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

With the concurrence of the Chairman, under Section 100(B)(4)(a) of the Local Governement Act 1972 this matter is included on the agenda in order to meet the County Council budget decision making timetable.

1 Summary

1.1 The Cabinet at its meeting on 19 December 2005 asked executive members to submit proposals for:

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

· a programme of schemes supported by Government grants and scheme- or programme-specific supported borrowing allocations for 2006/07 and those expected to be supported in 2007/08, 2008/09 and 2009/10

· the use of unsupported borrowing in accordance with the County Council's policy on prudential borrowing

· possible private finance initiative (PFI) projects which might attract support from the Government.

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 significant temporary shortfalls of resources available to fund expected capital payments in the period from 2006/07 to 2009/10. It is proposed that unsupported borrowing be used to meet the shortfall in 2006/07.

1.3 If the proposals outlined later in the report (section 3) on meeting the revenue consequences of unsupported borrowing are agreed, the proposed programme complies with the requirements of the Prudential Code for Capital Finance in Local Authorities. The prudential indicators are included in Appendix 12 of the report on this Agenda on the Revenue Budget and Precept for 2006/07 and Provisional Budget for 2007/08.

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 2005, together with schemes supported by Government grant and borrowing allocations

· the total value of the programme over the four-year period is £525m.

2 Expenditure and resources cashflow - summary

2.1 Table 1 shows the annual capital expenditure flows from the proposed capital programme, compared with the financing resources available.

2.2 Table 1 shows that capital expenditure will exceed resources by £12.9m at the end of 2005/06. Part of this shortfall can be met from the capital reserve, but as the balance in the capital reserve at 1 April 2005 was only £3.6m, there will be an unfunded shortfall at 31 March 2006 estimated to be £9.3m. This shortfall will eventually be eliminated but not until 2012/13. This change in the financing position of the capital programme, from being fully funded in February 2005 to a large estimated deficit now, is a result of two main factors:

· in the short term, a delay in obtaining capital receipts in 2005/06, from £9.3m assumed in February 2005 to £2.3m now. This delay has reduced the expected amount available to finance the capital programme (ie, excluding receipts required to finance in/out schemes or to repay unsupported borrowing and amounts borrowed under the School Balances Loan Scheme). This is a temporary shortfall as the disposals are expected to be completed in 2006/07

· higher levels of professional fees required on capital receipt reinvestment schemes and capital building projects than allowed for in the general fee scale used to construct the capital programme.

2.3 Provision is made within the capital programme for fees at the level of 16% of the cost of construction works for most schemes, with a lower percentage for some major schemes. The actual level of fees being incurred has proven to be higher than these estimates by around £1m per annum at current programme levels. Such a gap may be good value in the light of additional capital receipts forecast and the scale of major capital building projects which are improving public services in Hampshire and also reflects the initial preparatory work needed for many new policy developments.

2.4 As the funding position is forecast to rectify itself over time, provided fees are contained to the level assumed in constructing the programme, it is suggested that unsupported borrowing is used to finance the estimated shortfall of £9.324m in 2005/06. Decisions on funding the temporary shortfalls in 2007/08 and 2009/10 do not need to be taken until nearer the time, in the light of future reviews of the capital programme, but provisionally further temporary borrowing can be assumed. This would be repaid as the funding position recovers in subsequent years. The Director of Property, Business and Regulatory Services will review and update capital receipt projections during the summer and these will be reported to Cabinet.

2.5 The County Treasurer and the Director of Property, Business and Regulatory Services will review the level of provision that should be made for fees to ensure the successful delivery of building projects in future capital programmes. It may be necessary to vary the fee percentage assumed in preparing the capital programme which would be financed by a combination of increased capital receipts and a reduction in the amount of building work that can be carried out. The capital programmes for 2007/08 onwards would need to be revised accordingly. A further report will be made to Cabinet during the summer at the same time as the capital receipts review.

2.6 Payments and resources will continue to be closely monitored during the remainder of 2005/06 and in 2006/07. 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 further 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.

2.7 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 included in section 4 below.

3 Unsupported borrowing

3.1 In November 2003, Cabinet agreed a framework for the use of unsupported borrowing under the Prudential Code for Capital Finance introduced by the Local Government Act 2003. `Unsupported borrowing' does not attract Government revenue grants towards the loan charges. Instead, the loan repayments and interest charges have to be financed by the County Council from its own resources. Briefly, the framework 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.

3.2 Interest on the `bridging' loans agreed to date is being rolled up and will be met from the capital receipts when they are eventually received.

3.3 Subject to approval by Cabinet of proposals by the executive member for Children's Services for further unsupported borrowing of up to £11.3m (paragraph 8.11), the County Council's use of unsupported borrowing will increase as Table 2 shows.

3.4 The repayment and interest costs for the nursing care accommodation, Calshot accommodation unit and IT Services schemes will be met from revenue budget savings or additional income. The remaining schemes are `bridging loans' in advance of capital receipts or developers' contributions. The sources of those repayments are summarised in Appendix 3.

