By Joanne Pitt, CIPFA Policy Manager Local Government
Reflecting the evolving nature of local authorities, as a result of changes to CIPFA’s Prudential Code, capital strategies must be in place for all local authorities from 1 April 2019. While this might be a new requirement, in many circumstances organisations will have already produced a similar document, but might not have formally recognised it as such.
A capital strategy is intended to give a high level overview of how capital expenditure, capital financing and treasury management activity contributes to the provision of services, along with an overview of how associated risk is managed and what the implications might be for future financial sustainability.
While the strategy should be tailored to the authority’s individual circumstances, it should include capital expenditure, investments, liabilities and treasury management, along with sufficient detail to allow all members to understand how stewardship, value for money, prudence, sustainability and affordability will be secured, and how they will meet legislative reporting requirements.
To help local authorities get their capital strategy into place, my colleague Chris Brain has put together some helpful notes, which I’ve shared below. While these may seem detailed, it is important to note that the Financial Management Code, which supports your capital strategy, takes a principles-based approach.
The Code means each local authority will be able to determine its own prerequisites for their capital strategy, while taking into account any statutory requirements, with this flexibility intended to make the implementation of these important documents more manageable.
Of course the upside of having a capital strategy in place, is it means local authorities will be better positioned to manage risks, and justify their investments through a well-reasoned, and long term vision. With local authorities increasingly needing to take a more entrepreneurial approach, such strategies will become crucial documents.
What would we expect to see in the capital strategy?
In terms of capital expenditure, the capital strategy should include:
- An overview of the governance process for approval and monitoring of capital expenditure, including links to the authority’s policies on capitalisation.
- A long-term view of capital expenditure plans, where long term is defined by the financing strategy of and risks faced by the authority with reference to the life of projects/assets.
- An overview of asset management planning including the cost of past borrowing, maintenance requirements and planned disposals.
- Any restrictions around borrowing or funding of ongoing capital finance, for example requirements around the HRA or Police Funds.
The strategy should additionally include:
- The authority’s approach to commercial activities including processes ensuring effective due diligence and defining the authority’s risk appetite in respect of these, including proportionality in respect of overall resources.
- Requirements for independent and expert advice and scrutiny arrangements.
- An overview of the governance process for approval and monitoring and ongoing risk management of any other financial guarantees and other long-term liabilities.
- A summary of the knowledge and skills available to the authority and confirmation that these are commensurate with the authority’s risk appetite.
This article first appeared in Public Finance Magazine.