Draft borrowing and capital spending plan 2008/09 to 20014/15

Report: 7
Date: 19 November 2007
By: the Commissioner and Treasurer

Summary

This report provides information on progress achieved in the preparation of the proposed seven-year borrowing and capital-spending plan 2008/09 to 2014/15. It outlines the work undertaken to ensure an affordable capital programme is achieved. This recognises the capacity of provisioning departments to deliver a range of property, information technology and transport projects, as well as schemes resulting from the staging of the Olympics/Paralympics in 2012 and new counter-terrorism initiatives. The plan is required as part of the overall budget submission to the Mayor of London Detailed information is provided regarding the capital strategy, stewardship of the capital expenditure programme, and expected funding available to finance capital investment projects.

A. Recommendations

That the Committee is invited to:

1. agree the revised capital spending plan for 2007/08,the draft borrowing and capital spending plan 2008/09 to 2014/15, and inclusion of the latter within the Authority’s budget submission to the Mayor of London (Appendix 1A - D refers):

2. note the revised criteria for prioritisation and scoring of the draft borrowing and capital spending plan 2008/09 to 2014/15 (paragraphs 30 to 34 inclusive refer):

3. agree the present position regarding financing of the draft borrowing and and capital spending plan 2008/09 to 2014/15 (paragraphs 35 to 47 inclusive and Appendix 2 refer):

4. note the key prudential indicators calculated from the draft borrowing and capital spending plan 2008/09 to 2014/15 (Appendix 3 refers): and

5. note that the seven-year capital programme and related spending programme will be subject to further review following the announcement of the revenue and capital settlements by the Home Office and setting of the precept by the Mayor (paragraph 52 refers). The programme will also be subject to annual review thereafter (paragraph 2 refers).

B. Supporting information

Introduction

1. The Mayor’s budget guidance relating to the preparation of the borrowing and capital spending plan requires that relevant financial information be submitted to the Greater London Authority as part of the overall MPA budget submission by 27 November 2007. The proposed programme now also covers new potential capital investment for the Olympics/Paralympics and counter- terrorism

2. The budget guidance requires that a borrowing and capital spending plan commencing with financial year 2008/09 and spanning at least three financial years is prepared. To enable efficient and effective planning of investment requirements for the MPA/MPS it has been recognised that a more long-term perspective needs to be adopted. Therefore, the capital programme has been enlarged in scope to cover a period of seven years. This is the first time the MPA/MPS has adopted this approach and the programme will be reviewed on an annual basis.

Capital Strategy

3. The Finance Committee approved a revised Capital Strategy on 19 July 2007. The Strategy is seen as providing a framework for considering investment proposals against the business priorities of the MPA/MPS and the resource constraints that must operate within the Authority/Service. It is integral to financial and business planning. As part of the annual budget setting process it supports decisions relating to capital investment under the Prudential Code. It is essential that the Strategy be viewed in the context of available capital finance. It provides a focus to analyse the affordability, prudence and sustainability of investment proposals as required by the Prudential Code.

4. The Capital Strategy focuses on processes to take forward a strategically led, priority driven, capital programme. In this regard capital projects must contribute to one or more of the Service’s strategic priorities, namely;

• Make our services more accessible and improve people’s experience of their contact with us, especially victims and witnesses
• Enhance our counter terrorism capacity and capability
• Reduce serious violence and protect young people
• Disrupt more criminal networks and reduce the harm caused by drugs
• Make our neighbourhoods safer through local and city-wide problem solving and partnership working to reduce crime, anti-social behaviour and road casualties
• Plan for and effectively police major events in London and prepare for the 2012 Olympics.

These priorities will enable the achievement of the Commissioner’s four strategic outcomes:

• Increased confidence and satisfaction;
• Improved security and reassurance;
• Crime, disorder and harm prevention and reduction; and
• More offenders brought to justice.

In order that the overall capital programme can be prioritised according to the corporate needs of the organisation, individual projects have been analysed with reference to key criteria.

