Scottish Local Government Financial Statistics 2014-15

2. Local Government Capital Expenditure and Financing

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 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 revenue funds
• Capital receipts from asset sales

The Local Government in Scotland Act 2003, provides local authorities with the power 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 Chartered Institute of Public Finance & Accountancy (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, 2014-15

£thousands

	General Fund Services	Housing Revenue Account	Total
Acquisition of land, leases, existing buildings or works	48,122	15,481	63,604
New construction, conversions & enhancement to existing buildings	1,308,806	640,186	1,948,992
Vehicles, machinery & equipment	165,645	8,798	174,443
Intangible assets	13,856	205	14,061
Total Gross Capital Expenditure	1,536,429	664,671	2,201,100
Revenue Expenditure funded from Capital Resources	198,176	826	199,002
Total Expenditure to be met from Capital Resources	1,734,605	665,497	2,400,102
Scottish Government General Capital Grant	677,689	2,802	680,491
Scottish Government Specific Capital Grants	145,308	58,136	203,444
Grants from Scottish Government Agencies and NDPBs	96,178	12,431	108,610
Other Grants and Contributions	83,685	24,045	107,731
Borrowing (advances from Loans Fund)	518,296	311,404	829,701
Capital receipts used from asset sales/disposals	41,850	66,069	107,919
Capital Reserves (Capital Fund)	34,595	0	34,595
Capital funded from current revenue	94,302	190,609	284,911
Assets acquired under credit arrangements (e.g. finance leases, PPP/PFI)	42,701	0	42,701
Total Financing	1,734,605	665,497	2,400,102

Source: Capital Returns (CR Final)

In 2014-15 total gross capital expenditure was £2.2 billion. In addition to this, local authorities funded £0.2 billion of revenue expenditure from capital resources - this was mostly funding third party capital housing projects. This means that total expenditure funded from capital resources was £2.4 billion in 2014-15 (£0.67 billion in the housing revenue account and £1.73 billion in the General Fund). 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 2014-15 was grants. Local authorities received a total of £1.1 billion (46% of total financing) in grants and contributions to fund capital expenditure (£1.0 billion for the General Fund and £0.1 billion for the HRA). The second most significant source of financing was borrowing (advances from the Loans Fund). This funded a further £0.83 billion (35% of total financing, £0.52 billion in the General Fund and £0.31 billion in the HRA) of capital expenditure.

Table 2.2 - Total Capital Expenditure and Financing, 2010-11 to 2014-15

£thousands

	2010-11	2011-12	2012-13	2013-14a	2014-15
Acquisition of land, leases, existing buildings or works	98,730	137,332	146,930	90,335	63,604
New construction, conversions & enhancement to existing buildings	1,876,692	2,142,293	2,037,385	1,967,310	1,948,992
Vehicles, machinery & equipment	156,289	194,836	197,022	189,509	174,443
Intangible assets	5,042	6,052	6,638	13,119	14,061
Total Gross Capital Expenditure	2,136,753	2,480,513	2,387,975	2,260,273	2,201,100
Revenue Expenditure funded from Capital Resources	211,409	181,021	161,349	199,728	199,002
Total Expenditure to be met from Capital Resources	2,348,162	2,661,534	2,549,324	2,460,001	2,400,102
Scottish Government General Capital Grant	352,652	565,541	450,088	438,163	680,491
Scottish Government Specific Capital Grants	228,865	234,365	217,281	180,549	203,444
Grants from Scottish Government Agencies and NDPBs	115,726	82,764	141,311	150,761	108,610
Other Grants and Contributions	94,486	85,714	124,311	142,077	107,731
Borrowing (advances from the Loans fund)	1,113,929	1,261,468	1,165,387	1,105,526	829,701
Capital receipts used from asset sales/disposals	114,722	94,020	105,937	92,167	107,919
Capital Fund applied	14,916	21,653	36,867	24,798	34,595
Capital funded from current revenue	208,894	209,122	294,087	295,335	284,911
Assets acquired under credit arrangements (e.g. finance leases, PPP/PFI)	103,972	106,888	14,055	30,625	42,701
Total Financing	2,348,162	2,661,534	2,549,324	2,460,001	2,400,102

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. In particular, 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 2013-14 and 2014-15, total capital expenditure to be met from capital resources fell by 2.4% (£0.06 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 29% between 2013-14 and 2014-15. This is mainly due to the profiling of capital grant allocations over the whole spending review period. (-£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 amount of capital expenditure financed through Advances from the Loans Fund has decreased by 25% between 2013-14 and 2014-15.

From 2011-12 all borrowing undertaken by local authorities became self-financed. Prior to this the first £305 million of local authority borrowed was supported by the Scottish Government through grant included within the local government revenue settlement.

Chart 2.1 - Capital Expenditure Financing¹

1. Following the Police and Fire Reform (Scotland) Act 2012 figures for 2013-14 may not be comparable with previous years. See Background to Local Government section for details.

Source: Capital Returns (CR Final)

2.1 General Fund Capital Expenditure

General Fund capital expenditure in 2014-15 was £1.735 billion, 5.8% lower than in 2013-14. The service with the highest capital expenditure was Education with 32% (£559 million) of General Fund capital expenditure, which is 7% higher than in 2013-14.

The next biggest service for capital expenditure is Roads and Transport which had expenditure of £430 million (25% of General Fund expenditure and 6% lower than in 2013-14).

