Scottish Court Fees 2018-2021 consultation: business and regulatory impact assessment

2. Capital Expenditure and Financing

Spend which creates an asset that the authority will use over several years, such as building schools or buying vehicles, is known as Capital Expenditure.

Whilst a local authority cannot borrow to finance day-to-day expenditure, capital expenditure may be funded from borrowing. The costs of repaying the debt, including the interest costs, are met from the revenue account.

2016-2017 Capital Financing: £2.96bn

2016-2017 Capital Expenditure: £2.96bn

• Total Capital Expenditure: £2.96 billion - an increase of 17% on 2015-16;
• Education has the largest share ( 29%) of capital expenditure with £0.9bn - an increase of 31% on 2015-16;
• The Housing Revenue Account ( HRA) is the second largest service area with 23% ( £0.7bn) of capital expenditure – an increase of 5% from 2015-16;
• 80% of capital expenditure is on constructing or enhancing buildings;
• 40% ( £1.2bn) of expenditure is financed through borrowing;

2.1 Total Capital Expenditure and Financing

Capital expenditure by local authorities is mainly for purchasing, constructing or enhancing physical assets, such as buildings ( e.g. care homes or schools), land ( e.g. playing fields), infrastructure ( e.g. roads and flood defences), and vehicles, plant and machinery. Generally, capital expenditure is expenditure that creates an asset, extends the life of an asset or increases the value of an asset. Capital expenditure also includes expenditure that legislation permits local authorities to treat as capital expenditure and meet from capital resources, such as capital grants to third parties, where the asset it creates or improves is not owned by the local authority.

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

• Capital grants and contributions;
• Borrowing or Credit Arrangements;
• Contributions from capital or revenue reserve funds;
• Capital receipts from asset sales.

Unlike revenue expenditure, local authorities can borrow to fund capital expenditure. The Local Government (Scotland) Act 1973, provides councils with a general power to borrow. Other local authorities' powers are set out in legislation specific to that authority. The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 sets out the purposes for which a local authority may borrow. The Local Government in Scotland Act 2003 places a local authority under a statutory duty to set their own maximum capital expenditure limits. These limits must be set with regard to the Chartered Institute of Public Finance & Accountancy ( CIPFA) Prudential Code, which requires that capital expenditure plans by local authorities must be affordable, prudent and sustainable. Detailed breakdowns of Capital Expenditure can be found in Annexes G and H.

In 2016-17 total gross capital expenditure was £2.79 billion. In addition to this, local authorities funded £0.17 billion of revenue expenditure from capital resources. This was mostly funding third party capital projects. The total expenditure funded from capital resources was £2.96 billion in 2016-17, with £0.68 billion in the housing revenue account and £2.29 billion in the General Fund.

Table 2.1 – Total Capital Expenditure and Financing, 2016-17 ( £thousands)

	General Fund Services	Housing Revenue Account	Total
Acquisition of land, leases, existing buildings or works	209,472	23,868	233,340
New construction, conversions & enhancement to existing buildings	1,709,872	648,081	2,357,953
Vehicles, machinery & equipment	191,038	2,157	193,195
Intangible assets	9,767	31	9,798
Total Gross Capital Expenditure	2,120,149	674,137	2,794,286
Revenue Expenditure funded from Capital Resources	164,938	2,667	167,605
Total Expenditure to be met from Capital Resources	2,285,087	676,804	2,961,891
Scottish Government General Capital Grant	504,460	4	504,464
Scottish Government Specific Capital Grants	143,419	81,506	224,925
Grants from Scottish Government Agencies and NDPBs	98,363	19,473	117,836
Other Grants and Contributions	170,893	13,868	184,761
Borrowing from Loans Fund	954,113	224,697	1,178,810
Capital receipts used from asset sales/disposals	58,706	128,453	187,159
Capital Reserves (Capital Fund)	65,282	0	65,282
Capital funded from revenue reserves	82,833	208,803	291,636
Assets acquired under credit arrangements ( e.g. finance leases, PPP/ PFI)	207,018	0	207,018
Total Financing	2,285,087	676,804	2,961,891

Source: Capital Returns ( CRFinal)

The majority (80%) of capital expenditure went on new construction, conversions and enhancements to existing buildings.