Capacity

5. Detailed information has been sought from provisioning departments and business groups on capital investment needs in line with the approved Capital Strategy. In setting out the capital expenditure proposals it was requested that the capacity of each provisioning department to deliver proposed projects be recognised. This was expected to contribute in a significant way to the elimination of the high level of ‘slippage’ recorded over past years as a result of over ambitious capital expenditure plans. This has been an area of concern for MPA Finance Committee members and MPS senior management. It was regarded as imperative that realistic assessments were made of the ability of the relevant ‘provider’ department to deliver schemes put forward for implementation by the ‘user’. Capacity to achieve implementation of listed projects is a key determinant of the capital programme. If this issue is approached in a considered manner then many of the problems associated with the prioritisation of requested schemes and the need to over-programme to eliminate underspends should be reduced.

6. Provisioning departments were asked to consider capacity issues on present resource levels. However, where appropriate, it should be indicated if there were schemes suitable for reprofiling should the possibility of additional resources be realised.

7. Provisioning departments have expressed the view that present procurement and project management practices restrict the scale of the capital programme that can be delivered. They are therefore looking to become more innovative in terms of project delivery. The options differ slightly dependent upon the area of activity e.g. property refurbishment, IT system development. These options are explained further on in the report. Also, covered are the risks and potential cost associated with these revised areas of delivery. However, it is important to note that adoption of these new methods of working has the potential to increase substantially the level of capital investment that the MPS/MPA can accommodate in any one financial year.

Chart 1  Main programme and Actual spends - See Appendix 3

8. Implementation of the new delivery proposals would allow, over time, the programme to expand to meet the demand for new investment. The graph below indicates the level of spend that has been delivered in past years and confirms that capacity has always been a limiting factor. These figures exclude proposed expenditure on the Olympics/Paralympics and counter terrorism.

9. With proposed expenditure on the Olympics/Paralympics and counter-terrorism added to the main programme the potential size of the spending plan increases, with a significant peak in 2009/10. The impact of this will need to be considered fully by provisioning departments when the Government confirms any additional funding for the Olympics/Paralympics and counter-terrorism purposes. The implications are represented below.

Chart 2 – Full Programme Breakdown - See Appendix 3

Capital Programme 2008/09 to 2014/15

10. Appendix 1A-D provides details of the revised seven-year capital programme. The revenue costs associated with individual areas of capital expenditure are identified at Appendix 1D as required by the GLA as part of the capital budget submission. This enables the capital expenditure programme to be considered at the same time as the revenue expenditure plan and ensures that investment plans are affordable and sustainable. Revenue costs associated with capital projects primarily relate to those costs required

• to ensure a project achieves implementation
• to allow for ongoing/running costs once the scheme is implemented

Any capital financing costs arising from the manner in which a project is funded will be managed on a corporate basis. The impact will be reflected in the Medium Term Financial Plan (MTFP).

11. As the capital programme for 2008/09 to 2014/15 has been prepared over a seven-year period, it has not proved possible for all schemes to have been subject to detailed scrutiny regarding expenditure profiles, deliverable benefits, etc. In accordance with the Capital Strategy, all projects that have not previously been approved to proceed will need to be considered by the MPS Capital Programme Review Board and/or MPS Investment Board. All projects costed in excess of agreed devolved limits will also need to be forwarded to this committee for approval. The presented business case will 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. Each case will be assessed against corporate objectives, the Capital Strategy, operational initiatives and the Met Modernisation Programme. Only if relevant criteria are fulfilled will authority to proceed be given and suitable financing identified. Inclusion of a project in the capital programme does not constitute approval to spend.

12. Appendix 1D shows those projects identified for consideration for inclusion within the capital programme 2008/09 to 2014/15. The appendix also shows the position for 2007/08 as per period 6 (September) which reflects the rephrasing of schemes into future years. These adjustments are built into the programme for 2008/09 and onwards. Approval is therefore sought for the revised spending plan for 2007/08.

13. In preparing the spending proposals for 2008/09 to 2014/15 provisioning departments had initial consultation with business groups to ensure that their operational needs were properly reflected. It is recognised that some further consultation with business groups will be required to enable the full scope of certain schemes to be determined and issues regarding competing demands to be resolved.

