Capital programme 2004/05 to 2008/09

Report: 09
Date: 19 February 2004
By: the Commissioner and Treasurer

Summary

This report sets out the current situation with regard to final development of the capital programme 2004/05 to 2008/09.

The report provides details of the capital settlement 2004/05 as announced by the Home Office. The settlement is then analysed in the context of (i) required amendments to the capital programme undertaken in light of the review of projects which best fit operational strategy and needs; and (ii) the need to determine the funding for further schemes of work to support front line policing. These changes have occurred since the draft programme was seen by the Committee on 13 October 2003. The final proposed programme will be reported for approval to the full Authority on 25 March 2004.

Information is also provided on (i) the likely level of funds that will be carried forward as a result of ‘slippage’ from the capital programme 2003/04 to support ongoing projects in 2004/05 and future years; (ii) the reporting of the Prudential Code financial indicators; and (iii) the establishment of a capital strategy and asset management plan.

A. Recommendation

The Committee is invited to:

1. note details of the capital settlement 2004/05 (paragraph 4-7).
2. approve an adjustment to the expenditure profile for Transport Services’ in 2005/06, 2006/07, and 2007/08 (paragraph 17).
3. approve the inclusion within the capital programme for 2004/05 of the purchase of urgent helicopter equipment (paragraph 18).
4. note that full details of (i) how additional funding made available by the favourable capital settlement 2004/05 should be utilised; and (ii) all projects to be undertaken within the capital programme 2004/05 to 2008/09; will be presented to the full Authority on 25 March 2004 (paragraph 21).
5. note the arrangements for reporting of the Prudential Code financial indicators (paragraph 27-28).
6. note proposals in respect of the establishment of a capital strategy and comprehensive asset management plan (paragraphs 30-34).

B. Supporting information

Appendix 1: Summary of capital programme 2004/05 to 2008/09, including funding information, following announcement of the capital settlement for 2004/05 and review of projects to support present operational policing needs.

Background

1. A draft capital programme 2004/05 to 2008/09 was approved by the Committee at its meeting on 13 October 2003. Details of capital projects to be undertaken by the MPA and how such schemes were to be funded were required as part of the formal budget submission to be made by the MPA as one of the functional bodies of the Greater London Authority (GLA). It was not possible to give final approval to the programme at the time as details of the capital settlement for 2004/05 were still awaited from the Home Office.

2. In preparing the draft programme it was assumed that (i) capital grant; and (ii) borrowing to be supported by central Government; would continue at the levels received in 2003/04. The programme also took account of (i) the projected capital receipts to be used for in-year funding purposes; and (ii) a phased use of capital reserves. Subsequent to presentation of the capital programme at Finance Committee, the decision was taken, during finalisation of the medium term revenue programme, to capitalise IT equipment purchased under the refresh agreement with the outsourced IT service provider. This had the effect of increasing the Directorate of Information’s allocation by £5m for each year within the capital programme. It was also agreed that the capital expenditure implications of the first year of the step change programme for the continued expansion of officer numbers would be directly linked with the capital programme. The resulting allocations for business groups are as set out below.

Table 1: Capital Programme Indicative Business Group Allocations Business Group

* Expenditure represents first year of Step Change Programme Only.

3. The scale of the capital plan, excluding C3i and the step change programmes, shows a marked reduction on that noted in previous years. This reflects the depletion of capital reserves and the sum that subsequently can be used to support the programme. It also takes heed of the need to maintain capital reserves of at least £10m during the lifespan of implementation of the C3i Programme to ensure that unexpected expenditure streams can be addressed.

Capital settlement 2004/05

4. Details of the capital settlement for 2004/05 for the MPA were announced on 3 February 2004. Capital grant of £29.034m has been awarded. This represents an increase of £4.632m, or 18.98%, on the 2003/04 figure of £24.402m. Of the grant total, £5.246m has been earmarked for investment in technology to support frontline policing. The grant is allocated on the understanding that matched funds will be provided from within the Authority’s own resources in support of IT projects. It is not subject to a bidding process. Monitoring arrangements are to be established by the Home Office to assess progress on the implementation of appropriate schemes in order to inform the 2005/06 capital settlement exercise. Given the scale of the MPS capital programme and the high level of investment in IT projects such arrangements are not envisaged to cause any difficulties.

