Draft borrowing and capital spending plan 2010/11 to 2016/17

Report: 5
Date: 5 November 2009
By: Treasurer and Director of Resources

Summary

This report provides details of progress on the development of the capital programme for 2010/11 to 2016/17.

A. Recommendations

Members requested to:

• agree the proposed funding of the draft borrowing and capital spending plan 2010/11 to 2016/17 (Appendix 4A refers);
• agree the annual statement regarding the 2010/11 Minimum Revenue Provision and the key prudential indicators calculated from the draft borrowing and capital spending plan (paragraphs 33 to 34 and Appendix 6 refer);
• subject to the above, approve the proposed capital programme 2010/11 to 2016/17 (paragraphs 21 to 22 and Appendices 4B to 4D & 5A refer) and the approach to managing the programme within available funds (paragraph 21 refers);
• note the three projects on the pending list which will be considered as having first call on any additional funding (paragraph 23)

B. Supporting information

Background

1. The Mayor’s budget guidance for 2010/11 was issued on 23 June 2009. It requires that a borrowing and capital spending plan be included as part of the MPA overall budget submission to the Greater London Authority. The guidance states that the borrowing and spending plan covers a period of at least three financial years. However, to enable efficient and effective planning, the Authority has a continuing seven year programme. This allows a longer-term perspective to be employed and a more strategic approach used in the replacement and updating of operational assets. This is particularly important given the present limitations on available funding.

Capital Strategy

2. The Capital Strategy, as approved by the Authority in July 2007, represents a solid framework upon which to consider the investment needs of the Service. It requires proposed projects to be assessed against business priorities, while giving due consideration to the resource constraints. As such it informs financial and business planning and provides the necessary focus to analyse the affordability, prudence and sustainability of investment proposals. These are requirements of the Prudential Code which the Authority is statutorily required to adhere to.

3. The Capital Strategy is underpinned by the Property Strategic Plan (Appendix 1), the Information Technology Strategic Plan (Appendix 2) and the Transport Strategic Plan/Asset Management Plan (Appendix 3).

Stewardship of the Capital Programme

4. Underspending continues to be an issue in the management of the capital programme, although unused funds can be carried forward through reserves to support projects at a future date. The failure to use resources when expected represents unused opportunities to improve operational assets at the earliest opportunity. Therefore, it is important to recognise that ‘slippage’ in major contracts will occur from time to time and to ensure that alternative schemes are available to optimise the use of available resources.

5. Effective governance of the capital programme requires the following:

• each project must have an approved business case to ensure all factors/benefits relating to a project are identified. While this may not be necessary at the time a scheme is included within the programme, the business case should be available at the earliest opportunity;
• a suitable forum for determination of capital expenditure issues should exist. This forum should also be responsible for ensuring governance is exerted over the capital programme;
• with the downturn in the property market, the profile of capital receipts and alternative funding sources needs to be closely monitored and managed; and
• in year monitoring of the capital programme needs to ensure that the impact of any delay in project delivery can be more readily understood in terms of how future expenditure and funding forecasts are affected.

Programme governance has until now been carried out by the Capital Programme Review Board (CPRB). However, to provide greater focus to developing and reporting on the capital plan, a Capital Programme Steering Group (CPSG) has been formed, consisting of the Directors of Information, Finance Services, Property Services and Transport Services. The Group will (i) recommend and monitor the delivery of the capital programme; (ii) continually engage with business groups regarding investment priorities; and (iii) report to Service Improvement Board on (a) delivery against approved programmes; and (b) advise on the development of the Capital Programme.

Review of Capital Programme 2009/10 to 2015/16

6. The MPA Full Authority approved the Policing London 2009-12 Business Plan on 27 March 2009. The Borrowing and Capital Spending Plan 2009/10 to 2015/16 and related prudential indicators formed part of this plan.