3.5 In deciding whether the level of unsupported borrowing set out in Table 2 is appropriate, Cabinet has had to consider whether the overall level of unsupported and Government-supported borrowing complies with the requirements of the Prudential Code for Capital Finance in Local Authorities. The prudential indicators used as part of the process of assessing compliance are included in Appendix 12 of the report on this Agenda on the Revenue Budget for 2006/07 and 2007/08.

3.6 In terms of the overall level of borrowing and the long-term revenue financing required to service the debt, the planned borrowing is clearly within prudent limits. It is necessary, however, to consider the short-term impact of the increasing level of `bridging' loans in advance of capital receipts or developers' contribution. Services propose covering the interest costs out of the eventual capital receipts by rolling up the interest. But in the meantime this leaves a cash flow shortfall for the annual interest cost, as well as the statutory minimum revenue provision of 4% per annum on all credit liabilities. The minimum revenue provision is the equivalent of a repayment of principal on the loan. The estimated cost to the revenue budget is shown in Table 3.

3.7 The table excludes the revenue impact of the temporary borrowing to balance payments and resources. As the proposed borrowing in 2005/06 is forecast to be repaid in 2006/07, the revenue impact would not be significant.

3.8 The impact of the latest Children's Services' proposals to borrow up to £11.3m in advance of capital receipts and developers' contributions could be a little less than shown in Table 3, depending on the timing of the capital expenditure and the receipts.

3.9 The short-term cost to the revenue account is expected to revert to nil in 2009/10 when all the loans should have been repaid.

3.10 It is suggested that the policy on `bridging' loans should be amended to require services to fund the annual interest and the statutory minimum revenue provision of 4% per annum in the year in which it is incurred, and not by rolling up the interest until the capital receipts are obtained. Services would have to meet this annual cost (broadly £9,000 per annum for each £100,000 borrowed) from their revenue budgets or from their existing capital programmes or by setting aside part of their shares of other capital receipts. This will eliminate the strain on the County Council's annual revenue budget which would otherwise have to be met by savings elsewhere or be charged to the council tax.

3.11 Over the full period of each loan, which in most cases is between one and three years, this change of policy will be cost neutral for services. Having paid the interest costs on an annual basis, they will not have to give up part of their capital receipt at the end of the loan to fund the rolled up interest costs. Requiring services to provide the funding for the County Council's statutory minimum revenue provision on an annual basis will reduce their principal outstanding that they have to repay when the capital receipt is eventually obtained.

3.12 It is suggested that this requirement is applied to all future `bridging' loans including the latest Children's Services proposals to use up to £11.3m of unsupported borrowing in the 2006/07 capital programme. Children's Services have set aside a contingency of around £1m per annum within the proposed programme for 2006/07 to 2009/10 and this would be one option for meeting these costs.

3.13 Services should be required in future to specify how they plan to meet these costs in recommending their proposals to Cabinet for unsupported borrowing for bridging purposes.

4 Government supported borrowing

4.1 The Government provides the `support' for its supported borrowing allocations in the form of revenue grant towards the cost of principal repayments and interest charges incurred by local authorities in servicing the loans. The revenue grant formula used in the relative needs formulae (RNF), formerly known as formula spending shares (FSS), includes a component that delivers revenue grant to meet 100% of the loan charges, in broad terms.

4.2 If a local authority's grant allocation is so low, however, that it is subject to the floor damping mechanism that guarantees a minimum percentage increase in grant (2.0% in 2006/07 for education authorities), there is no immediate benefit from additional Government supported borrowing approvals in terms of revenue grant. This is because the increase in the RNF for capital financing merely takes the authority closer to the minimum floor for grant increases. It does not actually increase the revenue grant at the margin. For authorities such as the County Council that are below the floor by a considerable margin, there is no prospect in the foreseeable future of any benefit from increased revenue grant as a result of taking up additional Government supported borrowing approvals.

4.3 Authorities whose grant increases are above the +2% floor level are also affected because their above-floor grant increases are severely scaled back (by a factor of 84.5% in 2006/07) to pay for the cost of the floor. So they too will see little benefit in terms of revenue grant for taking up Government borrowing approvals in 2006/07.

4.4 The issue has been recognised by the Government in the past and the floor damping mechanism prior to 2006/07 included a `capital adjustment' intended to give authorities some revenue grant benefit from additional borrowing approvals. However, the Government has decided to remove the capital adjustment from 2006/07, possibly because the cost for floor authorities would have increased the scaling factor for authorities that are above the floor to more than 100%, rendering the floors mechanism unworkable.

4.5 Representations have been made to the Government in the County Council's response to the revenue support grant consultation for 2006/07 and by other bodies such as the County Councils Network. The Government could reinstate an effective capital adjustment or provide all of its capital support as capital grants. As Table 4 shows, the Government's supported borrowing allocations for 2006/07 will total £53.4m with a further £44.5m in 2007/08. Allocations for later years are dependent on the outcome of the Comprehensive Spending Review in 2007.

