Capital strategy

Report: 08
Date: 10 October 2005
By: the Treasurer and Commissioner

Summary

This purpose of this report is to present the draft capital strategy for members’ comments and approval. The draft capital spending and borrowing plan for 2006 to 2009 will be based on this strategy.

A. Recommendation

That

1. Members consider and approve the draft capital strategy

B. Supporting information

1. On 22 July 2004 this committee approved the Authority’s first Capital Strategy. The strategy has now been revised and updated and the draft capital strategy 2006 to 2009 is attached at Appendix 1.

Background

2. It was stated in the first capital strategy that it would eventually become an integral part of the strategic financial and service planning of the MPA/MPS, and also become part of the annual budget setting process and support decisions on the Authority’s capital investment under the new prudential borrowing system. The Mayor also requires a three-year borrowing and capital spending plan as part of the budget submission.

3. The MPS/MPA is making progress to integrate its business planning with 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 requires the bringing together of strategic planning, asset management planning, 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 new MPA/MPS strategic priorities (within the new Corporate Strategy 2006-2009).

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

• Establishing whether it is considered 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; and
• Establishing the scope for capital investment to generate future revenue savings or income.

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

Reviewing the capital strategy

5. Last year the MPA/MPS approved its first capital strategy but acknowledged that it was some way away from a fully developed capital strategy and that a mature strategy would develop over a two to three-year horizon. Since then, the MPS has established a new Investment Board, prepared asset management plans for property, IT and transport whilst progressing work to integrate its business and financial planning functions. Further work is needed around identifying and developing key strategic capital initiatives and reviewing the existing capital programme to identify key areas of capital expenditure which support strategic priorities. The 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
• Processes for decision making, particularly timing of decisions for approval of new schemes, approval of the capital strategy/capital programme and the corporate priority criteria.
• 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.
• Governance of the arrangements, principally through the new MPS Investment Board.
• Further development of the asset management plans for property, IT and transport.

Prioritisation of new capital schemes

6. Each year the MPS Investment 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 strategic priorities and business group priorities. The following key prioritisation criteria (in order of importance) will be the basis of selecting new schemes:

• Mandatory legal requirement to provide the service or asset
• Meets one or more of the strategic priorities within the Corporate Strategy 2006-2009.
• 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 Investment Board will develop a weighted model based around these priority criteria to ensure a transparent, simple but robust approach. This process will be reviewed each 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. It is intended that once this strategy is agreed, a revised draft Capital Programme for 2006/07 to 2008/09 will be prepared for submission to MPS Investment Board and to MPA for inclusion in the Budget Submission to the Mayor.

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 annually.

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 priorities, capital strategy and Asset Management Plans.

Links to asset management plans

11. The MPS are well advanced in developing asset management plans for property, IT and transport – partly based on existing documents - and these will be subject to further review once the revised Corporate Strategy 2006-2009 is approved and also to reflect any relevant outcomes of the Service Review. The plans are a corporate document detailing existing asset management arrangements and outcomes and planned action to improve corporate asset use.

Timescale for implementation

12. It was acknowledged last year that the development of these proposals would need to be over a three year period with improvements taking place annually. This year the MPS has established a new Investment Board and has commenced work to further integrate business and financial planning. Business groups have also been provided with business case guidelines and were required to submit both revenue and capital bids on an integrated basis.

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

• Capital Strategy report to MPA Finance Committee July 2004

F. Contact details

Report author: Ken Hunt, Deputy Treasurer MPA and Terry Price, Director of Strategic Finance MPS.

For more information contact:

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

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