Section 4

Developing a capital programme

4.1 Introduction

A capital programme is a set of capital projects that an organisation plans to undertake within a given timeframe. It should be based on the capital strategy, which in turn should be linked to the asset strategy, as explained in sections 2 and 3; otherwise it will not be aligned to the organisation’s long-term objectives and will be more susceptible to considerations of what is expedient in the short run.

The approved programme typical covers a period of three to five years and is usually updated annually. However, the programme period may be significantly longer in an organisation, such as a ministry of defence, with assets that require a long time to develop and design.

The development of a capital programme involves the following key activities:

• ■setting the parameters
• ■identifying and developing project proposals
• ■evaluating and prioritising project proposals
• ■finalising and approving the programme and confirming the funding.

The flowchart below provides an overview of these processes, which are described in this section, and their links with the corporate strategies and plans described in sections 2 and 3.

4.2 Setting the parameters

4.2.1 Introduction

The process to develop the capital programme needs to be coherent and well organised to ensure that the projects that get approved are a) those that best meet corporate objectives, and b) deliverable. At the beginning of the process, senior management should:

• ■set a working assumption for the level of funding
• ■set the criteria for evaluating and prioritising project proposals
• ■issue clear instructions to departments.

4.2.2 The assumed level of funding

The process to determine the level of funding for the capital programme may be straightforward for an organisation that has a fixed capital budget, but for most public sector organisations is likely to be iterative because there are two variables – the available funding and the need to spend – neither of which is fixed. Each influences the other so that the funding is not finalised until the end of the process to evaluate and prioritise projects.
A working assumption therefore needs to be made at the beginning of the process about the level of funding; otherwise resources will be wasted in developing proposals for projects that have no chance of being approved.

The way the capital programme is funded should be consistent with the capital funding strategy, forming part of the capital strategy. Any proposals to use capital receipts should also be consistent with the disposals strategy forming part of the asset strategy. Capital financing and budgeting are discussed in section 5.

Capital expenditure has an impact on the revenue budget; the funding of the capital programme therefore needs to be linked with the medium-term financial strategy. In particular the organisation needs to ensure that the level of any borrowing used to fund the capital programme will be affordable in terms of the impact of the loan repayments and interest on the revenue budget.

At each annual review of the programme, the scope for selecting new projects in accordance with local priorities will be limited by:

• ■the availability of funding
• ■existing commitments from projects that have been approved previously
• ■unavoidable or compelling new pressures, for example health and safety requirements or a need to strengthen coastal defences following storm damage
• ■specific funding being available only for a defined purpose.

In a period of austerity, the room for manoeuvre may be very limited indeed; only a small proportion of the overall funding may be available for the organisation to use at its discretion to meet its own priorities. However, this makes a proper process for developing the capital programme all the more important, to ensure the best use is made of limited resources.

4.2.3 Evaluation criteria

Clear criteria are needed for evaluating project proposals and determining which of them should be approved for inclusion in the programme. The criteria, and any scoring system that is to be used, should be disclosed to departments at the beginning of the process so that they can develop their proposals accordingly.

The criteria should be consistent with the capital strategy and with corporate objectives. A housing authority, for example, with a strategy to improve energy efficiency, should set criteria that prioritise schemes which incorporate energy efficiency measures, such as better insulation.

In formulating the criteria, it is useful to think in terms of three broad headings: benefits, cost and deliverability/risks. The following table sets out criteria that might be used against each of these headings.

Projects that are essential in order for the organisation to continue to meet its statutory obligations, particularly those relating to health and safety, should have top priority; this should be made clear in the evaluation criteria.

Where projects are to be funded from external sources, the evaluation criteria may need to take into account the objectives of the funding body, including any explicit funding conditions. However, if these are not consistent with the organisation’s own objectives, it may not benefit the organisation to make use of the funding stream in question. This issue is explored further in section 5.4.