14. A further review exercise was then undertaken to ensure:

• all listed projects fully met strategic objectives and/or operational needs; and
• all business groups had been given the opportunity of contributing to the formulation of the capital spending plan, and in particular the prioritisation process.

15. This review exercise allowed business groups the opportunity of critically examining the schemes nominated for implementation over the seven years of the capital programme. They were able to verify that key needs were addressed and confirm the prioritisation process was appropriate, with particular emphasis on the scores given to schemes under the approved scoring mechanism.

Property Based Schemes

16. The budget profile for property based schemes allows for the continued roll-out of major initiatives such as patrol bases, custody clusters and the Safer Neighbourhoods Programme. As integral elements of the Estate Strategy these projects are essential in delivering operational bases that meet modern policing needs.

17. Discussions with Property Services have determined that with present resourcing levels a capital programme for property-related schemes of around £50m a year can be supported. However, much depends on the number and scale of the projects under consideration.

18. Property Services has put forward proposals under the title Estates Modernisation Delivery and Extended Arm whereby resources are procured from the market place under one umbrella contract mirroring the complete range of technical skills presently provided internally. As well as extending delivery capacity this proposal has the advantage of securing a large skills base which will enable complex and multi-discipline projects to be considered for ‘external’ project management. The use of such procurement models would be subject to MPA/MPS approval and would depend on the existence of a strong in-house client function.

19. The costs of the Olympics/Paralympics and counter-terrorism measures will put further demands on Property Services and this may require some re-profiling of core projects into later years within the seven year programme.

Information Technology Based Schemes

20. The proposed budget for information technology schemes as provided by the Directorate of Information takes account of all known developmental needs as expressed by Business Groups. This includes ongoing projects, areas where technological innovation is required and areas where replacement of existing systems is needed. The level of expenditure noted for each of the financial years covered by the capital programme represents the underlying need for capital investment in information technology.

21. Discussions with the Directorate of Information have ascertained that under present resourcing levels a capital programme for information technology projects of £99m in 2008/09 and circa £80m for subsequent years can be supported. .

22. The Directorate of Information has already explored options for delivering the capital programme and has three core streams that will allow it to improve its capacity. These are by:

• working to build the in-house capability through the development of a strategic resources pool, and working closely with HR Directorate in looking at ways of competing with the market in general to get the level of capability the force requires. This is an ongoing challenge, with a target of 50 in-house staff replacing contractors to give the MPS/MPA a far more robust core delivery team;
• on top of the existing core capacity/capability within the Directorate of Information the MPS/MPA has identified specific elements of the capital programme which directly effect procurement activity, and which will not be dependent on increasing delivery capacity in the shorter term. This is the reason why it is believed an increased programme can be delivered for 2009/10 specifically. This will require the involvement and support of Procurement Services; and
• looking to extend delivery capability by identifying packages of work that can be offered up to be undertaken under framework agreements set up with external suppliers. This underpins the extension of the IT based schemes capital programme from 2009/10 onwards.

23. The costs of the Olympics and CT will put further demands on DoI and this may require some re-profiling of core projects into later years within the 7 year programme.

Transport Based Schemes

24. Vehicles (cars, vans and motor cycles) and boats are essential assets in the efficient and effective policing of London. Therefore, a considerable element of the capital budget continues to be devoted to the replacement of these items once they reach the end of their economic life. A number of vehicles have also been purchased for specific operational initiatives using funds provided from third party sources. Demand for these vehicles remains high and replacement has therefore been incorporated into the capital programme.

C3i Programme & Safer Neighbourhoods Programme

25. Both of these major initiatives are now nearing their conclusion. Expenditure is still shown separately to allow analysis of 2007/08 budget figures and carry forward sums. However, it is intended that the remaining elements of spend will in future reports be shown under the respective property, information technology, and transport based elements of the capital programme.

