Scottish Local Government Financial Statistics 2012-13

2. Local Government Capital Expenditure and Financing

2.1 Total Capital Expenditure and Financing

Capital expenditure undertaken by Local Authorities is mainly for purchasing, constructing or enhancing physical assets, such as buildings (e.g. police or fire stations and schools), land (e.g. playing fields), infrastructure (e.g. roads), and vehicles, plant and machinery. Capital expenditure also includes expenditure that the Scottish Ministers have permitted the Local Authorities to treat as capital expenditure and is met from capital resources.

Capital expenditure is financed by one or more of the following types of income:

• Capital grants and contributions
• Borrowing/Finance leases
• Contributions from revenue funds
• Capital receipts from asset sales

Prior to 1 April 2004, Local Authorities were only permitted to incur liability to fund capital expenditure with the consent of Scottish Ministers. These capital consents were issued by Ministers under section 94 of the Local Government (Scotland) Act 1973. Following the introduction of the Local Government in Scotland Act 2003, Local Authorities are permitted to finance capital expenditure by borrowing without securing Government approval. Local Authorities have a statutory duty to set their own maximum capital expenditure limits. These limits must be set with regard to the CIPFA Prudential Code, which requires that capital expenditure undertaken by Local Authorities must be affordable, prudent and sustainable. Detailed breakdowns of Capital Expenditure can be found in Annexes G and H.

Table 2.1 - Total Capital Expenditure and Financing, 2012-13

			£ thousands
	General Fund Services	Housing Revenue Account	Total
Acquisition of land, leases, existing buildings or works	131,004	15,926	146,930
New construction, conversions & enhancement to existing buildings	1,468,935	568,450	2,037,385
Vehicles, machinery & equipment	174,493	22,529	197,022
Intangible assets	6,360	278	6,638
Total Gross Capital Expenditure	1,780,792	607,183	2,387,975
Revenue Expenditure funded from Capital Resources	161,253	96	161,349
Total Expenditure to be met from Capital Resources	1,942,045	607,279	2,549,324
Scottish Government General Capital Grant	450,088	0	450,088
Scottish Government Specific Capital Grants	173,369	43,912	217,281
Grants from Scottish Government Agencies and NDPBs	135,072	6,239	141,311
Other Grants and Contributions	109,026	15,285	124,311
Borrowing from Loans fund	852,238	313,149	1,165,387
Capital receipts used from asset sales/disposals	65,592	40,345	105,937
Capital Fund applied	36,517	350	36,867
Capital funded from current revenue	106,088	187,999	294,087
Assets acquired under credit arrangements (e.g. finance leases, PPP/PFI)	14,055	0	14,055
Total Financing	1,942,045	607,279	2,549,324

Source: Capital Returns (CR Final)

In 2012-13 total gross capital expenditure was £2.39 billion. In addition to this, local authorities had £0.16 billion of revenue expenditure from their capital resources - this was mostly funding third party capital projects in non-HRA housing. This means that total expenditure funded from capital resources was £2.55 billion in 2012-13 (£0.61 billion in the housing revenue account and £1.94 billion in the General Fund), compared to £2.66 billion in 2011-12 - a fall of £0.11 billion. The majority (around 80%) of capital expenditure went on new construction, conversions and enhancements to existing buildings.

The largest source of financing for capital expenditure in 2012-13 was borrowing. Local authorities borrowed £1.17 billion to fund capital expenditure (£0.85 billion for the general fund and £0.31 billion for the HRA). The second most significant source of financing were grants from the Scottish Government and its Agencies. These funded a further £0.81 billion of capital expenditure.

The capital data for 2009-10 (and subsequent years) include the changes arising from the introduction of International Financial Reporting Standards (IFRS). Under the new accounting arrangements the criteria for asset recognition moved from risk and reward to the control of service provision and control of the residual value of the asset. Based on the new tests most local authorities identified that they do have control of service provision and the residual interest in the PFI assets, such as schools. These assets are now recognised as assets of the local authority (on-balance sheet) which they were not under the previous arrangements and now form part of the capital regime. Any expenditure on their construction or enhancement will be capital expenditure. The associated financing of the arrangement is a type of debt which is known as a finance lease or credit arrangement.