For projects where the outputs or outcomes are suitable for measurement, it may be appropriate to require departments to specify SMART objectives and how they will be measured. This information can then be used to evaluate the contribution the project makes to meeting corporate objectives.

Lessons learned from post-project evaluation (see section 7.4.5) should be taken into account in formulating the evaluation criteria where appropriate, eg if a lot of projects have been slipping, more weight could be given to deliverability when deciding which projects should be included in the programme.

Scoring systems

Some organisations use a scoring system to prioritise project proposals. An example is the system used by Wrexham County Borough Council, as described in a report to its Finance and Performance Scrutiny Committee in March 2012. In summary, proposals are scored as follows.

The purpose of this approach is to introduce more discipline into the evaluation process and to make it more objective, so that the projects that are selected are those that are likely to best deliver the organisation’s objectives. However, scoring systems do have a number of potential pitfalls:

• ■they can make the process too bureaucratic and time-consuming
• ■they can lend a false sense of objectivity to a process that must involve both professional and political judgements
• ■it can be difficult to assign appropriate weightings to the criteria, especially if there are a lot of criteria
• ■it can be difficult to get evaluators to score on a consistent basis.

Careful consideration therefore needs to be given to whether the use of a scoring system is the right approach in a particular organisation. Where a scoring system is used, it needs to be designed well and applied intelligently.

Whether or not a scoring system is used, there is a risk of ‘groupthink’, ie that group dynamics prevent the different evaluators from thinking independently. This can undermine the objectivity of the process. This may be avoided by:

• ■having an evaluation team made up of a diverse range of individuals with different backgrounds and outlooks
• ■avoiding having evaluators with line management responsibility for other evaluators
• ■starting the process with each evaluator scoring the proposals independently, then recording the initial scores, as part of an audit trail, before the evaluation team meets to discuss the proposals and moderate the scores.

4.2.4 Instructions about the process

To enable the capital programme to be developed efficiently and coherently, the organisation should issue clear and timely instructions to departments about the process. These should cover:

• ■the deadlines for proposals to be submitted
• ■the evaluation criteria and any scoring system that is to be used
• ■the information that must be included in a project proposal, including estimates of whole life costs and other financial implications
• ■any requirements for feasibility studies and option appraisal to be carried out
  (see section 4.4.2)
• ■any information about the available funding that it has been decided should be disclosed to departments
• ■where relevant, guidance on the types of project that will be acceptable, taking into account any provisions of the capital strategy, such as those relating to the organisation’s appetite for risk, as discussed in section 3.4.3.

It may be useful to issue a form and/or a template business case for departments to complete for each project proposal. Care needs to be taken in the design of such forms and templates to ensure they enable departments to submit all the relevant information, but do not require unnecessary information. An example of a relatively simple form can be found in the report to Wrexham’s scrutiny committee (see section 4.2.3). The use of business cases in the evaluation of project proposals is discussed in section 4.4.1.

4.3 Developing and evaluating project proposals

4.3.1 Identifying potential projects and developing proposals

Proposals for new projects may have their origins in:

• ■an analysis of investment needs as set out in the asset strategy and AMPs
• ■new policies or initiatives from within the organisation
• ■initiatives from external organisations, such as partners and providers of funding
• ■external factors, such as new legislation and technological developments.

The need for investment in existing assets should be fully taken into account in the formulation of the capital programme. The starting point for this is an analysis of AMP information; otherwise it is likely that the programme will be skewed towards new,
high-profile projects, resulting in under-investment in existing assets.

The asset strategy and AMPs should be frequently revised in light of new policies, initiatives and external developments, but it will not always be practicable to keep them completely up to date. A separate analysis may therefore be needed to identify any capital investment that is required as a result of these changes.

Project proposals should as a minimum consist of a description of the proposed project and a rationale. The detail should be sufficient to enable the proposal to be evaluated and prioritised against other proposed projects. This will depend on the project. For complex and innovative projects, a detailed business case may be required, whereas for the most straightforward projects, a few sentences should suffice.