Olympics & Paralympics

26. The staging of the Olympics and Paralympics in London in 2012 will require major investment in security infrastructure and equipment to enable the Metropolitan Police to provide effective policing of all events. A detailed schedule of requirements has been prepared and this continues to be the subject of detailed discussion with the Home Office and HM Inspectorate of Constabularies. The buildings and equipment provided for effective policing of the games will remain available thereafter. These legacy issues are the subject of discussion with Government which will influence how items should be procured, financed and subsequently maintained. Decisions will also have to be taken on how these projects will integrate with long-term service activity post-2012. As discussions at the present time are relatively dynamic, expenditure proposals have not been subject to detailed analysis by the provisioning departments. Consequently, there may be project management and supply issues to be considered which will impact upon the core Service programme. The funding assumption at present is that additional capital and revenue grant will come from the Government to support the 2012 investment. This position will be kept under review and the capital and revenue budgets adjusted as and when agreement is reached with the Government on the legacy benefit to the MPS from the approved programme of works.

27. Projects supporting the Olympics/Paralympics are shown separately at this time due to ongoing discussions regarding legacy and funding issues. However, it is recognised that they will need to be integrated with the main capital programme at the earliest opportunity. This will ensure continuity of approach and also reflects that timescales for the delivery of key schemes are uncompromising and demand early start dates.

28. In order to optimise delivery capacity in respect of Olympics projects, discussions are taking place with other police forces to determine the extent to which they could deliver some projects on behalf of the MPA/MPS.

Counter-Terrorism Measures

29. Bids against the additional funds made available nationally for counter-terrorism purposes have been submitted to the Home Office. Details of the MPS bid are noted in general terms at Appendix 1A-D. It will not be known until later in the year whether the bids will be successful. In similar manner to the proposals for accommodation and equipment needed in respect of the 2012 Games, the bid for counter-terrorism equipment and facilities will need to be fully discussed with respective provisioning departments to consider its impact in terms of project management and how it may affect delivery of the core Service investment programme. The funding assumption is additional capital and revenue grant will come from the Government to support the counter-terrorism investment

Prioritisation of Capital Programme

30. To ensure that an affordable and deliverable capital programme for 2008/09 to 2014/15 is achieved it has been necessary for the expenditure proposals to be analysed against a set of key prioritisation criteria. As part of the preparation of the capital programme the present set of prioritisation criteria have been reviewed to ensure they meet current needs. The revised prioritisation criteria are

• Projects that must be delivered. This covers statutory requirements, compliance with health and safety issues and the replacement or renewal of core infrastructure. (Such projects are not subject to the scoring mechanism as they must be delivered to ensure the effective and efficient running of the Service.)
• Impact on delivery of MPS Strategic Objectives or Met Modernisation Programme;
• Continuation or completion of capital project where significant expenditure has already been incurred or where the MPS is already contractual committed;
• Where significant revenue or capital savings would result which could be reallocated elsewhere within the business or achieve an efficiency reduction in spend
• Business benefits of the project – with particular emphasis on performance improvement.

It is important to emphasise that these are not competing criteria, or listed in any order of importance.

31. The ranking of the core capital programme as noted at Appendix 1D was undertaken by a sub-group of the Capital Programme Review Board. This was then subject to review as highlighted in earlier paragraphs.

32. The programme is regarded as achievable by the provisioning departments in the medium to long term. This is subject to adoption of the revised procurement and project delivery methodology described earlier and sufficient support being made available from the ‘user’ community to ensure projects are delivered to set timescales.

33. Of prime interest is the number of projects classified as essential to be undertaken i.e. core projects. Such schemes include statutory requirements, compliance with health and safety issues or the replacement of core infrastructure. Failure to implement these schemes would be seen to have a detrimental impact on service delivery. The attached table shows the element of the proposed capital programme that is regarded as essential.

Table 1: Core Projects as % of Main Programme

34. Further refinement of the capital programme will be required as investment needs associated with the Olympics/Paralympics and counter-terrorism become part of the main programme. Consultation with business groups will be required to reflect relative priorities and overall capacity. This process will also need to take heed of the range of projects noted as ‘schemes that must be delivered’ i.e. ‘core’, and the operational initiatives they support, as the level of spend on these projects will severely restrict the opportunity for new development work.

