Capital and Investment Strategy 2022/23 - Cornwall Council
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Information Classification: PUBLIC Contents 1. Introduction 2. Background and Council priorities 3. Prioritisation policy 4. Governance, Scrutiny and Assurance process 5. Capital Programme 6. Loans, guarantees and non-treasury investment 7. Capital Indicators 8. Asset Management 9. Risk Management 10. Knowledge and Skills Appendices 1. Capital Programme (by Outcome) 2. Capital Financing 3. Capital Expenditure
Information Classification: PUBLIC CORNWALL COUNCIL CAPITAL STRATEGY 2022/23 – 2025/26 1. Introduction 1.1 The capital strategy sets out the direction for the Council’s capital programme management and investment decisions in support of our outcomes. It sets out the principles for prioritising our capital investments, the governance, scrutiny and assurance process. It also provides an overview of the asset management process and approach to risk management. 1.2 The requirement for councils to prepare a capital strategy is set out in the Prudential Code for Capital Finance in Local Authorities (2017), and this document has been produced in accordance with the latest guidance. 1.3 The Prudential Code is changing, with formal requirements to be applied from 2023/24. Through 2022/23 the changes can be viewed as guidance allowing for a transition period. As the capital programme is forward looking for several years it is advisable to take on board the guidance and incorporate into this year’s strategy. The changes are explained further in section 5.6. In line with updated guidance the Capital Strategy sets out plans to align investment activity to support Cornwall Council’s functions, identify the borrowing requirement and not invest for purely commercial return. 1.4 The capital strategy forms an integral part of the Council’s medium to long term financial and service planning and budget setting process as it can assist with invest to save activity and will impact the revenue budget through the debt repayment. It is also fundamental to the Treasury Management Strategy in relation to investment requirements and decisions. 1.5 Due to several factors including geographical location, the state of the economy, the supply chain and grant conditions, the ability to deploy capital expenditure within the county does have a limit and it is imperative that the Council has a well planned capital investment programme which is deliverable and allows the supply chain to plan accordingly. 2. Background & Council Priorities 2.1 Historically the Council had a very bottom up approach to capital with individual schemes being the driver for the overall programme, regardless of size or scope. This created limitations and did not focus on the level of investment that the Council can prudently afford, realistically deliver, and support the delivery of outcomes. In 2021/22 the Capital Strategy introduced a more strategic approach through a portfolio approach.
Information Classification: PUBLIC 2.2 The Council Business Plan has focused delivery through four priority outcomes. The management of the capital programme will mirror this with a portfolio for each outcome. Alignment of the capital programme to Council priorities will ensure that schemes are approved which clearly demonstrate delivery of key objectives. There will be a consistent approach across the Council in relation to scheme approval and funding. The capital programme can support the development of the capital public works supply chain and the Council’s commitment to increase spend with local suppliers. 2.3 A portfolio is defined as a grouping of programmes and projects to deliver an organisation’s strategic objectives. In this year’s capital strategy the portfolio approach is strengthened to support the four business plan outcomes: 2.3 Each portfolio will consist of individual projects or groups of projects managed on a programme basis. Portfolio boards will be required to manage programmes and projects through a clear and transparent phased approach that is consistent with best practice and the Treasury green book. The portfolio management will be designed in line with the Outcome Delivery Plans Example Portfolio structure
Information Classification: PUBLIC 2.4 The Outcome focus that the Council has adopted is also to maximise value for money and remove silo working. In terms of the capital programme this approach may create the opportunity for previously siloed service projects to benefit from wider engagement. As with all aspects of the Council’s finances the capital programme also needs to work efficiently. In this regard the Council will have clear and affordable prudential indicators set as targets to frame the size of future capital programmes to ensure the programme is affordable in the short and long term. 2.5 This approach will require programmes and projects to be developed to a higher level of detail before they progress to full approval and enter into the construction phase. In doing so business cases need to be prepared with reference to: • HM Treasury Green Book (Green Book) • Construction playbook • Best practice project management • Internal audit findings 3. Prioritisation Policy 3.1 When there are limited resources, not all proposals can be supported and delivered. To assist the prioritisation of limited resources new proposals will need to consider their outcomes against the following criteria: • Strategic fit, delivery of Council outcomes; • Climate change implications; • Impact on the Council’s revenue budget; • Deliverability; • Project risk; • Safeguarding of existing assets; • Health and safety implications;