Table 4 - Government supported borrowing allocations
	2006/07	2007/08
	£000	£000
Adult Services
Single capital pot	753	757
Mental health	346	336
Children's Services
Single capital pot	253	253
New pupil places	4,378	4,445
New Deal for Schools (including capital repairs)	14,001	16,572
Schools Access Initiative	2,143	2,143
Targeted capital - Sundridge School	516	-
Environment
Integrated transport and structural maintenance	27,907	19,952
A3 Bus Priority Scheme	3,130	-
	----------	----------
Total	53,427	44,458
	----------	----------

4.6 The Department for Education and Skills (DfES) has switched from 100% capital grant for its New Deal for Schools allocations in 2005/06 to 40% capital grant and 60% supported borrowing in 2006/07 and a 30% : 70% split in 2007/08. This change has exacerbated the problem facing the County Council. By contrast, the Department for Transport proposes switching its integrated transport and structural maintenance allocation from 100% supported borrowing in 2006/07 to a maximum of 75% in 2007/08 with the balance met by capital grant. All major transport schemes will be funded by 100% capital grant from 2007/08 instead of the current 50% : 50% basis. There are indications from discussions with Government departments that they have acted independently of each other, and of the Office of the Deputy Prime Minister, and may not have realised the consequences of their decisions.

4.7 The revenue grant lost by the County Council on the borrowing approvals listed in Table 4 will be £1.6m in 2006/07, rising to £6.6m in 2007/08 and to £9.5m in 2008/09.

4.8 It will be necessary to consider whether the County Council can afford to continue its policy of taking up in full all Government supported borrowing approvals. If it does continue to do so, the resultant increase in loan charges would have to be met from council tax income.

4.9 It is suggested that no change is made for 2006/07 whilst lobbying continues with the Government but that from 2007/08 onwards the County Council should limit its take-up of Government borrowing allocations so that the loan charges falling to be met by the revenue account and the council tax rise only in line with future overall increases in the revenue budget, say 2.5% per annum. Each year, debt is repaid at the rate of the statutory minimum revenue provision of 4%. This would allow new loans to be raised equivalent to these repayments with a neutral impact on the level of loan charges to be financed from the council tax. Adding a further 2.5% of debt outstanding would allow the increase in loan charges to match the average increase for the rest of the revenue budget.

4.10 Table 5 shows the estimated debt to be financed by the County Council assuming that all Government borrowing approvals are fully used.

Table 5 - Debt outstanding
	2005/06	2006/07	2007/08	2008/09	2009/10
	£m	£m	£m	£m	£m
Debt outstanding at the
beginning of the year	458.9	491.8	534.6	552.5	583.1
New borrowings	51.7	65.4	54.6	52.7	44.4
Repayments from:
- the revenue account	-18.8	-20.2	-21.7	-22.1	-23.3
- capital receipts	-	-2.4	-15.0	-	-22.9
	----------	----------	----------	----------	----------
Debt outstanding at the	491.8	534.6	552.5	583.1	581.3
end of the year	----------	----------	----------	----------	----------

4.11 Applying the limits suggested in paragraph 4.9 would restrict the take-up of Government borrowing allocations in 2007/08 to £32m (broadly £20m to replace repaid debt and £12m for the 2.5% increase, after adjusting to exclude unsupported borrowing from the figures in Table 5). This £32m compares with the £44.5m of Government borrowing allocations for 2007/08 listed in Table 4. Rationing the allocations between services could be on a pro rata basis so that they would be able to take up roughly 70% of their Government allocations. The final figure may be a little lower than 70%, depending on the level of any further Government borrowing allocations for 2007/08 that have yet to be announced.

4.12 Services would be able to supplement this level of borrowing by financing the resultant loan charges from elsewhere within their revenue budgets including any reductions in running costs achieved by capital investment, subject to Cabinet approval.

4.13 If the Government does not change its policy, it is important to consider these additional revenue consequences of the capital programme alongside other priorities for the revenue budget. It reinforces the integration of the decision-making processes for the revenue budget and capital programme.

4.14 The Government's change of approach to providing revenue grant for loan charges also helps to re-focus attention on the level of the County Council's outstanding debt, as shown in Table 5. If all the Government's borrowing allocations so far announced were fully used, the County Council's debt will rise by 27% between the start of 2005/06 and the end of 2009/10.

4.15 Further consideration should be given to the priority of reducing the level of debt as part of the ongoing Strategic Property Review, including the County Council's policy on the use of capital receipts. Services are currently entitled to 25% of general capital receipts (ie, those not earmarked to repay unsupported borrowing or advances under the School Balances Loan Scheme or for which specific in/out approvals have been given for the use of more than 25%), with the remaining 75% used to finance the locally resourced capital programme. No capital receipts are currently used to repay general debt.

4.16 A final decision on the extent that Government borrowing approvals are utilised in 2007/08 onwards can be taken by Cabinet later, in 2006 or early 2007.

5 Background to the guidelines for the capital programme

5.1 The existing capital programme for 2005/06 to 2008/09 was agreed by the County Council in February 2005. Progress has been monitored by executive members during the year and the programme amended where necessary with Cabinet's approval. A number of major projects were reviewed by Cabinet in October 2005 which resulted in further adjustments to the programme. The cost limit for the Ashburton Court refurbishment project was also approved.

