Capital strategy

Annex B: Cabinet report, 5 February, 2014 - the Newcastle capital investment programme

Submitted by: Executive Management Team

Portfolios: Finance and Resources, Economic Development and Town Centres

Ward(s) affected: all

Purpose of the report

To review the projected capital expenditure requirements over the four year period 2015-16 to 2018-19 and the resources likely to be available to finance this expenditure. To develop a number of different strategies to deal with these financial challenges.

Recommendations

These are:

  • that the contents of the report and appendix be noted
  • that strategies are developed to find solutions to meet the financial challenges in respect of the medium term capital expenditure requirements
  • that consideration is given to the formulation of a cabinet panel to develop and oversee the process required

Reasons

We need to be aware of future capital commitments over the medium term and whether we will have the resources available to finance them and to consider all available options in respect of our assets and future liabilities associated with them.

Background

At its meeting on 15 January 2014 the Cabinet approved the asset management strategy and recommended the capital strategy for approval at the full council meeting on 26 February. This report seeks to bring together the two documents in developing the detailed strategies in delivering our objectives in the medium term. We have an ongoing need to incur capital expenditure in order to replace or maintain our operational assets so that services can continue to be provided in accordance with corporate priorities and to ensure the safety and comfort of customers and staff and to comply with statutory provisions. We also need to maintain our stock of investment assets, such as shops and industrial units in order to comply with our landlord responsibilities and safeguard future income from these 
assets.

There are currently very limited resources available to finance capital expenditure. A part of the annual New Homes Bonus grant (£0.515m in 2014/15) is presently used to finance housing capital activities, principally disabled facilities grants, in excess of other grant funding. With the exception of the ICT Development Fund, which is fully committed to financing ICT development and replacement of essential ICT systems, all of our capital reserves have been used. Capital receipts will, therefore, be the main source of funding for future capital requirements. Following the use of £0.954 million of receipts to fund new projects included in the 2014-15 capital programme, there will remain only £0.700 million of receipts available for future use and it is prudent to keep this as a contingent sum for emergency situations. Continued capital investment, therefore, is largely dependent upon generating further capital receipts in the quantities, and at the time, required.

Issues

Based on current information eg service demands, recent stock condition surveys etc. the appendix below sets out projected capital expenditure requirements of £18.859 million over the period 2015-16 to 2018-19. The expenditure is that which is considered necessary to:

  • enable us to continue to provide our services in accordance with corporate priorities and/or approved strategies eg. vehicles and plant, repairs to operational buildings
  • fulfil our environmental and heritage responsibilities
  • comply with legislation, for example health and safety, disabled facilities grants
  • maintain our income from our investment properties, for example shops, offices, industrial units

All of this expenditure will have to be financed by ourselves from our own resources, since it is not anticipated that it will be funded by external bodies, or it is expenditure required over and above any likely external contribution, for example in respect of disabled facilities grants. It should be borne in mind that these estimates represent the minimum amounts that we are required to spend - or are likely to have to spend.

With the exception of some of the projects included in the 'investing in community facilities' section it does not include the provision of new facilities or other development expenditure, for example, in respect of economic development activities or a modern leisure facility in Kidsgrove (to replace the out-dated facility provided at Clough Hall School). The facility is currently managed by us on behalf of Staffordshire County Council and Clough Hall School. An ambitious plan for a comprehensive replacement of the facility has been discussed by both councils which would see the investment of new capital monies to replace the leisure centre. An outline business case has indicated that both councils can reduce their revenue cost liability by investing in a new facility although this will require the necessary capital funding package to be assembled. The current estimates are £4.75 million for a refurbishment and £7.75 million for a replacement. It is hoped that both Staffordshire County Council and Sport England will contribute to these costs but any amount that we have to fund will be in addition to the £19 million of expenditure identified in the appendix.

Similarly, if we wished to invest in the museum with a view to it being in a condition where it would be feasible to transfer it to a trust in 5 years' time, this could require an investment of around £3.5 million. Funding towards this would be sought from the Lottery Fund but any borough council funding would again add to the figures already outlined.

