authority and the approved borrowing limits. This provides much needed scope to the Authority in deciding when and by how much increased levels of borrowing may be considered.

9. The funding position for the Capital Programme as reflected in the draft Policing Plan is shown at Appendix 1 of this report.

Review of Capital Programme 2010/11 to 2016/17

10. Projects have been classified on the basis of being ‘core’ to Service effectiveness or ‘pending’ consideration for inclusion within the Capital Programme 2010/11 to 2016/17. Core projects consist of those schemes previously identified as (i) essential to the delivery of key infrastructure; (ii) necessary to meet statutory health and safety considerations; or (iii) necessary to meet contractual obligations. Added to this listing are those schemes which have dedicated funding sources available. A full listing of ‘core’ and funded projects, which make up the proposed programme and budget, is shown at Exempt Appendix 2. As Committee will be aware, inclusion of provision/projects in the budget/programme does not constitute approval to spend. Individual projects/programmes are subject to the normal approval processes.

11 Members of the CPSG were asked to re-examine the draft Capital Programme approved in November and provide details regarding any adjustments that were required. Provisioning departments were expected to advise of:

• known reprofiling of projects as a result of revised estimates of cost, project cancellation, or adjusted delivery timetable;
• projects that needed to be added to the programme due to operational importance;
• property based schemes to be added to years 2011/12 and future years thereby ensuring consistency of approach in identifying ‘core’ schemes for operational efficiency; and
• ‘slippage’ in schemes within the 2009/10 Capital Programme which had not previously been noted within the build of the 2010/11 to 2016/17 Plan.

The latter was expected to comprise of underspends declared against approved schemes that had arisen since Period 6 of 2009/10, and were reflected within the revised forecast spends for projects as noted at the end of Period 9. It was not anticipated that all ‘slippage’ during 2009/10 would be corrected at this time. Further project delay could possibly occur in the closing months of this financial year. In line with normal practice the programme will be reprofiled in June/July 2010 to reflect the year end position and the impact of any further slippage on future programmes.

12. As noted at bullet point three within paragraph 11, certain property based projects were expected to be identified to be added to 2011/12 and future years. This was required to ensure a consistent approach to the present ‘budget round’ and allow a better understanding of investment demand to maintain ‘core’ infrastructure to support Service activity.

13 The draft Capital Programme had been prepared using the same prioritisation criteria agreed during past years. This had proved necessary due to the large number of investment proposals and the fact that there continues to be a level of investment demand far in excess of available funds or the capacity of the Service to deliver.

14. Based on the revised details provided by the provisioning departments £23.7m reprofiling between the 2009/10 and 2010/11 programmes has been requested. The two largest changes relate to Heathrow Operational Facilities and the Eagle Data Centre. Against the additional expenditure requirement in 2010/11 of £23.7m, £1.7m is matched with earmarked funding. The remaining £22m is dependent on general sources of funding and results in an additional pressure in 2010/11 because the level of overprogramming managed in 2009/10 means that the expenditure is not matched in full by unused resources. Proposals for dealing, in part, with the additional funding shortfall are explored later in this report. Provisioning departments have indicated that the proposed reprofiling of projects will not result in a capacity problem in terms of delivery.

15. Additions totalling £4.1m to the capital budget for 2010/11 are proposed. All of these schemes have been identified as essential for infrastructure or statutory reasons. The main element of the additional cost relates to works at Empress State Building (£3.5m) as a result of refurbishment of a number of floors vacated by London Underground and Metronet. Part of the occupation of ESB is understood to involve SO Department and it is expected that an element of the cost could be funded through by CT grant. This sum is not presently included within £3.5m sum added to the capital programme in 2010/11. When firm details are available the overall cost of works at ESB will be increased with a corresponding rise in funding available from CT funds.

16. As noted within the draft budget submission prepared in November, there were three projects recorded as ‘pending’ that were regarded as having significant importance for operational delivery. These schemes were:

• Covert Authority Management System (CAMS)
• CCC Appointments System
• MetTime2 – Phase 2.

To these schemes now needs to be added potential provision for Body Worn Video Devices. This initiative is seen as a potential support to single patrolling and a pilot is currently in progress. Full roll-out, however, will be subject to a full business case and normal approval processes.

These projects have been added to the Capital Programme in order that their impact on overall projected expenditure in 2010/11 can be assessed. The impact in 2010/11 is £6.9m (£16.7m overall).

17. Reductions of £25.7m to proposed expenditure in 2010/11 reflect revised costings, delays into later years, and/or re-evaluation of necessary deliverables. This includes £5m of Olympic costs with specific funding.

