Must know: Capital expenditure

What do we mean by ‘capital expenditure’?

Local authorities need to ensure that there is a clear separation between capital and revenue expenditure in their financial activities and reporting.

Accountants usually define capital expenditure as expenditure that creates benefits lasting more than one year. 

The accountancy concept of ‘materiality’ excludes items of small value from this definition. Small value items are likely to be considered too insignificant to include on the balance sheet so are treated as revenue items. Each local authority will set its own ‘de-minimis’ level for capital expenditure.

If a local authority spends money on its assets, then this is generally considered capital expenditure. This would include purchasing new assets, such as land and buildings, but also refurbishing and improving existing assets. Maintaining assets in their existing state would not be considered capital expenditure.

Based on 2023/24 statistics, local authority housing and highways and transport services had the largest capital programmes at a national level.

In local government there is also a specific legal definition of capital.

Part 5 of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (S.I. 2003/3146, as amended) provides that certain expenditure that would not usually be regarded as capital expenditure is treated as such by local authorities. This includes the giving of a loan, grant, or other financial assistance to any person, whether for use by that person or by a third party, towards expenditure which would, if incurred by the authority, be capital expenditure; and the acquisition of share capital in any body corporate.

Nationally, while most capital expenditure during 2023/24 was on new construction and conversion works, local authorities also provided significant grants, loans, and financial assistance to third parties for capital schemes.

The Local Government Act 2003, section 16, provides that the Secretary of State can also make regulations that expenditure can be treated as capital, which may override proper accounting practices. An example of this is the ‘Flexible Use of Capital Receipts’ scheme. In November 2024, the government announced the extension of this scheme until 2030, to give local authorities the continued freedom to use capital receipts from the sale of their own assets (excluding Right to Buy receipts) to help fund the revenue costs of transformation projects and release savings. The key criteria used by government when deciding whether expenditure can be funded by the capital receipts flexibility is that it is forecast to generate ongoing savings to an authority’s, or several authorities’, and/or to another public sector body’s net service expenditure. A list of types of projects that would qualify for the flexible use of capital receipts is included in the guidance on flexible use of capital receipts

In recent years the Secretary of State has also allowed some local authorities in financial difficulties to capitalise expenditure that would usually be treated as revenue under its Exceptional Financial Support (EFS) scheme. EFS may be agreed where local authorities have financial pressures that are considered unmanageable in the short-term, to enable them to set a balanced budget. The support is provided on an exceptional basis, and where relevant, on the condition that a local authority is subject to an external assurance review. In 2025/26 the government will provide thirty local authorities with support to manage financial pressures through the exceptional financial support process. EFS does not provide those local authorities with additional resources but does enable them to spread the costs over a period of years. Any debt incurred to meet revenue costs will have to be serviced from revenue resources and tends to reduce long-term investment in capital assets, so the impact on the local authority and its local area should be robustly considered before any EFS application is made.

The Prudential Framework aims to ensure that the capital expenditure plans, and investment plans of local authorities are affordable and proportionate; that all external borrowing and other long-term liabilities are within prudent and sustainable levels; the risks associated with investments for commercial purposes are proportionate to their financial capacity and that Treasury Management decisions are taken in accordance with good professional practice.

Local authorities should look at their capital expenditure plans, investments and debt in the light of their overall organisational strategy and resources. Decisions should be made with enough regard to long-term financing implications and potential risks. The framework states that effective financial planning, option appraisal, risk management and governance processes are essential.

The Prudential Framework has four parts:

1. the Prudential Code for Capital Finance in Local Authorities (usually called “the Prudential Code”)
2. the Treasury Management in the Public Services: Code of Practice and Cross-sectoral Guidance notes (usually called “the Treasury Management Code”)
3. capital finance: Guidance on Minimum Revenue Provision
4. statutory guidance on local government investments.

The Prudential Code for Capital Finance in Local Authorities 

The Chartered Institute of Public Finance and Accountancy (CIPFA) issues the Prudential Code as a professional code of practice to support the decision making of local authorities.

The Prudential Code applies to all local authorities, including combined authorities, police and crime commissioners, fire and rescue authorities, and other bodies; but excluding parish, town, and community councils.

It sets out that while local authorities must determine their own programmes for capital investment in fixed assets to support public service delivery, the Code plays a key role in the capital finance of local authorities. Having regard to the Code is made compulsory in England & Wales under the Local Government Act 2003. “Have regard to” has a specific meaning that local authorities should comply it unless, having duly considered the code or guidance, there is justifiable reason to depart from it. Decisions that do not “have regard to” relevant guidance may be susceptible to challenge.

Under section 3 of the 2003 Act each local authority was given a duty to “determine and keep under review how much money it can afford to borrow.” To do this, regulations (the capital finance regulations 2003) were laid by the Secretary of State that, to discharge that duty, local authorities “shall have regard to the code of practice entitled the “Prudential Code for Capital Finance in Local Authorities” published by CIPFA, as amended or reissued from time to time”.