Table 2.2 - Total Capital Expenditure and Financing, 2008-09 to 2012-13

					£ thousands
	2008-09	2009-101	2010-11	2011-12	2012-13
Acquisition of land, leases, existing buildings or works	284,120	477,203	98,730	137,332	146,930
New construction, conversions & enhancement to existing buildings	1,808,204	2,385,906	1,876,692	2,142,293	2,037,385
Vehicles, machinery & equipment	189,280	183,013	156,289	194,836	197,022
Intangible assets	50,373	11,197	5,042	6,052	6,638
Total Gross Capital Expenditure	2,331,977	3,057,319	2,136,753	2,480,513	2,387,975
Revenue Expenditure funded from Capital Resources	200,164	214,040	211,409	181,021	161,349
Total Expenditure to be met from Capital Resources	2,532,141	3,271,359	2,348,162	2,661,534	2,549,324
Scottish Government General Capital Grant	364,039	462,640	352,652	565,541	450,088
Scottish Government Specific Capital Grants	262,093	268,370	228,865	234,365	217,281
Grants from Scottish Government Agencies and NDPBs	141,590	160,281	115,726	82,764	141,311
Other Grants and Contributions	115,871	104,575	94,486	85,714	124,311
Borrowing from Loans fund	1,206,318	1,091,548	1,113,929	1,261,468	1,165,387
Capital receipts used from asset sales/disposals	204,048	164,746	114,722	94,020	105,937
Capital Fund applied	40,609	28,616	14,916	21,653	36,867
Capital funded from current revenue	196,836	166,141	208,894	209,122	294,087
Assets acquired under credit arrangements (e.g. finance leases, PPP/PFI)	737	824,442	103,972	106,888	14,055
Total Financing	2,532,141	3,271,359	2,348,162	2,661,534	2,549,324

1. From 2009-10 onwards assets acquired through PPP/PFI are included. In addition, figures for 2009-10 include assets acquired through PPP/PFI for past years. ( more information on the changes can be found here - http://www.scotland.gov.uk/Topics/Government/local-government/17999/LACapital/CapExReport200910)

Source: Capital Returns (CR Final)

Because of the changes in accounting practice noted above it is difficult to draw conclusions about changes in capital expenditure and financing over the time period presented in Table 2.2 and Chart 2.1. In particular the figures for 2009-10 include all of the expenditure financed by PPP/PFI in the years up to then that would be counted as expenditure under the new regime - this is illustrated by the spike in capital expenditure financing for 2009-10 shown in chart 2.1. However, despite this, it is possible to conclude that there have been some changes in the way capital expenditure has been financed over recent years. As revenue from capital receipts has fallen they play an increasingly small part in financing expenditure, with other forms of financing (for example capital funded from current revenue) increasing their proportion of total capital financing.

Chart 2.1 - Capital Expenditure Financing

From 2009-10 onwards assets acquired through PPP/PFI are included. In addition, figures for 2009-10 include assets acquired through PPP/PFI for past years. ( more information on the changes can be found here - http://www.scotland.gov.uk/Topics/Government/local-government/17999/LACapital/CapExReport200910)

Source: Capital Returns (CR Final)

2.2 General Fund Capital Expenditure

General fund capital expenditure in 2012-13 was £1,942 million. The service with the highest capital expenditure was education with 27% (£517 million) of local government capital expenditure going on education. It is difficult to make comparisons with past data for education expenditure because of the changes made to accounting for PPP/PFI from 2009-10 onwards. It should be noted that expenditure for 2009-10 includes a large amount of expenditure funded by PPP/PFI for past years and this disproportionately affects education expenditure.

The next biggest service for capital expenditure is roads and transport which had expenditure of £503 million (26% of general fund expenditure). Expenditure on roads and transport by City of Edinburgh Council in 2012-13 was £161 million (32% of total roads and transport expenditure). In the period 2008-09 to 2012-13 City of Edinburgh Council's expenditure on roads and transport was £645 million out of a total of £2,337 million in Scotland. This represents 28% of total roads and transport expenditure. This high share of expenditure includes expenditure related to the construction of the Edinburgh Trams.

Table 2.3 - Capital Expenditure by Service, 2008-09 to 2012-13

					£ thousands
	2008-09	2009-101	2010-11	2011-12	2012-13
Education	479,258	1,248,645	508,691	691,878	517,158
Social Work	63,233	66,379	51,256	46,487	73,812
Police	45,673	37,744	25,241	30,188	45,365
Fire	33,449	24,759	30,983	43,856	21,755
Cultural & Related Services	207,088	216,345	196,014	245,371	257,040
Environmental Services	121,267	121,769	102,458	105,036	126,631
Roads & Transport1	479,769	471,795	399,084	482,554	503,480
Central Services	274,923	212,250	180,486	143,678	123,740
Planning & Economic Development	124,060	171,613	120,742	113,476	118,282
Non-HRA Housing	180,099	182,808	174,404	149,002	136,363
Trading Services	22,764	21,935	12,687	10,390	18,419
Total General Fund Capital Expenditure	2,031,583	2,776,042	1,802,046	2,061,916	1,942,045
Housing Revenue Account	500,558	495,317	546,116	599,618	607,279
Total Capital Expenditure	2,532,141	3,271,359	2,348,162	2,661,534	2,549,324