7. Capital budget preparation guidance issued in April requested provisioning departments, in consultation with business groups, to provide information to enable a capital programme for the period 2010/11 to 2016/17 to be prepared. The guidance was clear in stating that the projects put forward for consideration must be based on the Capital Strategy and support the MPS Strategic Objectives. It was also made clear that little opportunity for additional finance was available and that provisioning departments should work to the same level of allocation as provided within the presently approved capital plan.

8. The returns from the provisioning departments included many new projects and as a result indicated a level of investment demand far in excess of available funds or the capacity of the Service to deliver.

Borrowing

9. The borrowing limits for the MPA are set by the Mayor and approved by Treasury. Problems were experienced last financial year in that the initial borrowing limits were set so close to predicted long-term debt figures that the MPS’s financial flexibility would have been severely curtailed. However, this situation was resolved as a result of the decision to purchase New Scotland Yard. Initially the decision was taken to finance the acquisition through external borrowing and Mayoral approval to raise the borrowing limits by the total purchase sum of circa £130m was obtained. However, the MPA’s cash position at the time of the purchase was such that £120m was found internally. This has resulted in ‘headroom’ between the actual level of debt held by the Authority and the present borrowing limits. This provides much needed scope to the Authority in deciding when, and by how much, increased levels of borrowing may be considered.

10. The Finance and Resources Committee at its meeting in July 2009 approved a contingency borrowing sum of £60m to be made available for capital investment. Within the report a model of £30m to be used in 2009/10, £20m in 2010/11 and £10m in 2011/12 was shown. To date it has not proved necessary for the £30m ‘earmarked’ for 2009/10 to be taken up but this sum remains available in 2009/10 to support additional approved expenditure within the currently approved programme.

Capital Programme 2008/09

11. A report detailing the planning issues arising from the outturn for the capital programme for 2008/09 was considered by the MPA Finance and Resources Committee on 30 July 2009. That report noted that a number of projects had been delayed and agreed a revised capital budget for 2009/10 of £234.2m. This was an increase of £18.1m on the approved budget for 2009/10 of £216.1m, as agreed within the Policing London Business Plan 2009-12. As well as allowing for schemes continuing from 2008/09, new projects, which had emerged since the Capital Programme had been approved, were also incorporated. Funding of the increase in expenditure was achieved through an increase in forecast capital receipts, dedicated capital grant carried forward through reserves, and the planned use of revenue funds (£4m) to support a scheme for Improving Police Information (IPI).

12. The MPA report also noted the impact that the ‘slippage’ in projects from 2008/09 would have on delivery capacity in 2009/10, primarily that a number of schemes would need to be rephased from 2009/10 into 2010/11. A revised annual budget for 2010/11 of £219.1m was set. This showed a £43.6m increase on the previously agreed figure of £175.5m. The increase reflected the revised expenditure profile for continuing investment in the Safer Neighbourhood Programme and realignment of property development schemes. Funding of the Safer Neighbourhood Programme was to be achieved by borrowing permitted through the flexibilities provided under the Prudential Code. Financing of the delayed property schemes was to come from realignment of available funding sources after making due allowance for previous programme management sums and increases in budget profiles. Further adjustment to the 2010/11 budget is now proposed following revisions to expenditure profiles notified by the provisioning departments.

Draft Capital Programme 2010/11 to 2016/17

13. In preparing the draft capital programme 2010/11 to 2016/17 it has been necessary to:

• recognise the schemes delayed until 2010/11 as a result of the outturn for the capital programme in 2008/09;
• allow for the use of the £60m additional borrowing contingency sum, recognising that this will impact on the revenue budget in terms of increased capital financing charges; and
• give due consideration to those projects that have specific funding sources e.g. specific grants, third party contributions, SIP funds, revenue contributions.

A proposed funding position for the Programme is shown at Appendix 4A. This assumes that the additional £60m borrowing capacity recently approved by the MPA will be used in 2010/11 and 2011/12. This will go some way to closing the ‘gap’ in funding due to the impact the downturn in the property market is having on the capital receipts forecast. It is recommended that £50m be used in 2010/11 and £10m in 2011/12. The additional £60m borrowing is not now expected to be needed to cover overprogramming in 2009/10 which can, if necessary, be contained within funding forecasts for the year.