Information Classification: PUBLIC • Funding (including external funding leverage) and affordability. 3.2 Portfolios will need to assess new projects and prioritise within existing resources. For 2022/23 the Council has no provision for additional borrowing. • No new projects to start that requiring Cornwall Council resources • Priority need identified that is not already in the programme requires reallocation from existing portfolio resources. This will require other projects to stop or find alternative external funding. • Projects applying for external grants that require Cornwall Council match resources must identify the match element from existing portfolio budget prior to submitting the grant bid. If the match is not identified and agreed through Outcome Delivery Boards prior to submission the grant application will not be supported by the S151 Officer. This will result in the project not progressing and the grant being returned to the funding body. • Projects with 100% external funding, requiring no match from Cornwall Council, will be assessed and approved through standard governance. • Grant funded projects carry the risk of cost over run and scope changes that the Council is liable for. Any project costs due to contract, inflation or project scope changes will need to be met from the portfolios existing budget. 4. Governance, Scrutiny and Assurance Processes 4.1 Governance processes are in place to ensure capital investment decisions (including loans and grants) are made legitimately, transparently and deliver the priorities of the Council. No capital expenditure can be incurred without formal approval and inclusion in the capital programme. 4.2 The capital programme is agreed annually by Full Council as part of the budget setting process. Full Council will set the size of the capital programme, based on the affordability indicators. Allocation to Outcome capital portfolios will be set as part of the budget process. This will include the activity of the Council’s Group of Companies. 4.3 Projects and programmes will need to be assessed through a business case by the Outcome Delivery Board. The Outcome Delivery Board will be responsible for allocating the portfolio capital budget to projects and programmes to support the Outcome Delivery Plan. Review, prioritisation and allocation of capital portfolio resources will be ongoing through each financial year. 4.4 The process is the same for Treveth and other Council companies. The Business Plan will be approved by Cabinet. Any capital requirement will be reported to Full Council for approval into the capital programme. Due to the timing of the group of companies’ business planning cycle if the capital requirements are not
Information Classification: PUBLIC fully assessed for inclusion in the February budget report they will be presented to Cabinet in March, and to Full Council in the next capital report for inclusion in the capital programme. The Outcome Delivery Board responsible for commissioning the activity from the group company will review business cases and approve allocation of budget to individual projects or programmes. 4.3 The capital programme will consist of two separate categories and scheme will progress through the categories in line with the gateway process highlighted above. The two categories are: • Approved schemes: these are projects / programmes that are already in delivery or ready to be delivered; • Indicative schemes: these are projects / programmes that have been approved at Full Council, which demonstrate alignment with the Council Outcomes but only have a strategic or outline business case. Additional work is still required to demonstrate that they are deliverable and affordable. These schemes can’t progress to the ‘approved’ category of the capital programme until a detailed business case has been approved by ICB. Indicative scheme development needs to be funded from revenue resources and be planning for future years (e.g. 2024/25 on). 4.3 Proposals will follow a gateway process, ensuring Treasury Green Book compliance, and must be successful at each gateway to proceed to the next before they achieve full approval to the capital programme, and are allowed to commence delivery. The Investment and Commercial Board (ICB) will manage this gateway approval process. The table below sets out the different phases of activity and gateways: Project Phase Opportunity Policy Delivery Phase Managed and Completion Phase Formulation Construct Phase Phase (Phase 3) (Phase 4) (Phase 2) (Phase 1) HM Treasury Strategic Outline Outline Business Full Business Case Green Book Case Case Procurement Idea Define Procure/ IDA Manage Complete Lifecyle
Information Classification: PUBLIC Types of Opportunity Business Delivery – Contract and Close activities framing phase Justification publication, Implementation selection, • Deal with • Development evaluation, and • FBC to be defects period of business award. approved • Close contract Pipeline need (transition and move to activity • • Articulation Sourcing between operational of outcomes Strategy Phase 3 and stage • Category (make, do, Phase 4) • Handover Strategy and buy) • Award and process and should costs • Specification, sign asset transfer • Pre tender contracts • Project / engagement documents underpinning Programme with the and delivery close and benefit market contracts. approach realisation • SOC and • Market • Manage and formally engagement monitor added to the • OCB and performance pipeline preferred • Alignment • Budget option and reporting approval identified through the • Set up of • Refinement project, project, of budget programme, programme assumptions. portfolio governance • Enact governance to deliver procurement to deliver. / IDA/ other delivery route process • Prepare FBC following outcome of the delivery route Governance ICB – Gateway ICB – Gateway ICB – Gateway ICB – Project Close gateway Approval of SOC Approval of ICB Approval of FBC approval (Officer Governance) Cabinet (Political Approval of the SOC and
Information Classification: PUBLIC incorporation into the MTFP) Relationship Pipeline SOC required for Refinement of Full draw down of with the schemes approval in the assumptions in funds in the MTFS Budget developed MTFS. outcome portfolio for the process into SOC. budgets. implementation SOC only included if affordable Outcome within Outcome board to portfolio total. prioritise within budget New borrowing resources. and external grant increases New projects managed through exceeding the Headroom Outcome budget. budget to be considered for Headroom allocation 4.4 The gateway process will need to align with other Council processes and the management of the capital programme. This is set out in the diagram below: 4.5 The capital financing budget will take into account the capital programme (approved and indicative) funding requirements. 4.7 The capital programme will be governed by Outcome Delivery Board. The Outcome Delivery Board should meet to review the additions, reductions,
