Contact: Jon Pittam, ext 7400

1 Decision sheet - summary

1.1 The accompanying report sets out for approval the proposed capital programme for 2003/04 to 2006/07, based on the guidelines agreed by Cabinet on 23 December 2002 and the support for capital schemes recently announced by the Government. The proposals take account of the County Council's capital strategy, the impact on the capital financing position and debt outstanding, and the consequences for the revenue budget.

1.2 The following decisions are sought, based on the recommendations of the Leader and Cabinet to the County Council for the capital programme for 2003/04 to 2006/07:

1 That the Cabinet determine the allocation between services of the Government's allocation of its discretionary borrowing approval of £2.4m, as set out in section 5 of the main report.

2 That the provision of £2m added to the capital programmes for both 2003/04 and 2004/05 in February 2002 be deferred to 2005/06 and 2006/07, with the allocation to specific schemes to be recommended by the Leader and determined by Cabinet at a later meeting (section 7).

3 That the Leader review the capital programme again in May 2003 and then report to the Cabinet, to include potential public finance initiative (PFI) schemes, the prospects for capital receipts in 2004/05 and later years, and the need for investment in infrastructure in development land to maintain the flow of capital receipts (section 9).

4 That it be a recommendation to Council that:

i) the capital programme for 2003/04 be approved as set out in Appendix 3 of the accompanying report and subject to the conditions set out in section B.3 of the County Council's Financial Procedures.

ii) the capital programmes for 2004/05 to 2006/07 be approved as set out in Appendix 3 for the purpose of undertaking design work (including the preparation of feasibility and design project appraisals).

iii) expenditure on preliminary design and planning work for major transport schemes be permitted when they have achieved a place in the County Council's Local Transport Plan, subject to the cost being met within existing credit approvals.

iv) authority be given to incur expenditure on land purchases as follows:

(a) up to the sum specified in respect of sites still required for the schemes included in the capital programme for the period 2003/04 to 2006/07 provided that the relevant scheme has been the subject of a feasibility or design project appraisal approved by the relevant executive member;

(b) up to the amount included in the 2003/04 programme in respect of advance and advantageous land purchases.

v) the carrying out of feasibility studies for potential "in/out" schemes be approved, the cost to be met from within approved revenue budgets.

vi) the executive member for Policy and Resources be authorised to approve requests from executive members to undertake any design work associated with potential "in/out" schemes, provided that such costs as may fall on the County Council are met from within the relevant executive member's capital programme limits.

2 Reason

2.1 The full County Council must agree the capital programme for 2003/04 to 2006/07 at its meeting on 20 February 2003. The Leader will present his budget speech and recommendations at that meeting, including proposals for the capital programme. This report provides the background to the capital programme and proposes the recommendations from the Leader and Cabinet to the County Council.

3 Other options considered and rejected

3.1 Other options are not available as far as process and timetable are concerned, but the leaders of the opposition parties may wish to present their own recommendations on the capital programme to the County Council as amendments to these proposals.

4 Conflicts of interest declared by the decision maker or a member or officer consulted

4.1 Not applicable.

5 Dispensation granted by the Standards Committee

5.1 Not applicable.

6 Reason for the matter being dealt with if urgent

6.1 Not applicable.

Approved by: (signature) Date: (date of decision)

Councillor T K Thornber

i:\ . . . . \ian\docs\cap-cab-10feb2003a.doc 18 February 2003

Contact: Jon Pittam, ext 7400

1 Main report - summary

1.1 The Cabinet, at its meeting on 23 December 2002, asked executive members:

· to prepare proposals for a locally resourced four-year capital programme within the current programme limits, adjusted for inflation

· to submit, in addition, capital schemes supported by Government grants and scheme-specific borrowing approvals for 2003/04 and those expected to be supported in 2004/05, 2005/06 and 2006/07

· to submit possible capital projects which might be suitable for private finance initiative (PFI) revenue support from 2004/05 to 2006/07, subject to further reports on the outline business case for each scheme and the Government support available.

1.2 This report explains the background to the proposed capital programme. It collates the service programmes prepared by executive members and shows that the shortfall of resources, forecast in February 2002 to be £2.5m in 2003/04, has now reduced to £0.2m in 2004/05. It proposes that the additional starts of £2m per annum, added to the programmes for 2003/04 and 2004/05 in February 2002, should be deferred to 2005/06 and 2006/07. The allocation to individual schemes will be determined in detail at a later meeting.

