Contact: Jon Pittam, ext 7400, e-mail: [email protected]

1 Summary

1.1 The accompanying report sets out for approval the proposed capital programme for 2004/05 to 2007/08, based on the guidelines agreed by Cabinet on 15 December 2003 and the support for capital schemes recently announced by the Government. The proposals take account of the County Council's capital strategy and the new Prudential Code for Capital Finance in Local Authorities including the capital financing position, debt outstanding and the consequences for the revenue budget and council tax.

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 2004/05 to 2007/08:

1 That the Leader review the capital programme again later in 2004 and then report to the Cabinet, to include the possible use of borrowing that is not supported by Government grants, potential private 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 11 of the main report).

2 That it be a recommendation to Council that:

i) the scheme to provide nursing care accommodation at a cost of £60m be added to the Social Services capital programme for 2003/04, to be met by Department of Health contributions of £40m and up to £20m of County Council unsupported borrowing.

ii) the costs of principal and interest resulting from the £20m of unsupported borrowing for the nursing care accommodation scheme be met from within the revenue budget cash limit for Social Services.

iii) the capital programme for 2004/05 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.

iv) the capital programmes for 2005/06 to 2007/08 be approved as set out in Appendix 3 for the purpose of undertaking design work (including the preparation of feasibility and design project appraisals).

v) 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 Government allocations.

vi) 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 2004/05 to 2007/08 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 2004/05 programme in respect of advance and advantageous land purchases.

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

viii) 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 2004/05 to 2007/08 at its meeting on 25 February 2004. 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, C.B.E

Contact: Jon Pittam, ext 7400, e-mail: [email protected]

1 Summary

1.1 The Cabinet at its meeting on 15 December 2003 asked executive members:

· to prepare proposals for a locally resourced four-year capital programme within the current programme limits, adjusted for inflation, and to consider the integration of revenue and capital budgets within the guidelines set for the new Prudential Code on capital

· to submit, in addition, capital schemes supported by Government allocations, including grants and supported borrowing approvals for 2004/05 and those expected to be supported in 2005/06, 2006/07 and 2007/08

· to submit possible capital projects which might be suitable for private finance initiative (PFI) revenue support from 2004/05 to 2007/08, 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 there are sufficient resources available to fund expected capital payments in 2003/04, 2004/05 and 2005/06. A shortfall of resources of £1.5m in 2006/07 is forecast and the report proposes that the funding position, including the availability of capital receipts, be reviewed by the Leader and Cabinet later in 2004.

1.3 The report also sets out how the proposed programme complies with the requirements of the Prudential Code for Capital Finance in Local Authorities which was introduced with effect from 1 April 2004 by the Local Government Act 2003.

1.4 The other main points of the report are:

· the starts programmes proposed are in line with the guidelines set by Cabinet in December 2003, together with schemes supported by Government grant and borrowing allocations

· the total value of the programme over the four-year period is £650m

· the programme includes the County Council's contribution to the South Hampshire Rapid Transit scheme, projected to start in 2004/05.

2 Prudential Code

2.1 This is the first capital programme set under the new `prudential' capital control regime. The Government's progress on introducing the new arrangements was reported to Cabinet in November 2003. Until 1 April 2004, the Government exercises control over the level of local authorities' capital spending by setting limits on the amount local authorities may borrow. These take the form of basic credit approvals (BCA) which may be spent on any scheme and supplementary credit approvals (SCA) which are scheme or programme specific. Both BCAs and SCAs are backed by Government revenue grants through the revenue support grant system which meets all or virtually all the loan charges that result from the loans raised. In recent years, the Government has also issued some unsupported borrowing approvals (UCA) which enable local authorities to borrow for specific purposes but without any grant support so that the loans charges have to be met from local authorities' existing resources. Without BCA, SCA or UCA, local authorities are not currently permitted to borrow to finance capital spending.

