Draft capital programme 2007/08 to 2009/10 – progress report and proposed governance improvements

Report: 6
Date: 15 February 2007
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 the review of the capital programme against the recently approved prioritisation criteria and application of the agreed scoring mechanism for the ranking of projects. It also notes ways in which the preparation of the capital programme should be improved and makes recommendations regarding the setting of the capital programme for 2007/08 to 2009/10.

A. Recommendations

Members are requested to:

1. approve the proposed capital programme (Appendix 2);
2. note that a revised governance structure for the capital programme is to be introduced (paragraph 12); and
3. note that greater clarity around the timing and magnitude of capital receipts is to be secured to aid budget planning (paragraph 12).

B. Supporting information

Background

1. The Finance Committee approved the last draft of the capital programme for 2007/08 to 2009/10 on 23 November 2006. Subsequent to this the MPS Investment Board agreed a paper entitled ‘Developing a Strategic Approach to the Capital Spend’ on 20 December 2006. This report required further scrutiny of the capital programme be undertaken to ensure that it accurately reflected business needs and supported the updated prioritisation criteria against which capital investment projects should be considered. A scoring mechanism was also developed whereby every proposed capital investment would be ranked on a scale of 1 – 5 against each of the key criteria. Details of the prioritisation criteria and scoring mechanism are shown at Appendix 1.

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 prioritisation criteria and scoring mechanism are structured around the capital strategy.

3. The capital strategy will need to be updated to incorporate the revised prioritisation criteria and scoring mechanism as noted at Appendix 1. This will ensure that the strategy can continue to be a focus for the corporate wide analysis of overall affordability, prudence and sustainability. This is essential in developing closer integration of revenue and capital budgeting. It is proposed to bring the refreshed capital strategy to the July meeting of this committee.

Review of capital programme 2007/08 to 2009/10

4. Following review of the proposed projects to be undertaken it was agreed that the capital programme would be resubmitted to the Finance Committee for endorsement. The review excluded major schemes of work, which are primarily financed by external sources of funding e.g. the C3i Programme; and initiatives within the final year of their expenditure e.g. the Safer Neighbourhoods Programme. Therefore, the major areas of examination centred on the (a) property; (b) information technology; and (c) transport based elements of the capital plan.

5. In reviewing the capital programme it was accepted that the initial funding allocations for property, IT, and transport should not be subject to significant amendment. This was in recognition of the time restraints for the review and the need to provide funding for ongoing schemes. There was also a need to ensure that each support department had the capacity and capability to deliver.

6. Meetings took place to analyse the property, IT and transport based elements of the programme. The meetings were attended both by support departments and business groups to ensure there was transparency in the process. The opportunity to include new projects that had arisen since the start of the budget round was made available. Business group representatives were afforded the opportunity to challenge where it was considered that one scheme had been more advantageously scored than another. Projects were ranked in score order and a brief case was made as to why each project should proceed.

7. The findings of the meetings were subject to senior management consideration. Discussion highlighted concerns that further work was required to ensure that crosscutting projects were fully reviewed by provisioning departments to ensure there was no areas missed or double counted. Strategic Finance representatives were tasked to lead this piece of work. This further analysis was carried out to ensure links had been established between property and IT based projects to ensure full funding and resources were available to see each project delivered.

8. In analysing the capital programme it was acknowledged that certain infrastructure and strategy projects were essential to maintain core business. It was agreed that such schemes should proceed. Any funds remaining from set allocations would then be made available to the highest scoring projects using the agreed scoring mechanism. At the end of this process a ranked list of projects was available for the property and IT based elements of the programme. These are shown at Appendix 2. In respect of transport schemes it was agreed that as all projects related to the replacement of existing vehicles these should be treated as core business and continue at the proposed level of funding.

Review findings

9. To counter the problems experienced with regard to slippage in capital projects it has been proposed by the Director of Information Technology that the capital allocation for MPS technology based schemes of £49m should be oversubscribed. This over programming would allow schemes to a value in excess of the allocation to proceed. This would be on the understanding that expenditure would be closely monitored during the course of the financial year to ensure that projects could be accelerated or delayed to achieve a spend equalling as near as possible the overall allocation by year-end. The opportunity for over programming will also be incorporated within the Property programme.

