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Lancaster Council's Capital Investment Strategy for the period 2022-26. The strategy focuses on sustainable, strategic investment in the Lancaster district, aligning with the Council's future financial sustainability and strategic priorities. various ways the Council can use capital funding to achieve strategic goals, including through Local Authority Trading Companies (LATCos) and joint arrangements with commercial partners.
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This document represents the Councils Capital Strategy as defined by the Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code requirements. To be reviewed and approved annually by Council
Investing in the Future Sustainable, Strategic Investment Investment Models Housing Provision and the Housing Revenue Account Aims of the Strategy
A Sustainable District An Inclusive and Prosperous Local Economy Healthy and Happy Communities A Co-Operative, Kind and Responsible Council
Revised CIPFA Treasury Management Code and Prudential Code
The Capital Investment Lifecycle Governance Arrangements Risk Management Monitoring and Evaluation Capacity, Skills and Professional Advice
Asset Types Asset Management Valuations
Capital Programme Affordability & Financing Capital Investment Priorities & Compilation of Capital Bids Future Plans
Governance & Scrutiny Investment Borrowing
The Capital Investment Strategy is designed to support overall strategic goals by providing clear guidance and a route by which projects and activities can be proposed, developed and ultimately delivered through the prioritisation and allocation of capital funds. This strategy will therefore be strongly linked with the Council’s wider framework of strategy and policy, including its: Medium Term Financial Strategy Asset Management Strategy Homes Strategy Climate Emergency and Carbon Zero initiatives Regeneration and Economic Development activity
The strategy recognises that there are various ways in which the Council can use capital funding to achieve strategic goals. These may include shared investment with partners of good financial and reputational standing. Another route is for the Council to establish Local Authority Trading Companies (LATCos), which are entirely separate commercial entities able to independently access capital funding as part of their operations. The LATCo model also has the potential to create established, long-term income streams including commercial income. A LATCo is subject to its own governance and decision-making, as a wholly separate entity from the Council. This strategy does not set out the terms on which a LATCo may invest to generate a commercial return. However, it does recognise that the LATCo model may contribute to the achievement of the Council’s wider investment goals. As Lancaster’s existing LATCos are wholly owned by the Council, they are Assets of the Council, and we may choose to invest in them in order to grow their Asset value.
The Council operates a separate funding stream for the provision of local authority housing, known as the Housing Revenue Account (HRA). It is a legal requirement for HRA funding to be ring-fenced for the sole purpose of housing provision. Maintaining and developing the Council’s housing provision requires a substantial HRA capital programme, which is largely funded by housing revenue. The HRA capital programme is delivered in line with the Council’s HRA Business Plan, and determined via the Council’s budget-setting process, with HRA matters considered separately from General Fund activities. Where HRA investments may contribute to the Council’s overall social, environmental and place-making ambitions, decision-making will recognise the statutory HRA ring-fencing requirements.
Maintaining a focus on the outcomes described in the Council’s strategic priorities (summarised above), the Capital Investment Strategy seeks to: Define the process for proposing, developing and delivering projects which require capital funding, including the acquisition of land and property. Provide a systematic structure for considering the risks, benefits and outcomes associated with capital investment. Articulate the relevant governance, financial, and monitoring requirements to support capital investment proposals. Support opportunities for investment through LATCos and co-investment with partner organisations.
2. The Strategy: Four Investment Streams Investing in the future via the Council’s Capital Programme, or LATCo capital activity, will be achieved through four core Investment Streams. These will provide a structure within which the balance of the Capital Programme can be maintained in order to deliver against the widest range of strategic objectives. For each Stream, financial returns and impacts on the Council’s budget or LATCo will be considered alongside a balanced scorecard which captures quantifiable measures in respect of broad economic, environmental, and social returns as defined by the Council’s strategic Priorities and Outcomes. Where there is a negative financial return or an overall cost to the Council, this will be acknowledged as a growth impact on the revenue budget. The four Streams, set out below, correspond to each of the Council’s Strategic Priorities in turn. 1) A Sustainable District This includes schemes developed to deliver demonstrable reduction to carbon emissions in line with the Council’s goal of reaching net carbon zero by 2030, as well as other priority outcomes for climate change and the environment. Schemes may include, but are not limited to: Installation of solar panels, Investment in larger scale solar energy facilities, Decarbonising heat and improving thermal efficiency, Supporting agile working to reduce our carbon footprint, The increased electrification of our vehicle fleet, Climate resilience, Resource efficiency.