Information Classification: PUBLIC movements and delivery of their capital programme portfolio on a regular basis proportionate to the size, scope and risk of their delivery plan. The function of the Outcome Delivery Board in relation to the capital programme will be to have oversight, stewardship, provide strategic direction and approve the inclusion of new schemes supported by a business case. They will be responsible for prioritising and challenging the delivery of individual projects and programmes by: • ensuring that risks are managed and mitigated; • spend is in line with the approved budget and pressures identified; • deliver the programmes and projects in accordance with the detailed business case; • recommend the reallocation of approved capital budget in line with emerging priorities if required. • take mitigating action to stop or slow projects in order to operate within the approved portfolio target. 4.8 The Outcome Delivery Board will also have challenge and input into new capital projects. No capital project should be considered for the gateway process without the support of the Outcome Delivery Board. 4.9 Investment and Commercial Board (ICB) will be responsible for the gateway approval process outlined above. 4.10 Capital Oversight Group (COG) will take senior ownership of the capital strategy. The focus of COG will be to ensure that resources are used to best effect, review pipeline development in advance of the budget process, monitor the impact of the programme on debt indicators, capital receipts and affordability. 4.11 The responsibilities of the Outcome Delivery Board and COG do not detract from the individual accountabilities of those officers responsible for the development, implementation, and completion of the projects within the capital programme. On completion of significant capital projects or programmes, the Senior Responsible Officer should undertake a post scheme evaluation. They should assess if the project has delivered its objectives and outcomes, suitability of design and construction, affordability, identify good practice and lessons learnt. 4.12 Annually as part of the budget setting process, all projects and programmes will be reviewed to ensure they continue to contribute to the Council’s Priorities and remain affordable. Any that fail to satisfy these conditions will be removed from the programme with the residual budget allocated to the Council headroom capacity.
Information Classification: PUBLIC 4.13 A quarterly capital report will be update Cabinet and Full Council on the progress and delivery of the approved capital programme and any variations for which agreement is sought. 5. Capital Programme 5.1 Cornwall Council’s approved capital programme and funding set out by portfolio below: Summary of existing Capital Programme 2025/26 2021/22 2022/23 2023/24 2024/25 Total & Beyond (£m) (£m) (£m) (£m) (£m) (£m) Existing programme Empowering and enterprising Council 7.277 13.161 12.784 10.460 10.099 53.782 A thriving, sustainable Cornwall 275.138 349.674 299.820 170.584 106.957 1,202.172 A brilliant place to be a child and grow up 25.973 42.769 15.736 10.119 - 94.597 Vibrant, safe, supportive communities 4.135 9.819 11.749 5.024 7.010 37.737 Total existing programme 312.523 415.423 340.089 196.187 124.065 1,388.288 Existing programme - Funding Revenue 5.686 5.055 4.647 4.732 5.740 25.860 Prudential Borrowing 167.543 210.436 202.934 116.555 83.251 780.718 Capital Receipts 11.359 17.884 11.895 2.595 6.687 50.420 Specific Reserves 34.563 47.483 29.098 19.630 19.854 150.628 Grants & Contributions 93.372 134.565 91.515 52.675 8.534 380.662 Total existing programme 312.523 415.423 340.089 196.187 124.065 1,388.288 5.2 The table illustrates how the Council proposes to direct c£1.4bn of capital resource towards its strategic objectives over the life of the Medium-Term Financial Plan. 5.3 As the Council transitions to operating through Outcome Delivery Plans alignment of activity will release further resources to create £50m headroom capacity to support new starts and provide a contingency allowance. This will be allocated through the annual budget process. 5.4 There is no further capacity in the programme for new projects that require prudential borrowing in 2022/23. Outcome capital portfolios are expected to operate within their approved budget and will require projects to be prioritised. 5.5 It is expected that projects with 100% external funding will be added to the programme once business case requirements are met: • Strategic fit • Investment appraisal • Financial impacts • Commercial approach • Management resources 5.6 External funding should only be applied for to support identified priorities and activities in the Outcome Delivery Plan. On this basis any external funding
Information Classification: PUBLIC awarded to support existing projects and priorities will require the Outcome capital portfolio to release Council resources equivalent to the external funding value to the Council Headroom budget. The Outcome capital portfolio will have the same allocation to deliver the identified and agreed projects, only the funding will change. This will allow the Council to build up additional headroom for forward planning and annual allocation to Outcomes Delivery Boards in line with revised Delivery Plans. Capital Council Council Revised Capital Portfolio Programme Resource Resource Programme £m £m £m £m Outcome Portfolio 1,000 800 1,000 795 Council Headroom 50 50 55 55 Total 1,050 850 1,055 850 5.5 Projects that are income generating or provide an invest to save option will be considered on the basis that the income or saving created offsets the cost of borrowing. 5.6 The Capital Strategy reflects the categorisation of investments in line with the Prudential Code. • Service delivery investment is the primary function of the Council’s capital programme to deliver public services such as housing, regeneration and local infrastructure. In some instances, these investments may generate a small return, which can be used to help pay for borrowing. Service investments are made with statutory powers and service outcomes as the first requirement. These investments are from budgeted Council resources e.g. capital or revenue. ▪ Asset build and refurbishment ▪ Financial instruments e.g. an investment fund that supports housing or shares in a regeneration project ▪ Loans ▪ Grants ▪ Non – Treasury investments. Linked to Service delivery but utilise the Council’s cash balances. Non-Treasury investments can include loans to community organisations for cash flow assistance while waiting for grants to be paid to them. • Treasury management investments utilise the Council’s cash balances and are governed by the Treasury Management Strategy. The aim of Treasury investments is to ensure there is sufficient cash for the Council to operate and when the Council needs to take out borrowing.