1.3 The other main points of the report are:

· the starts programmes proposed are in line with the guidelines set by Cabinet in December 2002, together with schemes supported by Government grant and specific borrowing approvals

· in total, the programme over the four-year period totals just over £500m

· the County Council has been awarded the maximum discretionary amount of £2.4m from the Government's single capital pot for 2003/04 - suggestions are made for the use of this £2.4m.

2 Background to the guidelines for the capital programme

2.1 The existing capital programme, agreed by County Council in February 2002, was set at a level that could be supported by the capital resources then estimated to be available, subject to a further £2.5m of resources being found in 2003/04. The programme included £2m of additional starts in both 2003/04 and 2004/05, which were added to the programme by Council in February 2002, to be funded from forecast increases in capital receipts.

2.2 When the Cabinet considered guidelines in December 2002 for the future starts programme, the final position on Government borrowing and grant approvals for 2003/04 and other financing resources was still emerging. As a result, executive members were asked to prepare programmes for locally resourced schemes within the existing capital programme limits, uplifted for inflation. `Locally resourced' schemes are those not met by Government grant or specific borrowing approvals and are financed, instead, from the County Council's own resources such as capital receipts, contributions from the revenue budget and other funds.

2.3 Some adjustments have been made to the guidelines agreed at the Cabinet's meeting in December 2002 to reflect proposals by executive members for transfers between capital and revenue. The adjusted guidelines for each service are shown in Table 1.

Table 1 - Guidelines for locally resourced capital programmes
2003/04 to 2006/07
	2003/04	2004/05	2005/06	2006/07
	£000	£000	£000	£000
Education	-	-	-	-
Environment	12,776	12,776	12,776	12,776
Policy and Resources	16,814	16,096	16,096	16,096
Recreation and Heritage	596	596	596	596
Social Services	723	723	723	723
	---------	---------	---------	---------
Total	30,909	30,191	30,191	30,191
	---------	---------	---------	---------

2.4 As requested by the Cabinet, executive members have also prepared programmes for schemes supported by Government grant and specific borrowing approvals. These programmes total £376.2m over the four years. They include the County Council's share of the capital cost of the South Hampshire Rapid Transit scheme at £119m after developers' contributions, which is programmed to start in 2004/05.

3 The programmes submitted

3.1 The total starts value of the four-year programme submitted by executive members is £503.5m, as shown in Table 2.

Table 2 - Starts programmes submitted 2003/04 to 2006/07
	Land	Works, Fees, Furniture and Equipment			Total
		Locally resourced programmes	Schemes supported by Government approvals	Total
	£000	£000	£000	£000	£000
2003/04	929	30,965	87,054	118,019	118,948
2004/05	1,029	29,862	181,235	211,097	212,126
2005/06	929	31,362	52,968	84,330	85,259
2006/07	929	31,362	54,918	86,280	87,209
	--------	-----------	-----------	-----------	-----------
	3,816	123,551	376,175	499,726	503,542
	--------	-----------	-----------	-----------	-----------

3.2 The proposed programmes are in line with the guidelines set in December 2002. A reconciliation between the guidelines and the total proposed programme is included in Appendix 1.

3.3 The payments flowing from these programmes and from the works currently in progress are summarised in Appendix 2, together with the resources available to finance those payments. The programmes themselves are set out in detail in the yellow pages in Appendix 3.

4 Issues arising from executive members' programmes

Education

4.1 The proposed programme for Education of £119.4m over the next four years is supported primarily by Government allocations of borrowing approval and grant, as Table 3 shows.

Table 3 - Education capital programme
	2003/04	2004/05	2005/06	2006/07	Total
	£000	£000	£000	£000	£000
Resources carried forward from 2002/03	5,751	-	-	-	5,751
Government's borrowing approvals:
- general	7,996	8,586	4,000	4,000	24,582
- Schools Access Initiative schemes	2,114	-	-	-	2,114
- New Deal for Schools Modernisation	12,708	12,708	12,708	-	38,124
Government grants for:
- allocations direct to schools	14,321	14,321	14,321	-	42,963
- Seed Challenge	1,260	-	-	-	1,260
- staff workplaces	517	-	-	-	517
- Neighbourhood Nurseries Initiative	61	-	-	-	61
- Nursery Education in Disadvantaged
Areas	424	-	-	-	424
Local resources:
- Insurance Fund, following the fire at
Beech Down School	2,500	-	-	-	2,500
- additional resources from the sale of
sites at John Hanson Community
School, Andover	600	-	-	-	600
Land purchases	100	200	100	100	500
	---------	---------	----------	----------	---------
Total	48,352	35,815	31,129	4,100	119,396
	---------	---------	----------	----------	---------

4.2 The Government is not expected to announce its direct allocations to schools and the NDS Modernisation programmes for 2004/05 and 2005/06 until March 2003. The Education programme above assumes that the 2003/04 levels will continue. The allocations for 2006/07 will depend on the Government's next Spending Review in 2004.

