Draft capital programme for 2007/08 to 2009/10 - progress report

Report: 5
Date: 23 November 2006
By: Acting Director of Resources on behalf of the Commissioner and the Treasurer

Summary

This report provides details of progress on the development of the capital programme for 2007/08 to 2009/10. It gives information on proposed revisions to the capital programme following further deliberations on the revenue budget as part of the current business planning process and greater clarity on the direction of the operational estate strategy.

A. Recommendations

Members are requested to:

• note the draft capital programme 2007/08 to 2009/10 (paragraph 8 and Appendix 1 refer);
• note the proposed funding of the programme (paragraph 30 and Appendix 1 refers); and
• note the final capital programme for 2007/08 to 2009/10 will be submitted for approval by Finance Committee in the new year (paragraph 30 refers).

B. Supporting information

Introduction

1. A meeting of the Joint Planning, Performance & Review and Finance Committee on 21 September 2006 approved the initial draft of the capital programme for 2007/08 to 2009/10. The original programme has been developed further as part of the implementation of the Business Planning Framework that introduced a new way of developing the capital programme. Capital needs have been built up from business group requirements. This allows the capital programme to become more focused in delivering the strategic priorities and supporting front line policing. This process has also encouraged the capital programme to be linked to the revenue budget, therefore allowing the full impact of decisions made regarding capital investment to be fully reflected in revenue spending plans. It was recognised that preparation of the capital programme was taking place at the same time as consideration was being given to the scale of the revenue budget. It was known that savings would need to be delivered in revenue expenditure proposals to achieve a balanced budget. Therefore, while the capital programme assumed that sufficient revenue funds would be available to meet implementation and ongoing running costs, it was acknowledged that a review of future capital investment proposals would be required once further scrutiny of the revenue budget had occurred and areas of saving had been agreed.

2. Since approval of the draft capital programme 2007/08 to 2009/10 it has also proved possible for further consideration to be given to the financial impact of the rollout of the operational estate strategy. Detailed discussions have taken place between the Treasurer and representatives of Property Services and Finance Services on the financial model to be followed to meet modern operational accommodation needs. The proposed revisions to the capital investment plan reflect these deliberations.

3. The capital programme continues to be informed by the capital strategy and the key prioritisation criteria. Accordingly, business groups have been required to assess investment needs on the basis of:

• alignment with strategic objectives;
• alignment with strands of the Met Modernisation Programme;
• a mandatory legal requirement to provide a service or asset;
• the continuation or completion of a capital project where there is a contractual commitment;
• the continuation or completion of a project where significant expenditure has already occurred and unjustifiable wastage of resources would result; and
• where significant revenue savings would result.

4. The prioritisation criteria as listed in the preceding paragraph are not seen to be competing with each other and are not listed in any express order of importance. However, while no monetary baseline was set for the totality of capital expenditure proposals to be submitted by individual business groups, it was expected that the above criteria would be used to rank investment needs against realistic spending levels and work programmes. These spending levels and work programmes were to be determined in consultation with provisioning departments, recognising the project management skills necessary to ensure delivery of a capital programme to budget without undue ‘slippage’ occurring.

5. By the very nature of preparing a three year capital investment proposal it is noted that projects have not been subject to detailed scrutiny regarding expenditure profiles, deliverable benefits, etc. Therefore, it would be expected that in accordance with the revised financial and business planning procedures, all projects that have still to commence will be required to submit a full business case for consideration and approval, through the MPS Investment Board and onto the MPA. The presented business case will describe the requirement that will be served, the urgency and priority of delivery, and the benefits to be secured. The business case will also 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.

6. The projects and the funding of them will be managed within the MPS by the Investment Board, which has oversight of the revenue and capital expenditure programmes. This will allow the initial decision to be taken as to how to fund a project. This stewardship role is vital in ensuring capital investments remain affordable.