Information Classification: PUBLIC • Commercial return given the level of risk associated with commercial investments and the update to the Code the Council has not, and will not, invest for purely commercial return. 6. Loans, guarantees and non-treasury investments 6.1 The Council may consider some investments that fall into a non-treasury investment category. The Council has the power to lend monies to third parties subject to a number of criteria. These are not treasury type investments, rather they are service delivery policy investments e.g. to support local business, for regeneration and economic development. 6.2 Loans of this nature will be approved in line with the Council’s Financial Regulations and only after relevant due diligence has been undertaken. There are a number of instances where this may occur, and it is deemed good practice that there are is a framework and criteria that the Council sets and uses to manage these arrangements. 6.3 Non-Treasury investments utilise the Council’s cash balances, but the organisations invested in do does not meet the Treasury investment criteria for risk rating, liquidity or security. 6.4 The type of loans/investments covered by this framework are: • Parish & Town Council Loans not covered by Treasury Strategy (i.e. over 5 Year) • Council Owned Companies Loans • Council Owned Companies Equity • Charity and not for Profit Community Interest Companies • Local Businesses • National Businesses as part of a service provision contract or partnership The framework should set the requirements relating to: • Criteria for Assessment • Security • Financial Limits • Method of Interest Rate Calculation Criteria for Assessment 6.5 All proposals will need to be assessed and a risk or rating category allocated. In most cases it is unlikely that the organisation involved will hold a formal credit rating as issued by one of the three credit rating agencies, hence the assessment will need to be manual and based on a financial analysis of the organisations financial status which will involve analysis of recent accounts and
Information Classification: PUBLIC credit ratings. The assessment will need to identify whether the organisations financial position is: • Strong • Good • Satisfactory • Weak • Bad/Financial Difficulty Security 6.6 In all instances security should be sought as this is a form of collateralisation that ensures the Council is protected in the event of a default. Security should be a first charge against the asset and should be against an asset that can be made liquid fairly quickly and without significant effort. Security will not be obtainable in all instances, and in these cases the rating category set out above becomes increasingly important. In addition, the level of security is a factor in setting the interest rate. Financial Limits 6.7 The financial limits will be based on both an individual organisation, the type of organisation and the Council’s overall risk appetite. In terms of an individual organisation’s limit this will be generic for all organisations in terms of total exposure, there will need to be part of the assessment process an analysis of an acceptable level for each specific application if it’s within the overall total. Interest Rate Calculation 6.8 Interest Rates chargeable will need to reflect base and market rates and will always vary. For short term loans (< 3 years) the rate can be fixed for the duration of the loan and should be calculated on the forecast rate at the halfway duration period. For loans of a longer duration there should be a clause built into the loan agreement to review rates on a periodic basis and should be calculated based on the rate at the commencement of the loan. 6.9 The rates set should take into account the Council’s cost of securing similar length duration money as this is the opportunity cost of using the Council’s surplus cash, the risk and level of security that is obtained and a 25bps margin added on to cover the cost of administration and potentially providing for defaults. The table below sets out the framework for calculating interest rates:
Information Classification: PUBLIC Loan Rates per annum Financial Rating / Rating Security Category High Moderate Low 75 -100% 25-74% 60%) 59%) Strong (AAA-A) 60 75 100 Good (BBB) 75 100 220 Satisfactory (BB) 100 220 400 Weak (B) 220 400 650 Bad/Financial Difficulties (CCC 400 650 1000 & Below) LGD is the Loss Given Deafault - expected loss in % terms of the debtors exposure taking into account recoverable amounts from collateral and the bankruptcy of assets (Inverse of Collateral/ security)
Information Classification: PUBLIC 6.11 The reference rate is published by the European Commission and is based on each individual Countries IBOR (Interbank Offered Rate). For example, if IBOR was 1% and an organisation was deemed to have normal collateralisation but a weak credit rating then 400bps would be added to the IBOR rate giving a minimum interest rate of 5% p.a. Criteria and Limits 6.12 The table below sets out the limits and criteria for the making of loans or investments that are non-treasury. As this is the first attempt at introducing such a framework it will need to be kept under review to see if it delivers the outcomes required (the table has been updated to reflect the lending to Treveth as part of the updated financial model) Maximum Total Total Exposure Organisation Rating Criteria Security Period Exposure per to Organisation Category Parish & Town Councils Manual Assessment N/A £250,000 5 - 25 years £10m Council Owned Companies See Treasury Management Strategy (Cash Flow revolving Loans) Council Owned Companies Manual Assessment N/A £250M Upto 50 Years £300m (Term Loans) Council Owned Companies Manual Assessment N/A £50m N/A £100m (Equity) Charity & not for profit High £5m Up to 7 Years Financial Rating / Community Interest Manual Assessment Medium £2m Up to 5 Years £15m Companies Low £1m Up to 2 Years High £2m £15m Financial Rating / Small Local Business (SME) Manual Assessment Medium £1m Low £500,000 Length of Contract National High £10m or 7 years Organisations/Contractor Financial Rating / Length of Contract (only as part of Medium £5m £25m Manual Assessment or 5 years Procurement Contract/partnership) Length of Contract Low £2.5m or 3 years (Changes in bold) 6.13 Financial Regulations All loans and investments must comply with the Council’s financial regulations, for ease the approval limits for loans covered by the financial regulations are: • For amounts up to £1m, the Section 151 Officer can authorise where there is no adverse impact on Council Policy or service delivery and can be funded from approved budgets. • For amounts over £1m and funded from existing resources the Cabinet. • For amounts of £1m to £5m which are not funded from existing resources the Cabinet.