5.2 The guidelines for the locally resourced programme agreed by Cabinet in December 2005 were based on the existing programme limits, plus an allowance for inflation. Adjustments were made to reflect the funding of capital repairs of schools from the new dedicated schools grant and the addition of the Ashburton Court project to the Policy and Resources programme for 2006/07 at a cost of £40.2m including the purchase of Capital House.

5.3 `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, in theory, are backed by revenue grants towards the resultant loan charges. The issue of whether Government borrowing allocations will actually attract additional revenue grant support has been considered earlier in the report in section 4.

5.4 Some adjustments have been made to the guidelines agreed at the Cabinet meeting in December 2005 including proposals by executive members for transfers between capital and revenue:

· a revised split of the former Social Services guideline between Adult and Children's Services following further discussions between the two services

· a reduction of £0.232m per annum in the guideline for Environment to continue a virement to revenue agreed in 2005/06

· a continuation in 2006/07 of the addition made to Environment's structural maintenance provision each year since 2003/04 when an extra £3.5m was first added to the programme. The amount for 2006/07 is £2.989m after transferring £0.780m of the original provision to the revenue budget for the proposed allocation of £10,000 each to members for their local spending priorities

· further net virements to revenue requested by the executive member for Environment, which will transfer £119,000 to revenue in 2006/07 and £34,000 per annum in 2007/08 and subsequent years.

5.5 The adjusted guidelines for each service are shown in Table 6.

Table 6 - Guidelines for locally resourced capital programmes
2006/07 to 2009/10
	2006/07	2007/08	2008/09	2009/10
	£000	£000	£000	£000
Adult Services	656	656	656	656
Children's Services	123	123	123	123
Environment	14,315	11,411	11,411	11,411
Policy and Resources	48,225	13,406	7,341	6,341
Recreation and Heritage	611	611	611	611
	---------	---------	---------	---------
Total	63,930	26,207	20,142	19,142
	---------	---------	---------	---------

5.6 Executive members were asked by Cabinet in December 2005 to identify how 2.5% efficiency savings are being achieved. The response, including any savings arising from the capital programme, is covered in the report on the Revenue Budget on this Agenda.

6 The programmes submitted

6.1 The total starts value of the four-year programme submitted by executive members is £525m, as shown in Table 7. It includes £388m of schemes supported by Government funding.

Table 7 - Starts programmes submitted 2006/07 to 2009/10
	Land	Works, Fees, Furniture and Equipment			Total
		Locally resourced programmes	Schemes supported by Government approvals	Total
	£000	£000	£000	£000	£000
2006/07	1,993	63,598	110,813	174,411	176,404
2007/08	993	25,631	98,030	123,661	124,654
2008/09	993	24,376	84,017	108,393	109,386
2009/10	993	18,376	95,277	113,653	114,646
	--------	-----------	-----------	-----------	-----------
	4,972	131,981	388,137	520,118	525,090
	--------	-----------	-----------	-----------	-----------

6.2 The proposed programmes are in line with the guidelines set in December 2005. A reconciliation between the guidelines and the proposed programme is included in Appendix 1.

6.3 The capital expenditure flows from these programmes and from the works currently in progress are summarised in Appendix 2, together with the resources available to finance those expenditure flows. The programmes themselves are set out in detail in the yellow pages in Appendix 4.

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

7 Adult Services

7.1 The proposed programme for Adult Services in Appendix 4 is in line with the guidelines for the locally resourced programme. In addition, it includes schemes supported by Government grant to improve information management (£0.376m in 2006/07 and £0.367m in 2007/08), and by Government borrowing approvals for Mental Health (£0.346m in 2006/07 and £0.336m in 2007/08).

7.2 In approving the current four-year Social Services capital programme in February 2005, Cabinet asked the executive member for Social Care to report to a future meeting on the funding of the programme then proposed, including the overall use of future capital receipts available to Social Services to cover the following outstanding commitments:

· £1.32m for Social Services' contribution towards the cost of the improvements to older persons homes between 2000/01 and 2002/03

· £0.375m for Social Services' 50% matching contribution to the replacement day centre for older people in the Hythe and Dibden area, requested by Cabinet in July 2004 when adding the other 50% (£0.375m) to Social Services' capital programme

· £1.7m for the shortfall on the SWIFT social care IT system.

7.3 That report is still outstanding as much of the funding for these commitments totalling £3.4m is likely to be found from Social Services' share of capital receipts from disposals that have been approved but not yet completed. As all these commitments are for Adult Services schemes, it is suggested that Cabinet confirms the request that the executive member for Adult Social Care reports to an early meeting of Cabinet on how the commitments will be funded. Given the overall funding shortfall in the County Council's capital programme, it is important that these issues on Adult Services are resolved without further delay. In the meantime, it is suggested that approval of the Adult Services capital programme for 2006/07 to 2009/10 is deferred until solutions for the outstanding financing issues have been agreed by Cabinet.

8 Children's Services

8.1 The proposed programme for Children's Services of £182.2m over the next four years is supported primarily by the Government with capital grant and supported borrowing allocations, as Table 8 shows.