14. Other funding sources supporting the capital programme in 2010/11 can be summarised as follows:

• Police Capital Grant - This is a general grant from central Government and is expected to continue at £38.44m per year:
• Capital Reserves - £13.38m was agreed by the MPA Finance and Resources Committee last year;
• SIP Funds - A revenue allocation of £12.24m in 2010/11 from the Service Improvement Fund will fund capital expenditure which will generate material savings in future years;
• Revenue Contributions to Capital from dedicated revenue reserves. Approval is sought for expenditure of £7.38m to be financed in this way. Funding of £9m from general revenue reserves was agreed by the MPA Finance and Resources Committee last year; and
• Revenue Contributions to Capital from in year revenue savings Savings of £5.58m will fund capital expenditure in 2010/11.

15. The additional borrowing of £60m leads to increased capital financing charges of £2.9m in 2011/12 and £5.3m in 2012/13. These have now been included in the 2010-13 draft budget submission. The capital programme also brings with it implementation and on-going revenue costs as projects progress to completion. Details of the associated revenue costs have been captured and they have been recognised within the revenue budget proposals.

16. The capital returns from provisioning departments revealed that, as well as those projects already within the capital programme, a large number of new schemes had been put forward for consideration. Projects have been classified on the basis of being ‘core’ to Service effectiveness or ‘pending’ consideration for inclusion within the capital programme. Core projects consist of those schemes previously identified as (i) essential to the delivery of key infrastructure; (ii) necessary to meet statutory health and safety considerations; or (iii) necessary to meet contractual obligations. Added to these are projects that have emerged since the last budget setting process that (a) meet these noted requirements; or (b) have dedicated funding sources available. They are (i) those schemes which have not previously been possible to consider for implementation because of lack of funding together with (ii) ‘new’ projects that have emerged following discussions with business group leads but which do not meet, at this time, the ‘core’ classification. Tables showing the ‘core’ projects summarised by (i) Provisioning Department; (ii) Business Group; and (iii) Service objective are shown as Appendices 4B to 4D respectively.

17. The A full listing of ‘core’ and ‘pending’ projects is provided at Appendix 5 [Exempt information]. Core projects are shown in Appendix 5A with pending projects noted at Appendix 5B.

18. Based on the total bids (core and pending) submitted by Business Groups, and the information currently available regarding the CT and Olympics funding streams, the overall demand for capital resources is set out below:

Table 1: Demand for Capital Investment

This level of demand is neither affordable nor capable of being delivered. Dedicated funding sources are available for certain areas of expenditure e.g. Olympics, counter-terrorism initiatives, SIP Fund. However, the sums available to fund the main programme remain limited. This is highlighted by Appendix 4A. In the past capital reserves have been used to bolster expenditure levels when other funding sources have been stretched. However these funds are planned to reduce to a minimal level after 2010/11.

19. The following table gives a comparison between available funding and core and pending projects, excluding specifically funded projects. It clearly identifies that insufficient funds are available to undertake the full range of schemes submitted for consideration.

Table 2: Comparison between available funds and total projects, excluding specifically funded projects

As the table illustrates there are not enough general funds available to finance the core projects not specifically funded except for small surpluses in 2011/12 and 2016/17. The funding shortfalls represent a level of overprogramming which will be suitably managed.

20. In addition to the projects in table 2, the specifically funded projects are analysed as follows.

Table 3: Proposed Capital Programme 2010/11 to 2016/17

Way forward

21. It is recommended that the capital programme be limited to the core projects as noted within Appendix 5A. These projects have been adjusted as necessary to reflect emerging priorities and specific funding streams. For 2010/11 expenditure of £296.7m is shown against available funding of £259.2m. A prioritised capital programme will be determined, with those schemes/programmes within the overprogrammed sum of £37.5m in 2010/11 only proceeding when ‘slippage’ in other schemes allows suitable funding to become available. This level of overprogramming is high, represents some 22% of the core funding, but through this structured programme management approach it will be possible to ensure that overall expenditure remains within the total funding figure. This position will, however, be closely monitored and reported to Management Board and the MPA Finance and Resources Committee on a monthly basis.

