Department of the Environment,
Transport and the Regions

Local Government Finance
Modernising Local Government
Capital Finance Paper
Chapter 3 - Changes to the Capital Allocation System

3.1 The Government currently provides capital support to local authorities in a variety of different ways. These are outlined in detail in Annex A. Methods used in deciding the exact amounts to be provided to individual authorities vary from sharing out support according to "needs" formulae (for example, social services funding is partly given according to numbers of elderly people in the area) to more complex assessments of efficiency and effectiveness (for example, as part of the mechanism used in delivering the housing capital programme); alternatively, support may go to the best bidder in a winner-take-all competition, as in some regeneration funding.

3.2 Different government departments are already considering how to allocate their capital resources more effectively. New capital resources have already been provided for schools and housing, to contribute towards the Government's Manifesto commitments. Further options, on which the Government is seeking views, are considered below. The basis of all the allocation options discussed in this section of the paper is that the current legislative system will remain in place and that when possible resources will be allocated as basic credit approvals (BCAs).

3.3 The aim is to improve the ability of the capital finance system to influence strategic and corporate planning within local authorities, and to give local authorities the incentive to focus more clearly on cross-cutting issues such as social exclusion and youth crime. This links with the development of a best value approach to capital programmes and asset management as part of a Council's overall "Local Performance Plan".

Development of the Existing Service Specific Capital Allocations.

3.4 The existing system of service by service capital allocations has a number of advantages. Allocation criteria can take account of a wide range of service specific factors influencing capital spending, which may vary significantly from authority to authority. They can also take account of performance measures which are again highly specific to the service in question: for example, in the application of the Department for Education and Employment's (DfEE) area guidelines and cost benchmarks to each Local Education Authority's (LEA) management of its school estate.

3.5 The current framework can also provide an important element of flexibility within particular services. For example, in some schools - voluntary-aided schools - most capital expenditure is supported by grant paid direct to governors. These schools, comprising about 20% of the total, are unevenly distributed amongst LEAs. The current system allows DfEE to switch capital spending on education easily between the local authority and non-local authority sectors in particular areas as relative needs change.

3.6 Although service-based allocations can deliver improvements in service performance, it is not clear the current system offers sufficient incentives for good corporate working and planning or enough encouragement for cross cutting initiatives. Councils that try to adopt a corporate approach and deliver cross-service programmes may face a bewildering array of independent, allocation specific timetables, rules and mechanisms that can be difficult to manage in a coherent way. The SRB demonstrated the advantages of bringing together separate programmes to support a more corporate and partnership-based approach to regeneration spending - although like all competitions, it inevitably increases uncertainty for authorities whilst bidding is in progress.

3.7 The current system is not static, and within its basic framework of service based allocations, significant improvements should be possible. Ways might be found to increase local choice and encourage the development of corporate and strategic thinking in authorities, the use of private finance, and partnership with the local community and business.

3.8 Developments within some service areas are suggesting ways forward. DfEE are consulting local education authorities on the introduction of Asset Management Plans (AMPs) to encourage best practice in property management and to tackle the maintenance backlog, as part of the New Deal for Schools (these plans are considered in more depth in paragraph 4.7). In transport, consideration is being given to the allocation of resources on a block basis, linked to a five-year transport strategy. In housing, local authorities are being encouraged to be more strategic and to ensure that their housing strategies are part of a more corporate approach, an approach emphasised in the HIP process and described in more detail below. The need for housing strategies to form part of a wider corporate approach to service delivery will be developed as part of best value. Links between housing and other areas, notably regeneration and welfare to work, have also been highlighted under the Capital Receipts Initiative (CRI). All service areas will be examining ways of increasing local authority discretion over expenditure within their area by considering how programmes and policies can be brigaded to ensure that they make the maximum contribution to meeting long term need.

The Housing Investment Programme (HIP)

3.9 The Audit Commission suggested that HIP offered a good example of the use of need and corporate assessment in making capital allocations. In HIP, half of the available housing resources are allocated purely in accordance with a needs formula. The other half are initially shared out in the same way, but are then adjusted up or down in accordance with Ministers' assessments of the relative merits of the authorities' capital strategy for housing and their performance. The key elements of the HIP process are:

3.10 The HIP process is generally considered to have been successful in improving local authority performance, while it has also helped to promote specific government policies.

Summary

3.11 Development of the existing allocation system along these lines, while encouraging local authorities to think more corporately, would allow the existing divisions amongst services to be maintained. These divisions are often reflected in the approach to budget setting adopted by authorities.

