Capital Strategy
Wayne Butcher
For more than 24 months, Towns Fund Towns have been busy defining and preparing a series of interventions that form a core part of their Town Investment Plans but how do they ensure that these projects can effectively align with other projects that are part of their wider local strategy?
Wayne Butcher looks at the benefits of producing an effective capital strategy but also the challenges faced in the near future.
Introduction
Capital strategies are developed by Local Authorities to support not only the planning around delivery but to articulate the ambition of a place and how it wishes its residents to live, work and play in the area.
It is important that the approach moves beyond being purely strategic and helps to set the blueprint for how projects inter-relate, how the Council will manage the progression of projects and the financial opportunities and risks that are forecasted to arise from these aspirations.
It is important to note that the capital strategy is not solely focused on the council as an accountable body, but also needs to recognise that its governance needs to include the private sector (e.g. as represented on the Towns Deal Board) and potential external delivery partners. Hence the capital strategy should seek to bring out those interdependences between the council and the Town Deal Board to give a full, holistic picture which is more useful to the public and other external interested parties.
The Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code requires Councils to produce a capital strategy to demonstrate how capital expenditure, capital financing and treasury management activity contribute to the provision of desired outcomes and take account of stewardship, value for money, prudence, sustainability, and affordability. The supporting CIPFA guidance on capital strategy steers Local Authorities to take a whole organisation approach when meeting this requirement. We unpack this further…
So, where to start?
I have seen many capital strategies prepared by Local Authorities and a common observation is that these documents can tend to become quite large and hence cumbersome in their application. Whilst the detail needs to be included, it is important that the strategy is clear, concise and to the point. Broadly speaking, we would anticipate a strategy that incorporates the following information:
One page story / executive summary showing an evidenced need for investment (based on national and local data analysis), including an introduction to the Towns Fund story, or any other related funding streams.
Council priorities (including the Levelling Up transformation)
Strategic planning framework and other key technical elements – including a visualisation of activities to take place and to meet the goals.
Medium-term financial strategy (MTFS) and the impact of the wider economic environment on the capital strategy
Consideration for financing and impact on minimum revenue provision.
Capital investment plan and asset management plan
Internal capacity to deliver (i.e. including governance and risk) and relationships with external parties to deliver.
Interestingly, the one-page story can often be an area Councils find difficult to tell but it’s important that the author can summarise the “Who, What, When, Where, Why, and How”. For the strategy to be compelling, an interested stakeholder needs to clearly be able to understand the driving force behind the strategy (i.e. what are we trying to achieve?) and how the projects come together to deliver impact which is greater than the sum of the parts – it’s vital to remember that the capital strategy is about the portfolio of all projects and not just individual schemes, which will have their own detailed business cases.
The priorities of the Council should be known but, as indicated above, it’s easy to be consumed by individual projects that start to dominate the strategy. Hence if the priorities are “to move more people down to the promenade, spend more time in the town centre or reduce traffic on the ring road”, it’s important that this golden thread, and wider theory of change remain at the heart of the strategy.
Items (iv) to (vi) are linked and hence I have considered as one. The MTFS is important in that the delivery of the strategy can only be successful if it’s underpinned by robust financial management and a clear understanding of the impact of capital projects on the revenue budget and reserve levels.
We work with a lot of Councils in this area and understanding the level of reserves available, headroom in the capital financing requirement, appetite to prudentially borrow within the regulations etc. are critical questions. Hence, finance (and in particular treasury management) has a major role in working with project/regeneration teams to translate the implication of these areas for non-financial users, in arriving at a balance between ambition and financial realism.
Building upon this, explaining the role of the private sector in delivery both at a capital and asset management level is also vital. A strategy is not just about the building phase but how assets are managed going forward and how to ensure this is sustainable too – again, team working between different parts of the Council is vital in ensuring there is capacity to manage the risks and opportunities that the Council faces from a wider portfolio perspective.
I would anticipate that a strategy will consist of projects with a mixed position in terms of viability, so it’s important to address this and present back to decision-makers if there is an assumption of a group of more viable projects subsidising projects which carry greater risk.
This is a likely scenario if place-shaping is at the heart of a capital strategy – we all know that challenging projects will exist! Hence the importance of the capital strategy in setting out an approach to show how the portfolio will be managed collectively to avoid delivery of only the best opportunities and giving confidence that the full programme can be delivered. This needs to also pay reference to value for money and prudence in that ensuring one project does not skew a wider strategy in terms of the overall risk that the strategy carries.
A final area of consideration surrounds the capital strategies intended recipients. The capital strategy can act as a marketing piece, showcasing the Towns aims and ambitions. Therefore, it is important to brand the approach appropriately and present the strategy in an easy-to-read format which engages the reader.
Benefits this can drive
In summary, an effective capital strategy can:
Sharpen focus on outcomes and outputs and ensure this is clearly linked back to the “bigger picture” in terms of the overarching ambition/vision.
Inspire and excite officers, who will have lots of ideas on how they can help shape the strategy and drive forward.
Be used as a resource to help residents understand what is going on, but that can be used to externally showcase the ambitions and attract private capital.
Give confidence that value for money and prudence is at the heart of wider planning.
Allow partners to understand the overall picture that the Council is trying to deliver.