2.2 The Local Government Act 2003 has introduced a more flexible approach to borrowing for capital purposes with effect from 1 April 2004. Local authorities will then be able to determine their own levels of borrowing provided their actions are `prudent' within the terms of a Prudential Code for Capital Finance developed by the Chartered Institute of Public Finance and Accountancy (CIPFA). The Code has been given statutory recognition by Regulations issued under the Local Government Act 2003. The Government will continue to support local authorities' borrowing, up to a level it determines, by issuing supported borrowing allocations for education, local transport and social services. These allocations will continue to be backed by revenue support grant towards the loan charges, but principal repayment and interest costs on any borrowing above these supported levels will have to be financed by the local authority from its own existing resources. The phrase "unsupported borrowing" has been used in this report to described borrowing that the County Council may decide to undertake which will not attract any Government grant towards the loan charges and which will have to be financed from the County Council's own revenue resources.

2.3 The Code sets outs a number of prudential indicators designed to enable local authorities to assess whether their proposed actions on capital investment and borrowing are prudent. These indicators cover affordability, prudence, capital expenditure and financing, external debt, treasury management and interest rate exposures. The full range of indicators are set out in Appendix 9 to the report on this Agenda on the Revenue Budget and Precept 2004/05. That report confirms that, after allowing for the effects of the proposed capital programme for 2004/05 to 2007/08, all the indicators remain within prudential limits.

2.4 The most significant freedom for the County Council under by the new Prudential regime is the ability to raise additional loans over and above the Government supported limits. Cabinet agreed a framework for unsupported borrowing at its meeting on 24 November 2003. Briefly, this included:

· borrowing for which loan charges are financed by virement from the executive member's revenue budget, including invest-to-save schemes that will generate revenue savings or additional revenue income

· `bridging' finance that will be repaid by eventual capital receipts, capital grants or contributions

· capital investment by business units

· limited borrowing for corporate priorities.

2.5 The following suggestions for using unsupported borrowing have been considered in preparing the proposed capital programme:

· £20m for nursing care accommodation over the period from 2004/05 to 2007/08, with the costs of repayment and interest to be met from Social Services' revenue cash limit

· South Hampshire Rapid Transit (SHRT) - no provision at this stage pending the Government's final approval of the scheme. It is assumed that costs will be supported by Government grant or Private Finance Initiative approvals

· advance infrastructure for the development of North Popley, including the replacement of John Hunt of Everest Community School - defer until later in 2004 when timing, costs and capital receipts have been identified

· household waste recycling centres - the executive member for Environment has asked Cabinet to add £1m to the 2004/05 programme for a new HWRC at Fawley, Fleet or North West Basingstoke. It is suggested that a decision is deferred until the overall capital programme is reviewed later in 2004 for the reasons set out later in the report in paragraph 6.18

· Calshot Activities Centre, unsupported borrowing of £0.490m within a scheme costing £1.210m. It is proposed that this scheme is added to the programme, with the borrowing costs financed from Calshot's revenue income

· IT Services - possible funding of various hardware, software and installation capital schemes to avoid continuing business unit revenue deficits to finance investment later recovered by charges to service users.

2.6 The specific additions above for nursing care accommodation and the Calshot Activities Centre can be met within prudential limits but the SHRT scheme would need to be reviewed if it is not fully supported by Government funding.

2.7 The revenue costs of the nursing care accommodation scheme will not add to the overall cash limit increases as they will offset purchases of care that would otherwise be made in the private sector. However, the costs of servicing the unsupported borrowing will add £20m to the prudential indicators for the capital finance requirement.

3 Background to the guidelines for the capital programme

3.1 The existing capital programme, agreed by the County Council in February 2003, included an unallocated provision of £4m for additional starts of £2m in both 2005/06 and 2006/07. The programme was reviewed by the Cabinet in June 2003 to take account of an increase in the forecast level of capital receipts and to allocate this £4m provision to individual schemes.

3.2 The guidelines for the locally resourced programme agreed by Cabinet in December 2003 were based on the existing programme limits including the allocations in June 2003, plus an addition for inflation.

3.3 `Locally resourced' schemes are those financed from the County Council's own resources such as capital receipts, contributions from the revenue budget, reserves and other funds. They do not include schemes supported by capital grant or borrowing allocations from the Government that are backed by revenue grants towards the resultant loan charges.