4.3 The Government's general borrowing approval for Education is forecast to reduce to £4m per annum in 2005/06 and 2006/07 as the demand for additional secondary school places passes its peak.

4.4 The Government's support for capital investment in Education for 2003/04 exceeds £54m, as Table 4 shows. This is an increase of nearly 24% over the £44.2m allocated by the Government for 2002/03.

Table 4 - Government support for capital spending on Education
	2002/03	2003/04
	£000	£000
Government's borrowing approvals:
- general	9,604	7,996
- post-16 basic need	1,607	-
- expansion of popular schools	-	946
- Schools Access Initiative schemes	1,614	2,114
- New Deal for Schools Modernisation	6,807	12,708
- specialist schools	200	-
Government grants:
- allocations direct to schools	9,188	14,321
- Seed Challenge	1,266	1,260
- school security	231	-
- staff workplaces	216	517
- specialist schools	500	-
- adult and community learning	390	-
- Neighbourhood Nurseries Initiative	153	61
- Nursery Education in Disadvantaged Areas	424	424
- New Deal for Schools Condition	11,998	14,436
	---------	---------
Total	44,198	54,783
	---------	---------

4.5 Table 4 includes the Government's grants for the New Deal for Schools Condition programme to improve the condition of school buildings. As this funding is used largely for capital repairs, it is included in the Policy and Resources capital programme. The allocation for 2003/04 is £14.436m.

4.6 Despite the overall increase of 24% in the Government's allocations, the Education capital programme has been under continuing pressure because of:

· high levels of inflation in building costs

· the level of basic need projects (to provide for increasing pupil numbers) requiring significant furniture and equipment allocations, for which specific provision is not made in Government allocations

· investment in schemes in advance of in/out capital receipts from the disposal of sites, including reorganisation schemes for special schools, leading to cash flow difficulties within the Education programme.

4.7 There are sufficient resources available to the executive member for Education to fund all the schemes which need to be started in 2003/04. This has been achieved, however, only by deferring schemes costing £8.6m to later years, without the resources to fund them. Several ways of reducing this under-funding have been identified:

· capital receipts of £8m from Education sites currently in the process of being sold

· developers' contributions due in the next five years, amounting to some £2m

· using NDS Modernisation funding and schools' direct allocations from the Government to support basic need schemes which include an improvement element

· possible sales of excess land at school sites with development potential, subject to the agreement of governing bodies, generating up to £3m after allowing for the cost of priority capital work in the schools concerned

· the balance of the contingency in the 2002/03 programme, if it is not fully utilised.

4.8 Bridging funding may be available to support the programme, in advance of the capital receipts referred to in paragraph 4.7, from a schools balances loan scheme that is currently being discussed with schools. If agreed, it would be possible to `borrow' up to 25% of schools' accrued balances to fund the capital programme. This could provide up to £7.7m, based on the balance at 31 March 2002 of £31m. It would be repaid to the schools' reserve account when the expected capital receipts are received. The scheme could also be used to finance the removal of surplus school places which would generate savings to repay the `loan'.

4.9 The proposed starts programme includes schemes to implement the rationalisation of primary school places in south-west Basingstoke, approved by the School Organisation Committee in October 2002. This includes the £2.5m scheme to extend St Mark's CE (A) primary school. Part of the funding identified is an allocation from the £2.5m from the Insurance Fund, following the fire at Beech Down primary school in Basingstoke, which the executive member for Policy and Resources will be asked to approve.

4.10 Funding for the 2003/04 programme also includes the balance of £0.6m from the sale of the existing sites of John Hanson Community School, Andover. The school has been relocated to a new site under an `in/out' arrangement. The resources for the scheme, including the proceeds from the sale of the school's two existing sites, exceeded the capital cost of the new school and the agreed payment of £0.75m to Test Valley Borough Council in lieu of affordable housing allocations, by £0.6m. The executive member for Policy and Resources will be asked to approve the allocation of this £0.6m to the Education capital programme.

4.11 Land required for schemes in the capital programme is not normally charged against executive members' guideline limits. The amounts involved are often relatively small and can be met from local resources. The proposed Education programme includes a scheme to provide additional primary school places in Whiteley which may require the purchase of a site at a more significant cost. Additional funding will be necessary if the purchase is approved.