1. From 2009-10 onwards assets acquired through PPP/PFI are included. In addition, figures for 2009-10 include assets acquired through PPP/PFI for past years. ( more information on the changes can be found here - http://www.scotland.gov.uk/Topics/Government/local-government/17999/LACapital/CapExReport200910)

Source: Local Financial Returns - LFR 00

The next largest spending service is cultural and related services (which includes recreation and sports facilities) with expenditure of £257 million (13% of total general fund expenditure). Annex G presents Capital Expenditure by Local Authority and Service. This shows that Glasgow City Council had capital expenditure on cultural and related services of £83 million (32% of total cultural and related services expenditure).

In the period 2008-09 to 2012-13 Glasgow City Council's expenditure on cultural and related services was £335 million out of a total of £1,036 million in Scotland. This represents 32% of cultural and related services expenditure. This high share of expenditure includes some expenditure related to the Commonwealth Games.

Chart 2.2 - Capital Expenditure

From 2009-10 onwards assets acquired through PPP/PFI are included. In addition, figures for 2009-10 include assets acquired through PPP/PFI for past years. ( more information on the changes can be found here - http://www.scotland.gov.uk/Topics/Government/local-government/17999/LACapital/CapExReport200910)

In any given year capital expenditure per capita varies substantially between local authority areas. This will in part reflect the different priorities of local authorities however it also reflects differences in the timing of capital projects. Expenditure on capital projects is uneven and expenditure per head in local authority areas will move (possibly substantially) from year to year.

Chart 2.3 - Gross Capital Expenditure per Capita by Local Authority Area 2012-13

Source: Capital Returns (CR Final) & National Records of Scotland Mid-Year Population Estimates (2012)

2.3 General Fund Capital Financing

2.3.1 Capital Grants

Capital grants are grants provided to local authorities to fund capital investment. The Scottish Government provides two types of grant funding to local authorities - a General Capital Grant and a number of ring-fenced grants. Scottish Government Agencies, such as Transport Scotland, and Non-Departmental Bodies, such as sportscotland may also award grants for projects. Other grants and contributions include grants from other local authorities, European Structural Funds, contributions from private developers or persons, and grants from the National Lottery. Table 2.4 details capital grants by source, and type of local authority.

Table 2.4 - Capital Grants, 2012-13 ^{1, 2}

							£ thousands
	Scotland	Unitary Authorities	Police Boards	Fire Boards	Regional Transport Partnerships	Bridge Authorities	Valuation Boards
Grants from Scottish Government Agencies and NDPBs	693,020	638,072	5,128	15,509	17,542	16,769	0
Grants from other Local Authorities/Joint Boards	16,936	8,692	5,617	0	2,601	0	26
European Union Structural Funds	7,365	7,365	0	0	0	0	0
Contributions from private developers or persons	8,816	8,816	0	0	0	0	0
Grants from the National Lottery	13,526	13,526	0	0	0	0	0
Other grants/ contributions	99,750	96,491	3,040	60	0	0	159
Total Grants	839,413	772,962	13,785	15,569	20,143	16,769	185

1. These figures are those reported by local authorities in their 2012-13 Final Capital Return for Income. They will not, therefore, match the figures for financing in Table 3.2

2. Figures include Housing Revenue Account

Source: Capital Returns (CR Final)

2.3.2 Capital Receipts

'Capital receipts' is the term used to recognise income from the sale or disposal of a fixed asset, such as land or council housing. Under statute capital receipts may only be used to fund capital expenditure or for the repayment of the principal of loans.

Table 2.5 details capital receipts categorised by service from 2008-09 to 2012-13. In order to reflect the corporate nature of assets and to promote good asset management practices local authorities commonly move assets to "Central Services" (which forms part of the "Other Services" categorisation in this table) when they become identified as surplus for disposal. This can be seen from the table where in recent years for General Fund services, the greatest value of capital receipts has generally been reported against "Other Services". From 2009-10, Local authorities have been required to report Capital Receipts against the service with which the asset was last in use. A detailed breakdown of Capital Receipts by Service for 2012-13 can be found in Annex J.