Capital investment in property, including retail, industrial, hotel, office, food & beverage and other investments may also be considered where they comply with the Capital Investment Regulations and Guidance and meet the Council’s priorities. – LATCos and other forms of special purpose vehicle may also be established to generate income that can be invested in delivering Council priorities to reduce reliance on Council expenditure and therefore support the Council’s financial sustainability.
3. Capital Investments Regulation & Guidance Alongside the Council’s strategic ambitions, the Local Government Act 2003 (the Act) and supporting regulations requires the Council to have regard to the Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code , the CIPFA Treasury Management Code of Practice (the Code) and Investment Guidance (the Guidance) issued by The Ministry of Levelling Up, Housing and Communities (LUHC) to ensure that the Council’s capital investment plans are affordable, prudent and sustainable. Depending on the particular circumstances, the Council will fund acquisitions through grants, contributions or capital receipts; or by utilising borrowing, reserves, or a combination of both. It is worth noting that following the review of local authority borrowing from Public Works Loan Board (PWLB) it is no longer possible to utilise PWLB to fund commercial investment projects. HM Treasury has issued guidance to local authorities as to the appropriate use of PWLB. The guidance details the characteristics of projects that would be supported, set out as follows: The project is addressing an economic or social market failure by providing services, facilities, or other amenities that are of value to local people and would not otherwise be provided by the private sector. The local authority is making a significant investment in the asset beyond the purchase price: developing the assets to improve them and/or change their use, or otherwise making a significant financial investment. The project involves or generates significant additional activity that would not otherwise happen without the local authority’s intervention, creating jobs and/or social or economic value. While some parts of the project may generate rental income, these rents are recycled within the project or applied to related regeneration projects, rather than being applied to wider services. All capital schemes will follow the provisions of the Prudential Code, and where applicable other capital schemes will follow the DLUHC Investment Guidance. As a minimum the following will be kept under review: Transparency and Democratic Accountability Contribution Proportionality Prudential Indicators (Affordability & Sustainability) Borrowing in Advance of Need Capacity and Skills A LATCo is able to source capital borrowing to fund investment for a commercial return as part of its activities. Any investments seeking a commercial return could be delivered via a LATCo and considered under the LATCo’s independent governance and decision-making structure.
CIPFA published the revised codes on 20th^ December 2021 and has stated that formal adoption is not required until the 2023/24 financial year. This Council has to have regard to these codes of practice when it prepares the Treasury Management Strategy Statement and Annual Investment Strategy, and also related reports during the financial year, which are taken to Full Council for approval_._ The revised codes will have the following implications: a requirement for the Council to adopt a new debt liability benchmark treasury indicator to support the financing risk management of the capital financing requirement; clarify what CIPFA expects a local authority to borrow for and what they do not view as appropriate. This will include the requirement to set a proportionate approach to commercial and service capital investment; address ESG issues within the Capital Strategy; require implementation of a policy to review commercial property, with a view to divest where appropriate; create new Investment Practices to manage risks associated with non-treasury investment (similar to the current Treasury Management Practices); ensure that any long term treasury investment is supported by a business model; a requirement to effectively manage liquidity and longer term cash flow requirements; amendment to Treasury Management Practice 1 to address ESG policy within the treasury management risk framework; amendment to the knowledge and skills register for individuals involved in the treasury management function - to be proportionate to the size and complexity of the treasury management conducted by each council; a new requirement to clarify reporting requirements for service and commercial investment, (especially where supported by borrowing/leverage). In addition, all investments and investment income must be attributed to one of the following three purposes:
Arising from the organisation’s cash flows or treasury risk management activity, this type of investment represents balances which are only held until the cash is required for use. Treasury investments may also arise from other treasury risk management activity which seeks to prudently manage the risks, costs or income relating to existing or forecast debt or treasury investments.