7. Future capital investment proposals are only bids at this time and reflect the fact that detailed scrutiny of the programme for 2008/09 and onwards has not yet taken place. In order to reflect this need for further scrutiny and prioritisation based on an assessment of capacity/affordability the capital programme includes an adjustment to bring the overall programme down to a level that is assessed, at this time, as affordable. Further work, which will continue over the coming months, will negate the need for this adjustment. As part of the development of the financial planning framework the linkages to revenue and the scrutiny process are being developed. These areas for improvement are being fed into the review process that is now taking place. This will also form a formal report to members in the new year.

Capital Programme 2007/08 to 2009/10

8. Appendix 1 provides details of the draft capital programme for 2007/08 to 2009/10. The proposed level of investment in 2007/08 is £181.2m. This represents an increase of £0.7m, or 0.4% on the sum shown in the initial draft programme of £180.5m as approved on 21 September. For 2008/09 the proposed spend of £181.3m is an increase of £10.4m, or 6.1%, on the previously approved sum of £170.9m. The figure of £180.4m for 2009/10 compares with the sum of £177.9m approved in September.

9. In updating the capital programme it is noted that for a number of areas of expenditure it has proved possible to validate that previous proposals for investment are reasonable, and can be accommodated within the relative capacities of affected provisioning and business groups and operating revenue budgets. The following paragraphs therefore deal with those parts of the capital programme 2007/08 to 2009/10 where adjustment to proposals as seen by members in September is required.

Property Based Capital Projects

10. The noted schemes support the rollout of the Estates Strategy and the requirement to respond to the operational and community needs of the modern policing agenda, e.g. Safer Neighbourhood bases, patrol bases and custody centres. Further forecasting and profiling of schemes as shown within the draft capital programme approved on 21 September has taken place. Members should note that further revisions will be necessary as the programme progresses and goes through the approval process. Commercial implications and planning authorisations may also affect estimated project expenditure and profiling as more up to date information is obtained.

11. Many schemes have projected start dates in 2006/07. It should be noted that a number have been put on hold pending MPA approval of the stakeholder consultation and communication strategy developed by the MPS. Approval of the strategy was deferred at the meeting of the MPA full authority on 26 October. At the time of writing it is expected that the strategy will be considered further at the MPA full authority meeting in December.

12. The costs of several other schemes previously included in the draft capital programme have been revised; most notably an additional £42m for priority Central Operations accommodation and £18m for DoI related accommodation. CO accommodation requirements now include, stables, a firearms training facility and the proposed ‘super bases’. It should be noted that these recorded costs are pre-feasibility estimates and are likely to change as more details on actual requirements become known. Commander Firearms is due to report to the MPA on the requirements and pressures the firearms training facilities are facing due to extra demands placed on the training facilities.

13. In recognition of the significant proposed increase in property based projects for 2008/09 and 2009/10, and the planned scrutiny of the draft capital programme, it is has been agreed that a reduction of £70m should be applied for each of these financial years. This is considered prudent pending the outcome of the stakeholder consultation, verification of the revenue implications of this major investment programme, and clarification of the capacity to deliver all of the proposed schemes given other competing pressures.

14. Members have previously been made aware of other emerging pressures for capital investment in forthcoming years. Some of these have been included in the attached appendices, e.g. additional CO accommodation requirements, operational facilities in central London, Hendon & Heathrow, the Olympics 2012. Many of these schemes are at the pre-feasibility stage and will therefore change as the projects schemes and requirements are more fully developed.

IT Based Capital Projects

15. The projects included are those where the MPS has a contractual commitment, are ongoing projects, or where significant levels of investment have already been made.

16. The Director of Information has recognised that delivering all of the listed projects over the three-year period is challenging and would stretch organisational capabilities. This is particularly so for 2007/08 in the light of ‘slippage’ in major schemes from prior years. It is currently estimated that £16.5m of project funding will shift from the current financial year into 2007/08. A reduction has therefore been shown in the schedule to reflect what is considered to be achievable during 2007/08. This level of capital spend is also consistent with the revenue budget allocation to support the development of the capital programme.

17. There are a number of new projects that need to be prioritised. A prioritisation exercise is planned to be undertaken by the Information Management Steering Group, a sub group of Investment Board, in early December.