10. As previously advised, in accordance with the revised financial and business planning framework further work will be undertaken to ensure an integrated approach to revenue and capital budgeting and linkage with business needs. The review of this year’s planning round has highlighted areas where significant improvements have been made e.g. direct correlation of investment plans to strategic objectives. However, it has also shown further areas for improvement. These lessons will be incorporated into the instructions to be issued for the next planning round. Members will be kept informed of developments.

Capitalisation of internal staff costs

11. The capitalisation of internal staff costs directly related to the implementation and delivery of a capital project has formally commenced during 2006/07. These costs are currently shown as a single entry, but in the future costs will be part of individual schemes. The figure noted in respect of capitalisation of staff costs for IT based projects has been revised downwards from £4m to £2.5m. This recognises the forecast completion of the C3i Programme.

Future approach and governance

12. At the last meeting of this committee it was agreed that there would be a review of the operation and governance of the capital programme. Members had in particular been concerned for some time at the continuing level of underspend, the lack of ability to bring schemes forward quickly to replace slipped schemes or to have more accurate scheme costings at the start of the planning process. There was also a need to make the governance arrangements clearer about approval of new investment. The review of the capital programme has highlighted that:

• each project requires a business case to ensure all factors/benefits relating to a project are identified. This will require each business case to follow the formal approval process of Investment Board and the MPA as required.
• a suitable forum for discussion of capital expenditure matters and for ensuring governance is exerted over the capital programme needs to be established. This role was partially provided by the Capital Programme Review Board (CPRB). It is proposed that this group is reconstituted with strengthened terms of reference; the group would include a representative from the Authority where appropriate. It would report to MPS Investment Board on a quarterly basis.
• greater transparency on the scale and profile of capital receipts over coming years is required. The receipts are a corporate resource to be used for the benefit of all areas of capital investment.
• the preparation and monitoring of the capital programme should be reviewed and improved. This development will be taken forward by MPS Strategic Finance with the CPRB.
• The need to have properly costed revenue effects prepared for each of the schemes in the capital programme.

In order to ensure that reports on the capital programme arrive in good time for members to take decisions to be taken in the context of the annual budget cycle the following is proposed:

Preparation of the Capital Strategy - The Finance Committee will approve the annual Capital Strategy and Asset Management Plan each June (after approval by MPS Management Board and Investment Board), triggering the start of a new capital cycle, and providing the strategic context and framework for the development and implementation of the capital programme for agreement by the Authority and inclusion in the Mayor’s annual Budget Submission.

Commencement of capital programme planning - At the start of each cycle, in June, the MPS CPRB reviews the committed capital programme and considers capital resourcing for the next (uncommitted) year, taking account of previous years under or overspent programme. This will include an assessment of the supported borrowings authorised within the prudential framework, the capital receipts target forecast by the Director of Property Services (from the Asset Management Plan), capital grant and possible other funding sources as well as revisions to capital expenditure.

Guidelines - The CPRB will then circulate guidelines for the preparation of capital proposals. These guidelines, which are designed to ensure consistency of approach will include a requirement:

• to address how each project will support the delivery of the MPA/MPS strategic objectives through the capital initiatives
• for an assessment of priorities outlined in the capital strategy
• for critical planning information required to support the proposal – budgets, specific project objectives, targets, milestones and indicators
• for information on the extent to which projects have undergone consultation with partners and other stakeholders and· a thorough option appraisal and assessment of funding opportunities available.
• And a new requirement to identify schemes which will be available ‘in year’ to replace possible schemes which may slip.

Business Groups will then use this information (assisted by specialist advice from corporate departments (Property Services/DOI/Transport) to refine existing schemes and define new ones.

