Agenda item

The Director of Corporate Services / Treasurer 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 was reported to the Authority for approval each February.  The programme set out the capital projects taking place in the financial years 2021/22 to 2025/26, and would be updated in May to reflect the effects of the final level of slippage from the current financial year (2020/21).

 

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.

 

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:

 

	2021/22 (inc Slippage)	2022/23	2023/24	2024/25	2025/26	TOTAL
	£m	£m	£m	£m	£m	£m
Vehicles	4.525	0.996	0.947	1.592	1.712	9.772
Operational Equipment	0.444	1.000	0.250	0.530	-	2.224
Buildings	4.325	1.200	8.450	3.400	11.200	28.575
IT Equipment	2.005	0.350	-	0.220	0.600	3.175
	11.299	3.546	9.647	5.742	13.512	43.745

 

Vehicles

 

The Fleet Asset Management plan had been used as a basis to identify the vehicle replacement programme as detailed in the report.  This was a very large programme and hence some slippage may occur.

 

It was noted that Lancashire Fire & Rescue Service (LFRS) currently had several vehicles provided and maintained by Communities and Local Government (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, it was understood 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, these vehicles (or any potential grant) had not been included in the 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.

 

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.  Again, this was a very large programme of works, which would be a challenge to deliver alongside on-going day-to-day property issues, and any new initiatives that were identified at a later date.

 

It was noted that costs and timing for both Preston Fire Station and the Service Headquarters relocation were estimates only, based on current information.  The Director of Corporate Services confirmed the first SHQ Working Group was scheduled for the following week.  As plans were refined further updates would be provided for specific approval.

 

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.

 

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 2020/21 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 2021/22, 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 expected to hold £1.7m of capital receipts as at 31 March 2021.  This would be fully utilised during the 5-year programme.

 

There was no allowance for the potential sale of the existing Fulwood site as this could not be disposed of until such time as any changes required to Fulwood Fire Station were enacted. Once this was complete sale proceeds were forecast to be in excess of £2m, depending on which Fulwood Fire Station option was undertaken.

 

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. The Authority expected to hold £18.7m of capital reserves as at 31 March 2021.  Over the life of the programme it was anticipated all these reserves would be utilised.

 

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 £2.25m.

 

Drawdown of Earmarked Reserves

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

 

Drawdown of General Reserves

No allowance has 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:

 

	2021/22 (inc Slippage)	2022/23	2023/24	2024/25	2025/26	TOTAL
	£m	£m	£m	£m	£m	£m
Capital Grant	1.000	-	-	-	-	1.000
Capital Receipts	-	-	-	1.663	-	1.663
Capital Reserves	8.049	1.296	7.397	1.828	0.150	18.720
Revenue Contributions	2.250	2.250	2.250	2.250	2.250	11.250
	11.299	3.546	9.647	5.741	2.400	32.633

 

Summary Programme

 

Based on the draft capital programme as presented there was a shortfall of £11.1m:

 

	2021/22 (inc Slippage)	2022/23	2023/24	2024/25	2025/26	TOTAL
	£m	£m	£m	£m	£m	£m
Capital Requirements	11.299	3.546	9.647	5.741	13.512	43.745
Capital Funding	11.299	3.546	9.647	5.741	2.400	32.633
Surplus / (Shortfall)	-	-	-	-	(11.112)	(11.112)

 

This was a very large funding gap, demonstrating that the programme as set out was not achievable without significant borrowing.

 

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.  The capital programme showed the Authority utilising all of its capital reserves and receipts part way through 2025/26, 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. 

 

Based on the provisional 1-year settlement, and future forecasts, the position in respect of the revenue budget appeared sustainable until March 2024. Dependent upon the outcome of the next Spending Review and its impact on future funding the revenue contribution to capital (RCCO) could come under increasing pressure. It therefore appeared unlikely that there would be any scope to increase RCCO in future years. (It was noted that the existing contribution of £2.25m was only sufficient to meet the current vehicle replacement programme, any capital requirements over and above must be funded in another way.)  This meant the Authority needed to borrow to meet future capital requirements and this would impact the revenue budget as capital financing (interest payable and Minimum Revenue Provision) charges.

 

As funds had already been set aside (prepaid MRP) to offset the existing £2.0m of PWLB borrowing we would need to take out new borrowing of £9.1m. This would have a significant impact on the revenue budget, in terms of interest payments and setting aside a sum equivalent to the Minimum Revenue Provision (MRP).  Two examples are provided in the report showing the position over a 25 and a 50-year period, based on current long-term interest rates.  The final year of the revenue budget, presented elsewhere on this agenda, included the sum of £142k to meet the costs associated with this borrowing, however the impact on the MRP would not be felt until 2026/27.

 

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, significant external borrowing would be required in the final year 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 £8.2m 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 it was generally agreed at the last Authority meeting that the Headquarters building was not suitable.  Given the planned meeting of the Service Headquarters Working Group for the following week and the number of other large capital requirements set out in the report (for vehicles, buildings and ICT etc. coupled with the Treasurer’s pessimistic view in the long-term) he wanted to wait until a decision had been made on a new location before agreeing to the recommendations set out in the report.  In response, the Director of Corporate Services provided reassurance that in terms of the Headquarters capital requirement, the report set funding aside pending the Authority’s formal decision.  The report tried to set out a programme of potential costs to set aside money for as and when changes were agreed. 

 

Due to a technical issue with the webcast the meeting was adjourned until the issue was resolved.  The Clerk ensured all Members were present and Members then:

 

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

 

i)     Capital Strategy;

ii)    Capital Budget; and

iii)   Prudential Indicators as now presented.