Table 8 - Children's Services capital programme
	2006/07	2007/08	2008/09	2009/10	Total
	£000	£000	£000	£000	£000
Resources carried forward from 2005/06	7,277	-	-	-	7,277
Government's supported borrowing and capital grant allocations:
- new pupil places	4,378	4,445	4,445	4,445	17,713
- Schools Access Initiative schemes	2,143	2,143	2,143	2,143	8,572
- New Deal for Schools Modernisation	10,734	10,890	10,890	10,890	43,404
- schools' devolved capital	20,688	21,824	21,824	21,824	86,160
Local resources:
- guideline	123	123	123	123	492
- capital receipts	1,249	-	-	-	1,249
- unsupported borrowing	11,300	-	-	-	11,300
- Insurance Fund	4,600	-	-	-	4,600
- land for schemes in the programme	1,100	100	100	100	1,400
	---------	---------	----------	----------	---------
Total	63,592	39,525	39,525	39,525	182,167
	---------	---------	----------	----------	---------

8.2 The proposed programme includes schemes costing £7.277m which the executive member for Children's Services wishes to defer from the 2005/06 starts programme to 2006/07, together with matching resources. The schemes are listed in Table 9.

Table 9 - Children's Services schemes to be deferred from 2005/06 to
2006/07
	£000
Basingstoke School Plus	250
Sundridge School, Havant	5,150
Whiteley Primary	1,438
Minor works	439
	---------
Total to be carried forward to 2006/07	7,277
	---------

8.3 As in previous years, the Government's New Deal for Schools (NDS) allocations have been divided between modernisation works (included in the Children's Services capital programme) and condition works (included in the Policy and Resources capital programme) using the 46% : 54% split agreed by the executive members in July 2003. The amounts are shown in Table 10.

Table 10 - New Deal for Schools - modernisation and condition
	2006/07	2007/08
	£000	£000
Children's Services - modernisation	10,734	10,890
Policy and Resources - condition	12,601	12,784
	---------	---------
Total	23,335	23,674
	---------	---------

8.4 Similar allocations are assumed for the last two years of the capital programme, 2008/09 and 2009/10, although these will not be announced by the Government until it has completed its Comprehensive Spending Review in 2007.

8.5 The Government provided its NDS allocations for 2005/06 for both modernisation and condition as 100% capital grant. For 2006/07, however, it has decided to allocate its support as 60% supported borrowing and 40% capital grant. The supported borrowing proportion increases to 70% in 2007/08. With `supported borrowing', the Government should provide revenue grant to meet in full the loan charges incurred in servicing the borrowing. That has changed in 2006/07, particularly for authorities that are at the general grant damping floor for revenue grant, such as the County Council, which will receive no additional grant at all if they take up these supported borrowing allocations as discussed in section 4.

8.6 The Government's Building Schools for the Future (BSF) programme started in 2005/06, with the intention of replacing or substantially refurbishing all secondary schools in England over a ten to fifteen year period. The Department for Education and Skills (DfES) has confirmed that the earliest that Hampshire secondary schools could be included in the BSF programme is 2011.

8.7 The DfES recently announced that significant additional funding will be available from 2008/09 onwards for large-scale building projects in primary schools. A consultation paper is expected shortly, including details of the allocation criteria and basis of the Government's funding support. An assessment will then be made on how any allocation for Hampshire primary schools can be financed by the County Council. Indicative national totals are £150m for 2008/09 and £500m a year thereafter.

8.8 The Government's support for overall capital investment in Children's Services in Hampshire for 2006/07 in the form of capital grant and borrowing approvals exceeds £51m including the allocations for condition, as Table 11 shows. This is a little lower than the £52m allocated by the Government for 2005/06. The formula-based allocations have increased significantly in total, although most of this increase is for the schools' devolved capital allocations which will be 25% higher in 2006/07. These amounts are allocated by the Government directly to schools and are intended to fund high priority projects identified in their asset management plans.

Table 11 - Government support for capital spending on
Children's Services
	2005/06	2006/07
	£000	£000
Formula-based allocations:
Personal Social Services - Children	253	253
New pupil places	3,766	4,378
Schools Access Initiative	2,119	2,143
Schools' devolved capital	16,574	20,688
New Deal for Schools - modernisation	9,661	10,734
New Deal for Schools - condition	11,341	12,601
	---------	---------
	43,714	50,797
Scheme-specific allocations:
Targeted Capital Fund - East Hampshire SEN	5,000	-
- allocated by Government in 2003/04
Targeted Capital Fund - Sundridge Special	3,545	-
	---------	---------
Total	52,259	50,797
	---------	---------

8.9 The Government has also made an indicative capital allocation of £9.515m for the provision of 53 children's centres in Hampshire for 2006/07 and 2007/08. Specific schemes require DfES endorsement and approval to add them to the capital programme will be sought from Cabinet as that endorsement is obtained.

8.10 Two schemes have been included in the 2006/07 capital programme which will be partly funded by fire reinstatement awards totalling £4.6m from the County Council's Insurance Fund. The £4.750m scheme to relocate the Woodlands Education Centre in Havant following a major fire includes a £2m contribution from the Insurance Fund. The rebuilding of Pinewood Infant School in Farnborough at a cost of £3.815m will be partly funded by a £2.6m contribution from the Insurance Fund.

