Section 3

Capital planning

3.1 Definition of capital expenditure

Capital planning is about capital investment or expenditure, as distinct from revenue expenditure or running costs. For the purposes of this guide, capital expenditure can be defined as expenditure on assets that will provide a benefit to the organisation beyond the current financial year. This includes expenditure on:

• ■purchase of new assets
• ■creation of new assets
• ■enhancing and/or extending the useful life of existing assets.

A more detailed definition of capital expenditure, as it applies to UK local authorities, is contained in Practitioners’ Guide to Capital Finance in Local Government (CIPFA, 2012).

The accounting treatment should be in accordance with International Accounting Standard 16 Property, Plant and Equipment.

3.2 Importance of the capital strategy

A capital strategy is the foundation of proper long-term planning of capital investment and how it is to be delivered. Every public sector organisation that has significant capital assets and access to capital funding should therefore have a robust capital strategy. Even if the organisation’s only assets are office buildings and equipment, it is likely to need to reconfigure and invest in those assets at some point and therefore to require a long-term plan for how it will secure that investment.

3.3 Contents of the capital strategy

The following table summarises what the contents of the capital strategy should be and cross-refers to the relevant sections of this guide.

3.4 Developing a capital strategy

3.4.1 Link with corporate objectives

The starting point for developing the capital strategy is to identify corporate objectives and to translate these into achievable goals for capital investment. This should be integrated with the asset planning process described in section 2 to identify what investment is required in existing assets to meet these objectives.

A corporate strategy or similar document may be considered as the definitive statement of the organisation’s objectives. However, these documents tend to focus on objectives that require a change from business as usual and may not cover routine activities where no change is envisaged within the relevant planning horizon. The latter may include some of the organisation’s statutory functions and so it is essential that they are taken into account in the formulation of the capital strategy.

The objectives that are expressed in the capital strategy must be achievable, at least in the long run; otherwise the strategy will not be a useful tool for determining action. It is important to distinguish between strategy and vision; the vision may not be achievable within any reasonable planning horizon. The capital strategy, however, must recognise constraints and bear some relation to:

• ■what is physically feasible
• ■the funding that may be available
• ■what may be achievable within the relevant planning horizon.

This is illustrated in the example below.

That is not to say that a capital strategy should be based on pessimistic assumptions. It is a plan for the long term and it is appropriate for it be more ambitious than the capital programme, which will be based on a firmer and more realistic assessment of constraints over the medium term, including the funding identified in the medium-term financial strategy. The process for developing a capital programme is described in section 4.

It is important to ensure that those charged with the governance of the organisation (such as ministers, elected members and non-executive directors) are involved in the formulation of the capital strategy. Their role in determining the content of the capital programme is discussed in section 4.3.3.

3.4.2 Link with infrastructure planning

Public sector organisations that are responsible for providing infrastructure should ensure that their capital planning is joined up with sound infrastructure planning.

Different public sector organisations are responsible for providing different elements of infrastructure, such as roads, railways, housing, health facilities and schools. They cannot fulfil their functions effectively if they operate in isolation from each other. In areas of England where there is a two-tier system of local government, for example, county councils and district councils have to work together to ensure that where there is a new housing development, the local road network is developed accordingly and sufficient new school places are created in the area.

Infrastructure planning is particularly important where there is a growing population, as there is in the UK at present. This requires a proactive approach, eg to agree housing targets and how they are to be met, and good partnership working with other organisations, including private developers.

Public sector organisations with responsibility for spatial planning, economic development and development control have a special role in the infrastructure planning process. These functions therefore need to be joined up with capital planning; staff from the relevant departments, with knowledge of future requirements for infrastructure investment, should be involved in the process to develop the capital strategy.

3.4.3 The organisation’s appetite for risk

An organisation’s ability to achieve its corporate objectives, especially if those objectives are ambitious, depends not only on the availability of resources, but also on the organisation’s willingness to take a reasonable level of risk. This has implications for the capital strategy.

Although public sector organisations, as custodians of taxpayers’ money, must be more risk averse than commercial enterprises, excessive caution is likely to result in paralysis, particularly in the sphere of economic regeneration. Accepting risk means accepting that there may be the occasional failure and consequent adverse publicity. Although this can be painful, it can also enable the organisation to achieve more overall.

In formulating its capital strategy, a public sector organisation may find it useful to think about its attitude to risk and include a statement about this in the strategy document. Bournemouth Borough Council’s Capital Strategy and Corporate Asset Management Plan 2013-16 Handbook, for example, indicates that the council will share risks with the private sector to enable it to progress ambitious, large-scale regeneration plans.

The degree of risk each organisation should take is a matter of policy, to be decided by the organisation’s leadership. What is important is that the risks involved in different methods of delivering capital investment are fully understood. This is particularly important when innovative delivery models, as discussed in section 8.3, are being considered.

3.5 Relationship between asset planning and capital planning

There is a great deal of overlap between asset planning and capital planning, at both the strategic and the operational level.

The following table illustrates the overlap between the asset strategy and the capital strategy.

Asset planning considers the entire asset portfolio and the need for capital investment both to maintain and renew existing assets and to create new assets. This is vital information for developing the capital strategy and for identifying potential projects to include in the capital programme.

In addition, asset planning identifies assets for disposal and is therefore the primary source of information for assessing the availability of capital receipts to fund the capital programme. See section 5.3.2 for more information about capital receipts.

The importance of AMP information in the development of the capital programme, as mentioned in section 2.3, is another reason why asset planning and capital planning are closely linked.

There is therefore a strong argument for asset and capital planning to be integrated instead of being treated as two separate processes. This helps to ensure that sufficient resources are directed to maintaining and reshaping the asset base so that it continues to be fit for purpose.

An example of an organisation that has established a clear link between capital planning and asset planning is Bournemouth Borough Council. This can be seen in its capital strategy mentioned above.