3.4 Some adjustments have been made to the guidelines agreed at the Cabinet meeting in December 2003 to reflect proposals by executive members for transfers between capital and revenue, notably:

· continuation in 2004/05 of the £3.5m addition made to Environment's structural maintenance provision in 2003/04

· virement to revenue by Environment of £1.813m per annum from 2004/05 from the structural maintenance provision, to be used for routine revenue highways maintenance, marketing to support behavioural change, technical studies and modelling. This reduction in locally resourced structural maintenance will be replaced by an increased allocation of £1.850m per annum for structural maintenance and bridges from within the Government supported local transport programme

· continuation in 2004/05 of the £0.7m addition made to schools' capital repairs in 2003/04

· re-phasing of the guidelines for the Recreation and Heritage programme to allow the provisions for Discovery Centres and Calshot Activity Centre to be aggregated into larger schemes, with no detrimental impact on the assumed flows of capital payments

· no specific provision has been made in the proposed Policy and Resources programme for advance infrastructure for the development of North Popley and the County Council's share of the Manydown development site, which had been allowed for in the December 2003 guidelines. The provision for starts of £10.2m has been retained corporately, pending the proposed further review of the capital programme later in 2004.

3.5 The adjusted guidelines for each service are shown in Table 1.

Table 1 - Guidelines for locally resourced capital programmes
2004/05 to 2007/08
	2004/05	2005/06	2006/07	2007/08
	£000	£000	£000	£000
Education	-	-	-	-
Environment	14,680	11,092	11,092	11,092
Policy and Resources	17,235	16,499	16,499	16,499
Recreation and Heritage	1,303	2,431	611	611
Social Services	741	741	741	741
North Popley / Manydown	-	10,200	-	-
	---------	---------	---------	---------
Total	33,959	40,963	28,943	28,943
	---------	---------	---------	---------

3.6 As requested by the Cabinet, executive members have also prepared programmes for schemes supported by Government grant and borrowing approvals. These programmes total £513m over the four years. They include the County Council's share of the capital cost of the South Hampshire Rapid Transit scheme which, if funding is finally approved by the Government, is programmed to start in 2004/05.

3.7 The Government has abandoned its separate discretionary allocation of borrowing approvals for those local authorities whose capital strategies and corporate asset management plans were considered by ministers and civil servants to be worthy of merit. Although the County Council received the maximum allocations under this arrangement in 2002/03 (£2.2m) and 2003/04 (£2.4m), the return to allocating resources according to need can be welcomed.

4 The programmes submitted

4.1 The total starts value of the four-year programme submitted by executive members is £650m, as shown in Table 2 on the following page.

4.2 The proposed programmes are in line with the guidelines set in December 2003. A reconciliation between the guidelines and the proposed programme is included in Appendix 1.

4.3 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.

Table 2 - Starts programmes submitted 2004/05 to 2007/08
	Land	Works, Fees, Furniture and Equipment			Total
		Locally resourced programmes	Schemes supported by Government approvals	Total
	£000	£000	£000	£000	£000
2004/05	2,050	35,476	217,521	252,997	255,047
2005/06	950	40,113	94,768	134,881	135,831
2006/07	950	28,093	102,850	130,943	131,893
200708	950	28,093	97,850	125,943	126,893
	--------	-----------	-----------	-----------	-----------
	4,900	131,775	512,989	644,764	649,664
	--------	-----------	-----------	-----------	-----------

4.4 The following sections summarise the programmes prepared by executive members and highlight the issues arising.

5 Education

5.1 The proposed programme for Education of £132.0m over the next four years is supported primarily by the Government with capital grant and supported borrowing allocations, as Table 3 shows.

Table 3 - Education capital programme
	2004/05	2005/06	2006/07	2007/08	Total
	£000	£000	£000	£000	£000
Resources carried forward from 2003/04	3,668	-	-	-	3,668
Government's supported borrowing and capital grant allocations:
- new pupil places	1,883	3,766	4,000	4,000	13,649
- Schools Access Initiative schemes	2,144	2,119	2,000	2,000	8,263
- New Deal for Schools Modernisation	14,644	9,661	9,500	9,500	43,305
- allocations direct to schools	16,034	14,321	15,000	15,000	60,355
- Seed Challenge	1,286	-	-	-	1,286
Local resources:
- land purchases for schemes in the
programme	1,200	100	100	100	1,500
	---------	---------	----------	----------	---------
Total	40,859	29,967	30,600	30,600	132,026
	---------	---------	----------	----------	---------

5.2 The proposed programme includes schemes funded from resources of £3.668m from the 2003/04 starts programme which the executive member for Policy and Resources has been asked to defer to 2004/05.