Funding

As highlighted above, capital resources are currently very limited. Councils fund capital expenditure in a number of ways. As significant owners and users of land and buildings, councils carry out regular reviews of their assets and make decisions about which are surplus to their needs. The Audit Commission has produced a number of studies on councils' stewardship of assets and recommends that councils keep their assets under review. In Newcastle-under-Lyme, a comprehensive asset management system is operated and through the annual asset management strategy, land and property is identified for disposal. The majority of councils fund their capital development requirements through the disposal of surplus assets. Where there is a shortfall of available assets to dispose of, councils will use borrowing as the alternative mechanism for funding capital development. Councils may also use grant funding from a range of sources to supplement their own capital funding for particular schemes.

Cabinet approved the marketing for sale of a number of sites at its meeting on 15 January 2014, which could realise receipts of up to £8.000 million. Up to 31 March 2019, other sites or assets had to be approved for sale and opportunities may have arisen to realise receipts from one-off sales. It may take some time for this activity to result in actual receipts being received and in the meantime there may be urgent works which need to be carried out. However, these receipts are essential to fund the items in the appendix to the benefit of the borough.

Contributions towards the cost of capital projects may be obtained from partner organisations or from other bodies or via section 106 planning payments or, in future, the Community Infrastructure Levy. These are, however, unlikely to be towards the cost of projects concerned with maintaining the operational capability of ourselves and any such projects are likely to be additional to those included in the tables contained in the appendix and funded entirely, or almost so, from such external contributions. It is not anticipated that there will be any significant amount of external funding forthcoming in respect of any of the projects included in the appendix.

Development of strategies and actions

Strategies and actions are required for dealing with the possible shortfall of resources to meet the cost of the projected capital expenditure contained within the appendix. These should encompass the following:

  • a critical review of all the projected capital expenditure detailed in the appendix categorising expenditure as essential, desirable, long term etc. and developing a prioritised rating
  • rescheduling of projects being aware of dangers inherent in this such as possibly costing more in the long run, greater likelihood of unexpected breakdown/repairs; perpetuation of inefficiencies, health and safety implications, etc.
  • prioritisation of projects
  • looking at opportunities in respect of 'invest to save'
  • exploring opportunities for alternative service delivery linked in with the revenue budget and the work being undertaken as part of the Newcastle 2020 project
  • seeking opportunities of working with others embracing one of our priorities of a co-operative council
  • assessing any requirement for the use of temporary borrowing to cover shortfalls
  • assessing any requirement for the use of reserves to cover shortfalls with reserves being 'repaid' when resources become available (limited by availability of and amounts held in reserves)
  • creation of rotating or sinking funds to provide for cyclical replacements, for example vehicles
  • evaluating options for the leasing of items such as vehicles as an alternative to capital purchase

It is proposed that the assets review group, comprising officers from a variety of asset related disciplines, which is attended by the Cabinet portfolio holder for Economic Development, Regeneration and Town Centres, should develop these strategies and that Cabinet gives consideration to the formulation of a Cabinet panel to develop and oversee the process required.

Financial and resource implications

These are set out throughout this report and in the appendix.

Major risks

The overall risk is that insufficient resources will be available to finance the capital expenditure needed over the period, with a secondary risk that resources, particularly capital receipts, may not match the timing of the expenditure.

If projects set out in the Appendix are not carried out a number of risks may arise, depending upon which projects are concerned:

  • service continuity suffers or service may not be able to be provided at all
  • customers, staff and the general public are exposed to unacceptable health and safety risks, e.g from unsafe buildings and structures
  • council fails to fulfil its statutory responsibilities
  • council fails to meet its legal obligations, e.g. with regard to property leases
  • income is lost because commercial properties become unlettable or cannot obtain acceptable rentals

List of appendices

Appendix: the Newcastle capital investment programme 2015-16 to 2018-19.