Agenda item

The Director of Corporate Services presented the report.  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, ensuring 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.

 

Managing capital expenditure

 

The Capital Programme was prepared annually through the budget setting process, and reported to the Authority for approval each February.  The programme set out the capital projects taking place in the financial years 2020/21 to 2024/25, and was updated in May to reflect the effects of any slippage from the current financial year (2019/20).

 

The majority of projects originated from approved asset management plans, subject to assessments of ongoing requirements.  Bids for new capital projects were evaluated and prioritised by Executive Board prior to seeking Authority approval.

 

A budget manager was responsible for the effective financial control and monitoring of their elements of the capital programme.  Quarterly returns were submitted to the Director of Corporate Services on progress to date and estimated final costs.  Any variations were dealt with in accordance with the Financial Regulations (Section 4.71).  Where expenditure was required or anticipated which had not been included in the capital programme, a revision to the Capital Programme must be approved by Resources Committee before that spending could proceed.

 

In response to a question from County Councillor Wilkins regarding the management of slippage, the Director of Corporate Services advised that slippage tended to be a timing issue and did not represent anticipated underspends.  Project costs were front loaded in the year the project was anticipated to begin to ensure sufficient allocation was made in that year, in case the project proceeded quicker than anticipated.

 

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.

 

A summary of all capital requirements was considered by Members:

 

	2020/21	2021/22	2022/23	2023/24	2024/25	TOTAL
	£m	£m	£m	£m	£m	£m
Vehicles	3.249	1.388	1.020	1.132	1.368	8.157
Operational Equipment	0.100	0.215	0.500	0.250	1.000	2.065
Buildings	5.575	4.695	6.641	4.250	2.750	23.911
IT Equipment	1.895	0.600	0.100	-	0.220	2.815
Total	10.819	6.898	8.261	5.632	5.338	36.947

 

Vehicles

 

The Fleet Asset Management plan had been used as a basis to identify the vehicle replacement programme as detailed in the report.  The plan set out the content of the vehicle replacement schedule and the following was noted:

 

·         Replacement of the ALP in 2021 would keep the number of ALPs at 4 – with the expansion of the Water Tower capability this could potentially be reviewed;

·         Two additional Water Towers replaced a Pumping Appliance in 2021 & 2122 (note the Service was still considering options in terms of its long term capability which may lead to a further two Water Towers replacing Pumping Appliances – this would add a further £0.6m into the programme cost);

·         The budget for the provided cars was based on the current cost of a hybrid Toyota Rav4, reducing the impact on the environment;

·         No allowance had been made for the introduction of vehicles with specific high-rise capability.

 

LFRS currently had several vehicles provided and maintained by CLG under New Dimensions (5 Prime Movers and 1 Incident Response Units), 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 might be available to fund them.  Based on the current position, we had not included these vehicles (or any potential grant) in the replacement plan.  

 

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. 

 

Of the 20/21 budget, £4.9m had been transferred from the approved 2019/20 programme, comprising £4.2m in relation to the Fleet workshop replacement facility, £0.5m in relation to Morecambe NWAS & Training hub works, with the balance relating to improved station facilities.

 

It was noted that both Preston Fire Station and the SHQ relocation were subject to ongoing review/business case development, hence costs and timing were estimates only at this stage.  Further updates would be presented to Resources Committee in due course.

 

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 had repaid a large proportion of borrowing in October 2017.  There was no allowance for any borrowing in the draft programme, although this did result in a funding shortfall in the last 2 years, which was referred to later in the report.

 

Capital Grant

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

 

The ESMCP project carried forwards from 2019/20 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 2020/21, 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.

 

The Authority held £1.6m of capital receipts as at 31 March 2019.  It was proposed to amend the current accounting policy to have all vehicle sales proceeds classified as capital receipts, rather than revenue income in order to provide more funding for future capital items, therefore notional annual capital receipts of £50k had been included to reflect anticipated disposal proceeds.

 

At the end of the 5-year programme all the capital receipts would have been utilised, however should the relocation of SHQ go ahead, the income from the sale of the surplus site would be received in 2025/26.  This could be in the region of £1.5m dependent on what happens to Fulwood fire station within the site boundary.

 

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 2019/20 capital programme, the Authority expected to hold £17.0m of capital reserves.  Over the life of the programme it was anticipated that all these reserves would be used.

 

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.

 

In order to balance the capital programme over the next 3 years, the revenue contribution had increased to £2.15m in 2020/21 returning to £2.0m in subsequent years.

 

Drawdown of Earmarked Reserves

No allowance had been made for the drawdown of any earmarked reserves.

 

Drawdown of General Reserves

No allowance had been made for the drawdown of any of the general reserve.