Lessons learned from post-project evaluation (see section 7.4.5) should also be taken into account when proposals for new projects are being developed.

4.3.2 Ensuring the process is manageable

It is not cost-effective for an organisation to expend significant resources on developing proposals for projects that have little or no chance of being approved. Departments may understand this implicitly and limit the number of proposals they make accordingly, but there is a risk that they submit ‘wish lists’ and that the process becomes unmanageable.
The submission of an excessive number of proposals may be discouraged by:

• ■setting funding parameters at an early stage
• ■requiring feasibility studies and option appraisal (see section 4.4.2) to be carried out before projects are proposed for inclusion in the capital programme
• ■requiring service directors to sign off proposals before they are submitted to the corporate centre.

Even if steps are taken to limit the number of proposals, it may still not be feasible to carry out detailed evaluation of all the proposals received. A two-stage approach is common.
A simple evaluation process is used to determine a long list, then a further, more detailed evaluation is carried out to determine the short list. However, the second stage of evaluation should remain relatively simple for smaller, straightforward projects.

4.3.3 Evaluating and prioritising proposals

Evaluation and prioritisation should be carried out in accordance with the criteria set at the beginning of the process (see section 4.2.3).

In an organisation with a diverse range of services, it may be difficult to compare proposals from different departments (eg to compare a project to renew refuse collection vehicles with one to improve kitchens in social services day centres). One option in these circumstances is to allocate a capital budget to each department and let each prioritise its own projects within that budget. This approach is not ideal, because it is likely to result in the selection of projects that do not best meet corporate objectives. On the other hand, if evaluation is carried out by a corporate team, there is a risk that it does not have the right resources and skills to make judgements about the relative priority of a diverse range of potential projects. There is no easy answer to this dilemma; each organisation should careful consider the best way to deal with it, depending on its own structure and culture.

The use of business cases, feasibility studies, option appraisal, AMP information and financial information in the evaluation of project proposals is described in section 4.4.

The role of those charged with governance and senior management

The role of those charged with governance in determining the capital strategy is described in section 3.4.1. They are also likely to have a role in deciding which projects are included in the capital programme, as well as being responsible for the formal approval of the programme.

Senior management – the chief executive, the director of finance and service directors – are responsible for leading the capital programme process and for advising those charged with governance on the decisions that they take.

It is important to ensure that both those charged with governance and senior management carry out their roles in a way that supports the organisation’s corporate objectives and its capital strategy. This can be facilitated by:

• ■clear corporate objectives
• ■a robust asset strategy and AMPs
• ■a robust capital strategy with a clear link to the asset strategy
• ■strong governance with the process for determining the capital programme clearly set out in the capital strategy
• ■clear criteria for prioritising projects that are consistent with the capital strategy
• ■giving decision-makers clear and complete information, with alternative options set out where appropriate, to enable them to make good decisions.

The role of the head of property is critical in ensuring that decision-makers are aware of their responsibilities to protect existing assets. It may therefore be appropriate to give him or her a formal role in advising on decisions relating to the approval of the capital programme, similar to the role that the director of finance and the chief legal officer usually have.

4.4 Information used to develop and evaluate proposals

4.4.1 Business cases

Section 4.2.4 suggested that departments should complete a form and/or submit a business case when proposing a project for inclusion in the programme. A careful judgement needs to be made about the level of detail that is appropriate at this stage. It is unlikely to be
cost-effective to require business cases for all project proposals, but it may be appropriate to require them for projects, or groups of projects, that exceed a specified threshold. It may be useful for the organisation to specify in its capital strategy when business cases are required and the level of detail that must be submitted at each stage.

Where business cases are required, they should include estimates of whole life costs so that these can be taken into account in evaluating project proposals. If an option appraisal is carried out, then the information should be generated as part of that exercise.

Business cases are more likely to be required for projects at key stages after they have been approved. Typically an outline business case is required for approval to commence procurement and a final business case is required for approval to award the main contract. The role of business cases at the project delivery stage is described in section 7.4.4.