Environment

4.12 The Government's local transport capital settlement for 2003/04 includes an allocation of borrowing approvals of £27.549m for the County Council. This is an increase of 16.1% compared with the equivalent figure for 2002/03. The 2003/04 allocations include £13.2m for highway maintenance which is an increase of 25.1% for this part of the settlement. The total approved is 33% more than the amount assumed for 2003/04 in February 2002. The starts programmes for Government supported schemes for the later years of the programme in Appendix 3 have been set at the level of the Government's indicative figures for those years.

4.13 A scheme-specific borrowing approval of £1.127m, matched by grant of a similar amount, has also been allocated by the Government for advance works in 2003/04 for the South Hampshire Rapid Transit (SHRT) scheme.

4.14 The Fareham-Gosport-Portsmouth section of the SHRT scheme has been included in the proposed programme for 2004/05. The County Council's share of the capital cost, after allowing for Portsmouth City Council's 30% share and external contributions, is £119m at 2003/04 prices. The Government has indicated that it will support 75% of the public sector cost of the scheme. The precise details of how the scheme will be financed will depend on the outcome of the procurement process which is currently in progress. It is likely to involve a significant private finance initiative (PFI) element. The issues that will be clarified then include:

· how the Government's 75% support will be paid

· how the remaining 25% will be financed

· the extent of the ongoing revenue consequences of the scheme for the public sector.

4.15 The Government's 75% support for the construction costs is likely to take the form of borrowing approvals and capital grant. In addition, the Government is expected to provide support as part of a PFI scheme for the annual `availability' payments. These payments will be made by the local authority partners to the operator in return for making the transit system available to users to standards set by the partners. The exact combination of borrowing approvals, capital grant and `PFI credits' will not be known until the procurement has been completed.

4.16 The remaining 25% not funded by the Government will include the capital costs of land acquisition and procurement fees and the revenue costs of monitoring the operator and that part of the `availability' payments not covered by the PFI credits. Land and procurement costs will have to be met from external contributions by the operator or from contributions by developers benefiting from the SHRT scheme or, if there is a shortfall of external contributions, by Hampshire County Council and Portsmouth City Council as promoters of the scheme.

4.17 The County Council agreed in February 2002 that the County Council's share of any shortfall for SHRT should be met from the capital resources already available within the Environment programme. These include the borrowing approvals already issued by the Government for the local transport programme and which would have to be diverted from the proposed schemes set out in Appendix 3. This will also apply to any costs incurred before the procurement process is completed.

4.18 The revenue consequences of the scheme not covered by Government support should also be met from within the resources already allocated to the Environment service. These revenue costs may include a share of the ongoing `availability' payments to the operator, which could be more than £1m per annum.

4.19 The funding position for the scheme will become more clear as the procurement is finalised. It was agreed in February 2002 that the executive member for Environment should report to Cabinet before the scheme is committed on how the capital and revenue costs of the scheme will be funded within the conditions set out above.

4.20 The proposed four-year programme includes one other major scheme, Chickenhall Lane Link in Eastleigh, at a cost of £30m starting in 2006/07. This scheme has not yet been accepted for Government support and the funding for any design and other preparatory work will be found in the meantime from within the overall transport allocation.

4.21 The A3 Corridor Bus Priority scheme, included in the four-year programme in February 2002, has not received full Government support. As a result, any costs incurred on the scheme will have to be accommodated within the general local transport plan allocations.

4.22 The locally resourced programme has been supplemented by Environment's 25% share of its capital receipts obtained in 2001/02. This £56,000 has been allocated as a contribution to private street works in 2003/04.

Policy and Resources

4.23 The allocation of the Policy and Resources capital programme between schemes is broadly similar to the existing programme. The maintenance of the core buildings in the County Council's built estate, through the capital repairs programme, continues to be the main corporate priority.

4.24 Three adjustments have been made:

· £0.7m has been allocated in 2003/04 for capital repairs in schools, funded from the provision within revenue contributions to capital that has been used over the last two years to make corporate contributions towards flood and storm damage repairs. This will be used mainly for repairs related to asbestos management in schools

· the provision of £25,000 per annum for capital works at the Sir George Staunton Country Park has been transferred from Policy and Resources to Recreation and Heritage. This will bring all the County Council's funding for the Park within the control of the executive member for Recreation and Heritage

· schemes have been added to the programme for 2003/04 for investment by the County Council's business units for printing, supplies, transport management and catering. These schemes will be financed from the business units' reserves.

4.25 As outlined in paragraph 4.5, the 2003/04 programme includes the grant-backed provision of £14.4m from the Government's New Deal for Schools Condition initiative to improve the condition of school buildings through capital repairs.

4.26 The programme for 2003/04 includes £0.2m for the second year of the Government's grant support for the capital cost of implementing electronic government.

