Agenda item

A report was presented that set out the Capital Strategy and capital programme for 2019/20-2023/24, together with the funding of this.

 

Capital Strategy

 

The Authority’s capital strategy was designed to ensure that the Authority’s capital investment:

 

·        assisted in delivering the corporate objectives;

·        provided the framework for capital funding and expenditure decisions, ensured that capital investment was in line with priorities identified in asset management plans;

·        ensured statutory requirements were met, i.e. Health and Safety issues;

·        supported the Medium Term Financial Strategy by ensuring all capital investment decisions considered the future impact on revenue budgets;

·        demonstrated value for money in ensuring the Authority’s assets were enhanced/preserved;

·        described the sources of capital funding available for the medium term and how these might be used to achieve a prudent and sustainable capital programme.

 

Proposed Capital Budget

 

Capital expenditure was expenditure on major assets such as new buildings, significant building modifications and major pieces of equipment/vehicles.

 

The Service had developed asset management plans which assisted in identifying the long-term capital requirements. These plans, together with the operational equipment register had been used to assist in identifying total requirements and the relevant priorities.

 

The 2019/20 & 2020/21 programmes included various items of slippage that had been removed from the 2018/19 programme.

 

A summary of all capital requirements was considered by Members:

 

	2019/20	2020/21	2021/22	2022/23	2023/24	TOTAL
	£m	£m	£m	£m	£m	£m
Vehicles	2.672	1.861	1.066	1.037	1.147	7.783
Operational Equipment	0.150	1.000	0.195	0.800	0.250	2.395
Buildings (timing)	6.145	6.190	0.930	0.200	-	13.465
IT Equipment	2.470	0.425	0.500	0.100	-	3.495
Total	11.437	9.476	2.691	2.137	1.397	27.138

 

Vehicles

 

The Fleet Asset Management plan had been used as a basis to identify the vehicle replacement programme as detailed in the report.  It was noted that the pumping appliance budget included the majority of the stage payments for the 7 appliances slipped forwards from the 2018/19 programme, in addition to the full cost of the 3 to be purchased in 2019/20.

 

LFRS currently had several vehicles provided and maintained by CLG under New Dimensions (5 Prime Movers and 1 Incident Response Unit), which under LFRS replacement schedules would be due for replacement during the period of the programme.  However the understanding was that CLG would issue replacement vehicles if they were beyond economic repair, or if the national provision requirement changed.  Should LFRS be required to purchase replacement vehicles, grant from CLG may be available to fund them.  Based on the current position, we had not included these vehicles (or any potential grant) in our replacement plan.  

 

In addition, Fleet Services continued to review future requirements for the replacement of all vehicles in the portfolio, hence there may be some scope to modify requirements as these reviews were completed, and future replacement programmes would be adjusted accordingly.

 

A number of vehicles had protracted lead times in excess of 12 months. Therefore in order to deliver vehicles in line with their replacement timeframes it was necessary to order pumping appliances, water towers and Ariel Ladder Platform’s (ALPs) at least 12 months prior to their planned replacement. As such orders in respect of 4 pumping appliances and 1 ALP scheduled for replacement in 2020/21 would need to be ordered in the new financial year.

 

Operational Equipment

 

The operational equipment plan as detailed in the report allowed for the replacement of items at the end of their current asset lives, based on current replacement cost.  Each of the groups of assets were subject to review prior to replacement, which may result in a change of requirements or the asset life. 

 

Buildings

 

In terms of all the building proposals it was noted that requirements/designs were still being developed hence costings were to provide some context for decision making.  The two most significant building projects, both carried forward from last year related to:

 

·        Preston Fire Station where plans were being refined, following North West Ambulance Service’s decision not to pursue a joint facility; and

·        Fleet workshop facility, where plans had been refined and a revised total budget cost of £3.9m was presented and agreed at November’s Resources Committee.

 

The plan also incorporated amendments to the Private Finance Initiative (PFI) facility at Morecambe to provide an enhanced training facility for use by stations within the Northern Area and station modifications to enable site sharing with NWAS.  Designs for this were still being refined, whilst discussions were on-going with the PFI provider to agree on how best to facilitate these changes. NWAS had proposed that the Authority funded the capital investment but that they would enter into a long term lease covering both running and the recovery of capital costs over the life of the lease, with suitable break causes included to allow for a recovery of outstanding capital in the event of early termination of the lease.  Details relating to other Service Training Centre works were considered at November’s Resources Committee.  Based on the latest stock condition survey, several stations had identified upgrades to dormitory, drill tower, community room and shower facilities, the actual timing of which may be varied to match the capacity to deliver the works.