Information Classification: PUBLIC • For amounts over £5m and not funded from existing resources the Cabinet can authorise but only after Council has made specific provision in the capital programme/budget 7. Capital Indicators 7.1 The overall size of the capital programme is in part driven by third party funding from grants and contributions that align with the Council’s priorities. In addition to external funding the Council needs to set targets for the level of borrowing it can afford to ensure that short term and long term debt repayments are affordable at a rate that allows the Council to continue to invest, maintain and develop new and existing assets into the future. 7.2 A further consideration is that a proportion of the programme funded by borrowing relies on income generated by the project to repay the debt; in the main this relates to Treveth housing and employment space investments but may include other areas such as low carbon initiatives. To ensure compliance with the prudential code for capital it is important that some control is exercised around the proportion of debt that is being serviced from income. The debt will continue to need to be serviced for many years, hence there is a need to ensure income streams are robust, sustainable and manageable if there is downturn in income. 7.3 The capital strategy therefore outlines that the following indicators are adopted for the general fund: 7.4 The current Council asset to debt ratio is 1.7x (as at 31 March 2022) and will continue to be monitored as part of the regular review of the capital strategy. 7.5 The capital programme can also be funded by capital receipts, generated from the sale of assets. Capital receipts are a valuable resource as it removes the need for borrowing and the associated cost and long-term commitment. Ensuring that all capital receipt opportunities are fully captured is a critical element of managing the Council’s capital programme. Therefore, as part of introducing a new approach to capital for the Council, a capital receipt target is
Information Classification: PUBLIC to be set as part of the capital strategy. The target is currently set at £10m and will be reviewed at 6 month intervals. 7.6 The Housing Revenue Account (HRA) and Investment Programme will be included in the calculation of the Council limits above, but also have separate criteria and indicators which will be assessed through their governance and approval process. 8. Asset Management 8.1 Cornwall Council’s Asset Management practices are to balance costs, opportunities and risks against the desired performance of our assets to achieve corporate objectives, and optimise the delivery of value. 8.2 The objective of Cornwall Council Asset Management approach is to apply a systematic approach to the governance and realisation of value from the tangible assets (physical objects such as buildings or equipment) and to intangible assets (such as human capital, intellectual property and/or financial assets). 8.3 Cornwall Council recognises the benefits and objectives of Asset Management to include: • Enhanced satisfaction from improved performance and control of non- performance; • Improved health, safety and environmental performance; • The ability to demonstrate coherent and sustainable planning and investment decisions; • Demonstrate evidence of controlled processes to meet legal, regulatory and statutory requirements alongside strong returns on investment; and • Improved risk and opportunity management with corporate governance and clear audit trials. 8.4 A process of physical asset management has started by forming an initial systematic base line approach to developing, operating, maintaining, upgrading and disposing of physical assets in the most cost-effective manner. Real Estate 8.5 The Council has a real estate portfolio of around 15,000 assets of land and buildings (including Council dwellings), with a book value of c£1.4bn that are held mainly for operational service requirements and administrative buildings. 8.6 Under the Estate Transformation Programme the Council is developing the strategic approach for managing the portfolio of estate assets. To achieve a robust and sustainable cycle of real estate asset management and achieve strategic alignment with corporate objectives, a corporate landlord real estate management approach has been developed. 8.7 The aim of corporate landlord is to guide the future shape and direction of the property estate management to ensure that the portfolio of land and buildings is optimally structured to perform and deliver corporate and service aims.