18. The various adjustments to the 2010/11 capital programme, as noted above, result in an overall increase in projected expenditure of £9.0m as shown in Table 1 below. The impact on funding is, however, more significant with an additional requirement of £16.3m being identified.

Table 1: Adjustment to Planned Expenditure in 2010/11

19. At paragraph 5 it is noted that £5.6m in excess of the budgeted sum of £23.6m is forecast to be received this financial year in respect of capital receipts from the disposal of redundant or obsolete property. Paragraph 14, notes that ‘slippage’ in projects during 2009/10 is leading to requests for the reprofiling of expenditure to 2010/11. This is required to maintain overall cost profiles. Not all of the named schemes have specific funds linked to them. Therefore, it is proposed that the forecast excess receipts from 2009/10 of £5.569m be used in 2010/11 to support the additional funding requirement.

20. A comparison of the forecast position for 2009/10 is shown at Table 2.

Table 2: Forecast Outturn Position for Capital Programme 2009/10

Table 2 highlights that in the interval between the revised budget being set in September 2009 (end of Period 6) and updated expenditure forecasts being prepared at the end of December 2009 (Period 9), the provisioning departments have reprofiled expenditure such that over programming amounts no longer feature in 2009/10. It is understood that this results from (a) cost reductions in a number of schemes; (b) certain projects being aborted pending revised specifications being prepared; and (c) other schemes being reprofiled into 2010/11.

21. The reduction in 2009/10 expenditure means that £5.9m of general funding will be available to carry forward to 2010\11. Although this will only partially offset the expenditure being carried forward.

22. Table 3 gives a comparison between available funding and cost of ‘core’ projects.

Table 3: Comparison Between Available Funds and Total Projects

Table 3 illustrates that there continues to remain insufficient funds to finance the ‘core’ projects. However, the level of shortfall in 2010/11 has increased the level of overprogramming to be managed from £37.5m to £42.3m. Unless additional funding is identified or projects scaled back in 2010/11 the over programming sum will roll forward to 2011/12 increasing future shortfalls.

23. Tables showing the ‘core’ projects summarised by (i) provisioning department; (ii) business group; and (iii) service objective are included at Appendix 3.

Capital Programme 2009/10

24. The purchase of a property in Richmond has been submitted to the MPA Finance and Resources Committee for consideration. This property will provide an ideal base for training purposes, serving the south-western segment of Greater London. Purchase of this property will enable the training sites at Kingston and Sunbury to be released in 2011/12 and would add to the projected receipts figure of £40m. The cost of acquisition and development would not adversely impact on the funding of the capital programme. It would also facilitate the delivery of the training and corporate real estate Service Improvement Plan (SIP) projects, together with their associated savings, which have been built into the budget. Approval of the purchase of Sovereign House is the subject of a report to be considered by the MPA Finance and Resources Committee on 18 March.

25. A separate detailed monitoring report on the 2009/10 Capital Programme as at the end of December 2009 is timetabled for discussion at the MPA Resources and Productivity Sub-committee meeting on 1 March 2010.

The Way Forward

26. Subject to Authority approval, the capital programme and budget will be actively monitored and managed by the CPSG in liaison with business groups to ensure the projects falling within the over programmed amount only proceed when (a) ‘slippage’ in other schemes; and/or (b) additional funds become available. This structured programme management approach will enable overall expenditure to remain within total funds available. It will facilitate a ready list of schemes that will be able to absorb capital underspend and ensure the capital outturn remains close to the declared budget.

27. As indicated, work is also underway with Management Board to review the programme in the light of the medium-term financial constraints faced by the MPA/MPS and the need to contain demand within the funding limits which are realistically available to the Service. The results of this exercise will be reflected in the formal review of the capital programme and budget which will be completed as part of the closing of the 2009/10 accounts. Revisions to the Programme and Budget will be reported to the MPS Management Board and the MPA in July 2010 and will reflect revisions both to spending profiles and income streams which are currently being clarified.

The Mayor’s Draft Capital Spending Plan 2010/11

28. Under Section 122 of the Greater London Authority (GLA) Act 1999, as amended by the Local Government Act (LGA) 2003, the Mayor is required in each financial year to prepare a capital spending plan including the investment proposals for the GLA and the four functional bodies. The format and the content of the capital spending plan are also set out in the noted legislation.

29. The Mayor’s Draft Capital Spending Plan for 2010/11 was issued on 14 January 2010. Written comments are invited by 5 February 2010. In preparing the draft the MPA was asked to verify the information included in respect of the MPA/MPS’s capital investment plans.