4.27 Also included is the annual provision of £0.8m for advance and advantageous purchases of land.

Recreation and Heritage

4.28 The executive member for Recreation and Heritage has recommended to Cabinet that the guidelines for the capital programmes for 2003/04 and 2004/05 be increased by £0.5m per annum by virement from his revenue budget. The increase will be used to:

· reverse the decline in the physical condition of buildings and property which, if continued, would bring about further reductions in usage and visits

· restructure and remodel facilities to make them more attractive and better able to cater for the needs of existing and potential users (eg, as Discovery Centres)

· enable services to be delivered in new ways to meet user expectations including developing ICT infrastructure to meet e-government targets and underpin service improvement.

4.29 The remainder of the programme in Appendix 3 is in line with the guidelines set in December 2002.

4.30 The executive member for Recreation and Heritage and the Leader also wish to give further consideration to additional support to the Recreation and Heritage capital programme to match at least the virement achieved from existing resources. In addition to the issues identified in paragraph 4.28, this would cover:

· countryside infrastructure

· outdoor centres

· extensions to Romsey library, funded primarily by the sale of land.

4.31 A decision on additional resources for Recreation and Heritage will be deferred for further consideration against other priorities in May 2003. The existing locally resourced capital programme is £0.6m per annum (to be supplemented by the virement proposed of £0.5m in 2003/04 and 2004/05). Any further resources would need to be found by a combination of:

· transferring the balance of resources set aside within Policy and Resources for new libraries etc, or from capital repairs - using capital repairs to match improvements in buildings by Recreation and Heritage

· allocation from the discretionary borrowing approval (2003/04 only)

· allocation from the additional starts provision of £2m per annum available in 2005/06 and 2006/07.

Social Services

4.32 The locally resourced programme for Social Services in Appendix 3 is also in line with the guidelines. Schemes supported by Government grant in 2003/04, 2004/05 and 2005/06 to improve information management (£385,000 per annum) and for IT for looked-after children (£136,000 per annum) have been added to the programme.

4.33 The £60m scheme to provide 500 new nursing beds to maintain capacity in the nursing home market is being progressed with the Health service. Funding of £40m will be provided via the Strategic Health Authority, with £20m being met from Government grant and £20m from the Authority's capital programme. A bid for borrowing approval for the remaining £20m has been made to the Government. The Office of the Deputy Prime Minister has responded that this is an issue for the Department of Health and its response will be reported to the Cabinet in due course.

4.34 If no allocation is forthcoming the scheme may need to be limited to £40m, or supplemented by the use of the Council's own local resources. Alternatively, consideration may need to be give to a PFI scheme for the balance and this can be reviewed in May 2003.

5 The Government's discretionary allocation of borrowing approval

5.1 The Government has again top-sliced 5% of its support to create a discretionary pool for allocation to councils at the discretion of ministers, based on civil servants' assessments of councils' capital strategies, corporate asset management plans (AMPs) and the service plans for education, local transport and social services. The 2002/03 allocation was £2.168m and the whole amount was allocated to Environment and used in the end to support advance payments on SHRT which have now been reflected in the 2003/04 local transport plan allocation.

5.2 All the County Council's plans scored sufficiently highly for the County Council to be awarded the maximum amount of borrowing approval from the discretionary pool, £2.391m, as Table 5 shows.

5.3 The ratings for Education and Social Services have improved since 2002/03 when both were assessed as "average". Arguably, the County Council's success in 2003/04 is more widely based and less dependent on the excellent local transport plan.

5.4 Just over 64% of the national discretionary pool was top-sliced from the local transport allocations. Most of the remainder was taken from education (33%), with 2% from social services.

5.5 Proposed allocations for the £2.391m include:

· contribution towards a proposed scheme to extend Romsey library for which £0.35m is required in advance of the disposal of land to the rear of the library

· the redevelopment of the Bar End depot site in Winchester, for which the funding of the final £0.4m has yet to be identified, and any further resources for other household waste recycling sites (if not PFI-funded)

· £1m towards the possible purchase of land for additional primary school places

· contribution of £132,000 towards Trosnant early years centre, Havant

· £59,000 for initial resources to fund the external costs involved in developing PFI schemes

· £450,000 to support developments in Recreation and Heritage.

5.6 Any additions to the capital programme from the discretionary borrowing approval would be for one-off schemes only. The Government has announced that 2003/04 will be the last year in which it will make these discretionary allocations. The resources will revert to the main service allocations to be distributed according to need, which is a welcome move.