5.3 The Government is expected to announce further allocations from its Targeted Capital Fund towards the end of January 2004. Allocations for voluntary aided schools will follow in February 2004. The Government's Building Schools for the Future programme will start in 2005/06, focusing on secondary schools. The outcome of the County Council's submission, approved by Cabinet in December 2003, is expected in March 2004.

5.4 The provisions included in the proposed programme for 2006/07 and 2007/08 are estimates pending the Government's next Spending Review announcement in the summer of 2004.

5.5 From 2004/05 onwards, the Government has combined its previously separate New Deal for Schools (NDS) allocations for Modernisation and Condition. The executive members for Education and Policy and Resources agreed in July 2003 to split these NDS allocations for 2004/05 onwards in the ratio of 54% to condition and 46% to modernisation. The condition allocations have been included in the Policy and Resources capital programme.

5.6 The Government's support for overall capital investment in Education for 2004/05 exceeds £53m including the allocations for condition, as Table 4 shows. This is a little lower than the £57m allocated by the Government for 2003/04.

Table 4 - Government support for capital spending on Education
	2003/04	2004/05
	£000	£000
General	7,996	-
New pupil places	-	1,883
Expansion of popular schools	946	-
Schools Access Initiative schemes	2,114	2,144
New Deal for Schools Modernisation	12,829	14,644
Allocations direct to schools	14,303	16,034
Seed Challenge	1,260	1,286
Staff workplaces	517	-
Specialist schools	900	-
Adult and community learning	624	-
Neighbourhood Nurseries Initiative	61	-
Nursery Education in Disadvantaged Areas	661	-
New Deal for Schools Condition	15,068	17,190
	---------	---------
Total	57,279	53,181
	---------	---------

5.7 Last year's report to Cabinet on the proposed capital programme, in February 2003, noted that there continued to be a funding shortfall within the overall Education capital programme. Schemes costing £8.6m had been deferred to later years without the resources to fund them. Increased allocations from the Government have helped to reduce the latest estimate of this shortfall to £7.1m. Maximum use has now been made of the Schools Balances Loan Scheme to fund projects in advance of capital receipts. Pressure will be maintained to make sure that developer contributions and capital receipts are secured as quickly as possible. It is also anticipated that there will be a significant balance of resources available from the 2003/04 programme which will be available in 2004/05.

6 Environment

6.1 The Government's local transport capital settlement for 2004/05 includes an allocation of supported borrowing of £31.179m for the County Council. This is an increase of 13.1% compared with the equivalent figure for 2003/04 and follows a 16.1% increase in the previous year. The total approved is 13% more than the amount assumed for 2004/05 in February 2003 and 48% more than the indicative allocation notified in the Local Transport settlement of December 2000, which illustrates the extent to which the Government has boosted its support for investment in local transport schemes. The starts programmes for Government supported schemes for the later years of the programme in Appendix 3 assume that the Government's allocations will continue at the level of £31m per annum.

6.2 The proposed starts programmes for structural maintenance and integrated transport are summarised in Table 5.

Table 5 - Government supported structural maintenance
and integrated transport
	Government support	Proposed programmes
	£000	£000
2003/04	27,549
	----------
2004/05	31,179	34,805
2005/06	31,000	32,690
2006/07	31,000	31,000
2007/08	31,000	31,000
	----------	----------
Total 2004/05 to 2007/08	124,179	129,495
	----------	----------

6.3 Following delays in the Government giving funding approval for the A3 Corridor Bus Priority scheme, provision was made within the integrated transport programme for 2002/03 for the early phases of the scheme. The Government has now approved the full bid of £25.1m for funding of the scheme. As it will not now be necessary to charge the early phases of the A3 scheme to the integrated transport programme, the executive member for the Environment has proposed starts programmes for 2004/05 and 2005/06 that exceed the Government allocations by a total of £5.3m, as shown in Table 5. This will make sure that the County Council uses in full the available support from the Government.