3.12 Further service based development could be regarded as part of a transition toward more "corporate" central allocations, as described below, in due course. Such development would meanwhile give more local discretion, help to facilitate the inclusion of service specific plans within corporate best value planning, improve asset management and reward good performance. The maintenance of tailored service based allocations in the short to medium term would also allow changes to service delivery, such as those outlined in the School Standards and Framework Bill, and any others arising as a result of other comprehensive spending reviews and consultations, to settle in.

Q1 The Government would welcome views on improvements to the current service based allocation systems.
The Creation of A Single "Pot" Allocating A Large Proportion of Capital Support Through A Single Funding Mechanism

3.13 This further step could be based on the suggestion by the Audit Commission in Capital Gains, and would also relate to the proposals by the LGA for a New Commitment to regeneration funding. It would also amount to building on the HIP system described above by creating a single "pot" covering a large proportion of all capital resources currently allocated to local government. Such a pot might include most of the resources currently distributed through service annual capital guidelines (ACGs - see Annex A, paragraphs 14-15), and would be likely to include some resources currently allocated through supplementary credit approvals (SCAs) and grants, including some currently provided through various separate competitive funding schemes. Resources from this pot could be allocated:

3.14 This approach could achieve an extra degree of local autonomy, increase local accountability, and allow greater opportunity to mobilise resources to tackle cross cutting issues. Provided that the pot was sufficiently large, it would provide more stability, with less year-to-year variability in allocations. Authorities would need to take a greater responsibility for allocating resources themselves, rather than waiting for specific bids to central government to succeed.

3.15 The resulting system could be simpler and more unified, but would not lend itself to identifying highly specific service-related needs. For example "basic need" allocations in education support - based on a complex assessment of demographic pressures and available school places in local areas - might have to be replaced by a relatively simple formula element based largely on pupil numbers.

Developing a cross-service needs indicator

3.16 A needs indicator covering all capital services would have to be developed. This would probably simply be the aggregate of service based indicators - for example, the GNI might continue to represent the housing element of need. The indicators could be chosen partly on the grounds of stability from year to year, so as to lead to greater overall certainty over future allocations. Totals for each individual service element would probably be aggregated in a similar way to the existing service blocks within the Standard Spending Assessments (SSAs) for revenue finance. Such a system would be similar to that currently used in Wales.

Developing an assessment framework

3.17 A clear assessment procedure would also be needed. This would involve indicators of good practice for each service and for corporate management of the programme. The latter might include the use of a best value capital strategy, including:

3.18 Under a best value capital strategy, the Government would expect to see evidence that each programme or major project had been included after an objective needs assessment, and after it had gone through a priority setting process and a business case appraisal. The strategy would also assess the medium and long term financial implications of the capital programme and measure the outcome of capital projects, taking into account factors, such as whether they were completed on cost and to time, and whether their original objectives were achieved.

3.19 The assessment would provide the incentive for authorities to improve their performance in managing their programmes and in making best use of their existing assets, in line with the overarching principles of best value (see paragraph 2.9). Detailed guidance would continue to be issued for housing, education and transport, setting out the Government's priorities and the strategic planning framework and key relationships with other local partners that it would wish to see developed and maintained. Best practice in asset management is covered in more depth in Chapter 4.

3.20 As in the HIP, GOs could play a part in examining corporate capital strategies. Gos already have some background in assessing cross-service strategies, as this was one of the main evaluation criteria in the pilot Capital Challenge competition. But at present they only have limited experience of assessing asset management and lack close links with some government functions, such as health and education. However, there seems no reason to think that both these areas could not be developed. Assessment would become more sophisticated as time goes on.

3.21 As best value becomes more established, it should be possible for assessments of performance to rely increasingly on the information produced by authorities in their Local Performance Plans. That information would need to be considered subject to the system of external checks on validity and appropriateness envisaged in Chapter 5 of the Government's consultation paper on best value.

3.22 Corporate strategic assessments would undoubtedly be more effective if linked to longer term planning and resource availability. The SRB has shown the effectiveness of a number of years of guaranteed funding in addressing the problems of severely deprived areas. This issue is addressed in more depth in Chapter 5.

Q2 The Government would welcome views on:

(i) the development of a cross-service needs indicator; and

(ii) the most appropriate criteria to use in making a corporate strategic assessment.

