Scottish local government financial statistics 2017-2018

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.

• Total Capital Expenditure: £2.98 billion - an increase of 0.7% on 2016-17;
• Education has the largest share (30%) of capital expenditure with £0.90bn - an increase of 5% on 2016-17;
• The Housing Revenue Account (HRA) is the second largest service area with 23% (£0.68bn) of capital expenditure – an increase of 1% from 2016-17;
• 76% of capital expenditure is on constructing or enhancing buildings;
• 33% (£0.99bn) 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 2017-18 total gross capital expenditure was £2.81 billion. In addition to this, local authorities funded £0.18 billion of revenue expenditure from capital resources. This was mostly funding third party capital projects. The total expenditure funded from capital resources was £2.98 billion in 2017-18, with £0.68 billion in the housing revenue account and £2.30 billion in the General Fund.

Table 2.1 – Total Capital Expenditure and Financing, 2017-18

£thousands

	General Fund Services	Housing Revenue Account	Total
Acquisition of land, leases, existing buildings or works	320,578	42,042	362,620
New construction, conversions & enhancement to existing buildings	1,619,051	634,799	2,253,850
Vehicles, machinery & equipment	179,008	5,655	184,663
Intangible assets	4,674	0	4,674
Total Gross Capital Expenditure	2,123,311	682,496	2,805,807
Revenue Expenditure funded from Capital Resources	175,006	1,856	176,862
Total Expenditure to be met from Capital Resources	2,298,317	684,352	2,982,669
Scottish Government General Capital Grant	651,836	0	651,836
Scottish Government Specific Capital Grants	159,281	69,202	228,483
Grants from Scottish Government Agencies and NDPBs	74,520	11,785	86,305
Other Grants and Contributions	151,531	35,028	186,559
Borrowing from Loans Fund	739,527	254,849	994,376
Capital receipts used from asset sales/disposals	49,625	72,342	121,967
Capital Reserves (Capital Fund)	31,342	0	31,342
Capital funded from revenue reserves	44,439	241,146	285,585
Assets acquired under credit arrangements (e.g. finance leases, PPP /PFI)	396,216	0	396,216
Total Financing	2,298,317	684,352	2,982,669

Source: Capital Returns (CRFinal)

The majority (76%) of capital expenditure went on new construction, conversions and enhancements to existing buildings.

Local authorities received a total of £1.15 billion (39% of total financing) in grants and contributions to fund capital expenditure (£1.04 billion in the General Fund and £0.12 billion for the HRA ). The most significant source of financing was borrowing (advances from the Loans Fund). This funded £0.99 billion (33% of total financing, £0.74 billion in the General Fund and £0.25 billion in the HRA ) of capital expenditure, a decrease of 16% on 2016-17.

Table 2.2 – Total Capital Expenditure and Financing, 2012-13 to 2017-18

£thousands

	2013-14	2014-15	2015-16	2016-17	2017-18
Acquisition of land, leases, existing buildings or works	90,335	63,604	58,200	233,340	362,620
New construction, conversions & enhancement to existing buildings	1,967,310	1,948,992	2,096,542	2,357,953	2,253,850
Vehicles, machinery & equipment	189,509	174,443	182,501	193,195	184,663
Intangible assets	13,119	14,061	6,155	9,798	4,674
Total Gross Capital Expenditure	2,260,273	2,201,100	2,343,398	2,794,286	2,805,807
Revenue Expenditure funded from Capital Resources	199,728	199,002	191,818	167,605	176,862
Total Expenditure to be met from Capital Resources	2,460,001	2,400,102	2,535,216	2,961,891	2,982,669
				0
Scottish Government General Capital Grant	438,163	680,491	694,346	504,464	651,836
Scottish Government Specific Capital Grants	180,549	203,444	201,914	224,925	228,483
Grants from Scottish Government Agencies and NDPBs	150,761	108,610	112,017	117,836	86,305
Other Grants and Contributions	142,077	107,731	143,418	184,761	186,559
Borrowing from Loans fund	1,105,526	829,701	831,327	1,178,810	994,376
Capital receipts used from asset sales/disposals	92,167	107,919	173,392	187,159	121,967
Capital Fund applied	24,798	34,595	60,374	65,282	31,342
Capital funded from current revenue	295,335	284,911	296,702	291,636	285,585
Assets acquired under credit arrangements (e.g. finance leases, PPP /PFI)	30,625	42,701	21,726	207,018	396,216
Total Financing	2,460,001	2,400,102	2,535,216	2,961,891	2,982,669

Source: Capital Returns (CRFinal)

Between 2016-17 and 2017-18, total capital expenditure to be met from capital resources increased by 0.7% (£0.02 billion). The amount of capital expenditure that is financed by grants from the Scottish Government, including Scottish Government Agencies and Non-Departmental Public Bodies increased by 12% (£0.12 bn) between 2016-17 and 2017-18.

The amount of capital expenditure financed through Borrowing from the Loans Fund has decreased by 16% between 2016-17 and 2017-18.

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 2017-18 grant level is now closer to the level of capital grant that we would expect had the capital grant not been re-profiled.

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 2017-18, Education capital expenditure increased by 5% to £898 million, which represents 30% of total capital expenditure. The HRA is the service with the second highest expenditure at £684 million, an increase of 1% on 2016-17 and representing 23% of total capital expenditure.