6.4 The Government has allocated an SCA borrowing approval of £4.4m in 2003/04 for the A3 Corridor Bus Priority scheme and has also confirmed the funding for payments of £7.5m in 2004/05, in the form of capital grant and supported borrowing allocations. The total support available from the Government for the scheme over the period from 2003/04 to 2006/07 will be £25.1m.

South Hampshire Rapid Transit (SHRT)

6.5 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, has been retained at £119m at 2003/04 prices based on the existing funding agreement between the two councils as promoters and the Government. Bids received for the project from contractors have left a shortfall of funding and negotiations are continuing with the Government, bidders and other stakeholders to resolve the position.

6.6 The Government had indicated that it will support 75% of the public sector cost of the scheme, subject to an overall limit. This 75% support for the construction costs could take the form of supported borrowing allocations and capital grant. In addition, the Government may provide support as part of a PFI scheme for the annual `availability' payments. These payments would 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' has not yet been finalised.

6.7 The remaining 25% not funded by the Government includes 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.

6.8 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 allocations 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.

6.9 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.

6.10 The funding position for the scheme will become more clear as the procurement negotiations are finalised. It is suggested that the executive member for Environment should be asked to 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.

Other major transport schemes

6.11 The proposed four-year programme includes three other major schemes. Bids for Government support will be made in future Local Transport Plan submissions. If they are approved, support is likely to take the form of 50% capital grant and 50% supported borrowing allocations. In the meantime, design and other preparatory work will be funded from within Environment's overall transport allocation from the Government.

6.12 The Chickenhall Lane Link Road in Eastleigh remains the top priority because of the employment opportunities it will provide together with potential associated improvements in Eastleigh. The earliest date that a submission could be prepared for the Government is July 2005 and so a scheme costing £30m has been included in the 2006/07 programme

6.13 It may be possible to bid in July 2004 for support for a scheme at Totton Town Centre to improve the pedestrian environment and help promote regeneration in the town. An early bid for this scheme should not adversely affect the chances of achieving support from the Government for Chickenhall Lane in 2005. The Totton scheme has been included in the proposed capital programme for 2005/06 at £20m.

6.14 It is also proposed that a bid will be made for Stubbington Bypass in 2006 and a scheme costing £25m is included in the 2007/08 programme. Current plans also include bidding for the Botley Bypass in 2007 which would lead to including the scheme in the 2008/09 programme (beyond the current four-year programme).

Household waste recycling centres

6.15 There is a need to improve the County's household waste recycling centres to help meet Government recycling centres. In the short to medium term, the existing sites at Winchester, Casbrook (Romsey), Hayling Island, Hartley Wintney, Eastleigh, Hedge End, Havant and Waterlooville may need enlarging or relocating. New sites may need to be provided in Basingstoke Town, North West Basingstoke, Fleet and Fawley. In the longer term, existing sites at Somerley, Efford and Netley may also need to be relocated. The estimated cost of this programme is up to £15m, including land costs.

6.16 The proposed Environment capital programme for 2004/05 includes a £5.4m scheme for waste minimalisation and recycling financed by a grant of £5m from the Government's National Waste Minimisation and Recycling Fund and £0.4m from the Waste Resources Action Programme. This will be used to support the waste collection authorities to improve kerbside recycling (£3.25m), improve household waste recycling centres (£1.25m) and support for Project Integra's communication strategy and waste minimisation work (£0.9m).

6.17 The locally resourced programme also includes £316,000 per annum over the four years from 2004/05 to 2007/08 for improvements to household waste recycling centres which has been set aside to fund the development at Bar End, Winchester.

6.18 The executive member for Environment has asked Cabinet to consider adding up to £1m to the capital programme for 2004/05 for a new household waste recycling centre at either Fawley, Fleet or North West Basingstoke. It is suggested that consideration of this request is deferred until later in 2004 when a best value review of waste services within Project Integra has been completed. This review is expected to establish the business case or otherwise for the priority areas for future investment.

Environment locally resourced programme

6.19 The provision for locally resourced structural maintenance in 2004/05 includes an additional £3.588m to continue the addition made to the programme in 2003/04 for repairs to local roads and footways.