22. Business Groups Heads have been consulted on capital investment needs and confirmed the existing programme. New schemes can be added to the approved programme if an equivalent (in value) core project can be deferred or cancelled, or suitable funding for a new scheme can be found. The latest expenditure profile for each project has been confirmed.

23. There are three projects noted on the ‘pending list at Appendix 5B that are regarded as having significant importance for operational delivery. These schemes are (a) Covert Authority Management System (CAMS); (b) CCC Appointments System; and (c) MetTime2 - Phase 2. In exploring ways of making additional funds available to support capital investment these projects will be considered as having first call on moving from the pending to the core listing.

24. It is clear that unless new funding opportunities present themselves it will not be possible to expand the capital programme. Table 2 above highlights that for future years there is insufficient funds to cover core projects and the scale of investment will shrink rather than grow. In the present economic climate there is little likelihood of there being a significant increase in police capital grant. Therefore, it is sensible to keep the asset disposal and borrowing policies under review to ensure receipts are optimised in support of the Service’s capital investment priorities. The current disposal programme is targeted at receipts of £23.6m for 2009/10; £20m for 2010/11 and £40m p.a. thereafter. The targeted receipts have been reduced from previous years as a result of the current state of the property market. The property market is regularly monitored and reported on to the MPA through Estates Update Papers to Finance and Resources' Committee. In accordance with MPA financial regulations, a summary will be presented in early 2010 of future possible disposals of property deemed surplus to requirements including all those valued at over £1m and any below £1m which have particular significance.

25. The overall level of capital borrowing is not particularly high. However, the revenue consequences of further borrowing would need to be considered against the test of affordability, particularly in the context of the overall level of budget reductions required to meet the Mayor’s budget guidance. The scope for securing specific grants e.g. EU development funds will also be investigated.

26. The Capital Programme 2010/11 to 2016/17 will form part of the overall budget submission to the MPA and then the Mayor of London. However, it will be necessary 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.

Information Technology Based Schemes

27. 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.

28. The underlying level of demand for investment is significantly in excess of the sums that can be made available for allocation. The Director of Information has initiated detailed discussion with business groups to ensure that core infrastructure is delivered upon which the development of a number of key operational systems depend. Priorities for other projects have then been determined upon the support provided to Service objectives and the operational benefits delivered.

29. Discussions with the Directorate of Information have ascertained that under present resourcing levels the proposed capital programme for information technology projects can be supported.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 seven year programme.

Property Based Schemes

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

31. Other major initiatives in the programme, include the continuation of works at NSY to improve the resilience and the utilisation of the property; the completion of the security works for MIB and the provision of additional SO accommodation. The provision of the SCC is also due to be completed in line with previous MPA approvals.

32. Discussions with Property Services have determined that with present resourcing levels a capital programme for property-related schemes of around £70m a year can be supported. Much depends on the number and scale of the projects under consideration.

Prudential Indicators

33. Based on the funds available to finance the draft Borrowing and Capital Spending Plan 2010/11 to 2016/17, an updated set of key Prudential Indicators has been prepared. These are attached at Appendix 6. These indicators take account of the proposed funding decisions as outlined within this report and summarised at Appendix 4A.

34. The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations came into force on 31 March 2008. They require the Authority to approve an annual statement regarding the amount of money to be set aside from revenue funds to meet the repayment of borrowing undertaken to support capital investment. This is known as Minimum Revenue Provision (MRP). A report on this topic will be forwarded to the Finance and Resource Committee shortly. A draft of the required annual statement has been included within Appendix 6 and will form part of the budget submission.

