ITEM EX6 - ANNEX 2
EXECUTIVE – 11 NOVEMBER 2003CAPITAL PROGRAMME 2003/04 TO 2005/06PRUDENTIAL CODE FOR CAPITAL FINANCE
What is the Prudential Code?
A major change in the system of capital financing in local government will be introduced from 1 April 2004. Currently the government controls how much new borrowing each authority can take out each year. In future the system will be based largely on self-regulation, with each local authority determining its own capital spending and funding. The current government approvals will continue in some form as part of the new system. The CIPFA Prudential Code for Capital Finance in Local Authorities establishes the framework for local authority capital spending and funding to ensure that plans are affordable, prudent and sustainable. The Code is also referred to as the Prudential Guidelines.
CIPFA has agreed the Prudential Code which has recently been published. There are also new government regulations to be put in place in support of the new system. A full report on all the implications of this new system will be taken to the Executive once all the details are known.
How does the Code operate?
The Prudential Code sets out a series of indictors that authorities must approve each year as a mechanism of ensuring that local authorities have considered all factors in setting its capital spending plans. These indicators cover the areas of affordability, prudence, capital expenditure, external debt and treasury management.
The Code places more emphasis on Capital Strategy and asset management plans. The authority’s capital strategy sets the framework for capital investment and provides the link between the Council’s key priorities and objectives and its investment plans. The Code also places a greater emphasis on option appraisal to ensure that the most appropriate schemes and methods of delivery are achieved.
When do the indicators need to be approved?
The Code requires the indicators to be approved by Council before 1 April each year, although they can be revised during the year if required. For practical reasons, it is recommended that the indicators are set each year at the same time as the Council sets the budget and Council Tax.
Can Oxfordshire use these additional borrowing powers to fund part of its revenue budget?
No. Borrowing can only be undertaken to fund capital investment. The indicators seek to demonstrate that this is the case.
How much additional money do the indicators allow Oxfordshire to spend on Capital?
The Code does not include indicative limits or ratios for the indicators, rather it is for each authority to decide whether, taking all things into account, plans for capital investment are affordable, prudent and sustainable.
As part of the budget setting process for 2003/04, it was proposed that an additional £2m on top of the normal capital expenditure approvals be borrowed for each of the financial years 2004/05, 2005/06 and 2006/07 to fund additional capital investment and the capital financing charges associated with this have been taken into account in forward projections from 2004/05 although current thinking is that any additional borrowing should be restricted to invest to save type initiatives that could at minimum repay any borrowing costs. These costs are met entirely from Council Tax or savings as there is no grant support. There are no credits as with some PFI deals, so this is not on a level playing field at present. The Council should keep under review the cumulative budget impact of this additional borrowing. The exact amount of any future additional borrowing to fund capital will need to be considered as part of the 2004/05 Budget Setting Process.
Does the introduction of the Code require any changes for Oxfordshire?
The
key change to our current practice with regard to capital and treasury
management is that forward-looking indicators are required for the next
3 years, rather than just 1 year at present. This means that we will need
to develop a detailed capital programme for the next 3 years, although
this can be revised at any stage. At the moment we have a one year detailed
capital programme, with future years additions contained within the preparation
pool. The work in preparing a 3 year capital programme will need to be
undertaken during the autumn.
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