Agenda item

The Scrutiny & Overview Committee is provided with a report considered by the Mayor at the Cabinet meeting on 6 December, regarding the Capital Programme and Capital Strategy 2023-2029. The Committee is asked to: -

1.  Review the information provided in the report on Capital Programme and Capital Strategy 2023-29 and

2.  Decide whether there are any concerns or recommendation to reflect in the Committee’s report on 2024-25 Budget.

The Committee considered a report on pages 43 to 98 of the agenda that provided an update on the capital programme and capital strategy covering the period 2023 to 2029. This report was included on the agenda at the request of the Committee to help inform its discussion on the forthcoming budget.

The Cabinet Member for Finance, Councillor Jason Cummings, Section 151 Officer, Jane West, Director of Finance, Allister Bannin and Head of Strategic Procurement, Scott Funnell were in attendance for this item at the meeting.

During the introduction to the report, the following points were noted: -

• The principal driver for the capital programme was cost reduction and the Council was not in a position to be making choices on investment, unless it would deliver a saving.
• It had also been decided not to cut back on areas that could lead to further costs down the line, such as highways maintenance.
• The capital budget for 2023-24 and 2024-25 would be balanced through the use of income capital receipts from asset disposal. At present, it was projected that the capital budget in subsequent years would require additional borrowing.

Following the introduction, the first question of the Committee asked how the capital programme aligned with the Mayor’s Business Plan and the Improvement & Assurance Panel’s Exit Strategy. In response, it was highlighted that the Mayor’s Business Plan did not include any significant capital promises, as it was known that the Council was not in a position to deliver these. The Exit Strategy did not have a significant focus on capital spend, beyond the Council managing its debt burden and asset disposal. It was also highlighted that the capital budget was funded to a far higher percentage from external sources that other local authorities, given the need to do as much as possible without costing the Council.

It was questioned what percentage of the capital budget was derived from external funding sources. In response, it was advised that external funded equated to approximately 28% of the total income when taking account of capitalisation, but if capitalisation was not included, it was a much higher percentage. It was also asked whether a breakdown could be provided on the funding allocated to meet statutory requirements and proportion that was discretionary. It was advised that this was difficult to define as what was required to meet statutory need was a matter of judgement. In general, areas such as school funding would be considered as statutory, while other areas such as IT would be considered discretionary.

It was questioned whether the capital budget presented in the report was in breach of the Prudential Code. It was acknowledged that although the Council was in compliance with many of the indicators within the Code, it was not in overall compliance. It would be difficult to achieve compliance unless a solution was found for the Council’s debt burden.

It was noted that 49% of the capital budget was being spent on capitalisation and as such it was questioned whether this was having a long term impact. It was advised that it was difficult to foresee the potential impact for Croydon as there was no precedent across the local government sector. The Council’s currently had a £38m annual gap in its revenue budget, with the only solution for closing this being further capitalisation, which increased the debt burden. Without capitalisation as a solution, it would potentially be dangerous to take £38m from the budget.  As mentioned above, it was projected that the capital programme for 2023-24 and 2024-25 could be delivered without further borrowing, with capital receipts being used. The Council had a four year asset disposal programme, but if disposals continued beyond that point, then the Council would be asset less, which was not a position any local authority should be in.

It was noted that the projected capital spend for the Housing Revenue Account (HRA) for 2024-15 was £57m, half of which would be met through borrowing. It was questioned whether this level of borrowing was prudent and how it compared to other local authorities. It was confirmed that borrowing within the HRA was actually less than that of other local authorities due to previous underinvestment. It was highlighted that there would be an updated report coming before Cabinet in February which would specify the use of reserves to fund the HRA capital programme in 2024-25 rather than borrowing.  It was confirmed that the transfer from the General Fund to the HRA, to correct a previous error over the accounting treatment of Croydon Affordable Homes, had been a contributing reason as to why borrowing was not required next year.

As a follow-up, it was questioned whether it would be sustainable to have the amount of borrowing projected in the HRA over the length of the current Medium Term Financial Strategy (MTFS) period. It was advised that additional borrowing would be okay in the short term but would need to be reviewed annually to ensure the right level of investment was being made in resident’s properties and to consider the future provision of new properties. As a result of the Government capping rent increases, some boroughs, who had been borrowing consistently, were experiencing difficulties within their housing revenue accounts, but as a result of the low level of HRA borrowing in Croydon, the rent cap was not having the same impact locally.

Further information was requested on the work of the Council to improve its management of the capital account. It was highlighted that a report had been considered by the Audit and Governance Committee in November on both the revenue and capital fund improvements, which included the Capital Internal Control Board being set up to oversee the capital programme. The Board met monthly to review new capital bids and to monitor delivery of the programme. A revised process for seeking approval for new capital bids was being developed in line with best practice. In doing so, a balance would be found to reduce the reporting requirements for smaller projects in comparison to a higher level of information expected for larger projects.