30. Under Section 3(2) of the LGA 2003 the Mayor is required to determine how much money the GLA and the functional bodies can afford to borrow. It is a requirement of Section 3(3) and (4) of the LGA 2003 that before making any determination, the Mayor must consult with the London Assembly and the MPA. In complying with this duty, Regulation 2 of the Local Authority’s (Capital Finance and Accounting) (England) regulations 2003 require the Mayor to have regard to the Prudential Code for capital finance in local authorities.

31. It has been confirmed that the information within the Mayor’s draft Capital Spending Plan 2010/11 regarding expenditure proposals and borrowing requirements agrees with the draft Capital Programme 2010/11 to 2016/17 approved by the MPA on 19 November 2009. The MPA draft Capital Programme was also the subject of debate when the Mayor’s Plan was discussed at the London Assembly Committee meeting held on 19 January 2010. No objections to the MPA spending proposals were raised.

32. The Mayor must send his final Capital Plan to the Secretary of State (CLG) – copies to functional bodies – before 28 February 2010.

33. Final approval of the MPA Capital Programme 2010/11 to 2016/17 will occur during March 2010, as part of the final report to the Authority seeking adoption of the Policing London Business Plan 2010/13. Therefore, it is possible in the period between the finalisation of the consolidated capital budget and approval of the MPA Capital Programme that minor adjustments to spending proposals may prove necessary. This is recognised by the GLA and London Assembly and is regarded as a problem incurred through meeting statutory timetables. Working policy is that only relatively minor adjustments to functional spending plans should occur and that any revisions would need to:

• have no effect across financial years on the incremental impact on council tax of capital investment decisions; and
• operate within borrowing limits as agreed by the Mayor.

Environmental implications

Pressures on capital funding for MPS programmes of work can have significant sustainability implications. These implications can be both positive and negative. Scarcity of capital can limit the opportunity to implement mitigating measures for building energy and water efficiency, waste minimisation and recycling which have an associated initial capital investment, even though they usually generate future revenue savings. The Stern Review highlighted that it is almost certainly cheaper to take action to avert climate change now, than it will be in the future but this can be difficult to justify when core policing services are immediately threatened. However a reduced capital budget does offer the opportunity to innovate to create improved efficiency which will result in positive sustainability implications through the avoidance of resource use and reduction in waste. MPS processes require that all business cases are reviewed for environmental implications and going forward in 2010, this will be formally expanded to include the review of wider sustainability implications.

C. Race and equality impact

1. There are no specific race, equality or diversity implications arising from this report. Equality impact assessments are undertaken on individual projects.

D. Financial implications

1. The financial implications are discussed in the main body of the report. Decisions on further capital investment will need to be taken following full evaluation of the revenue impact.

2. The Service is presently reviewing the 2010/11 revenue budget in the light of notified funding settlements and emerging priorities. A balanced budget will be agreed with the full cost of borrowing as noted in the Capital Programme reflected in the final revenue figures. However, the pressures on the Capital Programme could adversely impact on the revenue budget in terms of:-

• a reduced ability to capitalise internal staff costs;
• delays in delivering efficiency savings; and
• increase maintenance costs in support of assets earmarked for enhancement/disposal/decommissioning.

The overall impact on the revenue will be kept under close review and reflected in the final Policing London Business Plan 2010/13.

3. This paper identifies £250m of unfunded ‘core’ projects across the lifetime of the Capital Programme 2010/11 to 2016/17. . A major effort is going to be required to review and rationalise the programme and\or identify additional sources of funding.

E. Legal implications

1. A number of legal requirements are discussed within the main body of this paper. Beyond these, the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 & (Amendment) Regulations 2008 require (a) an updated set of Prudential Indicators and (b) a statement on Minimum Revenue Provision (MRP) to be prepared. It is intended that the revised Prudential Indicators be drawn up once all revisions to the Capital Programme. They will form part of the Policing London Business Plan as has occurred in the past. The statement on MRP will be included as part of the Treasury Strategy report to be discuss at the MPA Finance and Resources Committee on 11 February 2010.

F. Background papers

• Draft Borrowing and Capital Spending Plan 2010/11. Paper by the MPA Treasurer and Director of Resources presented at the MPA joint Finance and Resources/SOP Committee on 19 November 2009.

Appendices

• Appendix 1: Proposed Funding of Capital Programme 2010/11 to 2016/17
• EXEMPT Appendix 2: Full listing of projects put forward for inclusion within the Capital Programme 2010/11 to 2016/17
• Appendix 3: Summary of Capital Programme 2010/11 to 2016/17 by (i) provisioning department; (ii) business group; and (iii) service objective.

G. Contact details

Report author: Nick Rogers, Director of Group Finance, Finance Services, MPS

For information contact:

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

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