Limits on the size of the pot

3.23 Not all existing capital resources would be likely to go into the central pot. There is a strong case (supported by the Audit Commission) for regeneration funding under the SRB to be kept separate, and similar arguments could apply elsewhere. For example:

3.24 Maximising the amount in the pot might imply converting some existing specific grants to block credit approvals and the conversion of some service specific credit approvals to block allocations. On the other hand, it is also likely that some resources would be held back as SCAs for specific programme areas. However, if too many were held back, the system would not significantly increase either local discretion or the role of corporate assessment. It seems unlikely that the arrangements would be fully effective unless they covered a wide range of service areas and a total at least as large as that currently provided through BCAs and preferably somewhat larger.

Method of deciding how much would go in the pot

3.25 If this approach were adopted, the size of the pot could be determined in either of two distinct ways:

3.26 Although the choice here is essentially for the Government, views on the relative impact of the different methods on local government would be welcomed.

Transitional arrangements

3.27 The Government recognises that the creation of a single pot would require a step change and could not simply evolve. At some point a cross service evaluation of corporate/strategic planning would need to be introduced, distinct from purely service based assessments. Logically this might be accompanied by the central change to a corporate block. The Government would wish to allow the conclusions of all the consultations and the CSR to be considered before any final decision, so it would be unlikely to begin to implement a single capital pot fully before the allocations for the financial year 2000/01 at the earliest. Even this timetable would require bidding guidance to be finalised by late Spring 1999. Development of the present system as outlined above in paragraphs 3.4 - 3.12 would make any transition simpler.

Summary

3.28 In summary, the creation of a large pot would increase local discretion significantly, whilst leaving open the possibility that central government could influence capital strategies in line with national priorities and reward good performance. A relatively simple formula could be developed to ensure that resources are allocated broadly in line with need". It would build on the lessons of earlier allocation methods and, whilst accepting that England has more variation in authority size and circumstances, would be similar to the system that already operates successfully in Wales.

3.29 However, from a central government viewpoint, there would be increased uncertainty over how resources would be used and perhaps a danger that some services would lose out. Without dedicated support, large projects in smaller authorities might prove difficult to fund. It could also be more difficult to support services delivered by both local authorities and other local providers in a coherent and equitable way.

3.30 As in the current system, service departments would continue to influence the use of resources in the pot through performance related elements in the assessment criteria. It might be argued that the net effect of this change would not, therefore, be greatly different from the existing service specific system. The key difference would be that the single pot, combined with a single set of assessment criteria would allow local authorities to determine their capital programmes from first principles, in the absence of implicit signals from central government about how the total should be divided between services. The long-term certainty of funding for authorities could also be increased (paragraph 5.3).

Q3 The Government would welcome views on:

(i) the advantages and disadvantages of allocating a large proportion of capital support through a single "pot" funding mechanism;

(ii) how authorities should approach the allocation of their block resources amongst services, and how they should address cross-cutting initiatives; and

(iii) categories of expenditure that should be included in, or excluded from, the pot.

A Special Targeted Fund Aimed At Corporate and Cross-cutting Initiatives

3.31 To increase the experience of both authorities and central government in corporate assessment, it would be possible to allocate a limited proportion of existing mainstream funding by competition (say œ500-600m over 3 years, a similar amount to that currently being allocated on the Capital Challenge pilot trial. Capital Challenge is described further in paragraph 48 of Annex A). The remainder of capital funding would continue to be provided through the existing system. The fund could be allocated on the basis of competitive assessment carried out initially by the GOs. This could involve reference to the quality of corporate strategies, in particular rewarding imaginative approaches to addressing cross-cutting issues such as social exclusion. It would provide further encouragement for partnership and corporate working, and for better strategic planning of expenditure. It would also allow authorities to choose their own priorities for funding, and bid for projects that might not otherwise be funded.

3.32 The fund would allow central government to target resources at authorities with a track record of effective performance, and to meet a range of its key policy objectives. Local "need" might be explicitly recognised as a factor in assessing schemes, while major "show-piece" projects could be discouraged in favour of more broadly based strategies for sustainable investment.

3.33 However, a new pot of this type would add to the multiplicity of existing funding sources that authorities can bid for. In 1997-98 at least a dozen separate government funding competitions existed, as well as other bidding processes, such as those for European and National Lottery funding. A further funding competition might not therefore be welcome, given the staff time that bidding and assessment can take up. And there are other concerns, such as the possible diversion of councils' attention from more routine expenditure needs.

Q4 The Government would welcome views on the advantages and disadvantages of allocating a limited amount of capital resources through competitive assessment aimed at corporate and cross-cutting initiatives.
Chapter 4 - Encouraging Best Practice in Asset Management
Published on 30 March 1998
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