The Capital Internal Control Board was chaired by the Director of Finance and its membership included key officers from across services.  The Board monitored the financial position of projects at its meeting which included information such as forecasts on possible slippage and overspends. The Board also looked at project delivery risks and sought further reassurance through deep dives when there were areas of concern.

Although given the Council was delivering a reduced capital programme, the Board had less demonstrable impact than in normal circumstances, it had led to the better use of intelligence in deciding on projects, reduced capital expenditure through increased rigour and ensured departments were regularly reporting on project risks. 

It was questioned whether there was a robust process in place to manage potential project overspends. It was advised that the monthly project status reports to the board provided the opportunity to review the risk of a potential overspend, so they could be identified at an early stage and managed accordingly. However, if further funding was required, the project lead would have to provide an updated business plan to explain why. If the additional funds were not required in year, it would go through the normal approval process for capital funding. If the additional amount was required in-year, the Section 151 Officer had delegated authority to increase a budget by up to £500,000. If a larger amount was required, it would need to be presented as a report to Cabinet for a decision by the Mayor.

In response to a follow-up question about the information required in a business case, it was advised that it would capture feasibility costs, capital costs including material, labour costs including internal staff time to manage the project, any one-off or ongoing revenue costs, the expected profiling on when expenditure would happen, any external funding and any legal advice.

As it was noted that the Growth Zone provided an income for further investment through the retention of a higher proportion of those business rates generated as a result of the Growth Zone, it was questioned whether the current Town Centre Growth Zone could be extended or an additional Growth Zone set up in the borough. It was advised that a new Growth Zone could potentially be set up, but further work would be needed to establish the requirements and cost of doing so.

It was noted that there was a risk from delivering a pared back capital programme, that it could lead to further issues in the future particularly in areas that required regular maintenance such parks and highways.  As such it was questioned whether there were areas of risk identified in which it was important to maintain a certain level of funding to prevent higher costs in the future. It was advised that it was important to have a balance between upfront investment and later remedial costs, with Highways being one area where it was important to balance long and short term repairs. Funding was provided by both the Government and Transport for London for highways maintenance, but it was not sufficient to cover the full cost of the work needed. It was advised that Croydon benchmarked well against other local authorities on core maintenance spend, but its focus was on ensuing health and safety was maintained rather than more cosmetic considerations.

It was previously noted that the capital receipts delivered in the past year were being used to fund the capital programme without further borrowing, which raised concern as this meant that the Council was reducing the number of assets held without reducing its overall debt burden. It was confirmed that as a result of the need for capitalisation to balance the budget it was necessary to use the capital receipts to prevent further borrowing. When deciding on whether to proceed with a capital project, if external funding could be utilised it was more likely to proceed, whereas if it needed to be funded through capital receipts or borrowing, it would be more challenging to justify.

In response to a question about the Digital Strategy, it was advised that a new strategy would be produced as part of the work on the transformation programme which would come forward later in the year. In the meantime, urgent projects, such as Oracle Improvement project and the laptops refresh would continue to be progressed.

At the conclusion of the item, the Chair thanked the Cabinet Member and the officers for their engagement with the questions of the Committee.

Actions

Following its discussion of the Capital Programme and Capital Strategy report, the Committee agreed the following actions to follow-up outside of the meeting:-

1.  That the development of a Digital Strategy would be raised with the Director of Transformation at a forthcoming briefing.
2. That the Streets & Environment Sub-Committee be asked to review the use of Community Infrastructure Levy funding within the capital programme.

Conclusions

Following its discussion of the Capital Programme and Capital Strategy report, the Committee reached the following conclusions: -

1. The Committee acknowledged that both transparency and the governance processes of the Council have been improved due to the hard work of officers and the Cabinet. However, despite this hard work, the financial situation remained dire and potentially dangerous with the £38m budget gap remaining unresolved without further capitalisation and the Council being in breach of the Prudential Code.
2. The Committee also acknowledged that the financial situation for the Housing Revenue Account capital budget was much healthier than the General Fund capital budget and was supportive of the proposal to use reserves, rather than borrowing, to fund capital works in 2024-25.

Recommendations

Following its discussion of the Capital Programme and Capital Strategy report, the Committee agreed to submit the following recommendations for the consideration of the Mayor: -

1. The Scrutiny & Overview Committee recommends that organisations including the LGA or London Councils are approached to review whether there is any currently untapped external funding sources available to the Council for capital projects, to provide reassurance that every avenue for inward funding was being explored.
2. The Scrutiny & Overview Committee recommends that the potential business case for either extending the existing Growth Zone or establishing a new Growth Zone are explored, which would give Croydon the change to keep a higher proportion of any new business rates generated as a result, rather than passing them to central government.