Table 2.3 – Capital Expenditure by Service, 2013-14 to 2017-18

£thousands

	2013-14	2014-15	2015-16	2016-17	2017-18
Education	523,776	559,309	652,552	854,325	898,147
Cultural & Related Services	148,933	121,778	160,315	219,850	168,605
Social Work	80,849	73,690	62,553	64,701	42,555
Roads & Transport	458,876	430,265	429,569	471,361	402,035
Environmental Services	188,525	138,267	128,063	129,604	100,435
Planning & Development Services	94,415	66,488	90,416	200,832	258,444
Central Services	175,153	174,094	195,922	178,082	258,494
Non-HRA Housing	156,699	165,543	166,452	162,689	152,734
Trading Services	14,059	5,171	6,720	3,643	16,868
Total General Fund Capital Expenditure	1,841,285	1,734,605	1,892,562	2,285,087	2,298,317
Housing Revenue Account	618,716	665,497	642,654	676,804	684,352
Total Capital Expenditure	2,460,001	2,400,102	2,535,216	2,961,891	2,982,669

Source: Capital Returns (CRFinal)

Chart 2.2 – Capital Expenditure by Service, 2012-13 to 2017-18

£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 highly variable as some projects can be high-value and infrequent, 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 – General Fund Capital Expenditure per Head by Council, 2017-18

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

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 2017-18.

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 2013-14 to 2017-18. 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 2017-18 can be found in Annex J.

Total Capital Receipts raised decreased by 34%, from £208 million in 2016-17 to £137m in 2017-18. 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 decreased by 48% in 2017-18 on the previous year due to a the decline in Right to Buy applications. Culture & Related Services capital receipts fell by 90% in 2017-18, however the 2016-17 figure was unusually high due to a number of one-off high-value receipts.

Table 2.4 – Capital Receipts Raised by Service, 2013-14 to 2017-18

£thousands

	2013-14	2014-15	2015-16	2016-17	2017-18
Education	13,798	15,498	16,324	12,572	11,879
Culture & Related Services	3,574	1,526	2,696	13,464	1,409
Social Work	2,632	5,574	1,306	4,311	2,823
Roads & Transport	1,742	21,398	2,086	2,968	3,903
Environmental Services	1,378	1,538	1,669	1,744	10,485
Planning & Development Services	58,276	22,163	117,742	12,989	11,639
Central Services	28,128	25,930	18,781	21,128	22,110
Non-HRA Housing	198	666	138	59	687
Trading Services	6	8	7,552	10	188
Total GF Capital Receipts	109,732	94,302	168,294	69,245	65,123
Housing Revenue Account	53,529	70,594	81,385	138,414	71,828
Total Capital Receipts	163,261	164,896	249,679	207,659	136,951

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, 2017-18

£thousands

	General Fund	Housing Revenue Account	Total
Capital receipts brought forward at 1 April 2017	82,908	9,782	92,690
Capital receipts from the sale/ disposal of fixed assets	65,123	71,828	136,951
Total Capital Receipts Available for Use	148,031	81,610	229,641
Capital receipts used from asset sales/disposals	49,625	72,342	121,967
Capital receipts used to repay debt	1,600	2,160	3,760
Capital receipts transferred to the equal pay or severance statutory adjustment account	2,110	0	2,110
Capital receipts transferred to Capital Fund	(10)	0	(10)
Capital Receipts Held 31 March 2018	94,706	7,108	101,814

Source: Capital Returns (CRFinal)

Table 2.5 shows that authorities had a total of £230 million of capital receipts available for use during 2017-18, of which £93 million was the balance brought forward at 1^st April 2017 and £137 million were raised during the year from the sale/disposal of fixed assets.

The main use of capital receipts in 2017-18 was to finance capital expenditure (£122 million), with a further £4 million used to repay debt. Around £2 million was used to pay for equal pay or severance costs. This resulted in a Capital receipts balance of £102 million at the 31^st March 2018.

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 2017-18 was £0.99 billion. This is a decrease of 16% on 2016-17 and an decrease of 10% on 2013-14. When interpreting the pattern of borrowing over the period from 2013-14 to 2017-18, the re-profiling 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, £739 million (down 23%) was in the General Fund and £254 million (up 13%) was in the HRA.

Table 2.6 – Loans Fund Borrowing to Finance Capital Expenditure – 2013-14 to 2017-18

£thousands

	2013-14	2014-15	2015-16	2016-17	2017-18
General Fund	788,568	518,296	558,669	954,113	739,018
Advances for Capital Expenditure	751,634	489,774	536,044	941,400	728,269
Advances for Consented Borrowing	36,934	28,522	22,625	12,713	10,749
Housing Revenue Account	316,958	311,404	272,658	224,697	254,849
Advances for Capital Expenditure	316,815	311,404	272,658	224,697	254,849
Advances for Consented Borrowing	143	0	0	0	0
Total Loans Fund Borrowing	1,105,526	829,701	831,327	1,178,810	993,867
Credit Arrangements	30,625	42,701	21,726	207,018	396,216
Total Borrowing and Credit Arrangements	1,136,151	872,402	853,053	1,385,828	1,390,083

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).