Information Classification: PUBLIC 8.8 By applying an effective real estate asset management strategy, the benefits will include: • Assets aligned with financial objectives and service aspirations and customer needs; • Devolution of services to the locality with community asset transfer where appropriate; • Ensuring the right mix of property interest to provide both flexibility and surety; • Integrated service delivery through co-location with partner organisations, improving property efficiency, choice and accessibility for customers; • Cooperative estate service provision driving economies of scale; • Improving the sustainability of the corporate estate; • Better targeting of funding by reducing revenue cost and identifying long term capital investment needs; • Challenging the retention of assets, introducing innovative non-asset dependent service delivery models; and • Ensuring appropriate long-term investment in maintenance and statutory property compliance. Real Estate Asset Management 8.9 The role of asset management is in essence to become a service property partner to implement a centralised and standardised asset management practice across all service estates to ensure there is alignment of estates to services’ priorities, corporate estate financial targets, and RICS Public Sector Asset Management guidelines and standards across the full estate. 8.10 The primary aim of asset management will be to act as property partners for directorates, to set five year service estate improvement plans that drive better use of space for each service, whilst managing estate in line with the overall estate financial plan, and to ensure properties are managed to industry recognised standards. 8.11 The Asset Management Group (AMG) undertakes the co-ordination of purchases, reallocations, and disposals of properties. Capital Projects Team 8.12 The Capital Projects Team, part of the Finance & Commercial Service, is the main delivery route for major construction and infrastructure projects within the Council. This team provides support and assistance in all aspects of planning and delivering major projects from inception and feasibility through to the final handover, including the management of risk and project budgets. 8.13 Early engagement with the team is imperative to ensure planned projects are viable and robust.
Information Classification: PUBLIC Roads and Highways 8.14 Cornwall Council adopts an Asset Management approach to the management of its highways assets that: • demonstrates a systematic approach to highways maintenance which takes a long-term view of treatments • applies lifecycle planning and costing in the consideration and determination of the most appropriate maintenance treatments over the life of highway assets; this is to inform the optimal treatment at each stage of the asset’s life. • considers customer expectations and defined levels of service - as outlined in the Highways Maintenance Manual and aligned, as far as reasonable practicable, to the national code of practice. • optimises and prioritises works based on assessed needs derived from the defined levels of service 8.15 All of the above, when implemented in a formalised framework approach, enables better decision making which takes account of the relationship between cost and performance. 8.16 The Highways Maintenance Manual (HMM) sets out how Cornwall Council manages and risk assesses the maintenance of its highways to fulfil its statutory obligations and deliver a safe, serviceable and resilient highway network. Taken as a whole the HMM sets out how the Council complies with the objectives and recommendations set out in national guidance documents and in particular the UK Roads Liaison Group Code of Practice “Well Managed Highway Infrastructure” published in October 2016. The manual is regularly review to ensure ongoing best practice is reflected. 8.17 The Local Transport Plan includes details and plans for the authority’s transportation and infrastructure assets. Other 8.18 Local Authorities have a statutory duty to ensure a sufficient supply of primary and secondary school places, including suitable provision for vulnerable children and those with additional needs. The Pupil Place Planning Strategy sets out the how the Council aims to deliver the required provision and forms the basis for the development and implementation of the Schools Capital Programme. 8.19 Vehicle, Plant and Equipment replacement policies and asset registers are maintained and managed by Cornwall Fire & Rescue Service. The Council’s Information Technology assets and their development are managed within the Council’s IT Service. 9. Risk Management 9.1 A key investment principle is that all investment risks should be understood with appropriate strategies to manage those risks. Major capital projects and programmes require careful management to mitigate the potential risks which
Information Classification: PUBLIC can arise. The effective monitoring, management and mitigation of these risks is a key part of managing the capital programme. 9.2 In managing the overall programme of investments there are inherent risks associated such as change in interest rates, credit risk of third party contributors, global economy (e.g pandemics). Accordingly, the Council will ensure that robust due diligence procedures cover capital investment decisions and where possible contingency plans will be identified and enacted when necessary. 9.3 No project should be approved where the level of risk is determined to be unacceptable to the Council. 10. Knowledge and Skills 10.1 The capital strategy has been developed by Officers of the Council, who have relevant knowledge and technical skills. In addition, external advice and management is employed by the Council procuring and appointing suitably qualified advisors and consultants to support the development, operation and design of the programmes and project. 10.2 Appropriate training is provided to all individuals with investment responsibilities. This includes all those making investment decisions such as officers of portfolio boards as well as members with scrutiny and governance responsibilities. Training is either provided as part of the meeting or by separate ad hoc arrangement. 10.3 The Council’s property portfolio is managed by its Property Services Team. The team has extensive knowledge of the Cornwall property market and experience in dealing with a mix of property types and professional works (including professional services, landlord and tenant, statutory valuations, acquisitions and disposals, commercial and residential property management). 10.4 The Council’s asset valuation for the financial statements are assessed on an agreed five year programme covering the whole property portfolio. The Council also has internal building surveying resource to advice on construction, repair and maintenance, and statutory compliance across its property portfolio.