6.20 The executive member for the Environment has proposed re-deploying £1.813m per annum from the capital programme provision for structural maintenance of non-principal roads to the revenue budget, totalling £7.252m over the four years of the proposed programme. It will meet the need for additional revenue provision for routine highway maintenance and for additional transport policy-related expenditure on marketing to support behavioural change, technical studies and sub-regional strategies modelling. The reduction in locally resourced structural maintenance will be replaced by an increased allocation of £1.850m per annum for structural maintenance and bridges from within the Government supported capital programme.

6.21 The locally resourced programme has been supplemented by Environment's 25% share of its capital receipts obtained in 2002/03. This £28,000 has been allocated as a contribution to private street works in 2004/05.

7 Policy and Resources

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

7.2 Two adjustments have been made:

· £0.736m has been added to the 2004/05 programme for capital repairs in schools, funded from revenue contributions to capital, to continue the additional allocation made in 2003/04

· schemes have been added to the programme for 2004/05 for investment by the County Council's business units for printing, supplies, transport management and catering. These schemes are estimated to cost £659,000 and will be financed from the business units' reserves.

7.3 As outlined in paragraph 5.5, the Policy and Resources programme includes the Government supported provision in the New Deal for Schools Modernisation allocation to improve the condition of school buildings through capital repairs. The amounts are £17.2m in 2004/05, £11.3m in 2005/06 and £11.2m in 2006/07 and 2007/08.

7.4 The programmes for 2004/05 and 2005/06 include £0.35m and £0.15m for the third and fourth years of the Government's grant support for the capital cost of implementing electronic government.

7.5 Also included is the annual provision of £0.85m for advance and advantageous purchases of land.

8 Recreation and Heritage

8.1 Cabinet agreed in June 2003 to allocate £4.8m to develop discovery centres and the Winchester Cultural Centre, including £1m in each year from 2003/04 to 2006/07. The guidelines set by Cabinet in December 2003 for the Recreation and Heritage programme reflected these additions. As it is now proposed that the £1m allocations in 2003/04 and 2004/05 are used for the Gosport Discovery Centre, which is expected to start in 2003/04, the provision of £1m in 2004/05 has been transferred to the 2003/04 programme.

8.2 Similar adjustments have been made to the programme to combine proposed provisions of £1m in 2005/06 and 2006/07 for other discovery centre developments, and of £180,000 in both 2004/05 and 2005/06 for a new accommodation block at Calshot Activity Centre. This adjustments can be made within the starts programme without adversely affecting the previous assumptions about the timing of payment flows and resources.

8.3 The total cost of the Calshot scheme is estimated to be £1.210m. Recreation and Heritage can provide a total of £720,000 towards the cost (from the £360,000 in the proposed programme for 2004/05 and £360,000 carried forward from earlier years' capital programmes). The executive member for Recreation and Heritage has suggested that unsupported borrowing could be used to fund the remaining cost of £490,000. The principal repayment and interest cost of this borrowing would be met from Calshot Activity Centre's revenue income. This scheme has been included in the proposed programme on this basis.

8.4 The Recreation and Heritage programme for the current year, 2003/04, includes increased provision for countryside and rights of way improvements and significant additional funding to support work needed to comply with Disability Discrimination Act requirements in the service's premises, community buildings and village halls. Ideally, the executive member for Recreation and Heritage would wish to continue this level of provision in subsequent years together with the established levels of provision for product development and updating ICT infrastructure. To this end, the executive member has identified three of the service's properties whose disposal would raise £830,000 for reinvestment in the capital programme in 2004/05, subject to the approval of the executive member for Policy and Resources. This addition has been included in the proposed programme for 2004/05.

8.5 These variations to the guidelines set by Cabinet in December 2003 are summarised in Table 6.

Table 6 - Recreation and Heritage capital programme
	2004/05	2005/06	2006/07	2007/08
	£000	£000	£000	£000
Guidelines set by Cabinet in
December 2003	2,123	1,611	1,611	611
Gosport Discovery Centre - transfer to
2003/04 programme	-1,000	-	-	-
Other discovery centres - transfer to a	-	+1,000	-1,000	-
single provision in 2005/06
Calshot Activity Centre
- transfer to a single provision in
2004/05	+180	-180	-	-
- provision carried forward from
earlier years	+360
- unsupported borrowing	+490
Addition funded by proposed retention
of capital receipts	+830	-	-	-
	---------	---------	---------	---------
Proposed programme	2,983	2,431	611	611
	---------	---------	---------	---------

9 Social Services

9.1 The locally resourced programme for Social Services in Appendix 3 is also in line with the guidelines. Schemes supported by Government grant in 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.