Table 2.3 - Capital Expenditure by Service, 2010-11 to 2014-15

£thousands

	2010-11	2011-12	2012-13	2013-14	2014-15
Education	508,691	691,878	517,158	523,776	559,309
Cultural & Related Services	196,014	245,371	257,040	148,933	121,778
Social Work	51,256	46,487	73,812	80,849	73,690
Roads & Transport	399,084	482,554	503,480	458,876	430,265
Environmental Services	102,458	105,036	126,631	188,525	138,267
Planning & Development Services	120,742	113,476	118,282	94,415	66,488
Central Services	180,486	143,678	123,740	175,153	174,094
Non-HRA Housing	174,404	149,002	136,363	156,699	165,543
Trading Services	12,687	10,390	18,419	14,059	5,171
Total General Fund Capital Expenditure excluding Police & Fire	1,745,822	1,987,872	1,874,925	1,841,285	1,734,605
Police1	25,241	30,188	45,365
Fire1	30,983	43,856	21,755
Total General Fund Capital Expenditure	1,802,046	2,061,916	1,942,045	1,841,285	1,734,605
Housing Revenue Account	546,116	599,618	607,279	618,716	665,497
Total Capital Expenditure	2,348,162	2,661,534	2,549,324	2,460,001	2,400,102

1. Following the Police and Fire Reform (Scotland) Act 2012 figures for 2013-14 may not be comparable with previous years. See the Background chapter for details.

Source: Capital Returns (CR Final)

Chart 2.2 - Capital Expenditure, 2010-11 to 2014-15

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, as such, chart 2.3 should be interpreted with care.

Chart 2.3 - Total Expenditure to be met from Capital Resources per Capita by Local Authority Area 2014-15

Source: Capital Returns (CR Final) & National Records of Scotland Mid-Year Population Estimates (2014)

2.2 General Fund 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 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 2.2 (above) provides time series of grant income from 2010-11 to 2014-15.

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 2.4 details capital receipts categorised by service from 2010-11 to 2014-15. 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 2014-15 can be found in Annex J.

Table 2.4 - Capital Receipts Raised by Service, 2010-11 to 2014-15^a

£thousands

	2010-11	2011-12	2012-13	2013-14a	2014-15
Education	18,822	20,177	5,623	13,798	15,498
Culture & Related Services	12,013	746	3,574	3,574	1,526
Social Work	2,026	3,477	3,155	2,632	5,574
Roads & Transport	913	6,087	2,778	1,742	21,398
Environmental Services	799	611	507	1,378	1,538
Planning & Development Services	17,901	13,962	15,011	58,276	22,163
Central Services	18,613	15,663	23,925	28,128	25,930
Non-HRA Housing	453	344	81	198	666
Trading Services	1,082	1	35	6	8
Total GF Capital Receipts excluding Police & Fire	72,622	61,068	54,689	109,732	94,302
Police & Firea	3,834	4,926	7,206
Total GF Capital Receipts	76,456	65,994	61,895	109,732	94,302
Housing Revenue Account	65,515	46,326	42,369	53,529	70,594
Total Capital Receipts	141,971	112,320	104,264	163,261	164,896

a. Following the Police and Fire Reform (Scotland) Act 2012 figures for 2013-14 onwards may not be comparable with previous years. See the Background chapter for details.

2. 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 raised and capital receipts used are not necessarily equal.

Table 2.5 - Capital receipts summary, 2014-15

£thousands

	General Fund	Housing Revenue Account	TOTAL
Capital Receipts brought forward at 1 April 2014	46,604	2,877	49,481
Capital receipts from the sale/ disposal of fixed assets	94,302	70,594	164,896
Total capital receipts available for use	140,906	73,471	214,377
Capital receipts used from asset sales/disposals	41,850	66,069	107,919
Capital receipts used to repay debt	20,776	6,104	26,880
Capital receipts transferred to Capital Fund	25,134	0	25,134
Capital receipts held 31 March 2015	53,146	1,298	54,444

Source: Capital Returns (CR Final)

Table 2.5 shows that authorities had a total of £214 million of capital receipts available for use during 2014-15, of which £49 million was the balance brought forward at 1^st April 2014 and £165 million was raised during the year from the sale/disposal of fixed assets.

The main use of capital receipts in 2014-15 was to finance capital expenditure (£108 million), with a further £27 million used to repay debt and £25 million transferred to the Capital Fund. This resulted in a Capital receipts balance of £54 million at the 31^st March 2015.

2.3 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.

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. It is not expected, however, that the levels of Loans Fund debt and external debt will be significantly different in value.

The total amount of Loans Fund borrowing in 2014-15 was £830 million. This is 25% less than in 2013-14, a fall that can be largely attributed to the profiling of capital grant allocations over the whole spending review period (-£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, £518 million (down 34%) was in the General Fund and £311 million (down 2%) was in the HRA.

Table 2.6 - Loans Fund Borrowing to Finance Capital Expenditure - 2010-11 to 2014-15

£thousands

	2010-11	2011-12	2012-13	2013-14	2014-15
General Fund	808,181	918,890	852,238	788,568	518,296
Advances for Capital Expenditure	794,407	915,766	846,269	751,634	489,774
Advances for Consented Borrowing	13,774	3,124	5,969	36,934	28,522
Housing Revenue Account	305,748	342,578	313,149	316,958	311,404
Advances for Capital Expenditure	305,748	342,578	313,053	316,815	311,404
Advances for Consented Borrowing	0	0	96	143	0
Total Loans Fund Borrowing	1,113,929	1,261,468	1,165,387	1,105,526	829,701

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. The costs of servicing debt are detailed in Table 1.1 which shows interest payable and the cost of repayments (Statutory Repayment of Debt).