Local authorities received a total of £1.03 billion (35% of total financing) in grants and contributions to fund capital expenditure (£0.92 billion in the General Fund and £0.11 billion for the HRA). The most significant source of financing was borrowing (advances from the Loans Fund). This funded £1.18 billion (40% of total financing, £0.95 billion in the General Fund and £0.22 billion in the HRA) of capital expenditure, an increase of 42% on 2015-16.

Table 2.2 – Total Capital Expenditure and Financing, 2012-13 to 2016-17 ( £thousands)

	2012-13	2013-14 a	2014-15	2015-16	2016-17
Acquisition of land, leases, existing buildings or works	146,930	90,335	63,604	58,200	233,340
New construction, conversions & enhancement to existing buildings	2,037,385	1,967,310	1,948,992	2,096,542	2,357,953
Vehicles, machinery & equipment	197,022	189,509	174,443	182,501	193,195
Intangible assets	6,638	13,119	14,061	6,155	9,798
Total Gross Capital Expenditure	2,387,975	2,260,273	2,201,100	2,343,398	2,794,286
Revenue Expenditure funded from Capital Resources	161,349	199,728	199,002	191,818	167,605
Total Expenditure to be met from Capital Resources	2,549,324	2,460,001	2,400,102	2,535,216	2,961,891
Scottish Government General Capital Grant	450,088	438,163	680,491	694,346	504,464
Scottish Government Specific Capital Grants	217,281	180,549	203,444	201,914	224,925
Grants from Scottish Government Agencies and NDPBs	141,311	150,761	108,610	112,017	117,836
Other Grants and Contributions	124,311	142,077	107,731	143,418	184,761
Borrowing from Loans fund	1,165,387	1,105,526	829,701	831,327	1,178,810
Capital receipts used from asset sales/disposals	105,937	92,167	107,919	173,392	187,159
Capital Fund applied	36,867	24,798	34,595	60,374	65,282
Capital funded from current revenue	294,087	295,335	284,911	296,702	291,636
Assets acquired under credit arrangements ( e.g. finance leases, PPP/ PFI)	14,055	30,625	42,701	21,726	207,018
Total Financing	2,549,324	2,460,001	2,400,102	2,535,216	2,961,891

a. Following the Police and Fire Reform (Scotland) Act 2012 figures from 2013-14 onwards may not be comparable with previous years. See section 5.2 for details.
Source: Capital Returns ( CRFinal)

In 2013-14 Police or Fire Boards were replaced by new national bodies that are not classified as local government. It is therefore difficult to draw conclusions about changes in capital expenditure and financing between 2012-13 and subsequent years.

Between 2015-16 and 2016-17, total capital expenditure to be met from capital resources increased by 16.8% (£0.43 billion). The amount of capital expenditure that is financed by grants from the Scottish Government, including Scottish Government Agencies and Non-Departmental Public Bodies decreased by 10.4% (£0.12 bn) between 2015-16 and 2016-17.

The amount of capital expenditure financed through Borrowing from the Loans Fund has increased by 42% between 2015-16 and 2016-17.

Over the spending review period, the grant allocations for individual years were adjusted as follows: -£120m in 2012-13, -£100m in 2013-14 and +£120m in 2014-15 with the remaining £94.2m allocated in 2015-16. Although the sum to be added back was originally £100 million this was reduced proportionately to £94.2 million following the transfer of the police and fire functions to the Scottish Government.

The profile of the capital grant allocations largely explain the decrease in grant funding and corresponding increase in borrowing, shown in Chart 2.1 below. The 2016-17 grant level is now closer to the level of capital grant that we would expect had the capital grant not been reprofiled.