Nursing care accommodation

9.2 Construction work on the £60m scheme to provide 500 new nursing beds to maintain capacity in the nursing home market is expected to start before the end of 2003/04. Funding of £40m will be provided via the Strategic Health Authority. A bid to the Government for borrowing approval or some other form of support for the remaining £20m has been unsuccessful. Partnership options with the private sector have also proved not to be viable. As a result, Cabinet are now asked to agree to fund the £20m from the County Council's own resources, in particular by using unsupported borrowing under the Prudential Code. Contributions from the Health Service will cover in full the costs in 2003/04 and much of the costs in 2004/05, leaving the amounts currently estimated to be financed from unsupported borrowing as shown in the following Table.

Table 7 - Nursing care accommodation - unsupported borrowing
	£000
2003/04	0
2004/05	7,000
2005/06	9,500
2006/07	3,500
	---------
Total	20,000
	---------

9.3 The cost of servicing this additional borrowing will be met from Social Services' revenue budget cash limit, so that the overall impact on the County Council's finances is neutral.

10 Private finance initiative

10.1 No specific PFI schemes have been identified by executive members for the 2004/05 to 2007/08 programme. There are, however, are number of areas for further investigation.

11 Further review

11.1 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 become clear for some time and it is suggested that a further report be made to the Leader and Cabinet later in 2004, when the Council's overall capital strategy could also be reviewed. The particular issues that could be covered include:

· proposals for the use of unsupported borrowing

· the funding of the South Hampshire Rapid Transit scheme

· the final detailed funding of the nursing homes scheme

· the re-development of the site adjacent to the Records Office and Ashburton Court in Winchester

· more detailed proposals for the use of PFI

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

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

12 Payments and resources - summary

12.1 Table 8 shows the capital payments flowing from the proposed capital programme, compared with the financing resources available. Payments are forecast to exceed £200m for the first time in 2004/05. Resources in 2003/04, 2004/05 and 2005/06 will be sufficient to cover the estimated level of capital payments in those years, with the use of the balance available in the capital reserve. In 2006/07, however, payments are forecast to exceed resources by £1.5m. Resources are then expected to be sufficient to cover payments from 2007/08 onwards.

Table 8 - Capital payments and resources
	2003/04	2004/05	2005/06	2006/07	2007/08
	£000	£000	£000	£000	£000
Payments	159,609	201,906	176,922	177,015	175,988
Resources	156,276	201,893	175,847	175,548	175,988
To be met from the capital
reserve	3,333	13	1,075	-	-
	----------	----------	-----------	-----------	----------
Resources to be identified	-	-	-	1,467	-
	----------	----------	-----------	-----------	----------

12.2 Payment profiles are difficult to predict three or four years ahead and a shortfall of £1.5m in 2006/07 can be managed within an overall four-year capital programme of £650m with payments running at over £150m per annum. No immediate action is required to eliminate the shortfall, which will be reassessed when the capital programme is reviewed later in 2004.

12.3 Payments and resources will continue to be closely monitored during the remainder of 2003/04 and in 2004/05. Regular reports on the progress of the capital programme will continue to be brought to the Leader and Cabinet and these will indicate if any action is required to restrain payments to the level of resources estimated to be available. Executive members will also review progress on their capital programmes at regular intervals during the year.

12.4 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.

13 Recommendations

13.1 The recommendations are included 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 capital allocations for 2004/05 and subsequent years.

i:\ . . . . \ian\docs\cap-cab-12feb2004a.doc 10 February 2004

Appendix 1

Capital Programmes 2004/05 to 2007/08 Proposed by Executive Members

1 Summary of the proposed programmes

1.1 The proposed four-year programme of £650m complies with the guidelines set by the Cabinet in December 2003, as the table below shows:

1.2 The starts value of schemes supported by Government grant and supported borrowing approvals, £394m, represents 74% of the four-year programme excluding the South Hampshire Rapid Transit (SHRT) Phase 1. This is 8% more than the proportion supported by the Government in the existing capital programme approved in February 2003. The Government's contribution of 74% illustrates the extent of its support for investment by local authorities but it also highlights the scope for the Government to influence the Council's priorities.