Draft Capital Programme - Agreed information will then be fed back to the CPRB who will prioritise schemes and integrate them into a draft capital programme, taking account of resourcing and revenue implications. The MPS Investment Board and Management Board then agrees the draft capital programme, before submitting to Finance Committee in September as part of the annual review of the capital programme, before onward submission to the Mayor as part of the budget submission in November. This earlier opportunity to see the draft capital programme will also allow integration with the emerging revenue budget to ensure consistency between capital plans and their revenue effects.

The output from this process will be a draft capital programme which allows members to scrutinise and formally agree new opportunities for addition to the capital programme while being assured that the existing committed programme has undergone ‘due process’. MPA Members will be assured that a process has been followed to assess bids against agreed priorities and it will allow opportunities for any additional capital spend at other times in the financial year to be considered against an existing priority list of schemes.

This will be a significant departure from existing practice. In practical terms the development of a capital programme aligned to Business Groups and the contribution made to corporate objectives will be an emerging process, likely to be built up over a number of years.

A key part of this process will be the opportunity for members to approve a ‘reserve’ list of schemes which could be implemented if significant slippage in the programme is predicted in year.

In January/February each year the Authority will receive an updated forward capital programme which will reflect any further changes, for example capital grant support, within the constraints of the revenue budget which will currently be with the London Assembly for approval.

Setting the capital programme - As part of the budget setting process schemes are currently identified by type of activity, such as property, IT and transport etc. It is planned that over the course of the next few years the analysis will change to show Business Group analysis, which will identify service areas in support of the MPA/MPS strategic goals, capital strategy and Asset Management Plans.

In April/May each year members will receive a report on the capital programme outturn for the financial year just ended.

Funding issues

13. Details of the capital settlement for police forces in England and Wales for 2007/08 are still awaited. However, the level of police grant, and supported borrowing is not expected to fluctuate significantly from previously notified figures.

14. Any additional ongoing capital financing costs arising from the review of the capital expenditure programme would need to be incorporated within the revenue budget. If extra borrowing is thought prudent to increase the level of capital investment the impact on our prudential indicators would need to be considered.

15. The draft programme at Appendix 2 shows that £60.68m of capital expenditure will be financed by way of borrowing during 2007/08. The financing costs associated with this borrowing have been taken into account when setting the revenue budget. Any increase in the level of borrowing costs approximately £85k per annum for every £1m increase; this would need to be met from further revenue savings. Other factors such as capacity and ongoing revenue costs would also need to be considered.

Summary of the draft capital programme

16. Property based projects – The programme for 2007/08, 2008/09 and 2009/10 is set at the allocation levels of £64.9m, £70.9m and £112.8m as noted at Appendix 2, the programme now also incorporates the estate strategy. A risk is that if the 2007/08 programme is approved there is insufficient funding in 2008/09 onwards to fund the delivery of all of the approved projects. Property Services has been asked to explore the:

• use of slippage to manage projects within the agreed allocation;
• re-profiling to reflect revised priorities and funding limitations; and
• review capital receipts to utilise any extra funds to deliver projects sooner.

This will allow controlled management of the property based element of the capital programme, with this work being supported by the CPRB. The MPA Property Oversight Group will also assist in this process.

17. IT based projects – The programme to be approved is detailed in Appendix 2. The programme will be to the allocation level of £48.6m. There is now an agreed list of projects that form the potential over programming from £48.6m to £68.0m. Expenditure will be managed by DoI to ensure delivery of projects falls within the approved total of £48.6m.

18. Transport and Other Equipment – The programme is for core infrastructure and remains unchanged and can be approved as detailed in Appendix 2.

19. C3i Programme and Safer Neighbourhoods Programme – The programme remains unchanged and can be approved as detailed at Appendix 2 to enable these key projects to be completed.

Abbreviations

CPRB

Capital Programme Review Board

DoI

Directorate of Information

IT

Information Technology

MPA

Metropolitan Police Authority

MPS

Metropolitan Police Service

POG

Property Oversight Group

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.
Report Author: Simon Hart, Acting Director of Finance Services

E. Background papers

None

F. Contact details

Report author: Ken Hunt. Treasurer

For more information contact:

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

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