18. The new projects are analysed by business priorities for the organisation. There is also a category for infrastructure, which is the expenditure required to maintain and refresh the IT infrastructure of the organisation. This is currently valued at £80m. Based on normal depreciation periods for IT equipment, a level of £20m expenditure each year to maintain the estate is required. The projects included within the infrastructure category also include items to support the Met Modernisation Programme.

Helicopters

19. As members are aware, the replacement of the helicopter fleet is nearing completion. Associated with this investment it has been determined that for health and safety reasons it is prudent to renew the fuelling facilities at the Lippetts Hill site and also to make improvements to the landing/runway and hard standing areas. These two projects total £1m and have been added to the capital spending programme. It is expected that 40% of the cost of these projects will be met by a specific grant to be awarded by the Home Office. The remaining element of expenditure will be financed through unsupported borrowing.

C3i Programme

20. Information in respect of the C3i Programme has been updated to allow for reprofiling of project delivery and increased by £2.4m in recognition of Airwave cabling costs at the new Heathrow Airport Terminal 5.

Safer Neighbourhood Programme

21. The Safer Neighbourhood programme remains within the estimates approved as part of the original brief. However, the opportunity has been taken to increase property based expenditure in 2007/08 by £7m in recognition of expenditure that has necessarily been deferred from prior years. There may be further requirements but as these are not yet known or quantifiable no information has been included in this report.

Intelligence and Operations Site for the MPS

22. Management Board has agreed that an intelligence bureau for the MPS with components from all business groups will be sited at a single location. This will involve the infrastructure at the site being developed to support intelligence and operations for both counter-terrorism and crime. The complexity of the business requirements and the implications for technical and building works means that it is not possible at this time to provide a realistic estimate of overall expenditure. Costs have not been included in capital estimates to date. The majority of the spend is forecast to occur during 2007/08. Once firm figures are available they will be communicated to Finance Committee for consideration and approval as part of the review of the capital programme. The intelligence bureau is part of the MMP programme and has a structured governance to ensure delivery, but to ensure it is done in an effective and efficient manner.

General issues

23. Capital projects continue to be shown in Appendix 1 against major programmes of work e.g. C3i Programme, Safer Neighbourhoods Programme, or under the department leading on delivery of the particular scheme. It remains an objective to revise this format of presentation to ensure that the user/provider relationship is accurately reflected. Ownership by a user (business group) is seen as critical in determining what is really required to support operational objectives and support the Met Modernisation Programme.

24. Thought continues to be given to the ways in which ‘slippage’ in major projects can be minimised. Project management skills are being sharpened and through close monitoring of projects it would be expected that wherever possible budgets would be adjusted to meet known circumstances. However, it is accepted that there will be occasions when through factors beyond the control of the project team e.g. supply issues, ‘slippage’ in a project will occur. The option of bringing forward schemes scheduled to commence in later years has been considered. This has advantages in that the overall level of funding for the capital programme is not affected and only adjustment of project totals between financial years is required. However, given the relatively long lead-time required to initiate a project only a few schemes present themselves for speedy implementation. It is therefore considered that a reserve list of projects needs to be established. This will comprise small capital projects that can commence with minimal preparation and can guarantee works being undertaken, and hence expenditure incurred, over a short time frame.

25. Recognising the significant levels of capital expenditure planned over the life of this capital expenditure programme, further consultation has taken place with provisioning departments/business groups to verify that all associated implementation and ongoing revenue expenditure has been considered when agreeing proposed budget levels. It has been confirmed that the recommended savings as noted within the revenue budget report do not adversely impact our investment proposals.

Capitalisation of internal staff costs

26. The capitalisation of internal staff costs directly related to the implementation and delivery of a capital project will commence during 2006/07. The administrative procedures detailing how this will be achieved are presently being drafted. In discussions on this topic it has been recognised that a number of the internal staff involved in technical areas of activity are not involved in one scheme of work but service a number of projects. Accordingly, further work is required to determine how the time spent by these internal staff should be allocated across the various capital projects in which they are involved. Consequently, the capitalisation of staff costs is shown at this time within the property based and information technology based projects as a single line entry. The impact of this additional capital cost on individual capital schemes will be recorded when the capital programme is next passed to members for approval.

