Scottish local government finance statistics 2015-2016

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, is met from the revenue account.

• Total Capital Expenditure: £2.5 billion - an increase of 5.6% on 2014-15;
• Education has the largest share ( 26%) of capital expenditure with £0.7bn - an increase of 17% on 2014-15;
• The Housing Revenue Account ( HRA) is the second largest service area with 25% ( £0.6bn) of capital expenditure - a fall of 3% from 2014-15;
• 83% of capital expenditure is on constructing or enhancing buildings;
• 33% ( £0.8bn) 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. Capital expenditure also includes expenditure that the Scottish Ministers have permitted the local authorities to treat as capital expenditure and meet from capital resources.

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.

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 Government (Scotland) Act 1975 sets out the purpose for which a local authority may borrow. This includes borrowing to finance capital expenditure of the authority. 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.

Table 2.1: Total Capital Expenditure and Financing, 2015-16

£thousands

	General Fund Services	Housing Revenue Account	Total
Acquisition of land, leases, existing buildings or works	46,810	11,390	58,200
New construction, conversions & enhancement to existing buildings	1,476,364	620,178	2,096,542
Vehicles, machinery & equipment	175,704	6,797	182,501
Intangible assets	5,998	157	6,155
Total Gross Capital Expenditure	1,704,876	638,522	2,343,398
Revenue Expenditure funded from Capital Resources	187,686	4,132	191,818
Total Expenditure to be met from Capital Resources	1,892,562	642,654	2,535,216
Scottish Government General Capital Grant	691,659	2,687	694,346
Scottish Government Specific Capital Grants	148,933	52,981	201,914
Grants from Scottish Government Agencies and NDPBs	92,268	19,749	112,017
Other Grants and Contributions	121,705	21,713	143,418
Borrowing from Loans Fund	558,669	272,658	831,327
Capital receipts used from asset sales/disposals	95,355	78,037	173,392
Capital Reserves (Capital Fund)	60,374	0	60,374
Capital funded from revenue reserves	101,873	194,829	296,702
Assets acquired under credit arrangements (e.g. finance leases, PPP/ PFI)	21,726	0	21,726
Total Financing	1,892,562	642,654	2,535,216

Source: Capital Returns ( CR Final)

In 2015-16 total gross capital expenditure was £2.34 billion. In addition to this, local authorities funded £0.19 billion of revenue expenditure from capital resources - this was mostly funding third party capital housing projects. The total expenditure funded from capital resources was £2.54 billion in 2015-16, with £0.64 billion in the housing revenue account and £1.89 billion in the General Fund. The majority (83%) of capital expenditure went on new construction, conversions and enhancements to existing buildings.

Local authorities received a total of £1.15 billion (45% of total financing) in grants and contributions to fund capital expenditure (£1.05 billion in the General Fund and £0.10 billion for the HRA). The second most significant source of financing was borrowing (advances from the Loans Fund). This funded £0.83 billion (33% of total financing, £0.56 billion in the General Fund and £0.27 billion in the HRA) of capital expenditure, an increase of 0.2% on 2014-15.

Table 2.2: Total Capital Expenditure and Financing, 2011-12 to 2015-16

£thousands

	2011-12	2012-13	2013-14 a	2014-15	2015-16
Acquisition of land, leases, existing buildings or works	137,332	146,930	90,335	63,604	58,200
New construction, conversions & enhancement to existing buildings	2,142,293	2,037,385	1,967,310	1,948,992	2,096,542
Vehicles, machinery & equipment	194,836	197,022	189,509	174,443	182,501
Intangible assets	6,052	6,638	13,119	14,061	6,155
Total Gross Capital Expenditure	2,480,513	2,387,975	2,260,273	2,201,100	2,343,398
Revenue Expenditure funded from Capital Resources	181,021	161,349	199,728	199,002	191,818
Total Expenditure to be met from Capital Resources	2,661,534	2,549,324	2,460,001	2,400,102	2,535,216
Scottish Government General Capital Grant	565,541	450,088	438,163	680,491	694,346
Scottish Government Specific Capital Grants	234,365	217,281	180,549	203,444	201,914
Grants from Scottish Government Agencies and NDPBs	82,764	141,311	150,761	108,610	112,017
Other Grants and Contributions	85,714	124,311	142,077	107,731	143,418
Borrowing from Loans fund	1,261,468	1,165,387	1,105,526	829,701	831,327
Capital receipts used from asset sales/disposals	94,020	105,937	92,167	107,919	173,392
Capital Fund applied	21,653	36,867	24,798	34,595	60,374
Capital funded from current revenue	209,122	294,087	295,335	284,911	296,702
Assets acquired under credit arrangements (e.g. finance leases, PPP/ PFI)	106,888	14,055	30,625	42,701	21,726
Total Financing	2,661,534	2,549,324	2,460,001	2,400,102	2,535,216

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 ( CR Final)

Because of the changes in accounting practice noted above and Police and Fire Reform, 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. Figures from 2013-14 onwards do not include Police or Fire Boards, which were replaced by new national bodies that are not classified as local government.

Between 2014-15 and 2015-16, total capital expenditure to be met from capital resources increased by 5.6% (£0.14 billion). The amount of capital expenditure that is financed by grants from the Scottish Government, including Scottish Government Agencies and Non-Departmental Public Bodies has increased by 4.7% (£0.05 bn) between 2014-15 and 2015-16.

The amount of capital expenditure financed through Borrowing from the Loans Fund has increased by 0.2% between 2014-15 and 2015-16.

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 increase in grant funding and corresponding fall in borrowing, shown in Chart 2.1 below.

