Capital Strategy

Report: 08
Date: 22 Jul 2004
By: Treasurer and Commissioner

Summary

This report presents the Authority’s draft capital strategy for members’ comments and approval. Subject to endorsement of the priority allocation criteria further development work will be undertaken before the final draft is presented to committee in October.

A. Recommendation

1. consider and approve the draft capital strategy, (subject to the further work to be undertaken - paragraph 5)

2. endorse the priority allocation criteria at paragraph 6

3. note the progress in developing asset management plans

4. agree an annual programme of reviews of the capital strategy.

B. Supporting information

1. On 19 February 2004 this committee endorsed proposals that a capital strategy be prepared. The draft capital strategy 2005-10 is attached at Appendix 1.

Background

2. It is intended that this first capital strategy will eventually become an integral part of the strategic financial and service planning that will in turn become part of the annual budget setting process and support decisions on the Authority’s capital investment under the prudential system. The Mayor requires a five-year capital plan as part of the budget submission.

3. It is accepted that the Authority needs 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. A robust capital programme will require the bringing together of strategic planning for the Authority, asset management planning (with an assessment of the state of the Authority’s assets), option appraisal, identification of investment needs including opportunities and priorities and setting all of this in the context of available capital resources and the contribution towards the achievement of the MPA/MPS strategic objectives.

4. In addition to the link between revenue/operational expenditure consequences of the overall capital proposals, financial planning will have to take into account the range of options for revenue funding and capital investment by:

• establishing whether the Authority considers it affordable and prudent to bear the additional future revenue cost of additional investment
• establishing whether the use of existing or new revenue resources to finance capital investment should have precedence over other competing needs for revenue expenditure
• establishing the scope for capital investment to generate future revenue savings or income.

The capital strategy will provide a focus for a corporate wide analysis of overall affordability, prudence and sustainability together as required by the Prudential Code.

Establishing the capital strategy

5. It was reported to the February meeting that the MPA/MPS is some way away from a fully developed capital strategy. A mature strategy will develop over a two to three-year horizon. It is recognised that this draft is work in progress and that further development is needed before a more final version is ready for approval by this Committee, which can then be incorporated in the Mayor’s budget submission in early November. In particular, work is needed around identifying and developing key strategic capital initiatives and reviewing the existing capital programme to identify key areas of capital expenditure ‘controlled’ by corporate priorities. This work will contribute to a core element of the strategy, which is to focus the Authority’s capital planning directly on projects and activities, which support the achievement of the Authority’s vision. However this process cannot be completed until Members have endorsed the general approach and in particular are content with the key prioritisation criteria (paragraph 6 below). The draft capital strategy does however, identify the development and implementation of processes for:

• The generation of option appraisal of capital project proposals
• Prioritisation of capital projects – informing choices on the allocation of new additional capital resources
• Stages at which MPA member involvement in the process will enhance corporate governance, particularly timing of decisions for approval of new schemes, approval of the capital strategy/capital programme and agreement of the corporate priority criteria (see para 5)
• Monitoring, evaluation and management of ongoing/completed projects
• Corporate review of existing properties and service needs to explore opportunities for more efficient and effective use of property, or to release resources through disposal
• MPS governance of the arrangements, principally through the new Capital Strategy Board
• Development of new Asset Management Plans, including property, IT and transport.

Prioritisation of new capital schemes

6. Each year the MPS Capital Strategy Board will review bids from business groups for capital projects. Each bid will be assessed using agreed criteria for prioritisation. Development of this process is at an embryonic stage but the intention is that it is based on a sound rationale that reflects MPA/MPS corporate strategic goals and business group priorities. Members are asked to agree the following key prioritisation criteria (in order of importance) which will be the basis of selecting new schemes:

• Mandatory legal requirement to provide the service or asset
• Meets the objective of the MPA/MPS TtSC strategy
• Continues or completes a capital scheme where there is a contractual commitment
• Demonstrable priority need to replace the asset and included in the Asset Management Plan
• Continues or completes a scheme where significant expenditure started in previous years
• Yields revenue savings

7. The MPS Capital Strategy Board will develop a weighted model based around these priority criteria to ensure a transparent, simple but robust approach. This process will be reviewed next year in the light of lessons learnt. The result of this appraisal process will prioritise projects for inclusion in the capital programme. It is intended that schemes that are not included are prioritised for further consideration in future years, or in the event that slippage occurs available for potential inclusion as a rapid alternative to the capital project that has slipped.

8. Timetable:

July
Finance Committee approves capital strategy – triggers start of new cycle.

July to Sept
MPS Capital Strategy Board reviews committed programme and considers capital resourcing for the overall capital programme for the next (uncommitted year). This estimate incorporates:

• Assessment of potential authorised borrowings
• Capital receipts target from AMP
• Other funding sources

The Capital Strategy Board considers capital bids from MPS business groups and after prioritisation integrates them into a draft capital programme for approval by MPS Resource Approval Committee and Management Board

11 October
Members consider and approve capital programme and capital strategy.

8 November
Budget submission to Mayor.

It should be noted that there will generally be no ‘ring fencing’ of capital receipts for property purposes; however the scale of the lack of required funding for property purposes (capital spend of c. £21 million in 2003/04 on an estate valued at £1.5 billion with a maintenance backlog estimated at £82 million) means that there will undoubtedly be a significant property call on any available new resources.

Governance

9. Members will give corporate direction to the capital strategy, giving the strategy support and enabling the delivery of corporate priorities. The Finance Committee has specific responsibility to ensure the resources delivered through the capital strategy are sufficient to achieve its priorities. Members will approve the capital strategy and Asset Management Plans.

Setting the capital programme

10. As part of the budget setting process schemes are currently identified by type of activity, such as property, IT and transport etc. It is hoped that over the course of the next two years the presentation will change to reflect business group analysis, which will identify service areas in support of the MPA/MPS strategic goals, capital strategy and Asset Management Plan.

Links to the Asset Management Plan

11. The MPS are well advanced in developing a property Asset Management Plan. Although not common practice in local authorities, it is felt that because of the size of transport and IT capital spend, it is appropriate to include these services in an overall AMP attached as part of the final capital strategy. In order to avoid unnecessary bureaucracy best endeavours will be made to use existing documents, rather than ‘forcing’ a new house style. The AMP would therefore be a corporate document detailing existing asset management arrangements and outcomes and planned action to improve corporate asset use. The AMP will set out the refining process as the longer-term use of corporate assets develops.

Timescale for implementation

12. It is likely that the development of these proposals would need to be over a three year period i.e. over the next three budgets, with significant improvements incorporated into the 2005/06 budget submission to the Mayor.

Review of the strategy

13. The effectiveness of the capital strategy will be reviewed annually in the light of changing investment needs and priorities. Ongoing reconsideration of the strategy will ensure that it is effective, reflects latest developments in asset management and achieves fulfilment of the MPA/MPS objectives.

C. Race and Equality impact

None specifically identified arising from this report.

D. Financial implications

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

E. Background papers

None

F. Contact details

Report author: Ken Hunt, Deputy Treasurer MPA

For more information contact:

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

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