5. As part of the capital settlement notification was also received that £18.999m of supported capital expenditure (revenue) would be available. Supported capital expenditure (revenue) is a transitional replacement for supplementary credit approvals and identifies the level of capital expenditure financed through borrowing which will in turn attract support through the local government revenue grant settlement. The supported capital expenditure (revenue) figure of £18.999m represents an increase of £2.157m, or 12.81%, on the 2003/04 sum for supplementary credit approvals of £16.842m.

6. A comparison between the MPA share of the 2003/04 and 2004/05 of the overall settlement is shown at Table 2.

Table 2: Capital Settlement – MPS Share of Total

7. The capital settlement results in an overall increase beyond sums assumed in the budget submission of £6.789m - £4.632m capital grant and £2.157m supported capital expenditure (revenue). This increase results from (a) the discontinuance of the Premises Improvement Fund (PIF); and (b) a reduced level of retained capital receipts. As members will recall, the Premises Improvement Fund operated during 2002/03 and 2003/04 with £20m ring-fenced per annum for modernising the police estate. The Fund worked to the detriment of the Authority in that a maximum of £1m was available to each force during a financial year on the assumption that bids to the Home Office were successful. The £20m funding has now been incorporated back into the general capital fund which is allocated under the general revenue funding formula. This means that the MPS has received 25.9% of the £20m funding i.e. £5.18m. Retained capital receipts are taken into account by the Home Office in determining the award of supported capital expenditure (revenue). Use of retained capital receipts in financing the capital programmes for 2002/03 & 2003/04 has improved the MPA share of the sum available for distribution to all forces within England and Wales.

Review of Capital Programme resources

8. The favourable capital settlement as announced by the Home Office means that additional resources beyond those assumed in the draft capital programme become available. It has been verified that funding of the programme expected to be made from internal sources i.e. in year capital receipts and capital reserves, continues to hold good. Therefore, a decision needs to be taken in light of the formal review of the capital projects to be undertaken during 2004/05 to 2008/09 as to whether the additional resources should be reallocated for expenditure purposes or held to cover unforeseen circumstances.

9. It should be noted that, in the short term, capital reserves will continue to be required to fund expenditure on the C3i Programme in advance of the receipt of Government specific grant. Future years’ grant receipts will serve to restore the reserves albeit that some element of MPA funding of the C3i Programme is required.

Capital Expenditure Programme 2004/05 to 2006/07

10. A comprehensive review of the capital programme has been undertaken since the draft capital programme was submitted to the Mayor in November 2003. This is to ensure that the investment needs of the Service accurately reflect operational objectives. In undertaking the review provisioning departments were asked to analyse the capital programme and prioritise projects on the basis of:

• force policing objectives;
• schemes deemed essential for continuity of service delivery;
• schemes that the Authority is contractually committed to; and
• the replacement of inadequate/dilapidated accommodation and/or equipment.

11. In undertaking the review provisioning departments were also required to take heed of relative capacity to deliver the proposed capital programme and the ongoing revenue consequences of projects within the draft programme.

Property Services

12. It continues to be the case that the scale of funding which can be made available to Property Services is insufficient to fund the full range of schemes that would be desirable within a modern police force. The growth in police numbers and the introduction of police community support officers brings with it accommodation issues that must be addressed. The worn-out and non-compliant condition of much of the MPA Estate means the capital programme is regarded as inadequate to meet real needs. In reviewing the land and building projects contained within the programme Property Services has maintained the move to policing priority themes, concentrating on statutory obligations placed on the MPA e.g. Disability Discrimination Act, and improving front line policing accommodation e.g. locker and cell accommodation.

13. Whilst expenditure for years 2006/07 to 2008/09 remains within previously advised allocations, forecast expenditure for 2004/05 has risen from £21.300m to £38.091m and for 2005/06 from £22.401m to £23.644m. For 2004/05 the funding gap of £16.791m is largely bridged by (i) anticipated funds to be carried forward from 2003/04 in respect of projects where timing problems have occurred; (ii) funds allocated during 2003/04 from earmarked capital reserves for major Estate improvements e.g. Frank O’Neill (OTIS) House and the Technical Support Unit evidential laboratories; and (iii) £2m to be found from forecast revenue underspend during 2003/04 against Deputy Commissioner’s Command cost centres to fund the initial tranche of the construction of operational command rooms for the integrated borough (IBO) function. However, these measures still leave funding shortfalls of £0.632m in 2004/05 and £1.244m in 2005/06.

Directorate of Information

14. The technology programme continues to be almost exclusively taken up by the Infrastructure Renewal Programme and the Information Strategy Implementation. Separate work streams are noted, containing a number of coherent projects that will deliver the objectives of the MPA with regard to information systems, their development, integration and management.