Funding Issues

35. In approving the borrowing and capital spending plan the Committee will be recognising the need to build up a body of schemes which can be progressed as resources and/or slippage are identified. This will, however, require tight management of the programme to ensure spend in any particular year does not exceed the resources available. If this approach is agreed and, subject to approval to individual schemes, provisioning departments will be able to build up capacity in terms of design and procurement methods, to ensure delivery against the approved capital spending plan. On this basis, the Service should be able to maximise capital investment within the approved funding envelope.

36. As this is the first year the MPA/MPS has completed a seven year capital programme, officers recognise the need to carry out more detailed work on the service demands and anticipated cost of projects for 2009/10 and beyond. This work will be carried out during 2008/09 to ensure the best match with strategic objectives is achieved and the proposals for increasing capacity can be assessed. The long-term affordability of the programme in terms of its impact on the MTFP will also need to be determined in more detail. The programme requirements for 2009/10 and beyond should, therefore, be regarded as indicative at this stage and further reports will be submitted to the Authority aligning longer term plans to available resources and changing prudential indicators as appropriate.

37. It is, therefore proposed for the next three year planning period overprogramming of £60m a year be reflected in the capital spending plans. On this basis, the capital spending plan can be summarised as follows:

Table 2: Level of Overprogramming

The overprogramming will have to be managed, in the main, by Property Services and DoI. It is proposed that the £60m reduction be split - £12m to property schemes and £48m to IT schemes. The overprogramming will be managed by the provisioning departments to ensure expenditure is maintained within the approved departmental total. The overall position will continue to be controlled by the Capital Programme Review Board and the Investment Board.

38. Even with the overprogramming, there is a significant increase in the capital spending plan for 2009/10. The implications of this spending profile will have to be discussed with the GLA in the context of the capital requirement of the group as a whole. In addition the MPA/MPS will need to consider options for optimising funding sources, other than borrowing, for supporting the delivery of the required capital programme.

39. The capital programme is financed through

•  police capital grant;
• specific and non-specific grants;
• third party contributions;
• in year capital receipts;
• usable capital receipts reserves and other capital reserves;
• revenue contributions to capital outlay (RCCO); and
• borrowing.

Following the introduction of the Prudential system of capital expenditure control - The Prudential Code - borrowing is no longer subject to a set limit. Borrowing is regarded as acceptable providing that it can be demonstrated within a set framework that it is affordable, prudent and sustainable for an authority to do so. The framework for decision making is the prudential indicators. These are to be used to show movement in various capital related calculations. Through trend analysis they are designed to support and record local decision making. The indicators will not in themselves determine what is affordable, that is a management decision.

40. Other than the redistribution of police grant top slice (see paragraph 42 below), the level of general police capital grant, third party contributions, and in year capital receipts is not expected to fluctuate significantly from previously approved figures. The anticipated funding sources over seven years of the programme are set out in Appendix 2. Therefore, to allow any increase in the level of investment it would be necessary to increase the amount of borrowing. This would increase revenue costs and therefore need further scrutiny at a corporate level.

41. It should be noted that as part of the Greater London Authority Group, the MPA is restricted by the overall borrowing level deemed appropriate by the Mayor for the Group as a whole. Allocation of the overall borrowing level determined by the Mayor in respect of the GLA Group will be made on the basis of the varying competing demands put forward by the constituent bodies as part of the capital budget setting process. Current guidance indicates that there is little scope for a significant increase in the MPA/MPS’s current requirement.

42. The table below shows the current implications of the proposed capital programme against likely funding sources including affordable borrowing levels:
 

Table 3: Expenditure and Funding issues

An additional £19.656m capital grant has been received following the decision by the Home Office to redistribute certain of the monies previously ‘top’-sliced’ for force reorganisation in England and Wales. This additional grant has been distributed equally across financial years 2008/09, 2009/10 and 2010/11. This provides an additional £6.552m police grant in these years on top of the expected £35.856m and will offset, in part, the significant funding deficit currently anticipated for the latter two years.