6 Feedback on the County Council's capital strategy and corporate AMP

6.1 The Government Office for the South East (GOSE) has provided the following feedback on the County Council's capital strategy and corporate AMP which were submitted to GOSE in July 2002.

Capital strategy

6.2 "This is a robust Capital Strategy that is clearly a corporate document and meets all the primary and secondary [assessment] criteria. Key aspects of expenditure are clearly identified and there are good examples of partnership working.

"The Department for Education and Science (DfES) are content with the level of priority given to schools within the Capital Strategy and are pleased that schools are the recipients of the greatest proportion of funding in the current year

"The Capital Strategy was consistent with Social Services Inspectorate and Transport plans and the colleagues we consulted from these Departments expressed no concerns."

Corporate AMP

6.3 "All the primary [assessment] criteria and secondary criteria have been met. There are sound organisational arrangements for corporate asset management. Data collection and maintenance arrangements are good and we are pleased to note that performance and management information is regularly provided to Members and stakeholders."

6.4 These assessments contributed to the County Council's Comprehensive Performance Assessment rating of Excellent. As a result, the County Council will not be required to submit the capital strategy and corporate AMP to the Government each year. Despite this `freedom', it is anticipated that both documents will still be required as evidence to support updated inspection and audit for the comprehensive performance assessment. The Council will be expected to revise the capital strategy as a key part of its financial management processes, for example, in underpinning reviews of the capital programme. The corporate AMP should also be updated annually.

7 Unallocated additions to the starts programme

7.1 The County Council agreed in February 2002 to add £2m to the starts programmes for both 2003/04 and 2004/05 following a review of the likely level of capital receipts over the period. Priorities for using this additional provision were to be recommended to the Cabinet by the Leader at a later meeting.

7.2 The executive member for Policy and Resources considered a report in December 2002 on the funding of the Enterprise Project to replace the County Council's business systems. Not all the capital costs were included in the capital programme when the project started on the understanding that the funding gap would need to be bridged when payments became due. This was the principal reason for the funding gap in the existing capital programme, to which the District Auditor referred in his management letter. The December report confirmed that the costs of the project could be managed without any impact on the remainder of the capital programme by deferring the unallocated capital programme provision of £4m by two years to 2005/06 and 2006/07. Specific proposals for the use of this £4m have not been fully developed and a deferral of this nature would not cause difficulties.

8 Private finance initiative

8.1 Cabinet asked executive members to identify any possible capital projects which might be suitable for PFI revenue support from 2004/05 to 2006/07, subject to further reports on the outline business case for each scheme and the Government support available. The response is summarised below.

8.2 Given the timescale and the need to build in PFI schemes as additions to the capital programme from 2004/05 (the earliest feasible start date), full identification and details of potential projects are not yet available. The further report to be made on the capital programme in May 2003 would enable more detailed consideration of both specific additions to the capital programme within borrowing approvals and local priorities and also of potential PFI schemes for 2004/05 onwards.

8.3 Education has not yet finalised which schemes to bid for in 2004/05 - both against borrowing approvals and the modernisation funds as well as PFI. Special educational needs schools appear likely to be lower in the priority for the DfES approval of PFI schemes which is more focused on improvement in secondary schools. Business cases to improve or rationalise secondary school buildings, or to relocate provision, are likely to be stronger than the cases for rebuilding schools because of the Council's investment in capital repairs and the Government's additional support in recent years from the New Deal for Schools condition and modernisation funds. The new school in Popley might perhaps be a PFI candidate depending on agreements reached with developers and exchange of land.

8.4 The supplementary credit approval required for the Council's £20m share of the nursing care places project is being pursued further with the NHS, Department of Health and the Strategic Health Authority but a PFI alternative may be needed.

8.5 Following the proposed review in May 2003, negotiations will then be required to build the outline business case for each potential project which has to be agreed by the Government's inter-departmental project review group which oversees the approval process for local authority PFI and public private partnership (PPP) projects.

9 Further review

9.1 There are a number of issues affecting the County Council's capital programme that are currently being investigated. The full position on most of them will not clear for some time and it is suggested that a further report be made to the executive member for Policy and Resources and then Cabinet in May 2003, when the Council's overall capital strategy could also be reviewed. The particular issues that could be covered include:

· more detailed proposals for the use of PFI

· use of the schools balances loan scheme, referred to in paragraph 4.8, and other measures to fund the Education capital programme

· the transfer of any resources to Recreation and Heritage

· the funding of the South Hampshire Rapid Transit scheme

· the funding of the nursing homes scheme

· the prospects for capital receipts in 2004/05 and subsequent years

· the need for investment in infrastructure to develop land in Popley to maintain the stream of capital receipts, and the need to meet the County Council's obligations to participate in the development of land at Manydown in Basingstoke.