15. In reviewing the capital programme the Directorate of Information has recognised the increasing demand expressed by the user community for IT solutions to assist in the fight against crime. This involves both new systems and acknowledgement of technological developments which would greatly enhance existing systems. The required budget noted in respect of years 2005/06 to 2008/09 remains at the previously set allocations. However, for year 2004/05 a significant increase on the present allocation of £24.500m is noted as required.

16. In providing details of the revised budget requirement for 2004/05 the Directorate of Information has afforded projects a priority classification. Those absorbing the present allocation of £24.500m are noted as essential activities which form the cornerstone of the user business expectations. However, further schemes that have a mandatory requirement attached are also featured. There is a high expectation from the user that such projects will be delivered. Additionally, a number of highly desirable projects to aid the structured upgrade of current systems are identified.

Transport services

17. The transport allocation is based on the assumption that like for like replacement will occur as and when vehicles fall due for replacement. Any restructuring of the fleet will be contained within the overall sum available. In reviewing the programme it has been possible to take into account the decision taken by the MPA Finance Committee on 20 November 2003 to purchase all public order personnel carriers rather than lease part of the fleet. This has the effect of reducing the capital requirement for transport needs in 2005/06 by £1.0m but increasing demand in 2006/07 and 2008/09 by £2.300m and £2.950m respectively. As these adjustments to the capital programme occur three years hence, and there will be a reduced demand to maintain a high level of reserves following completion of the C3i Programme, it is believed acceptable to fund these adjustments to the capital programme through use of capital reserves.

Helicopter equipment

18. An urgent need to replace the sensor turrets on each of the three MPA helicopters has been identified. It has been recognised that the camera equipment within the turrets cannot produce images of sufficient quality to meet present operational requirements and replacement is essential. A cost of £1.3m has been identified for this work and has now been included within the capital programme for 2004/05. Funding will come from a specific capital grant of £0.560m made available by the Home Office from the Air Support Fund. It is proposed that the remaining £0.740m will initially be financed from usable capital reserves, with the expectation that a revenue contribution be made by the Operations Technical Support Unit to fund at least half of this sum.

C3i /Airwave Programme

19. In keeping with good business practice the expenditure forecast for the C3i Programme is constantly reviewed. This is imperative as whilst the majority of funding for the Programme is coming from specific grant provided by the Home Office, considerable input of funds from the MPA is also required. Members will recall that £11.147m of MPA funds was invested at the beginning of the project. Present forecasts indicate that a further £7.57m will be required. This is made up of £5.73m for the C3i Project under the matched funding agreement with the Home Office for the final completion of the scheme, together with an unbudgeted sum of £1.84m to achieve full implementation of the Airwave Project. The present expenditure profile takes account of the timing adjustments due to construction delays, security enhancements, and determination of equipment specifications.

Step-Change Programme

20. The Authority has made clear its intention to continue the expansion of officer numbers and move towards a total uniformed police service of 35,000. The introduction of the Prudential Code regime has afforded the opportunity to be more flexible in determining the scale of the capital programmes providing investment decisions are taken in a prudent manner and can be demonstrated to be affordable and sustainable. With this in mind, it was agreed by full Authority that the capital commitments arising from the first year of the Step Change Programme would be incorporated within the capital programme 2004/05 to 2008/09 and financed through unsupported borrowing. Decisions on future years of the Step Change capital proposals will be made as part of the 2005/06 budget process.

Detailed Capital Expenditure Programme 2004/05 to 2008/09

21. Given the suppressed level of demand for investment within land & building and technology projects, it is proposed that deliberations take place on the most appropriate manner for distributing the additional funds of £6.789m per annum made available by the better than expected capital settlement. Once this is determined it will be possible for a full listing of all projects to be contained within the capital programme 2004/05 to 2008/09 to be made. It is intended that comprehensive information on funding proposals and resulting projects to be undertaken will be presented to the full Authority for approval at its meeting on 25 March 2004. A progress report will be provided to the Committee’s Budget Group on 12 March.

Capital Expenditure Programme 2003/04

22. At the end of the third quarter expenditure of £148.324m is forecast against the revised capital budget of £158.108m. This underspend of £9.784m (6.19%) is largely accounted for by a forecast underspend of £10.367m in respect of land and buildings projects experiencing timing problems offset by small overspends in other parts of the account. Property Services has indicated that it would wish to carry forward the sums noted as ‘slippage’ through reserves to be re-allocated to named projects in 2004/05. This is in line with present capital funding policy whereby sums allocated to a project are deemed available over the lifespan of that project. Full details of affected projects will be provided to Finance Committee as part of the 2003/04 capital expenditure final outturn report.