4.4.2 Feasibility studies and option appraisal

Feasibility studies and option appraisal provide invaluable information that may be used at both stages described in section 4.3: when project proposals are being formulated and when they are being evaluated and prioritised. This information may be included in the business case, if one is required at these stages; otherwise it may be summarised on the pro forma submission. Care should be taken to avoid duplication of information requirements.

The widespread use of feasibility studies and option appraisal is to be encouraged, but the degree of sophistication with which they are applied should be tailored to the needs of different projects depending on their size and complexity. Again, it may be useful for the organisation to specify in its capital strategy when these techniques should be used and the associated information that must be submitted with a project proposal.

Feasibility studies

The purpose of a feasibility study is to determine whether a proposed project is deliverable and to provide a reasonable estimate of the cost. Feasibility studies should be carried out for all significant projects, before the project is approved for inclusion in the capital programme. This helps to ensure that:

• ■projects included within the programme are deliverable
• ■project budgets are based on informed estimates rather than being just guesses.

Where a feasibility study has been carried out before a department makes a proposal for a project to be included in the capital programme, the information produced may be used by the corporate team as part of the evaluation of the proposal.

Option appraisal

Option appraisal is particularly useful for evaluating different options for achieving the same objective, eg to build a bridge or a tunnel to provide a new river crossing. A sophisticated option appraisal is appropriate for major projects where it is not obvious which solution is best. For simpler projects, it may be appropriate to require that project proposals include a brief explanation of the alternative options and why the proposed solution is considered the best option.

The guidance in The Green Book: Appraisal and Evaluation in Central Government (HM Treasury, 2003) is mandatory for central government departments and executive agencies in the UK.

More information about option appraisal is provided in Option Appraisal: A Practical Guide for Public Service Organisations (CIPFA, 2011).

4.4.3 Asset management plans and financial information

AMPs are a key source of information both for identifying potential projects and for the evaluation process. The relevant information that they provide may include:

• ■current usage
• ■current maintenance costs
• ■other operating costs
• ■incidence of faults/failures
• ■condition and suitability of the asset
• ■estimated remaining life of the asset
• ■plan for the asset based on the asset strategy.

Other financial information, such as information about actual running costs, should be used to complement or substitute for AMP information where appropriate.

The financial and performance information will be most useful if it is put in context, eg through trend analysis and/or benchmarking.

4.5 Finalising and approving the programme

The final stage in the development of the capital programme is approval of:

• ■the projects to be included in the programme
• ■the budget for each project
• ■any separate contingency budgets
• ■the funding for the programme as a whole
• ■any reserve projects.

As capital programmes are invariably for a multi-year period, if everything goes according to plan and nothing else changes, then each year, as the programme rolls forward:

• ■approved projects that have been completed will fall out of the programme
• ■approved projects that have not been completed will remain in the programme
• ■new projects will be approved for inclusion in the programme.

This is illustrated in the following simple model.

This assumes that every project is completed within a single financial year, but the same principle applies where projects stretch over more than one financial year.

The approved programme is fixed in the sense that, if all goes according to plan, the approved projects will remain in the programme until they are completed. In reality, however, things rarely go entirely to plan, and plans tend to change too. Projects that have been approved, but which have not yet commenced, may be removed from the programme for various reasons, including:

• ■a change in policy
• ■new legislative requirements
• ■external funding being less than expected
• ■other resources, such as capital receipts, being less than expected
• ■a feasibility study, undertaken after the project has already been included in the programme, showing that the project is not deliverable within the available budget
• ■a gateway review showing the project will not deliver the required outputs within the available budget
• ■the project not being deliverable at all, eg due to inability to acquire a piece of land
• ■a significant delay to the start of a project, eg due to a judicial review, resulting in a decision to take it out of the programme for the time being.

Over-programming, a list of reserve projects and programme contingencies may be agreed as part of the approval of the capital programme. The pros and cons of these options are described in section 7.4.2.