10 Payments and resources - summary

10.1 Table 6 shows the capital payments flowing from the proposed capital programme, compared with the financing resources available. Resources in 2002/03 and 2003/04 will match the forecast level of capital payments in those years with the use of the balance available in the capital reserve. By 2004/05, however, there is a small shortfall of resources of £0.2m.

Table 6 - Capital payments and resources
	2002/03	2003/04	2004/05	2005/06	2006/07
	£000	£000	£000	£000	£000
Payments	151,852	136,341	144,249	149,968	128,891
Resources	135,879	135,577	138,297	149,737	129,135
To be met from the capital
reserve	15,973	764	5,726	231	-
	----------	----------	-----------	-----------	----------
Resources to be identified	-	-	226	-	-244
	----------	----------	-----------	-----------	----------

10.2 Repayments to the capital reserve from the Enterprise Project in 2005/06 will provide sufficient reserves to cover the minor shortfall in that year and by 2006/07 resources marginally exceed payments.

10.3 This is a significant improvement in the financing position compared with the shortfall of £2.5m in 2003/04 forecast a year ago. Payments have slipped a little to smooth out the funding requirement, including the effect of the proposed deferral of the additional starts of £2m per annum to 2005/06 and 2006/07, referred to in paragraph 7.2. However, the major reason for the improvement is an increase in the level of capital receipts forecast for 2002/03, which is expected to reach £15.2m for non in/out disposals. The estimate in February 2002 for non in/out receipts was £8.8m, although part of the increase is a result of slippage in receipts originally forecast for 2002/03.

10.4 The remaining shortfall of £0.2m in 2004/05 is minimal in the context of annual payments running at an average of more than £140m per annum over the next five years. No immediate action is required to eliminate it.

10.5 Payments and resources will continue to be closely monitored during the remainder of 2002/03 and in 2003/04. Regular reports on the progress of the capital programme will be brought to the Cabinet and these will indicate if any action is required to restrain payments to the level of resources estimated to be available in 2003/04.

10.6 Appendix 2 also includes details of the longer term implications of the proposed programmes for the revenue budget from increased running costs and capital charges. Details of the impact on the County Council's debt outstanding are also included.

11 Recommendations

11.1 The recommendations are contained in the decision sheet summary which precedes this main report.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

Letters from Government departments on the single capital pot and other capital allocations.

Appendix 1

Capital Programmes 2003/04 to 2006/06 Proposed by Executive Members

1 Summary of the proposed programmes

1.1 The proposed four-year programme of £504.5m complies with the guidelines set by the Cabinet in December 2002, as the table below shows:

1.2 The starts value of schemes supported by Government grant and borrowing approvals, £254.1m, represents 66% of the four year programme excluding the South Hampshire Rapid Transit (SHRT) Phase 1. This is similar to the existing capital programme approved in February 2002. The 66% illustrates the extent to which the Government is able to influence the Council's priorities.

1.3 There is also a programme of highways schemes funded by developers, totalling £18.1m over the four years. The individual schemes are identified in the Environment capital programme in Appendix 3.

Appendix 2

Capital Payments and Financing Resources 2002/03 to 2006/07

1 Capital payments

1.1 The level of capital payments is one of the factors taken into account in determining the size of the capital starts programme, together with forecasts of financing resources.

1.2 Payments in 2002/03 and the following four years will result from works in progress (schemes started in 2002/03 and earlier years) plus those arising from the proposed programme for 2003/04 to 2006/07, as the table below shows.

1.3 In practice, payments in the years after 2002/03 may be even higher than suggested by the table if more funding allocations are announced by the Government. Further developer contributions and lottery grants are also likely to be received in the future which will result in additional payments. The increase in payments for 2004/05 and 2005/06 in the table reflects the impact of the South Hampshire Rapid Transit scheme. The precise nature of the funding for this scheme has yet to be decided. It is included in these forecasts on the basis that it will be met from a combination of Government support and external contributions.

1 Resources available for capital financing

1.1 The sources of finance to support the capital programme are:

· Government borrowing approvals, either:

`basic credit approvals' for general use,

`supplementary credit approvals' that are scheme or programme specific, or

`unsupported credit approvals' such as those awarded under the local public service agreement for which the Government provides no revenue grant towards the debt charges arising from the loan.

· Government grant

· contributions from developers and other bodies, including the national lottery

· capital receipts from the sale of land, buildings and other assets

· contributions from the revenue budget.