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 ( CR Final)

Table 2.3: Capital Expenditure by Service, 2011-12 to 2015-16

£thousands

	2011-12	2012-13	2013-14	2014-15	2015-16
Education	691,878	517,158	523,776	559,309	652,552
Cultural & Related Services	245,371	257,040	148,933	121,778	160,315
Social Work	46,487	73,812	80,849	73,690	62,553
Roads & Transport	482,554	503,480	458,876	430,265	429,569
Environmental Services	105,036	126,631	188,525	138,267	128,063
Planning & Development Services	113,476	118,282	94,415	66,488	90,416
Central Services	143,678	123,740	175,153	174,094	195,922
Non- HRA Housing	149,002	136,363	156,699	165,543	166,452
Trading Services	10,390	18,419	14,059	5,171	6,720
Total General Fund Capital Expenditure (excl. Police & Fire)	1,987,872	1,874,925	1,841,285	1,734,605	1,892,562
Housing Revenue Account	599,618	607,279	618,716	665,497	642,654
Total Capital Expenditure (excl. Police & Fire)	2,587,490	2,482,204	2,460,001	2,400,102	2,535,216
Police	30,188	45,365
Fire	43,856	21,755
Total Capital Expenditure	2,661,534	2,549,324	2,460,001	2,400,102	2,535,216

Source: Capital Returns ( CR Final)

Chart 2.2: Capital Expenditure by Service, 2011-12 to 2015-16

£thousands

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 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 Local Authority Area, 2015-16

Source: Capital Returns ( CR Final) & National Records of Scotland Mid-Year Population Estimates (2015)

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. Table 2.1 (above) provides time series of grant income from 2011-12 to 2015-16.

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 2011-12 to 2015-16. 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 2015-16 can be found in Annex J.

Total Capital Receipts raised increased by 51%, from £165 million in 2014-15 to £250 million in 2015-16. This increase is largely due to one council which sold a high value asset. Had this sale not taken place, capital receipts would have fallen by 12%. 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 from 2016-17.

Table 2.4: Capital Receipts Raised by Service, 2011-12 to 2015-16

£thousands

	2011-12	2012-13	2013-14	2014-15	2015-16
Education	20,177	5,623	13,798	15,498	16,324
Culture & Related Services	746	3,574	3,574	1,526	2,696
Social Work	3,477	3,155	2,632	5,574	1,306
Roads & Transport	6,087	2,778	1,742	21,398	2,086
Environmental Services	611	507	1,378	1,538	1,669
Planning & Development Services	13,962	15,011	58,276	22,163	117,742
Central Services	15,663	23,925	28,128	25,930	18,781
Non- HRA Housing	344	81	198	666	138
Trading Services	1	35	6	8	7,552
Total GF Capital Receipts	61,068	54,689	109,732	94,302	168,294
Housing Revenue Account	46,326	42,369	53,529	70,594	81,385
Total Capital Receipts	107,394	97,058	163,261	164,896	249,679
Police & Fire 1	4,926	7,206
Total Capital Receipts	112,320	104,264	163,261	164,896	249,679

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

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 are able to transfer capital receipts to a Capital Fund for future use. As such, capital receipts received and capital receipts used are not necessarily equal.

Table 2.5: Capital receipts summary, 2015-16

£thousands

	General Fund	Housing Revenue Account	Total
Capital Receipts brought forward at 1 April 2015	69,952	5,656	75,608
Capital receipts from the sale/ disposal of fixed assets	168,294	81,385	249,679
Total capital receipts available for use	238,246	87,041	325,287
Capital receipts used from asset sales/disposals	95,355	78,037	173,392
Capital receipts used to repay debt	5,694	5,054	10,748
Capital receipts transferred to Capital Fund	56,539	0	56,539
Capital receipts held 31 March 2016	80,658	3,950	84,608

Source: Capital Returns ( CR Final)

Table 2.5 shows that authorities had a total of £325 million of capital receipts available for use during 2015-16, of which £76 million was the balance brought forward at 1 ^st April 2015 and £250 million was raised during the year from the sale/disposal of fixed assets.

The main use of capital receipts in 2015-16 was to finance capital expenditure (£173 million), with a further £11 million used to repay debt and £57 million transferred to the Capital Fund. This resulted in a Capital receipts balance of £85 million at the 31 ^st March 2016.

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 2015-16 was £831 million. This is an increase of 0.2% on 2014-15. When interpreting the pattern of borrowing over the period from 2011-12 to 2015-16, 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 and +£120m in 2014-15 with the remaining £94.2m allocated in 2015-16). Of the total Loans Fund borrowing, £559 million (up 8%) was in the General Fund and £273 million (down 12%) was in the HRA.

Table 2.6: Loans Fund Borrowing to Finance Capital Expenditure - 2011-12 to 2015-16

£thousands

	2011-12	2012-13	2013-14	2014-15	2015-16
General Fund	918,890	852,238	788,568	518,296	558,669
Advances for Capital Expenditure	915,766	846,269	751,634	489,774	536,044
Advances for Consented Borrowing	3,124	5,969	36,934	28,522	22,625
Housing Revenue Account	342,578	313,149	316,958	311,404	272,658
Advances for Capital Expenditure	342,578	313,053	316,815	311,404	272,658
Advances for Consented Borrowing	0	96	143	0	0
Total Loans Fund Borrowing	1,261,468	1,165,387	1,105,526	829,701	831,327
Credit Arrangements	106,888	14,055	30,625	42,701	21,726
Total Borrowing and Credit Arrangements	1,368,356	1,179,442	1,136,151	872,402	853,053

Source: Capital Returns ( CR Final)

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).