Environmental implications

Pressures on capital funding for MPS programmes of work can have significant sustainability implications. These implications can be both positive and negative. Scarcity of capital can limit the opportunity to implement mitigating measures for building energy and water efficiency, waste minimisation and recycling which have an associated initial capital investment, even though they usually generate future revenue savings. The Stern Review highlighted that it is almost certainly cheaper to take action to avert climate change now, than it will be in the future but this can be difficult to justify when core policing services are immediately threatened. However a reduced capital budget does offer the opportunity to innovate to create improved efficiency which will result in positive sustainability implications through the avoidance of resource use and reduction in waste. MPS processes require that all business cases are reviewed for environmental implications and going forward in 2010, this will be formally expanded to include the review of wider sustainability implications.

C. Race and equality impact

There are no specific race, equality or diversity implications arising from this report. Equality impact assessments are undertaken on individual project

D. Financial implications

1. The financial implications are discussed in the main body of the report. The capital programme is deemed affordable within the proposed revenue budget. Decisions on further capital investment will need to be taken following full evaluation of the revenue impact.

2. The Service has prepared a balanced 2010/11 revenue budget which is currently being discussed with the Authority before formal submission. That submission reflects the cost of borrowing an additional £50m. However, the pressures on the Capital Programme as reflected in this report could adversely impact on the revenue budget in terms of:

• reduced ability to capitalise staff costs
• delays in delivering savings built into the revenue budget
• increase revenue support of maintaining assets

The overall impact on the revenue budget will be kept under close review and reflected in the final budget which will be considered by the Authority in March 2009 once the overall budget has been determined by the Mayor of London.

E. Legal implications

The legal implications of the proposed capital programme will be reflected in the final report to the Authority on the capital programme in March 2009.

F. Background papers

None

G. Contact details

Report author: Director of Resources, MPS

For more information contact:

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

Appendix 1

Estate strategy

Estates framework

The MPA have created an Estate Panel to review the current real estate plans that have been developed to support operational policing. A revised Estate Framework is being developed and will be presented to the MPA in December 2009.

The real estate objectives are to provide good quality accommodation to meet operational needs, in appropriate locations, offering an efficient and flexible working environment for all staff and officers and ensure value for money. It is intended that this will be achieved through the provision of modern accommodation that offers flexibility in use, in suitable locations. In some cases, provision can be achieved through the refresh/refurbishment of existing facilities; in other instances new facilities will be required. Where new facilities are taken, there may be opportunities to release surplus assets. Receipts generated from such sales form part of the capital funding budget.

In support of the Estate Framework, the MPS are developing a Corporate Landlord approach to the manner in which accommodation is allocated and utilised, this approach will continue systematically to review the operational portfolio and regularly review the acquisition, retention and disposal of assets in light of the MPS service and financial objectives.

Compliance, Resilience and Health & Safety Works

The MPS/MPA must ensure that the property estate is ‘fit for purpose’. There is currently a maintenance backlog in excess of £200m and the objective is to reduce this year on year with the target of ensuring that all service and operational property meet operational requirements.

The capital programme prioritises those programmes of work that support, maintain and improve the resilience of the property estate.

Other programmes

Further planned programmes of work support the MPS corporate objectives and in turn the operational objectives, such as SN, Custody and Patrol Base Programme, IPT Programme and the like. Additional programmes of work will be undertaken to improve the utilisation of the estate, provide revenue savings and increase productivity.

Prioritised programmes also include the support of national initiatives, such as the Olympics.

Appendix 2

Information Technology Strategy

Corporate applications

The MPS has an extensive portfolio of corporate applications, and these need to be kept in operation throughout their life. This can include changes to meet new legislation and changing business requirements as well as technical maintenance such as re-platforming. Reviews are under way, supported by the Directorate of Information, to ensure that each existing system is sponsored by a business user who is charged with assessing costs and benefits so as to provide assurance that the system should continue in operation.

At points of significant change the opportunity is taken to consider whether underlying functions and business processes should change to improve efficiency and effectiveness. If this can be achieved then new supporting systems are developed.

New technology, as well as new ways of doing things, also brings the opportunity to introduce systems into new areas of MPS business.