Investments held primarily and directly for the delivery of public services including housing, regeneration and local infrastructure. Returns on this category of investment which are funded by borrowing are permitted only in cases where the income is “either related to the financial viability of the project in question or otherwise incidental to the primary purpose”.
Recommend the most economically advantageous offer Document any contractual arrangements Confirm funding sources and / or requirements Demonstrate compliance with the Prudential Framework and HM Treasury ‘Green Book’ investment appraisal guidance Set out the detailed management arrangements, costs and plans for successful delivery and post evaluation. The FBC will be considered by CAG and Cabinet and / or the relevant decision-making body. Approval of the FBC by them will confirm the scheme’s inclusion within the Capital Programme. Stage 4 : Implementation The business case should be used during the implementation stage as a reference point for monitoring implementation, and for logging any material changes that the Council is required to make. The project will follow performance reporting protocols which will ensure that project progress, impact on outcomes and financial performance is measured throughout the project and following its completion. Stage 5 : Evaluation The business case and its supporting documentation should be used as the starting point for post- implementation evaluation, both in terms of how well the project was delivered (project evaluation review) and whether it has delivered its projected benefits as planned (post implementation review) to the Council, in meeting strategic aims.
All capital investment proposals must be subject to due diligence processes to ensure Transparency Democratic Accountability Ethical Responsibility Strategic Alignment As part of the Capital Investment Lifecycle, proposals will be subject to a governance framework including the following elements: Capital Assurance Group (CAG) An advisory working group comprising representation from Cabinet, Executive Team, Overview & Scrutiny, Budget & Performance Panel, Council Business Committee and relevant specialist officers. CAG will consider SOCs and FBCs and make advisory recommendations to budget holders. Comments from individual members will be provided to Cabinet. CAG’s Terms of Reference can be found at Appendix B. Capital Investments Appraisal Group (CIAG) An officer group with relevant expertise from economic growth and regeneration, communities and the environment, property, legal and finance, supported by external expertise and resource as required. The group will consider all potential capital investments in the first instance, following approval from the relevant Cabinet portfolio holder. The group will develop proposals for consideration by CAG. Proposals will first be brought to CAG at Stage 2 (see above), accompanied by an SOC. SOCs approved by Cabinet will return to CAG at Stage 3, accompanied by an FBC. Cabinet
Cabinet submits the annual Budget Framework to Council, including the Capital Investment Strategy and Capital Programme. It is responsible for consideration and decision-making on capital expenditure proposals within the Budget & Policy Framework and in line with the relevant guidance. Before officer time is spent on scoping a project, approval should be obtained from the relevant Cabinet portfolio holder. Overview & Scrutiny (O&S) Early involvement of the Chair of O&S in CAG meetings enables early scrutiny and added value through shaping of capital decision-making. This involvement does not remove or negate the right of O&S to call-in any decision made by Cabinet. Budget & Performance Panel (B&PP) The Panel will review the financial and operational performance of the Capital Investment Strategy as part of its Budget Framework scrutiny role. Council Full Council is responsible for approving the Capital Investment Strategy as part of the annual Budget Framework, including any material changes. A half yearly report on compliance with the prudential framework and investment guidance will be considered by Cabinet, Budget & Performance Panel and Council.
Effective risk management will allow the council to adapt rapidly to change and develop innovative responses to challenges and opportunities. The risk management cycle for capital projects incorporates risk identification, risk analysis, risk control and action planning and risk monitoring and review. All significant capital projects will comply with the council’s project management process which follows good practice in the management of risk. A full assessment of property risk will be carried out individually for each property acquisition proposal before entering any commitment. A further due diligence review will be undertaken in respect of a wide range of risk factors for all investment proposals which are taken forward. The Council’s asset portfolio will be risk managed through a regular, systematic asset challenge process which will review each asset’s performance, investment requirements and ongoing viability within the portfolio. This process will be developed through a forthcoming Asset Management Strategy.