8.11 The executive member proposes funding part of the Children's Services programme for 2006/07 by unsupported borrowing of up to £11.3m in advance of capital receipts from the sale of sites and developers' contributions. The schemes are listed in Table 12.

Table 12 - Schemes in 2006/07 partly funded by unsupported borrowing
Sundridge School, Havant	Capital receipt
Dowd's Farm Primary, Hedge End	Developer's contribution
Kings Copse Primary, Hedge End	Capital receipt
Freegrounds Infant, Hedge End	Capital receipt
Shamblehurst Primary, Hedge End	Capital receipt
Woodlands Education Centre, Havant	Capital receipt
Henry Tyndale School, Farnborough	Capital receipt

8.12 The executive member for Children's Services has recommended to Cabinet that the proposal for Sundridge School, Havant be approved at this meeting. The cost of the scheme is £5.697m with resources available of £5.150m, leaving a shortfall of £0.547m. It is proposed that this shortfall will be met from part of the capital receipt from the sale of land at Woolston Road, Havant. As the payments on the scheme are likely to be incurred in advance of the capital receipt, it is proposed that unsupported borrowing of £0.547m should be used, to be repaid when the capital receipt is obtained.

8.13 The details of the other proposals in Table 12 are being finalised and will be the subject of further reports to the executive member for Children's Services, prior to submission to Cabinet for approval of the unsupported borrowing. It is possible that the cashflow of payments and receipts will reduce the amount of unsupported borrowing required from the maximum level of £11.3m. At this stage, it is suggested that the Children's Services capital programme for 2006/07 is approved for submission to County Council on the basis that the schemes involving unsupported borrowing of up to £11.3m are subject to the normal arrangements for specific approval of the borrowing by Cabinet.

8.14 Excluding the proposals in this report, Cabinet has so far approved unsupported borrowing for Children's Services schemes totalling £17.4m, to be repaid from capital receipts. In addition, the School Balances Loans scheme has been used to borrow a further £4.4m from school balances, also to be repaid from capital receipts and developers' contributions. No repayments have yet been made on any of these loans but all the expected receipts are on target to be obtained in 2006/07 and 2007/08. In the meantime, however, the County Council has to bear the interest cost of the borrowing from the revenue budget, until it is recovered from the capital receipts as a rolled up interest charge, as discussed in section 3.

8.15 The reports to Cabinet on the proposed capital programmes in February 2004 and February 2005 noted that there was a funding shortfall within the Education, now Children's Services, capital programme of £7.1m in 2004 reducing to £1.3m by February 2005. This has now been eliminated, mainly by reducing the number of NDS modernisation schemes and through the use of unsupported borrowing against anticipated capital receipts.

8.16 There are still pressures on the Children's Services capital programme, however. The Government's allocation for new pupil places, shown in Table 11, continues at the relatively low level of just over £4m per annum in 2006/07 and 2007/08. Over the next few years, there will be a need to provide new schools and extensions to serve residential developments in the proposed major development areas and other areas of significant new housing in Hampshire. Timing will depend on planning consents for the developments but, broadly, additional capital expenditure of about £30m is likely to be required between 2007/08 and 2009/10. About half should be met by developers' contributions, with the Government's new pupil places allocations also available although these will also be needed to fund other smaller schemes outside the development areas. Current estimates indicate a shortfall of resources is likely in 2008/09. The extent of the shortfall will be quantified and a strategy for dealing with it developed and reported to the executive member for Children's Services.

9 Environment

9.1 The Government's local transport plan (LTP) capital settlement for 2006/07 includes an allocation of £27.907m for the County Council. This is a increase of 1.6% compared with the equivalent figure for 2005/06. Allocations of £27.0m in 2007/08 and £27.2m in 2008/09 and £27.5m in 2009/10 have been assumed in constructing the capital programme. The integrated transport part of these allocations for 2007/08 onwards could be increased by performance rewards, depending on the Government's assessment of the County Council's LTP. The rewards for 2007/08 onwards will be announced on an annual basis starting from next December.

9.2 The Government allocations will continue to be in the form of supported borrowing in 2006/07 but, in 2007/08, part will be switched to capital grant (broadly 25%, with any performance rewards also allocated as capital grant). This contrasts with the DfES's decision to switch part of its NDS allocations from capital grant to supported borrowing.

9.3 The proposed provisions in the programme for Government supported expenditure on structural maintenance and integrated transport have been set at a level to make sure that the Government allocation for 2006/07 and the estimated allocations for later years are fully utilised. The provisions are summarised in Table 13.

Table 13 - Government supported LTP allocations for structural
maintenance and integrated transport
	Government support	Proposed programmes
	£000	£000
2005/06	27,456
	----------
2006/07	27,907	25,054
2007/08 - estimate	27,001	34,460
2008/09 - estimate	27,244	21,150
2009/10 - estimate	27,490	32,410
	----------	----------
Total 2006/07 to 2009/10	109,642	113,074
	----------	----------

9.4 The programmes have been set at the proposed levels to make sure that the resulting expenditure cashflow fully uses all the available support from the Government in the years that it is available. They reflect expenditure flows from previous years' programmes as well as preparation costs for major and other transport schemes which will be met from the LTP allocations. Part of the expenditure from the proposed programme from 2009/10 will be a first call on Government allocations for 2010/11.

