Scottish Local Government Financial Statistics 2011-12

3. Local Government Capital Expenditure and Financing

3.1 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 3.1 - Total Capital Expenditure and Financing, 2011-12

£ thousands

	General Fund Services	Housing Revenue Account	Total
Acquisition of land, leases, existing buildings or works	80,360	56,972	137,332
New construction, conversions & enhancement to existing buildings	1,639,155	503,138	2,142,293
Vehicles, machinery & equipment	155,462	39,374	194,836
Intangible assets	5,918	134	6,052
Total Gross Capital Expenditure	1,880,895	599,618	2,480,513
Revenue Expenditure funded from Capital Resources	181,021	0	181,021
Total Expenditure to be met from Capital Resources	2,061,916	599,618	2,661,534
Scottish Government General Capital Grant	565,541	0	565,541
Scottish Government Specific Capital Grants	191,143	43,222	234,365
Grants from Scottish Government Agencies and NDPBs	78,209	4,555	82,764
Other Grants and Contributions	75,489	10,225	85,714
Borrowing from Loans fund	918,890	342,578	1,261,468
Capital receipts used from asset sales/disposals	50,296	43,724	94,020
Capital Fund applied	21,653	0	21,653
Capital funded from current revenue	53,807	155,315	209,122
Assets acquired under credit arrangements (e.g. finance leases, PPP/PFI)	106,888	0	106,888
Total Financing	2,061,916	599,618	2,661,534

Source: Capital Returns (CR Final)

In 2011-12 total gross capital expenditure was £2.48 billion. In addition to this, local authorities had £180 million 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 £2.66 billion in 2011-12 ( £0.60 billion in the housing revenue account and £2.06 in the General Fund), compared to £2.35 billion in 2010-11 - an increase of £313m. The majority of capital expenditure went on New construction, conversions and enhancements to existing buildings, this category accounted for over 80% of expenditure.

The largest source of financing for capital expenditure in 2011-12 was borrowing. Local authorities borrowed £1.26 billion to fund capital expenditure (£918 million for the general fund and £343 million for the HRA). The second most significant source of financing were grants from the Scottish Government and its Agencies these funded a further £883 million 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 3.2 - Total Capital Expenditure and Financing, 2007-08 to 2011-12

£ thousands

	2007-08	2008-09	2009-10	2010-11	2011-12
Acquisition of land, leases, existing buildings or works	76,370	284,120	477,203	98,730	137,332
New construction, conversions & enhancement to existing buildings	1,897,118	1,808,204	2,385,906	1,876,692	2,142,293
Vehicles, machinery & equipment	157,491	189,280	183,013	156,289	194,836
Intangible assets	51,530	50,373	11,197	5,042	6,052
Total Gross Capital Expenditure	2,182,509	2,331,977	3,057,319	2,136,753	2,480,513
Revenue Expenditure funded from Capital Resources	1,838	200,164	214,040	211,409	181,021
Total Expenditure to be met from Capital Resources	2,184,347	2,532,141	3,271,359	2,348,162	2,661,534
Scottish Government General Capital Grant	nc	364,039	462,640	352,652	565,541
Scottish Government Specific Capital Grants	nc	262,093	268,370	228,865	234,365
Grants from Scottish Government Agencies and NDPBs	94,655	141,590	160,281	115,726	82,764
Grants from Scottish Government Directorates	627,516	nc	nc	nc	nc
Other Grants and Contributions	132,287	115,871	104,575	94,486	85,714
Borrowing from Loans fund	710,474	1,206,318	1,091,548	1,113,929	1,261,468
Capital receipts used from asset sales/disposals	406,547	204,048	164,746	114,722	94,020
Capital Fund applied	34,440	40,609	28,616	14,916	21,653
Capital funded from current revenue	173,668	196,836	166,141	208,894	209,122
Assets acquired under credit arrangements (e.g. finance leases, PPP/PFI)	4,760	737	824,442	103,972	106,888
Total Financing	2,184,347	2,532,141	3,271,359	2,348,162	2,661,534

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 3.2 and Chart 3.1. 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 3.1. 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 borrowing from the loans fund) increasing their proportion of total capital financing.

Chart 3.1 - Capital Expenditure Financing

Source: Capital Returns (CR Final)

3.2 General Fund Capital Expenditure

General fund capital expenditure in 2011-12 was £2,062 million. The service with the highest capital expenditure was education with £692 million; around a third (34%) of local government capital expenditure went 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 expenditure for 2009-10 includes a large amount of expenditure funded by PPP/PFI for past years and this disproportionately effects education expenditure. In total, local authorities recorded their past years' PPP/PFI funded expenditure as £867 million and of this, £830 million was in education.

The next biggest service for capital expenditure is roads and transport which had expenditure of £483 million (23% of general fund expenditure). Expenditure on roads and transport by City of Edinburgh Council in 2011-12 was £135 million (28% of total roads and transport expenditure). In the period 2007-08 to 2011-12 City of Edinburgh Council's expenditure on roads and transport was £609 million out of a total of £2,317 million in Scotland this represents 25% of total roads and transport expenditure. This high share of expenditure includes expenditure related to the construction of the Edinburgh Trams.

