Capitalising on your Capital Strategy Laura Fallon

A perennial problem with keeping people informed is how to tell them enough detail so that they know what they need to without giving them so much detail that they get too confused to understand. This has long been a problem for local authority accountants who need to keep their elected Councillors informed about the capital spending and associated treasury management decisions they are ultimately responsible for. 

In a bid to fix this in 2017 the Chartered Institute of Public Finance and Accountancy (CIPFA) updated its bible on Local Authority capital spending, the Prudential Code, to include an additional document called a Capital Strategy. This is designed specifically to be short, easy to understand and cover the key issues and is essentially an overview of a number of other strategy documents. Its introduction came at a time when capital programmes at local authorities were increasingly involving the purchase of commercial assets to boost authorities’ income in light of long term central government cuts.

The document should address capital expenditure, which is ultimately a driver of whether the authority will need to borrow and if so how much and for how long. It should then make clear what borrowing is expected to be required and whether this is within affordable limits for the authority. Other liabilities such as the pensions deficit, guarantees or major provisions should also be covered. The strategy should discuss investments, both financial and non-financial, including the expected size of investments, what their risks are and what investments are made for service or commercial purposes. Finally, the strategy should talk about what knowledge and skills the authority has or has access to that are commensurate with the authority’s risk appetite.

Although it is no doubt a far simpler version of the full strategy statements that it covers, the Capital Strategy still has to cover some quite difficult to understand concepts. The requirement to include most prudential indicators creates a need to talk about the capital financing requirement, internal borrowing, minimum revenue provision (loans fund repayments in Scotland) and the liability benchmark. These are often difficult concepts to explain to qualified accountants with years of local government experience let alone local politicians with no financial background! Although the Prudential Code gives information on what the capital strategy should cover it does not dictate a specific format which is left to authorities themselves to decide on.

Arlingclose have provided our clients with a template to form the basis for their capital strategy including all the required prudential indicators and explanations of the key concepts. We recommend that authorities then tailor this to their individual circumstances aiming for around four pages of text (excluding tables and diagrams). This should keep that all important balance between giving Councillors the facts they need whilst ensuring they are still engaged enough at the end of reading the document to make the right decisions!

If you are wrestling with what to include in your 2021/22 Capital Strategy or need assistance in completing any of the required tables/indicators a member of our Technical Team will be able to offer assistance.