9.5 In addition, the Government has allocated £6.261m of support in 2006/07 for the A3 Corridor Bus Priority scheme which started in 2003/04. This is allocated as 50% supported borrowing and 50% capital grant. The Government has indicated that allocations for major schemes in future years will be 100% capital grant.

Other major transport schemes

9.6 No provision has been made in the proposed four-year programme for any new major schemes. Bids to the Government for funding for major schemes no longer have to be made at the start of the five-year LTP programme and may now be submitted at any time. A number of schemes are in preparation for possible bids, including Chickenhall Lane Link Road in Eastleigh and Winchester Park and Ride.

Household waste recycling centres

9.7 The previously agreed provision of £1m per annum has been included in the proposed four-year capital programme to improve the County's household waste recycling centres, in line with the proposals agreed by Cabinet in July 2004. The programme will be funded by Environment's share of capital receipts and by using the Government's Waste Performance and Efficiency Grant from the Government. Future years' programmes will be subject to revision if actual grant levels are insufficient to support the full increase in the programme to £1m per annum.

Environment locally resourced programme

9.8 The provision for locally resourced structural maintenance in 2006/07 includes an additional £2.989m above the guidelines set by Cabinet in December 2005. This continues, at a reduced level, the one-off additions to the capital programme in each of the last three years of £3.5m plus annual increases for inflation. For 2006/07, it is proposed that £0.780m of the £3.769m available is transferred to the revenue budget to provide an allocation of £10,000 for each member to spend on local priorities. This leaves £2.989m as a one-off addition to the capital programme for structural maintenance in 2006/07.

9.9 These annual increases in structural maintenance since 2003/04 have enabled the County Council to address specific concerns about the condition of footways and rural carriageways identified from recent opinion polls. An additional 305 footway and 98 carriageway schemes have been implemented. The additional investment has resulted in an improvement in the local highways condition rating system, in line with the Cabinet priority for highways, whilst helping to prevent further deterioration of the highway and reducing the maintenance backlog particularly on footways. The funding has also helped towards improving the achievement of the accident reduction PSA, reflecting the inclusion of sites in the maintenance programmes that have both accident-related as well as structural condition problems.

9.10 The provision for the environmental improvements, the Hampshire villages initiative and the regeneration of older urban areas has been reduced by £579,000 in 2006/07 and £494,000 per annum in later years by virement to the revenue budget, as recommended in the report on the Revenue Budget and Precept for 2006/07 and Provisional Budget for 2007/08.

9.11 The locally resourced programme for 2006/07 has been supplemented by £66,000 funded from Environment's 25% share of its capital receipts obtained in 2005/06.

10 Policy and Resources

10.1 The proposed programme for 2006/07 includes the scheme to refurbish Ashburton Court offices in Winchester at a cost of £40.2m, including the purchase of Capital House. This is the cost limit agreed by Cabinet in October 2005 and will be funded by capital receipts, a contribution from Winchester City Council and reduced future maintenance liabilities. Unsupported borrowing of up to £18m will be required in advance of the capital receipts.

10.2 With the introduction of the dedicated schools grant (DSG) in 2006/07, capital repairs of schools will be met from the new grant instead of local resources. The proposed programme is based on the provision that has been made for capital repairs in the proposed schools budget, £10.2m in 2006/07 and £10.9m in 2007/08. The capital programmes for 2008/09 and 2009/10 continue the provision at £10.9m per annum.

10.3 The DSG-funded capital repairs are additional to the Government-supported New Deal for Schools (NDS) allocations to improve the condition of school buildings through capital repairs, referred to in the section on the Children's Services capital programme (paragraph 8.3). The Policy and Resources programme includes NDS-funded provisions for condition work of £12.6m in 2006/07 and £12.8m per annum from 2007/08.

10.4 The allocation between schemes of the remainder of the Policy and Resources capital programme 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. Phasing of the capital repairs provision between years reflects decisions by the Buildings, Land and Procurement Panel.

10.5 Additions have been made to the programmes for 2006/07 and 2007/08 for investment by the County Council's business units for catering, supplies and transport management. These schemes are estimated to cost £0.368m in 2006/07 and £0.190m in 2007/08, and will be financed from the business units' reserves.

10.6 Also included is the annual provision of £0.893m for advance and advantageous purchases of land.

11 Recreation and Heritage

11.1 The proposed programmes include the £0.4m additional funding for the Winchester Cultural Centre, as requested by Cabinet on 24 October 2005. The amount has been divided into £0.1m in 2006/07, £0.2m in 2007/08 and £0.1m in 2008/09.

12 Manydown

12.1 The existing provision of £5m has been retained in the overall capital programme for 2008/09 for the payment to Basingstoke and Deane Borough Council to allow the County Council to participate in the future development of Manydown. The Local Plan Inquiry Inspector's Report on the Local Plan for Basingstoke was published in November 2005, following the Local Plan Inquiry. The Local Plan Inspector proposed that the period covered by the Local Plan should end in 2011. As a result, he made no recommendations on Manydown as it is a proposed location for development in the period after 2011.