Table 3.3 - Capital Expenditure by Service, 2007-08 to 2011-12

£ millions

	2007-08	2008-09	2009-102	2010-11	2011-12
Education	464,827	479,258	1,248,645	508,691	691,878
Social Work	65,449	63,233	66,379	51,256	46,487
Police	42,115	45,673	37,744	25,241	30,188
Fire	26,565	33,449	24,759	30,983	43,856
Cultural & Related Services	166,636	207,088	216,345	196,014	245,371
Environmental Services	101,341	121,267	121,769	102,458	105,036
Roads & Transport 1	484,669	479,769	471,795	399,084	482,554
Central Services	179,887	274,923	212,250	180,486	143,678
Planning & Economic Development	122,754	124,060	171,613	120,742	113,476
Non-HRA Housing	54,806	180,099	182,808	174,404	149,002
Trading Services	22,179	22,764	21,935	12,687	10,390
Total General Fund Capital Expenditure	1,731,228	2,031,583	2,776,042	1,802,046	2,061,916
Housing Revenue Account	453,119	500,558	495,317	546,116	599,618
Total Capital Expenditure	2,184,347	2,532,141	3,271,359	2,348,162	2,661,534

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 £245 million (12% of total general fund expenditure). Glasgow City Council had capital expenditure on cultural and related services of £81 million (33% of total cultural and related services expenditure).

In the period 2007-08 to 2011-12 Glasgow City Council's expenditure on cultural and related services was £288 million out of a total of £1,031 million in Scotland. This represents 28% of cultural and related services expenditure. This high share of expenditure includes some expenditure related to the Commonwealth Games.

Chart 3.2 - Capital Expenditure

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. For example in 2011-12 Inverclyde has the third highest expenditure per head but in 2010-11 it had the third lowest expenditure. This is mostly due to large expenditure on education recorded in 2011-12 by Inverclyde Council.

On the other hand, in Clackmannanshire expenditure per head in 2011-12 was £179, which ranks 32^nd, however two years earlier Clackmannanshire had the 8^th highest expenditure per head of £764. This again relates to large expenditure on education in 2009-10. Expenditure on capital projects is uneven and expenditure per head in local authority areas will move (possibly substantially) from year to year.

Chart 3.3 - Gross Capital Expenditure per Capita by Local Authority Area 2011-12

3.3 General Fund Capital Financing

3.3.1 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 grant 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 3.4 details capital grants by source, and type of local authority.

Table 3.4 - Capital Grants, 2011-12 ^{1, 2}

							£ thousands
	Scotland	Unitary Authorities	Police Boards	Fire Boards	Regional Transport Partnerships	Bridge Authorities	Valuation Boards
Grants from Scottish Government Agencies and NDPBs	724,402	647,870	6,494	11,527	40,588	17,923	0
Grants from other Local Authorities/Joint Boards	30,483	8,413	18,913	0	3,122	0	35
European Union Structural Funds	5,788	5,788	0	0	0	0	0
Contributions from private developers or persons	13,148	13,148	0	0	0	0	0
Grants from the National Lottery	3,007	3,007	0	0	0	0	0
Other grants/ contributions	43,020	41,636	250	442	638	0	54
Total Grants	819,848	719,862	25,657	11,969	44,348	17,923	89

1. These figures are those reported by local authorities in their 2011-12 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)

3.3.2 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 3.5 details capital receipts categorised by service from 2007-08 to 2011-12. 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 2011-12 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 3.5 - Capital Receipts Raised by Service, 2007-08 to 2011-12

£ thousands

	2007-08	2008-09	2009-10	2010-11	2011-12
Education	62,563	30,489	4,089	18,822	20,177
Culture & Related Services	12,697	2,594	2,243	12,013	746
Social Work	3,473	715	285	2,026	3,477
Police & Fire	4,112	4,908	3,709	3,834	4,926
Roads & Transport	5,849	1,928	742	913	6,087
Environmental Services	644	793	1,113	799	611
Planning & Economic Development	26,421	9,120	8,996	17,901	13,962
Trading Services	243	6	133	1,082	1
Other Services	168,348	43,557	142,394	18,613	15,663
Non-HRA Housing	454	211	602	453	344
Total General Fund Services	284,804	94,321	164,306	76,456	65,994
Housing Revenue Account	229,109	135,657	65,091	65,515	46,326
Total Services	513,913	229,978	229,397	141,971	112,320

Source: Capital Returns (CR Final)

Table 3.6 - Capital receipts summary, 2011-12

£ thousands

	General Fund	Housing Revenue Account	TOTAL
Capital Receipts brought forward at 1 April 2011	63,525	10,435	73,960
Capital receipts from the sale/ disposal of tangible fixed assets	65,924	43,072	108,996
Capital receipts from the sale/ disposal of intangible fixed assets	70	3,254	3,324
Total capital receipts available for use	129,519	56,761	186,280
Capital receipts used from asset sales/disposals	50,296	43,724	94,020
Capital receipts used to repay debt	2,912	7,420	10,332
Capital receipts transferred to Capital Fund	16,634	0	16,634
Capital receipts held 31 March 2012	59,677	5,618	65,295

Source: Capital Returns (CR Final)

Table 3.6 shows the impact capital receipts raised and used have on the capital receipts brought forward at 1 April 2011 (£74.0m), resulting in capital receipts held at 31 March 2012 of £65.3m.

3.3.3 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, whose proportion in terms of capital expenditure financing increased greatly from 2007-08 to 2008-09, as shown in Table 3.7.

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 3.7 - Loans Fund Borrowing to Finance Capital Expenditure

£ thousands

	2007-08	2008-09	2009-10	2010-11	2011-12
Scotland	710,474	1,206,318	1,091,548	1,113,929	1,261,468
Unitary Authorities	706,643	1,194,867	1,086,559	1,110,056	1,245,898
Fire	0	5,674	0	3,873	15,570
Police	3,831	5,777	4,989	0	0
Valuation Boards1	nc	nc	nc	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 2.1 which shows interest paid and the cost of repayments can be seen in Annex B (Statutory Repayment of Debt).