Chart 2.1 – Capital Expenditure Financing ( £thousands)

a. Following the Police and Fire Reform (Scotland) Act 2012 figures for 2013-14 onwards may not be comparable with previous years. See Background to Local Government section for details.
Source: Capital Returns ( CRFinal)

In 2016-17, Education capital expenditure increased by 31% to £854 million, which represents 29% of total capital expenditure. The HRA is the service with the second highest expenditure at £677 million, an increase of 5% on 2015-16 and representing 23% of total capital expenditure. Planning and Development Services saw the largest percentage increase (122%) to £201 million in 2016-17.

Table 2.3 – Capital Expenditure by Service, 2012-13 to 2016-17 ( £thousands)

	2012-13	2013-14	2014-15	2015-16	2016-17
Education	517,158	523,776	559,309	652,552	854,325
Cultural & Related Services	257,040	148,933	121,778	160,315	219,850
Social Work	73,812	80,849	73,690	62,553	64,701
Roads & Transport	503,480	458,876	430,265	429,569	471,361
Environmental Services	126,631	188,525	138,267	128,063	129,604
Planning & Development Services	118,282	94,415	66,488	90,416	200,832
Central Services	123,740	175,153	174,094	195,922	178,082
Non- HRA Housing	136,363	156,699	165,543	166,452	162,689
Trading Services	18,419	14,059	5,171	6,720	3,643
Total General Fund Capital Expenditure	1,874,925	1,841,285	1,734,605	1,892,562	2,285,087
Housing Revenue Account	607,279	618,716	665,497	642,654	676,804
Total Capital Expenditure	2,482,204	2,460,001	2,400,102	2,535,216	2,961,891
Police 1	45,365
Fire 1	21,755
Total Capital Expenditure incl. Police and Fire	2,549,324	2,460,001	2,400,102	2,535,216	2,961,891

Source: Capital Returns ( CRFinal)

Chart 2.2 – Capital Expenditure by Service, 2012-13 to 2016-17 ( £thousands)

Source: Capital Returns ( CRFinal)

In any given year capital expenditure per head 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 can be 'lumpy' and expenditure per head in local authority areas will move (possibly substantially) from year to year as projects begin or wind down.

Chart 2.3 – Capital Expenditure per Head by Council, 2016-17

Source: Capital Returns ( CRFinal) & National Records of Scotland Mid-Year Population Estimates (2016)

2.2 Capital Financing

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 specific or 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 the use of council tax discounts from second homes or long term empty properties. Chart 2.1 (above) provides a time series of grant income from 2012-13 to 2016-17.

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 debt.

Table 2.4 details capital receipts categorised by service from 2012-13 to 2016-17. 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 includes "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 "Central Services". A detailed breakdown of Capital Receipts by Service for 2016-17 can be found in Annex J.

Total Capital Receipts raised decreased by 17%, from £250 million in 2015-16 to £208m in 2016-17. The Housing (Scotland) Act 2014 repeals the Right-to-Buy provisions, and this came into force from the 1 ^st August 2016. This will affect the value of Housing Revenue Account capital receipts, which increased by 70% in 2016-17 on the previous year due to a sharp spike in Right to Buy applications shorlty before the Act came into force. Planning and Economic Development capital receipts fell by 89% in 2016-17. In 2015-16 capital receipts for Planning and Economic Development was unusually high due to the inclusion of a single high-value capital receipt due to the sale of an office block.

Table 2.4 – Capital Receipts Raised by Service, 2012-13 to 2016-17 ( £thousands)

	2012-13	2013-14	2014-15	2015-16	2016-17
Education	5,623	13,798	15,498	16,324	12,572
Culture & Related Services	3,574	3,574	1,526	2,696	13,464
Social Work	3,155	2,632	5,574	1,306	4,311
Roads & Transport	2,778	1,742	21,398	2,086	2,968
Environmental Services	507	1,378	1,538	1,669	1,744
Planning & Development Services	15,011	58,276	22,163	117,742	12,989
Central Services	23,925	28,128	25,930	18,781	21,128
Non- HRA Housing	81	198	666	138	59
Trading Services	35	6	8	7,552	10
Total General Fund Capital Receipts	54,689	109,732	94,302	168,294	69,245
Housing Revenue Account	42,369	53,529	70,594	81,385	138,414
Total Capital Receipts	97,058	163,261	164,896	249,679	207,659
Police & Fire 1	7,206	-
Total Capital Receipts	104,264	163,261	164,896	249,679	207,659