Information Classification: PUBLIC Appendix 1: Capital Programme (by Portfolio Board) Existing programme Summary of existing Capital Programme 2025/26 2021/22 2022/23 2023/24 2024/25 Total & Beyond (£m) (£m) (£m) (£m) (£m) (£m) Existing programme A secure home for all 159.734 170.645 201.106 100.013 77.666 709.163 A decent income for all 23.858 16.930 8.852 6.903 9.167 65.710 A great environment for all 91.546 162.099 89.862 63.668 20.124 427.299 A thriving, sustainable Cornwall 275.138 349.674 299.820 170.584 106.957 1,202.172 A brilliant place to be a child and grow up 25.973 42.769 15.736 10.119 - 94.597 Empowering and enterprising Council 7.277 13.161 12.784 10.460 10.099 53.782 Vibrant, safe, supportive communities 4.135 9.819 11.749 5.024 7.010 37.737 Total existing programme 312.523 415.423 340.089 196.187 124.065 1,388.288 Existing programme - Funding Revenue 5.686 5.055 4.647 4.732 5.740 25.860 Prudential Borrowing 167.543 210.436 202.934 116.555 83.251 780.718 Capital Receipts 11.359 17.884 11.895 2.595 6.687 50.420 Specific Reserves 34.563 47.483 29.098 19.630 19.854 150.628 Grants & Contributions 93.372 134.565 91.515 52.675 8.534 380.662 Total existing programme 312.523 415.423 340.089 196.187 124.065 1,388.288
Information Classification: PUBLIC Appendix 2: Capital Financing 1.1 The level and availability of capital funding determines the size of the overall capital programme. There are largely two main funding streams, external (including grants & contributions) and direct funding from the Council. The Council seeks to utilise a wide range of funding to support its capital programme, maximising external funding opportunities and limiting internal resources in the most efficient way to deliver its priorities. 1.2 The current capital programme is funded as shown below: Types of Funding: Internal / Type of Funding Detail External Internal Prudential Local Authorities are permitted to undertake Borrowing borrowing to finance capital expenditure. In planning for long term capital investment, it is essential the long term revenue financing cost is affordable. There are close links between the Capital Strategy and Treasury Management Strategy and Local Authorities must manage their debt responsibly with decisions made in consideration of prudent treasury management practice, as outlined in the Council’s Annual Treasury Management Strategy.
Information Classification: PUBLIC This type of borrowing has revenue implications in the form of financing costs: • interest payable to external lenders; • minimum revenue provision (MRP), and amount set aside for repayment of the principal debt. (Note: the charge in the first year will consist of interest only and will be based on the amount borrowed for a full year. However, there will be no principle (MRP) element payable in the first year and this will commence in the year following completion.) The Council has set capital indicators for borrowing. Over the medium term the costs of borrowing and minimum revenue provision (MRP) must not exceed 11.0% of the net revenue budget and borrowing must not exceed 2.6 times the annual net revenue budget. Capital Receipts The sale of capital assets generates a capital receipt. These receipts are ring-fenced, by statute, and can only be used to fund capital expenditure. Receipts under £10,000 are de minimis and classed as revenue. All capital receipts are pooled, allocation and use is determined as part of the overall capital programme requires. However, there are the following exceptions: • Cornwall Council Farms Estate; 40% of any receipt is retain for maintenance and improvement of the Farms Estate. • Housing; in accordance with legislation HRA derived proceeds are ring-fenced for reinvestment in housing projects. • Cornwall Land Initiative; receipts will be reinvested / recycled for further advancement of this scheme. • Revolving Loan Initiatives. • Langarth Garden Village; any receipt from sale of assets associated with the Langarth scheme will be reinvested / recycled to fund further investment to ensure delivery of the master plan. • Where the sale of an asset has been specifically approved by Cabinet to be ring-fenced to fund further development of that site or associate project. • Where the sale of an asset leads to the requirement to repay capital grant, then the first call on the capital receipt will be for this purpose. • Where otherwise explicitly approved by Cabinet.
Information Classification: PUBLIC Revenue The Council can use revenue resources to fund capital projects on a direct basis. However, given the pressures on the revenue budget it is unlikely that the Council will choose to undertake this method of funding if other sources are available. Reserves The Council will regularly review its reserves to identify resource that can be used to deliver Council priorities including, if appropriate, funding of capital investment. (The Place based and Capital Financing Reserve are the Council’s main reserves set aside for financing future capital investment.) Leasing Services may enter into finance leasing agreements to fund capital expenditure. However, a full options appraisal and comparison of other funding sources must be made and the Council’s Section 151 Officer must be certain that leasing provides the best value for money method of funding the scheme. Finance leasing agreements are included within the overall borrowing levels when considering prudence and affordability and calculating the capital indicators. External Grants Grant funding is one of the largest sources of financing the capital programme. This could be from central government departments (such as Department for Transport and Department for Education) or other organisations such as Environment Agency (EA), Homes England (HE), Heritage Lottery Fund (HLF). These will be applied to specific projects / programmes in accordance with their grant conditions. S.106 / Significant developments across the County are Community often liable for contributions. They are provided Infrastructure by developers towards provision of public Levy (strategic infrastructure required as a result of the element) development. These will be applied to suitable and relevant expenditure according to Private Sector / Any other contribution from an external Other External organisation (e.g. Town or Parish Councils), Contribution often contribution to a jointly beneficial scheme. 2. Optimising Council Resources 2.1 Whilst prudential borrowing is the main source of internal Council capital resource, it is not the only source. Direct revenue funding, reserves and capital
Information Classification: PUBLIC receipts can all be used to fund capital expenditure. However, whilst revenue and reserves can be used, it is not recommended to use these sources particularly when there is insufficient budget available to fund the Council’s ongoing revenue budget. 2.2 The Council can borrow to fund capital investment, but unlike central government cannot borrow to fund day to day revenue expenditure, therefore whilst there is a shortfall in revenue funding it is not strategically good practise to use revenue for something the Council can borrow for. 2.3 Capital expenditure will be funded from capital resources when prioritising funding and not use revenue linked resources until all available capital resources have been utilised. 3. Minimum Revenue Provision (MRP) 3.1 The minimum revenue position (MRP) is the amount set aside for the repayment of debt as a result of borrowing made to finance capital expenditure. The Council sets its MRP Policy annually as part of the Treasury Management Strategy. MRP charges reflect the economic benefit the Council gets from using the asset to deliver services over its useful life. This ensures the Council Tax payers are being charged each year in line with the asset usage and prevents future Council Tax payers being burdened with ‘debt’ and the costs of that debt, relating to assets that are no longer in use. 3.2 As a guide, borrowing incurs a revenue cost burden of approximately 4.1% of the loan each year i.e. for every £1 million of borrowing, this will incur revenue costs of approximately £41,000 per annum. This is calculated as follows: 3.3 Exact costs will depend upon the asset life associated with the particular capital investment and available interest rates. These are in addition to any ingoing maintenance and running costs associated with the investment.