In all areas the Directorate of Information is moving to a more standardised and more integrated set of systems solutions. This means greater use of SAP and Documentum, rather than every new system involving new technologies. This reuse and exploitation of software already owned by the MPS reduces the cost of new developments.

Efficient Management of the ICT Estate

The Directorate of Information is reviewing the next generation of outsourcing arrangement and seeking to attain better value from suppliers. One of the aims of this activity is that the MPS ICT Outsource provider supports the organisation in rationalising the estate, enabling a reduction in the total cost of ownership. This activity will enable a reduction in capital expenditure on infrastructure and application replacement, upgrade and enhancements over the next 7 years.

The Directorate of Information is improving the lifecycle planning of complex licence, support arrangements and hardware in place for the wide range of applications and infrastructure in the MPS to ensure that replacement or renewal is timely and extracts maximum value from the assets we hold. This will enable the MPS to achieve an optimal value for money position in respect of its ICT infrastructure.

Reducing Contractor Dependency

The Directorate of Information is putting plans in place to significantly reduce project dependency on contractors and consultants. The Directorate will achieve this through replacing contracted staff with our own staff and use of a flexible pool of in-house resources to be deployed across the project portfolio. This should increase the capacity of the capital programme over the next 7 years as some current estimates still assume the use of external resources that will be replaced by this initiative.

Prioritisation

The Directorate of Information is ensuring that as the 7 year capital plan is refreshed each new bid is supported by a Provisioning Business Case detailing strategic alignment, cost and benefits. This ensures that the appropriate level of information needed to identify which activities are strategically important and which deliver greatest value in comparison to the cost is available for determining relative priority.

Enterprise architecture

The Directorate of Information is developing a framework to match technical requirements to business needs. This will enable a faster, better and cheaper ICT estate. This capability will enable the Directorate to ensure that functionality and information will not be duplicated and reuse will be promoted wherever possible. This will result in better integrated systems and better re-use of information.

Convergence

There are opportunities, where practicable and of financial benefit, to rationalise our business operations and harmonise delivery with both other forces through the National Policing Improvement Agency Information Systems Improvement Strategy Programme and with GLA functional bodies and London local government.

Appendix 3

Vehicle Asset Management Plan

Vehicle Replacement cycle

The majority of the MPS fleet is outright purchased; therefore vehicles are replaced to established criteria relevant to the role (operationally task) and the duty number (the equipment fitted to the vehicle). These criteria have been established to maximise the capital investment. Replacing vehicles earlier than these criteria increases capital expenditure with limited impact on in life revenue costs (repair and maintenance); whilst extending can increase running costs (i.e. large component failures), with also the likelihood of increased vehicle downtime and therefore poor operational availability.

The disposal parameter is expressed as a balance between age and mileage, for example response cars (excluding traffic) have a life of 36 months, with an estimated cumulative mileage of 80,000.

Unplanned expenditure

The main considerations in the event of mechanical or collision write off are the current market value of the vehicle (including specialist equipment), the total estimated repair costs, the length of time to complete the repair, the vehicles remaining operational life and the operational need for the vehicle. This element of unplanned expenditure is estimated year on year and included in the capital programme.

Replacement profile

It is always assumed in the annual vehicle replacement programme that vehicles are replaced ‘like for like’, and the budget it built from this assumption. Any upgrades in vehicle type or role are funded by the necessary downgrades in the fleet, this from within the appropriate Business Group. The annual capital requirement for vehicles due replacement is established from this baseline using the current model selection and equipping specification for each role.

Vehicle selection

To find the most cost effective vehicle solution for operational use for any given role an engineering and whole life costing exercise is undertaken. This measures the in depth user requirement, against suitable vehicles that are on the NPIA framework. Those vehicles that are identified as matching the engineering criteria are then placed into a costing matrix to identify those vehicles with the lowest running costs. This ensures that any vehicle selected for MPS use is fully fit for purpose, whilst attracting the minimum through life costs, with the manufacturer’s full in life support and warranty.

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