 

ICT

 

The sums identified for the replacement of various ICT systems were in line with the software replacement lifecycle schedule incorporated into the ICT Asset Management Plan. All replacements identified in the programme would be subject to review, with both the requirement for the potential upgrade/replacement and the cost of such being revisited prior to any expenditure being incurred.

 

Capital Funding

 

Capital expenditure could be funded from the following sources:

 

Prudential Borrowing

The Prudential Code gave the Authority increased flexibility over its level of capital investment and much greater freedom to borrow, should this be necessary, to finance planned expenditure.  However any future borrowing would incur a financing charge against the revenue budget for the period of the borrowing.

 

Given the financial position of the Authority, it had not needed to borrow since 2007, and repaid a large proportion of borrowing in October 2017.  Based on the draft capital programme presented this position would not change. No allowance had been made of the potential relocation of Service Headquarters, as this project was due to be reviewed. The programme as presented would clearly need updating if the Authority decided to pursue the relocation in the future.

 

Capital Grant

Capital grants were received from other bodies, typically the Government, in order to facilitate the purchase/replacement of capital items.

 

The Emergency Services Mobile Communications Programme (ESMCP) project carried forward from 2018/19 was anticipated to receive £1.0m grant funding which was included in the programme.  To date no other capital grant funding had been made available for 2019/20, nor had any indication been given that capital grant would be available in future years, and hence no allowance had been included in the budget.

 

Capital Receipts

Capital receipts were generated from the sale of surplus land and buildings, with any monies generated being utilised to fund additional capital expenditure either in?year or carried forward to fund the programme in future years.  We did not hold any surplus property assets, therefore no further capital receipts were planned during the capital programme.

 

As at 31 December 2018 the Authority held £1.6m of capital receipts. At the end of the 5 year programme it was anticipated holding £1.4m of capital receipts, which would be available to meet future costs.

 

Capital Reserves

Capital Reserves had been created from under spends on the revenue budget in order to provide additional funding to support the capital programme in future years. Following completion of the 2018/19 capital programme, and allowing for the transfer of the year end underspends the Authority expected to hold £16.5m of capital reserves.  Over the life of the programme the Authority anticipated utilising £15.9m, leaving a balance of £0.6m by the end of 2023/24.

 

Revenue Contribution to Capital Outlay (RCCO)

Any revenue surpluses may be transferred to a Capital Reserve in order to fund additional capital expenditure either in?year or carried forward to fund the programme in future years.  The revenue contribution remained the same over the life of the programme, at £2.0m per annum.

 

Drawdown of Earmarked Reserves

The programme did not require the drawdown of any earmarked reserves.

 

Drawdown of General Reserves

The programme did not require the drawdown of any of the general reserve.

 

Total Capital Funding

The following table details available capital funding over the five year period:

 

	2019/20	2020/21	2021/22	2022/23	2023/24	TOTAL
	£m	£m	£m	£m	£m	£m
Capital Grant	1.000	-	-	-	-	1.000
Capital Receipts	-	-	0.088	0.137	-	0.225
Capital Reserves	8.437	7.476	0.603	-	(0.603)	15.914
Revenue Contributions	2.000	2.000	2.000	2.000	2.000	10.000
	11.437	9.476	2.691	2.137	1.397	27.138

 

If any other major capital project was identified the above position would change significantly. Dependent upon the extent of any new project the Authority would utilise all of the above reserves and may have to take out additional borrowing to deliver a balanced programme, with any such borrowing impacting directly on the revenue budget.