Each capital proposal will set out targeted benefits aligned with the Council’s strategic priorities. The performance of each proposal during the implementation and evaluation stages will be monitored to provide assurance on the achievement of its strategic and financial objectives. The monitoring and evaluation process will include: Delivering Our Priorities: Performance, Projects and Resources | The capital programme will be regularly evaluated as part of overall performance monitoring which incorporates financial, project and performance measures. This information is reported quarterly to Cabinet and B&PP. Capital Investment Strategy Monitoring | As the strategy is key to delivering the Council’s strategic goals, regular progress against the Council’s Corporate Plan Priorities & Outcomes will take place to ensure resources are appropriately allocated.
5. Our Assets The Council has a range of assets which it utilises to deliver its wide range of services throughout the District. The total valuation of these at the start of the financial year 2021/22 was £298.99M. The main constituents of these assets are as follows
Council Housing & Other Assets 131. Property Plant & Equipment 116. Community Assets 8. Investment Property 33. Heritage Assets 9. Intangible Assets 0.
At the start of the financial year the Council held 3,670 dwellings in total within its Housing Revenue Account. These dwellings include 1, 2, 3 & 4 bedroomed, houses, bungalows, flats maisonettes and bedsits.
Bedsits 77 1 Bedroom Houses & Bungalows 654 Flats & Maisonettes 550 2 Bedroom Houses & Bungalows 474 Flats & Maisonettes 664 3 Bedroom Houses & Bungalows 1, Flats & Maisonettes 6 4 or more bedroomed dwellings
These are assets which the Council predominately uses to deliver its services. These assets include Municipal Buildings, works depot, leisure centre and car parks. It also includes its refuse collection and vehicle fleet as well as various land holdings. The value of these assets at the start of 2021/22 financial year is provided in the table below Land & Buildings Vehicles, Plant Furniture & Equipment Infrastructure Assets Surplus Assets Assets Under Construction Total £M £M £M £M £M £M 59.33 7.21 41.18 0.99 0.14 108.
This type of Council asset is held primarily to generate income and comprise a mix of office and retail lets together with agricultural and commercial land and commercial buildings. Further detail in respect of the Council’s investment properties is given in section 8.
Office 4. Retail 2. Agriculture & Allotments 1. Commercial Land 2. Commercial Building 14. Mixed Commercial 8.
The Council’s heritage assets include 82 pieces of civic regalia, its museums’ collections at the Maritime, Cottage and City museums in Lancaster, pieces of artwork, items of Gillow furniture and public artwork including the statue of Eric Morecambe on Morecambe promenade.
These comprise software and software licenses held for the Council’s key systems.
The key objectives of the Councils’ Asset Management Policy are to: Provide the right buildings in the right place and at the right time and cost to meet the current and future aims, objectives, policies and plans of the Council. Optimise and prioritise the level of investment in property assets to minimise maintenance backlog, improve fitness for purpose and optimise occupancy levels. Maximise the value received from our non-operational commercial portfolio. Continue to improve the environmental sustainability of the Council’s property portfolio. Promote the innovative use of property by enabling urban regeneration and facilitating joint working with our partners and stakeholders. Challenge the use of land and buildings held by the Council to minimise revenue expenditure and maximise the generation of capital receipts.
The Council is required by accounting regulations to value its assets on a regular basis and currently values its General Fund assets on a rolling 3 year cycle. It is required to undertake a formal valuation of is HRA assets every 5 years in line with Ministry of Housing Communities and Local Government (MHCLG) requirements. The last formal valuation was undertaken 1 April 2016 and so work is currently underway to ensure these are up dated to reflect values as at 1st April 2021. A desktop revaluation is undertaken for HRA assets in the intervening years to ensure that values are current.