Capital receipts can be used to finance capital expenditure and repay debt (principal but not interest). These receipts are generated through the sale or disposal of assets, such as a council house or other local authority land/building. Revenue raised from capital receipts has been falling for a number of years, but because of the changes in recording practice it is difficult to attribute this fall to a particular service.

Table 2.5 - Capital Receipts Raised by Service, 2008-09 to 2012-13

					£ thousands
	2008-09	2009-10	2010-11	2011-12	2012-13
Education	30,489	4,089	18,822	20,177	5,664
Culture & Related Services	2,594	2,243	12,013	746	984
Social Work	715	285	2,026	3,477	3,155
Police & Fire	4,908	3,709	3,834	4,926	7,206
Roads & Transport	1,928	742	913	6,087	2,778
Environmental Services	793	1,113	799	611	507
Planning & Economic Development	9,120	8,996	17,901	13,962	15,011
Trading Services	6	133	1,082	1	35
Other Services	43,557	142,394	18,613	15,663	23,925
Non-HRA Housing	211	602	453	344	81
Total General Fund Services	94,321	164,306	76,456	65,994	59,346
Housing Revenue Account	135,657	65,091	65,515	46,326	42,369
Total Services	229,978	229,397	141,971	112,320	101,715

Source: Capital Returns (CR Final)

Table 2.6 - Capital receipts summary, 2012-13

			£ thousands
	General Fund	Housing Revenue Account	TOTAL
Capital Receipts brought forward at 1 April 2012	78,667	6,428	85,095
Capital receipts from the sale/ disposal of tangible fixed assets	59,289	42,369	101,658
Capital receipts from the sale/ disposal of intangible fixed assets	57	0	57
Total capital receipts available for use	138,013	48,797	186,810
Capital receipts used from asset sales/disposals	65,592	40,345	105,937
Capital receipts used to repay debt	1,012	5,013	6,025
Capital receipts transferred to Capital Fund	23,896	0	23,896
Capital receipts held 31 March 2013	47,513	3,439	50,952

Source: Capital Returns (CR Final)

Table 2.6 shows the impact capital receipts raised and used have on the capital receipts brought forward at 1 April 2012 (£85.1m), resulting in capital receipts held at 31 March 2013 of £51.0m.

2.3.3 Borrowing

Local Authorities have the statutory power to borrow under Schedule 3 of the Local Government (Scotland) Act 1975. Local Authorities may borrow for the purposes of:

• Acquiring land
• Construction of buildings
• Undertaking permanent work or provision of plant and machinery
• Lending to relevant authorities or Community Councils
• Any other purpose for which the authority is authorised under any enactment to borrow

Borrowing is a major component of the funding of capital expenditure as shown in Table 2.7.

The Scottish Government provides loan charge support as part of local authority revenue funding, which covers the debt charges on a notional amount of capital expenditure each year. This is known as supported borrowing. Borrowing over and above the level of supported borrowing is classified as self-financed borrowing, and is financed by the local authority itself.

Local authorities are required by legislation to operate a loans fund. All amounts of money borrowed by local authorities must be paid into this loans fund, which then makes advances to service accounts to fund capital expenditure. The Scottish Government monitors the value of debt recorded in the loans fund (rather than the level of external debt) because it is this amount of debt that is charged to services over a period of time. It is not expected, however, that the levels of loan pool debt and external debt will be significantly different in value.

Table 2.7 - Loans Fund Borrowing to Finance Capital Expenditure

					£ thousands
	2008-09	2009-10	2010-111	2011-12	2012-13
Scotland	1,206,318	1,091,548	1,113,929	1,261,468	1,165,387
Unitary Authorities	1,194,867	1,086,559	1,110,056	1,245,898	1,165,387
Fire	5,674	0	3,873	15,570	0
Police	5,777	4,989	0	0	0
Valuation Boards1	nc	nc	0	0	0
Regional Transport Partnerships	0	0	0	0	0
Bridge Authorities	0	0	0	0	0

1. Data from Valuation Boards was collected for the first time in 2010-11

Source: Capital Returns (CR Final)

The costs of servicing debt on Local Authority trading services (e.g piers and harbours) are mainly met through the charges made for these services, while the costs of servicing Housing Revenue Account (HRA) debt are met principally through income from rents and from Housing Support Grant. The costs of servicing debt are detailed in Table 1.1 which shows interest paid and the cost of repayments can be seen in Annex B (Statutory Repayment of Debt).