1. In 2012-13 fire boards had £41k in education capital receipts raised.
Source: Capital Returns ( CRFinal)

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. Authorities can hold Capital Receipts for future use. As such, capital receipts received and capital receipts used are not necessarily equal.

Table 2.5 – Capital receipts summary, 2016-17

£thousands

	General Fund	Housing Revenue Account	Total
Capital receipts brought forward at 1 April 2016	79,266	7,619	86,885
Capital receipts from the sale/ disposal of fixed assets	69,245	138,414	207,659
Total Capital Receipts Available for Use	148,511	146,033	294,544
Capital receipts used from asset sales/disposals	58,706	128,453	187,159
Capital receipts used to repay debt	5,817	11,313	17,130
Capital receipts transferred to the equal pay or severance statutory adjustment account	148	0	148
Capital receipts transferred to/(from) Capital Fund	(2,452)	0	(2,452)
Capital Receipts Held 31 March 2017	86,292	6,267	92,559

Source: Capital Returns ( CRFinal)

Table 2.5 shows that authorities had a total of £295 million of capital receipts available for use during 2016-17, of which £87 million was the balance brought forward at 1 ^st April 2016 and £208 million were raised during the year from the sale/disposal of fixed assets.

The main use of capital receipts in 2016-17 was to finance capital expenditure (£187 million), with a further £17 million used to repay debt. Around £2.5 million was transferred from the Capital Fund to the Capital Receipts reserve. This resulted in a Capital receipts balance of £93 million at the 31 ^st March 2017.

2.3 Borrowing and Credit Arrangements

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.

Local authorities are required by legislation to maintain a Loans Fund. All 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. The value of external debt is monitored as part of the prudential indicators of the local authority. See section 3.4 for more details.

The total amount of Loans Fund borrowing in 2016-17 was £1.2 billion. This is an increase of 42% on 2015-16 and an increase of 1% on 2012-13. When interpreting the pattern of borrowing over the period from 2012-13 to 2016-17, the reprofiling of the capital grant allocations over the spending review period should be kept in mind (-£120m in 2012-13, -£100m in 2013-14, +£120m in 2014-15 and +£94.2m allocated in 2015-16, with the remaining £5.8m allocated to Police and Fire). Of the total Loans Fund borrowing, £954 million (up 71%) was in the General Fund and £225 million (down 18%) was in the HRA.

Table 2.6 – Loans Fund Borrowing to Finance Capital Expenditure – 2012-13 to 2016-17 ( £thousands)

	2012-13	2013-14	2014-15	2015-16	2016-17
General Fund	852,238	788,568	518,296	558,669	954,113
Advances for Capital Expenditure	846,269	751,634	489,774	536,044	941,400
Advances for Consented Borrowing	5,969	36,934	28,522	22,625	12,713
Housing Revenue Account	313,149	316,958	311,404	272,658	224,697
Advances for Capital Expenditure	313,053	316,815	311,404	272,658	224,697
Advances for Consented Borrowing	96	143	0	0	0
Total Loans Fund Borrowing	1,165,387	1,105,526	829,701	831,327	1,178,810
Credit Arrangements	14,055	30,625	42,701	21,726	207,018
Total Borrowing and Credit Arrangements	1,179,442	1,136,151	872,402	853,053	1,385,828

Source: Capital Returns ( CRFinal)

The costs of servicing debt is mostly met from taxation and non-specific grant income, while the costs of servicing Housing Revenue Account ( HRA) debt are met principally through income from rents. The costs of servicing debt are detailed in Table 1.1 which shows interest payable and the cost of repayments (Statutory Repayment of Debt).