1.2 The following table shows the latest estimate of the resources available to finance capital payments.

1.3 Within its single capital pot, the Government issues annual capital guidelines (ACGs) in four blocks: for education, local transport, social services and other services (known as environmental, protective and cultural services or EPCS). It calculates the basic credit approval (BCA) from the ACGs. The BCA allows the County Council to borrow to finance its capital spending up to the limit of the BCA.

1.4 The education ACG for 2003/04 of £8.0m is 16.7% less than the equivalent figure for 2002/03 of £9.6m. However, the Government's total support for the Education capital programme in 2003/04, including borrowing approvals and capital grants, is £54.8m, as table 4 in paragraph 4.4 of the main report shows. This is 24% more than the equivalent allocation for 2002/03.

1.5 The local transport ACG for 2003/04 of £27.5m is 16.1% more than the figure for 2002/03 of £23.7m. The 2003/04 allocation includes £13.2m for highway maintenance which is an increase of 25.1%. In addition, the Government has awarded SCA and grant totalling of £2.3m for the advance costs in 2003/04 of the South Hampshire Rapid Transit Scheme.

1.6 The social services ACG for 2003/04 is £0.9m. This is a reduction of 15%. The EPCS ACG for all other services has also been reduced in 2003/04, by 33% to £0.145m. These reductions are largely because the Government has abolished its `receipts taken into account' mechanism which it had previously used to redistribute the capital financing power of capital receipts from areas able to generate higher levels of receipts, such as Hampshire, to those authorities in the North and Midlands with less marketable assets. The County Council has argued for its abolition for many years and the Government's decision is to be welcomed. The relatively minor reductions, in cash terms, in the County Council's social services and EPCS ACGs should be outweighed by the benefit from being able to retain the use of all of its capital receipts in future.

1.7 In total, the Government's support for the 2003/04 starts programme announced so far in the form of borrowing approvals and grant will be £90.7m. This is 33% more than the equivalent figure for 2002/03 of £68.2m, largely because of increased allocations for schools' capital.

1.8 The general capital receipts available for funding the capital programme are estimated to be £15.2m in 2002/03 and £6.15m in 2003/04. The planning assumptions for future years are based on £4.1m in 2004/05 and £6.15m in subsequent years. It is proposed that the Cabinet reviews these assumptions in May 2003. The estimates of in/out capital receipts match the payments on such schemes included in the payment forecasts.

1.9 Revenue contributions to capital will be £26.4m in 2003/04 in support of capital repairs (£14.3m), highway structural maintenance (£11.1m) and other capital schemes (£1.0m).

1.10 Overall, the resources available to the County Council are expected to be sufficient to meet the payments with the exception of a minor shortfall in 2004/05 of £0.2m. The capital programme will be managed to eliminate this shortfall, as outlined in section 10 of the main report.

1.11 The following table summarises the balance on the capital reserve.

2 Revenue Implications

2.1 The revenue implications of the new starts programme are shown in the following table.

2.2 The capital charges represent a 3.5% return on capital employed (4.625% on infrastructure and community assets) with, for most schemes, depreciation over the estimated life of the asset. They do not affect the County Council's overall expenditure as the charges to committees will be counter-balanced by a corresponding credit to the centrally managed asset account.

2.3 However, the actual revenue expenditure of the County Council will be increased by the capital financing costs on the loans raised to finance the programme. The full year revenue impact of the additional borrowing over the four-year programme will be £17.3m. These costs are reflected in the County Council's `formula spending share' for revenue expenditure and attract revenue support grant from the Government broadly equivalent to the costs. The exception is the unsupported credit approval of £2.25m awarded by the Government under the local public service agreement (PSA) which will not attract revenue support grant and which will be a first charge on any performance reward grant paid for successful achievement against the PSA targets.

3 Debt outstanding

3.1 The following table shows the debt to be financed by the County Council, including the new borrowings necessary to finance the proposed four year programme.

3.2 The upward trend in debt outstanding reflects the County Council's policy of using in full all the borrowing approvals made available by the Government. Since the requirement to use part of all capital receipts to repay debt was abolished by the Government in September 1998, the only repayments of debt are those from the revenue account at the statutory minimum of 4% of the debt outstanding, together with repayment over seven years of debt relating to the transitional costs of the local government reorganisation in 1997. However, as explained in paragraph 3.3 of this Appendix, most new capital financing charges attract revenue support grant from the Government broadly equivalent to the costs. The impact on the council tax should be neutral as a result. So even though the County Council's debt will increase by 51% over the period, borrowing at these levels should fall within the limits of the Government's proposed "prudential" regime for local authority borrowing.

i:\ . . . . \ian\docs\cap-cab-10feb2003a.doc 18 February 2003