Airwave capital grant 2004/05

23. Additional Airwave capital grant has been made available in 2004/05 to overcome the omission by the Home Office to provide sufficient Airwave revenue funding within the revenue settlement for 2004/05. This capital grant will be used to restore capital reserves utilised in 2003/04 to finance capitalised IT refresh expenditure in order to allow the revenue budget to benefit from this additional funding resource. This matter is referred to within the separate report on the 2004/05 revenue budget which is on the agenda for today’s meeting of the Finance Committee.

The Prudential Code – financial indicators

24. In accordance with the Local Government Act 2003, the prudential framework for capital finance takes effect from 1st April 2004. The ‘Code’ was developed by CIPFA as a professional code of practice to support local authorities in taking capital investment decisions.

25. The key objectives of the Prudential Code are to ensure, within a clear framework, that the capital programmes of local authorities are affordable, prudent and sustainable. A further key objective is to ensure that treasury management decisions are taken in accordance with good professional practice and in a manner that supports prudence, affordability and sustainability. To demonstrate that local authorities have fulfilled these objectives, the Prudential Code sets out a series of indicators that must be used, and the factors that must be taken into account, in approving capital expenditure and its financing.

26. Indicators for the forthcoming and following two financial years must be set before the beginning of the forthcoming financial year. They may be revised at any time during the year, but only following due process, and must be reviewed and revised where necessary.

27. The indicators for 2004/05 were approved by the Authority at its meeting on 9 December 2003 subject to review before the beginning of the financial year. There are only minor adjustments to report and these are dealt with in the Treasury Management Strategy report on this agenda.

28. The prudential indicators have to be set each year as part of the budget process. It is proposed that, during the year, the indicators are monitored internally within the existing treasury management report. This is prepared monthly by Exchequer Services for the consideration of the Treasurer. Adjustments to indicators, particularly those relating to borrowing requirements to support further capital investment, would be reported to the Finance Committee through appropriate capital expenditure monitoring or treasury management reports during the course of the year.

Capital strategy

29. The Authority needs to strengthen its approach to the formulation of its capital expenditure programme. This will ensure that investment decisions are taken based on high quality and value for money considerations. A cornerstone of this process will be to have in place a clear and focussed capital strategy.

30. A robust capital programme will require the bringing together of · strategic planning for the Authority; · asset management planning – accurately assessing the condition and realisable value of the Authority’s assets; · option appraisal; and · identification of investment needs including opportunities and priorities This will all need to be achieved in the context of available capital resources.

31. The capital strategy should form an integral part of strategic financial and service planning. It will be part of the annual budget setting process and support decisions on the Authority’s capital investment under the prudential framework.

32. The Authority needs to take steps to integrate its capital and revenue budget planning processes so that coherent decisions can take place on the level of borrowing that is prudent, affordable and sustainable. Underlying this approach is the need to develop a corporate asset management plan. This should include basic data on asset numbers, value, and condition, as well as key information on refurbishment schedules, replacement criteria, etc. This data will be used to inform and support decisions about investment needs and priorities to be addressed in formulating future capital programmes.

33. The starting point in formulating a capital strategy would be the Authority’s key objectives and priorities, which will be informed by ‘Building Towards the Safest City’ (BTSC), and other capital investment strategies e.g. transport strategy. The overall strategy would show how capital investment contributes towards the achievement of the Authority’s objectives. The strategy would identify the framework for the management and monitoring of the capital programme.

34. The asset management plan needs to assess the role and contribution of the Authority’s tangible and intellectual assets as a corporate resource supporting the delivery of corporate and service objectives, including the Authority’s priorities for improvement. There would need to be a clear understanding of the Authority’s business and service aims supported by a clarification of how and when the asset base contributes to these aims. Significant progress has been made with the launch of BTSC, where the explicit correlation between the estates strategy and the wider MPA/MPS strategy exists. Full implementation of these proposals will take time and development of these proposals would need to be over at least a two-year period.

C. Equality and diversity implications

There are no equality and diversity implications arising from this report.

D. Financial implications

Financial implications are discussed in the main body of the report.

E. Background papers

• Corporate Finance – Capital Programme 2003/04 to 2007/08

F. Contact details

Report author: Sharon Burd, Director of Finance, MPS.

For more information contact:

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

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