1.3 The Environment capital programme also includes a number of local transport schemes supported wholly or in part by developers, totalling £14.1m over the four years. The individual schemes are identified in the Environment capital programme in Appendix 3.

Appendix 2

Capital Payments and Financing Resources 2003/04 to 2007/08

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 2003/04 and the following four years will result from works in progress (schemes started in 2003/04 and earlier years) plus those arising from the proposed programme for 2004/05 to 2007/08, as the table below shows.

1.3 In practice, payments in the years after 2003/04 may be even higher than suggested by the table if more funding allocations are announced by the Government, particularly following the next Government Spending Review later in 2004. Further developer contributions and lottery grants are also likely to be received in the future which will result in additional payments. One of the reasons for the increase in payments shown in the table is the South Hampshire Rapid Transit scheme. The precise nature of the funding for this scheme has yet to be agreed. 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 support for borrowing, to which the Government has given the somewhat confusing title `Supported Capital Expenditure (Revenue)' or SCE(R). This can be either:

- un-ringfenced SCE(R), which is allocated by the Government within its single capital pot and which can be used for any capital purpose. It is the equivalent of the previous system's `basic credit approvals' (BCA), or

- ringfenced SCE(R), which has to be used for specified schemes or programmes. This is the equivalent of `supplementary credit approvals' (SCA).

The allocations are no longer permissions to borrow. Instead they are notifications that the Government will provide revenue support grant (RSG) to meet the principal repayment and interest charges on loans that the County Council raises, up to the value of the allocations

· unsupported borrowing - loans that the County Council may decide to raise in the knowledge that it will have to meet the principal repayment and interest charges from its own resources without any additional support from the Government. The County Council would need to consider the impact of such loans on the prudential indicators referred to in paragraph 2.3 of this report

· Government capital grants, now known by the Government as Supported Capital Expenditure (Capital) or SCE(C)

· contributions from other bodies, including the health service, other local authorities, developers and 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 In total, the Government's support for the 2004/05 starts programme announced so far in the form of borrowing allocations and capital grant is £104m. This has broadly maintained the level reached in 2003/04 (£98m) following significant increases in previous years as the Government sought to increase capital investment in local services.

1.4 The general capital receipts available for funding the capital programme are estimated to be £11.4m in 2003/04 and £12.0m in 2004/05, in line with the assumptions reported to Cabinet in June 2003. The planning assumptions for future years are based on £6.3m per annum. It is proposed that the Cabinet reviews these forecasts of capital receipts later in 2004 when the prospects for the development at North Popley and Manydown will be clearer. The estimates of in/out capital receipts match the payments on such schemes included in the payment forecasts.

1.5 Contributions from the revenue budget to fund capital payments will be £29.8m in 2003/04 and £30.9m in 2004/05. These contributions support capital repairs of buildings (£13.8m in 2004/05), highway structural maintenance (£12.9m) and other capital schemes in the locally resourced capital programme (£4.2m). The revenue contributions from 2004/05 to 2008/09 are supplemented by the redeployment of the savings of £9.1m achieved from SAP Benefit Realisation which will enable the capital resources used to fund the investment in SAP to be repaid.

1.6 Overall, the resources available to the County Council are expected to be sufficient to meet the payments with the exception of the shortfall of £1.5m in 2006/07. The capital programme will be managed to eliminate this shortfall, as outlined in section 12 of the main report.

1.7 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 (4.8% 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 services 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 £18.7m. Apart from the use of unsupported borrowing, these costs will be reflected in the County Council's `formula spending share' for revenue expenditure and will attract revenue support grant from the Government broadly equivalent to the costs.

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 supported borrowing allocations 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, new capital financing charges from Government supported borrowing attract revenue support grant 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 56% over the period, borrowing at these levels should fall within the limits of the Government's proposed `prudential' regime for local authority borrowing.