The Council sets its level of capital investment in line with the statutory requirements of prudence, affordability and sustainability as set out in the Prudential Code for Capital Finance issued by CIPFA. The Council assesses the affordability of the General Fund programme by looking at the financing costs of borrowing (interest and loan repayments) as a proportion of its net revenue stream. For general fund these are expected to increase over the life of the capital programme. The table below provides details of this key indicator 2020/21 2021/22 2022/23 2023/24 2024/25 2025/ Actual Estimate Estimate Estimate Estimate Estimate % % % % % % General Fund 14.61 19.97 20.24 23.09 22.25 22. HRA 20.79 19.41 18.42 17.69 17.25 16. This table shows that the cost of debt financing is estimated to be between 20% and 23% of the Councils general fund net revenue budget between 2021/22 and 2025/26. The Housing Revenue Account capital programme has its prudence, affordability and sustainability set out in a thirty year business plan. Further details on the impact of the Capital Programme on the Council’s borrowing is included below
7. Treasury Management Treasury management deals with the management of cash flows resulting from the Council’s day to day operations. It ensures that the cash flows are adequately planned with cash being available when it is needed. Surplus monies are invested in low risk counterparties or instruments commensurate with the Council’s low risk appetite, providing adequate liquidity initially before considering investment return. The Treasury management service also covers the funding of the Council’s capital plans which provide a guide to the borrowing need of the Authority.
The Council’s Treasury Management Strategy including its Prudential and Treasury indicators is approved annually by Full Council. Council also receives and approves a mid-year treasury management report which sets out in year progress of the treasury position and an annual treasury report which sets out how actual treasury operation compared to the estimates within the strategy. Both Cabinet and Budget and Performance Panel scrutinise the above reports before they are presented to and approved by Council. The Section 151 officer and his staff have delegated authority to make decisions in respect of detailed investment and borrowing acting in line with the framework set out in the treasury management strategy.
The Council’s investment strategy prioritises firstly security, secondly liquidity and then return. This maintains a firm focus on minimising risk rather than on maximising returns. The Treasury Management Strategy sets out the authority’s approach to managing investment risk in line with the following principles: Using minimum acceptable credit criteria to generate a list of highly creditworthy counterparties, facilitate diversification and avoid concentration of risk Defining the list of types of investment instruments that the treasury management team are authorised to use Setting lending limits for each counterparty and transaction limits for each type of investment Setting the limit for the amount of its investments which are invested for longer than 365 days at nil Specifying that investments will only be placed with counterparties with a minimum sovereign rating of AAA (Fitch) The Council’s Investments at 31.03.2021 were: Balance 31.03.202 1 £M Liquidity Bank Accounts 3.10 Instant Access Money Market Funds 0.00 Instant Access Other Local Authorities 22.00 Fixed Term Total Investments 25.
As part of its treasury management activities the Council considers forward projections for borrowing to fund its capital expenditure plans working within the self-regulating framework of the Prudential Code for Capital Finance. The framework requires authorities to determine that capital expenditure and investment decisions are affordable, prudent and sustainable and to set limits on the amount they can afford to borrow in the context of wider capital planning. The Council’s underlying need to borrow is represented by it’s Capital Financing Requirement (CFR). The CFR is the total amount of capital expenditure (including that from prior years) that has not yet been paid for from either revenue of capital resources. 2020/21 2021/22 2022/23 2023/24 2024/25 2025/ Actual Estimate Estimate Estimate Estimate Estimate £M £M £M £M £M £M CFR – Non Housing
CFR – Housing 37.23 36.19 35.14 34.1 33.06 32. Total CFR 94.95 100.62 104 102.08 105.34 105. The authority currently maintains an under-borrowed position meaning that it uses cash backed reserves to defer the need to externally borrow for capital investment. Forecasting of cash backed reserves facilitates a long term view of the level of risk associated with borrowing internally.
8. Commercial Activity
The Council’s existing investment property portfolio generates approximately £1.168M per annum to support the General Fund Revenue Budget. It is comprised of a mix of office and retail lets together with agricultural and commercial land and commercial buildings as set out below: The majority of this portfolio has been accumulated by the Council rover a number of years rather than actively acquired. Tenancy agreements are produced by the Council’s Estates Management Team in consultation with Legal Services and range from leases, licences and other agreements such as easements, wayleaves and rights of way The Council is obliged to obtain the best price it reasonably can for its commercial lets. Most properties have rents which are set based upon market conditions and comparable evidence to support the decision making process includes that from local agents, rents associated with other Council properties, recent transactions, inflation etc.
Performance monitoring will be developed to ensure that investments are monitored on a routine and exception basis and will determine what performance measures will trigger an exception report so that full council is aware at the earliest opportunity of any material increase in risk or threat to ongoing yield. The Capital Strategy will be updated with this information in due course.