Information Classification: PUBLIC 3.4 Local authorities must manage their debt responsibly and decisions about borrowing are made in consideration of prudent treasury management practice, as detailed in the Council’s Annual Treasury Management Strategy. 4. Flexible use of Capital Receipts 4.1 In February 2021 final settlement it was confirmed that the flexible use of capital receipts was extended for a further 3 years. The details and impact are still being assessed by government and guidance is yet to be issued. 4.2 There are no current plans for the Council to use capital receipts under the flexibility directive. Following guidance from government the Council will assess the need for use of capital receipts and incorporate into an updated Capital Strategy during the financial year.
Information Classification: PUBLIC Appendix 3: Capital Expenditure 1.1 Capital expenditure is the acquisition, creation or enhancement of fixed assets with a long-term value to the Council or on those assets of its partners. 1.2 If expenditure falls outside of this definition, it will be charged to the revenue account during the year that the expenditure is incurred; this is the default position. It is therefore crucial that expenditure meets the definition above before being included in the capital programme to avoid unexpected revenue charges within the year. Definition of capital expenditure is provided below, relating to some of the more complicated capital rules. Allowable Capital Expenditure Item of Capital or Detail expenditure Revenue Feasibility Revenue, but Until a specific solution has been decided studies could be capital if upon, costs cannot be directly attributable conditions met to bringing an asset into working condition. This includes costs incurred whilst deliberating on an issues, scoping potential solutions, choosing between solutions and assessing whether resources will be available to finance a project. However, feasibility studies can be capitalised if they occur after a decision has been made to go ahead with a capital project (i.e. if they are directly attributable in bringing an asset into use, or enhance the value) as long as they have been included in the approve project costs. Demolition of an Revenue, but Demolition would usually be an act of existing building could be capital if destruction that would be charged to conditions met revenue; However, if the costs incurred are necessary in preparing a site for a new scheme, it can be argued that they are an integral part of the new project. Cost of buying Revenue Does not enhance the asset or extend the out sitting asset life. tenants of existing building Initial delivery Capital As long as directly required to deliver the and handling asset or bring an asset into use. costs Costs of renting Revenue Considered to be a cost of delivering the alternative regular Service, does not directly deliver accommodation the asset. for staff during building works Site security Revenue Does not enhance the asset or extend the during asset life. construction
Information Classification: PUBLIC Installation and Capital As long as required to deliver the asset or assembly costs bring an asset into use. Testing whether Capital As long as required to deliver the asset or the asset is bring an asset into use. functioning properly Rectification of Capital As long as required to deliver the asset or design fault bring an asset into use. Liquidated Revenue Does not enhance the asset, relates to a damages breach of contract. Furniture and Capital (subject Subject to de-minimis expenditure level. fittings to de-minimis level) Training and Revenue These are revenue as it is training to use familiarisation of the asset, not costs incurred with getting staff the asset into a usable state. NB: Cloud based systems are not capital as we do not own the asset but purchase a licence to use it. Professional fees Capital As long as required to directly deliver the asset or bring an asset into use. Borrowing costs Revenue There is currently no provision for borrowing costs to be eligible for capitalisation within the Council. Internal staff Revenue, but Usually these are revenue, but if costs costs could be capital if /time can be identified that have directly conditions met contributed to the delivery and getting the asset into working condition and are dedicated to that asset then this could be capitalised, subject to agreement and funding. General overhead and apportionment of managerial costs are not capital. 1.3 Contributions and grants to external organisations / individuals (i.e. not on the Council’s own assets) can be capital expenditure as long as the ultimate use of the funds meets the Council’s definition of capital above.
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