 

Summary Programme

 

The summary of the programme, in terms of requirements and available funding was discussed, as set out below:

 

	2019/20	2020/21	2021/22	2022/23	2023/24	TOTAL
	£m	£m	£m	£m	£m	£m
Capital Requirements	11.437	9.476	2.691	2.137	1.397	27.138
Capital Funding	11.437	9.476	2.691	2.137	1.397	27.138
Surplus/(Shortfall)	-	-	-	-	-	-

 

Over the next five years the capital programme was currently balanced, however it was noted that the following assumptions could change:-

 

·        No allowance had been made for the potential relocation of SHQ, clearly there would be a need to take out significant additional borrowing if that project was pursued in the 5 year timeframe;

·        Operational Communications replacements (ESMCP) were subject to a great deal of uncertainty in terms of both timing and costs as they related to a national replacement project, in addition there may be grant funding available for this which was also unknown at this time;

·        Capital grant may be made available in future years, in order to assist service transformation and greater collaboration;

·        New Dimensions vehicle replacements were expected to be carried out by CLG, however this position may change;

·        All operational equipment item replacements were at estimated costs, and would be subject to proper costings nearer the time;

·        ICT software replacements were based largely on the ICT asset management plan, and were subject to review prior to replacement, which had led in the past to significant slippage;

·        Property project timings were estimated and as such were expected to vary between years.

 

The programme was balanced, and as such could be considered prudent, sustainable and affordable. Future funding levels, both in terms of revenue and capital, would inevitably impact upon the achievability of the programme as identified and should any of the funding assumptions or expenditure items within the programme change, this would have an impact on the overall affordability of the programme.

 

A further report will be presented to the Resources Committee in June, confirming the final year end capital outturn for 2018/19 and the impact of slippage from this on the programme outlined.

 

Impact on the Revenue budget

 

It was noted that the capital programme and its funding directly impacted on the revenue budget in terms of capital financing charges and in terms of the revenue contribution to capital outlay. Dependent upon future funding position, the revenue contribution to capital (RCCO) could come under increasing pressure which may mean that the Authority needed to borrow to meet future capital requirements which would impact the revenue budget as capital financing (interest payable and Minimum Revenue Provision (MRP)) charges, the scale of which would depend upon the type of asset the borrowing was charged against, as it was linked to the life of assets.

 

It was also worth noting that the capital programme showed the Authority utilising the majority of its capital reserves and receipts by the end of the 5 year period, meaning that any longer term capital requirements would need to be met from either capital grant, revenue contributions or from new borrowing.  Potentially this could leave a problem in some future years where the on-going revenue contribution of £2.0m was insufficient to meet the current vehicle replacement programme and operational equipment capital replacements.

 

If a potential relocation of SHQ were to go ahead, it would have a long term impact on the revenue budget, for each £1m borrowed, the annual MRP charges would be £20k (based on an allocated 50 year asset life in accordance with current accounting policy), and the annual interest payable would be in the region of £28k (based on the same 50 year asset life at a current 50 year borrowing rate of 2.8%).  For example, borrowing £5m would result in an additional £240k per year charge to the revenue budget.

 

Prudential Indicators

 

The Prudential Code gave the Authority increased flexibility over its level of capital investment and much greater freedom to borrow, should this be necessary, to finance planned expenditure.  However, in determining the level of borrowing, the Authority must prepare and take account of a number of Prudential Indicators aimed at demonstrating that the level and method of financing capital expenditure was affordable, prudent and sustainable.  Members considered the Indicators that were set out at Appendix 1 now presented, along with a brief commentary on each. 

 

The main emphasis of these Indicators was to enable the Authority to assess whether its proposed spending and its financing was affordable, prudent and sustainable and in this context, the Treasurer's assessment was that, based on the Indicators, this was the case for the following reasons: -

 

·        In terms of prudence, the level of capital expenditure, in absolute terms, was considered to be prudent and sustainable at an annual average of £7.6m over the 3-year period.  The trend in the capital financing requirement and the level of external debt were both considered to be within prudent and sustainable levels.  No new borrowing was currently planned during the three years.

·        In terms of affordability, the negative ratio of financing costs arose from borrowing reflected interest receivable exceeding interest payable and Minimum Revenue Provision payments in each of the three years.  This reflected the effect of the previous decision to set aside monies to repay debt.

 

RESOLVED: - That the Combined Fire Authority approved the:-

 

i)     Capital Strategy;

ii)    Capital Budget;

iii)   Ordering 4 pumping appliances and 1 ALP, scheduled for replacement in 2020/21, in the new financial year in order to meet delivery timeframes; and,

iv)   Prudential Indicators as now presented.