Capital receipts

27. The draft capital programme included a forecast for corporate capital receipts. The figures remain unchanged for 2007/08 & 2008/09. For 2009/10 a more conservative estimate of the receipts to be generated from the disposal of residential properties has been used. The property market within London has meant receipts in the past have been greater, but this is only due to current market forces. Therefore a more prudent figure has been used at this time. However, as the spending plan develops, and until the overall Estate Strategy is approved by the MPA, the forecasts will continue to change. Many of the forecast receipts will be generated from the disposal of redundant/surplus operational and residential properties. It has previously been mooted that receipts from such sales would be used to fund schemes that form part of the Estate Renewal Strategy. These receipts have also been expected to finance the planned level of investment required for patrol bases, custody clusters, etc. Table 1 below shows the present forecast disposal sums from operational and residential properties.

Table 1: Planned Disposal of Operational and Residential Properties

Note: It is also expected that the disposal of SO16 accommodation at Walton Street/Yeomans Row will prove possible during 2009/10 following the purchase and refurbishment of new premises at Lillie Road, SW6.

28. It is expected that receipts of £900k will be generated during 2007/08 following inauguration of the new helicopter fleet and the disposal of the old redundant craft.

Funding issues

29. The level of police grant, supported borrowing and general capital receipts is not expected to fluctuate significantly from previously approved figures. Therefore, to support any proposed increase in the level of investment it would be necessary for the Authority to increase the amount of unsupported borrowing financing capital expenditure. Over recent years financing of capital expenditure through borrowing has not resulted in an increase in external debt. This is because the Authority has held sufficient usable reserves and working capital to negate the need to go to the money market. The considerable investment now required means this practice would not be sustainable. The external debt level of the Authority is low at £70.8m. With attractive interest rate levels offered by the Public Works Loans Board it would not be regarded as disadvantageous to extend our overall level of external borrowings. The additional ongoing capital financing costs would need to be incorporated within the revenue financial envelope and the decision to extend our borrowings would need to be viewed with reference to our prudential indicators as prudent and sustainable.

Future steps

30. A further review of our investment plans will be necessary once the Home Office capital grant settlement is known and the revenue budget is finalised. It is also noted that amendments may be required due to emerging expenditure or funding pressures. Additionally, decisions have still to be reached on the exact projects to be undertaken within the information technology based spending plan (paragraphs 16-17) and on the overall cost of the new intelligence bureau (paragraph 22). In view of this a report detailing progress towards completion of the capital programme will be provided to members in January 2007. It would then be expected that the final capital programme for 2007/08 to 2009/10 would be submitted for approval by the MPA Finance Committee in the new year.
31. The capital programme was developed as part of the integrated business/financial-planning framework, which reflects a developing process which aims to ensure that capital and revenue resource decisions are driven by strategic priorities and business need. There is to be a review of the financial planning framework to take forward its development. It will be based on:

1. lessons learnt from this year; and
2. the need for improvements to be made together with future requirements.

This work will be undertaken with the assistance of the MPA Treasurer. An update report will go to the MPA in the new year.

Prudential Indicators

32. Since its inception the CIPFA Prudential Code has provided much needed flexibility in determining the overall scale and direction of the MPA capital spending plan. Analysis of the agreed indicators ensure that the investment plan is affordable, prudent and sustainable, that sensible planning principles are adopted, and that treasury management decisions are taken in accordance with sound financial management practice. The prudential indicators are regularly updated to ensure that the level of borrowing undertaken is maintained within affordable limits.

33. Revised prudential indicators and relevant calculations used in determining the appropriate level of borrowing to be negotiated by the Authority in support of capital expenditure will be provided to Full Authority.

C. Race and equality impact

There are no specific race, equality or diversity implications arising from this report.

D. Financial implications

The financial implications are discussed in the main body of the report. The capital programme is affordable within the currently agreed revenue budget. Decisions on further capital investment will need to be taken following full evaluation of the revenue impact and would need formal approval from the MPA.

E. Background papers

None

F. Contact details

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

For more information contact:

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

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