43. The following table illustrates the cumulative impact on the revenue budget if a set amount of additional borrowing is utilised each year to finance capital investment. It should be noted that this table does not take account of the present capital financing charges or those that will impact the revenue budget as a result of the financing of capital expenditure during 2007/08. It identifies additional cost in capital financing charges arising from a set level of borrowing for each financial year from 2008/09 onwards. For any level of borrowing deemed affordable compensating savings within the revenue budget will need to be identified to accommodate the extra financing cost.

Table 4: Cumulative impact of additional borrowing

44. The financing costs associated with each additional £1m of borrowing adds approximately £85,000 a year to the revenue budget. This covers the minimum statutory requirement for repayment of principal coupled with an interest charge. Any revenue implementation and additional running costs associated with proposed capital expenditure would need close review to establish if the costs could be covered by current funding allocated to business groups or they are truly additional. This area also presents a need for challenge, as capital investment should deliver efficiencies that may benefit the budget. These benefits will not necessarily become clear until the business cases for the project are prepared.

45. Given expected revenue grant settlements over coming years, the likely level of precept growth, and pressures already experienced within the revenue budget, it is not anticipated that a level of borrowing beyond £40m a year could be supported without significant savings being achieved elsewhere in the revenue budget.

46. The current level of funding supports a capital spend of around £180m to £238m a year. As explained, revenue costs will increase if further borrowing is undertaken. The potential for borrowing beyond the previously endorsed £40m to £50m a year (2008/09 £47m and 2009/10 £38m) is limited, given:

• the present ‘base’ position;
• affordability issues due to the tight revenue climate; and
• the fact that the Greater London Authority will be looking for a consistent level of borrowing, when compared to prior years, to support ‘main programme’ investment needs,

Consequently it is recommended that borrowing to support capital investment for the MPS should not exceed £40m a year.

47. Appendices 1 & 2 are based on the understanding that the programme and funding assumptions noted in this report are acceptable.

Prudential Indicators

48. During discussions on the 2007/08 budget submission the MPA Treasurer gave his agreement that the authorised limit and operational boundary for 2006/07, 2007/08 and 2008/09 in respect of debt requirements should remain at the levels set when the MPA budget for 2006/07 was finalised. This was in recognition of the uncertainty surrounding the borrowing requirements of the London Development Agency in respect of land acquisition for the 2012 Olympics/Paralympics Games. He also agreed a limit for 2009/10 in keeping with previous limits and boundaries.

49. Based on the funds available to finance the draft Borrowing and Capital Spending Plan 2008/09 to 2014/15, an updated set of key Prudential Indicators has been prepared. These indicators take account of the decision taken by the MPA Treasurer and are attached at Appendix 3.

Next Steps

50. The capital programme 2008/09 to 2014/15 once approved by the Committee will form part of the overall MPA budget submission to the Mayor of London. Provisioning departments and business groups will, however, need to start the necessary planning and procurement preliminaries before the final budget is agreed. All schemes will be subject to the normal project approval processes.

51. The majority of projects within the programme can be re-profiled to deliver against strategic priorities earlier or later than planned. Also new projects not identified within the programme can be added at a later date via the internal approval process of Capital Programme Review Board and Investment Board and then onto the MPA. This affords the programme a high degree of flexibility and allows the best use to made of available resources.

52. A further review of the capital programme will be necessary following the release of grant settlement figures by the Home Office and the setting of the precept by the Mayor. Also, further discussion is required on capacity issues for future years and the exact projects to be taken forward in 2008/09. In view of this it is envisaged that a final capital programme for 2008/09 to 20014/15 would be submitted for approval to the Finance Committee early in 2008.

 C. Race and equality impact

There are no direct equality and diversity implications arising from this report. However, Committee will note the inclusion of sustainability, diversity and environmental objectives within the Capital Strategy. These aim to promote the sustainable procurement agenda across all areas of capital expenditure in line with the GLA Statement on Sustainable Procurement approved by the MPA in June 2006.

D. Financial implications

The financial implications of the proposed capital programme and spending plan for the MPA/MPS are set out in the main body of the report.

E. Background papers

Capital Strategy report to the Finance Committee – 19 July 2007

F. Contact details

Report author: Anne McMeel – Director of Strategic Finance, MPS

For more information contact:

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

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