 

Total Capital Funding

 

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

 

	2020/21	2021/22	2022/23	2023/24	2024/25	TOTAL
	£m	£m	£m	£m	£m	£m
Capital Grant	1.000	-	-	-	-	1.000
Capital Receipts	-	1.749	0.050	0.050	0.100	1.949
Capital Reserves	7.669	3.149	6.211	0.012	-	17.041
Revenue Contributions	2.150	2.000	2.000	2.000	2.000	10.000
	10.819	6.898	8.261	2.062	2.100	30.140

 

Summary Programme

 

Based on the draft capital programme as presented there was a shortfall of £6.8m:

 

	2020/21	2021/22	2022/23	2023/24	2024/25	TOTAL
	£m	£m	£m	£m	£m	£m
Capital Requirements	10.819	6.898	8.261	5.632	5.338	36.947
Capital Funding	10.819	6.898	8.261	2.062	2.100	30.140
Surplus / (Shortfall)	-	-	-	(3.570)	(3.238)	(6.807)

 

This could be funded from additional borrowing, but would have an impact on the revenue budget, for interest payable and Minimum Revenue Provision (MRP).  For example, the above requirement to shortfall would actually result in borrowing £4.8m cash, as we had already set aside funds (prepaid MRP) to offset our existing £2.0m of PWLB. Borrowing over 25 years would cost approx. £0.5m per year in the revenue budget, or the same sum repaid over 50 years would cost approx. £0.3m per year in the revenue budget.

 

It was highlighted that the programme was based around a number of assumptions which could change:-

• Replacement of the ALP in 2021 would keep the number of ALPs at 4 – with the expansion of the Water Tower capability this could potentially be reviewed;
• Two additional Water Towers replace a Pumping Appliance in 2021 & 2122 (note the Service was still considering options in terms of its long-term capability which may lead to a further two Water Towers replacing Pumping Appliances – this would add a further £0.6m into the programme cost);
• No allowance had been made for the introduction of vehicles with specific high-rise capability;
• 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;
• The costs and timing for both Preston Fire Station and the SHQ relocation were estimates only at this stage, based on current information, but clearly if/when either of them goes ahead would create a need for external borrowing;
• Property project timings were front-loaded and as such were expected to vary between years;
• Operational Communications replacements (ESMCP) were subject to a great deal of uncertainty in terms of both timing and costs as they were related to a national replacement project, in addition there may be grant funding available for this which was also unknown at this 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;
• Capital grant may be made available in future years, in order to assist service transformation and greater collaboration;
• Capital receipts of up to £1.5m may be available following the end of the 5-year programme if the relocation of SHQ went ahead.

 

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. Based on the provisional 1-year settlement the position in respect of the revenue budget appeared sustainable. 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) charges, the scale of which would depend upon the type of asset the borrowing is charged against, as it was linked to the life of assets.

 

It was also noted that the capital programme showed the Authority utilising all of its capital reserves and receipts before the end of the 5-year period, meaning that the remainder of the capital programme would need to be met from either capital grant (if available), additional revenue contributions or from new borrowing.  Potentially this would also leave a problem in future years beyond this programme where the on-going revenue contribution of £2.0m was insufficient to meet the current vehicle replacement programme and operational equipment capital replacements.  For example, from 2025/26 onwards the estimated average annual capital spend (based on current vehicles in service and assumed spends for operational equipment, property and ICT systems) was £2.8m per year, an average shortfall of £0.8m.

 

Summary

 

Over the next three years the programme was balanced, and as such could be considered prudent, sustainable and affordable. Should all the items in the five-year programme go ahead, potentially significant external borrowing would be required in the latter years of the programme.

 

However, 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.

 

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.  These Indicators were set out at Appendix 1 now presented, along with a brief commentary on each. The Prudential Indicators were based on the programme set out in the report.   These indicators would be updated to reflect the final capital outturn position, and reported to the Resources Committee at the June meeting.

 

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 £8.7m 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 arising 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.

 

County Councillor O’Toole commented that the last Planning Committee meeting was held in a different meeting room due to flooding at Headquarters.  This had proven to him that the building was totally inappropriate for its purpose.  He thought that it was appalling that nothing had been brought before the Authority earlier to reconsider the move of Service Headquarters to Service Training Centre and he was concerned that since previously considered the associated costs would have increased.  He would like to see immediate progress on relocation including the current valuation of the site at Fulwood; with relocation of the fire station if necessary.

 

The Director of Corporate Services advised that the capital identified in the report was for building construction and that the business case was currently being progressed.

 

Following Member discussion there was general agreement for the project to be considered as soon as possible, ideally at the next Strategy Group meeting.

 

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

 

1.    Capital Strategy;

2.    Capital Budget; and

3.      Prudential Indicators as now presented.