13 Private finance initiative (PFI)

13.1 At the last meeting, Cabinet authorised the Director of Environment to submit an Expression of Interest to the Department for Transport for a PFI bid for the replacement of street lighting columns. As the proposal is at a very early stage it has not been reflected in the proposed Environment capital programme, which includes an allocation of £0.8m per annum for a conventionally procured replacement programme, funded from the Government supported LTP allocation. In addition, £1.5m per annum is included in Environment's revenue budget. The current backlog of street lighting investment is estimated to be £67m to £110m over a five to ten year period.

13.2 No other specific PFI schemes have been identified by executive members at this stage for inclusion in the 2006/07 to 2009/10 capital programme.

14 Further review

14.1 In recent years, the capital programme has been the subject of a mid-year review, sometimes in conjunction with the annual review of the County Council's overall capital strategy in July or when feasibility work on significant major projects has reached completion, as in October 2005. Issues for review later in 2006 include:

· cost of fees for building schemes

· the take-up of Government supported borrowing allocations in 2007/08 and later years

· progress on the Strategic Property Review, including the identification of potential future capital receipts and their use

· a review of asset management plans and the preparation of a formal plan for dealing with the backlog of maintenance liabilities as outlined in the Audit Commission's Annual Audit and Inspection Letter reported to the last meeting of Cabinet

· a revision of the capital strategy to reflect these issues.

15 Recommendations

15.1 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 2006/07 and subsequent years.

Appendix 1

Capital Programmes 2006/07 to 2009/10 Proposed by Executive Members

1 Summary of the proposed programmes

1.1 The proposed four-year programme of £525m complies with the guidelines set by the Cabinet in December 2005, as the table below shows:

1.2 The starts value of schemes supported by Government grant and supported borrowing approvals, £371m, represents 71% of the four-year programme. This is 7% more than the proportion supported by the Government in the existing capital programme approved in February 2005, largely reflecting the funding of schools' capital repairs from the new Dedicated Schools Grant from 2006/07. The Government's contribution of 71% illustrates the extent of its support for investment by local authorities but it also highlights the scope for the Government to influence the County 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 £19.3m over the four years. The individual schemes are identified in the Environment capital programme in Appendix 4. Contributions from developers will directly fund £0.241m of the Children's Services programme for 2006/07 and a further £2.268m of contributions will be used to repay part of the proposed unsupported borrowing, if approved.

Appendix 2

Capital Expenditure Flows and Financing Resources 2005/06 to 2009/10

1 Capital expenditure flows

1.1 The level of capital expenditure flows 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 Expenditure flows in 2005/06 and the following four years will result from works in progress (schemes started in 2005/06 and earlier years) plus those arising from the proposed programme for 2006/07 to 2009/10, as the table below shows.

1.3 In practice, expenditure flows in the years after 2006/07 may be 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 expenditure. Fees in the later years of the table will also be higher if the current level of fee cost were to continue, as discussed in section 2 of the main report.

1 Resources available for capital financing

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

· Government support for borrowing, known as `Supported Capital Expenditure (Revenue)' or SCE(R), 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, or

- ringfenced SCE(R), which has to be used for specified schemes or programmes.

Since the introduction of the Prudential Capital Code in April 2004, 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. The impact of the general grant floor damping scheme is discussed in section 4 of the main report.

· 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 3.5 of this report and on the revenue budget

· 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 expenditure.

1.3 In total, the Government's support for the 2006/07 starts programme announced so far in the form of borrowing allocations and capital grant is £87m. This is 2.2% higher than the level reached in 2005/06 (£85m).

1.4 Capital receipts are estimated to be £5.7m in 2005/06, £48.3m in 2006/07 and £37.9m in 2007/08, including receipts to be used for in/out schemes and to repay unsupported borrowing and amounts borrowed under the School Balances Loan scheme. The total for the period from 2004/05 to 2007/08, excluding in/out receipts and loan repayments, is £42.3m which matches the forecast reported to Cabinet in October 2005.

1.5 Contributions from the revenue budget to fund capital payments will be £30.0m in 2005/06 and £30.6m in 2006/07. These contributions support capital repairs of buildings (£15.6m in 2006/07, including £10.2m for school capital repairs funded by the revenue dedicated schools grant), highway structural maintenance (£12.4m) and other capital schemes in the locally resourced capital programme (£2.6m). The revenue contributions over the period from 2004/05 to 2008/09 have been supplemented by the redeployment of the savings of £9.1m achieved from SAP Benefit Realisation, repaying the capital resources used to fund the investment in SAP.

1.6 The following table summarises the changes in the balance on the capital reserve over the period of the proposed capital programme.

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 (4.4% 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 £18.0m. Apart from the use of unsupported borrowing, these costs should be reflected in the County Council's `relative needs formula' for revenue expenditure and will attract revenue support grant from the Government broadly equivalent to the costs. However, as explained in section 4 of the main report, this is not currently the case for authorities such as the County Council, that are subject to floor damping of general grant.

Appendix 3

Unsupported borrowing - sources of repayment for `bridging' loans

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