These changes were a major step in freeing local government from centrally imposed borrowing controls and the Government placing genuine trust and reliance in local government’s ability to manage its own affairs according to the sector’s own professional standards.

The Act requires authorities to determine and keep under review the amount of money they can afford to borrow for capital investment; and to do this having regard to all those aspects of the Prudential Code that relate to affordability, sustainability, and prudence. An authority therefore needs to consider whether it can afford the proposed capital investment during each year that a cost would be incurred.

The Prudential Code states that a soundly formulated capital investment programme must be driven by the desire to provide high quality, value for money public services. Therefore, the authority must have regard to option appraisal and risk, asset management planning, strategic planning for the authority and achievability of the forward plan.

Authorities are required to prepare a capital strategy. This sets out the long-term context in which capital expenditure, borrowing and investment decisions are made; and considers risk, reward, and impact on achievement of priority outcomes. This demonstrates that the authority takes capital expenditure and investment decisions in line with service objectives and takes account of stewardship, value for money, prudence, sustainability, and affordability properly.

Prudence is an important concept within the code as it requires that:

The local authority shall ensure that all of its capital expenditure, investments and borrowing decisions are prudent and sustainable.”

To do this, authorities must consider their arrangements for debt repayment, risk, and their overall fiscal sustainability.

Indicators for prudence must be set for a minimum three-year rolling period and should be set to be consistent with a capital strategy and asset management plan that are sustainable in the long-term.

The Chief Finance Officer is required to establish procedures to monitor and report performance against all forward-looking indicators at least quarterly. Local authorities can use a ‘liability benchmark’ to set out their borrowing profile. The Liability Benchmark is effectively the Net Borrowing Requirement of a local authority plus a liquidity allowance. CIPFA recommends that the optimum position for external borrowing should be at the level of the Liability Benchmark (ie, all balance sheet resources should be used to maximise internal borrowing).

The ‘authorised limit’ is a prudential indicator that authorities must set for the forthcoming year and the following two financial years. This provides a limit for total gross external debt, with borrowing identified separately from other long-term liabilities. It is expressed in the following manner:

The ‘operational boundary’ is another prudential indicator that authorities must set for the forthcoming year and the following two financial years. This provides a limit for total gross external debt, with borrowing identified separately from other long-term liabilities. It is expressed in the following manner:

The authorised limit and the operational boundary for external debt must be consistent with plans for capital expenditure and financing, and with treasury management policy, strategy, and practices. They must also take account of risk.

The authorised limit must provide headroom over and above the operational boundary, enough for example for unusual cash movements. The code explains that:

It will probably not be significant if the operational boundary is breached temporarily on occasions due to variations in cash flow. However, a sustained or regular trend above the operational boundary would be significant and should lead to further investigation and action as appropriate.”

Authorities must ensure that gross external debt does not (other than in the short-term) exceed the total of the capital financing requirement in the previous year plus the estimated additional capital financing requirement for the current and next two years. This is to ensure that gross debt will only be for capital purposes in the medium-term.

The objective of affordability is to ensure that capital investment is within sustainable limits. An authority must therefore consider all resources currently available and estimated to be available in future, together with all its capital plans and income and expenditure forecasts. This should include consideration of past borrowing, maintenance requirements, planned disposals, loans fund policy and risk.

In the case of combined authorities, consideration must be given to combined authority resources and the impact on underlying authorities.

Local authorities’ treasury Management powers are contained in the Local Government Act 2003. Treasury Management is regulated through:

• Treasury Management Code of Practice
• Prudential Code (see above).

The current Treasury Management code: ‘Treasury Management in the Public Services’ was issued by CIPFA in 2021.

The code defines Treasury Management as:

The code is built around three principles:

1. public service organisations should put in place formal and comprehensive objectives, policies and practices, strategies and reporting arrangements for the effective management and control of their treasury management activities
2. policies and practices should make clear that the effective management and control of risk are prime objectives
3. the pursuit of value for money and the use of suitable performance measures, are valid and important tools.

The code provides that local authorities should have a Treasury Management Strategy and Treasury Management Policy Statement and suggests the appropriate wording for standing orders and financial regulations.

Local authorities must also identify their treasury management practices, giving details of the systems and routines to be employed and the records to be maintained.

Investments that are not part of Treasury Management activity

The Treasury Management code draws a distinction between investments for treasury management purposes, investments for service purposes and investments for commercial purposes.

Investments for treasury management purposes are those investments that arise from the organisation’s cash flows or treasury risk management activity and represent balances that need to be invested until the cash is needed during business.

Investments for service purposes are taken or held primarily for the provision and for the purposes of delivering public services (including housing, regeneration, and local infrastructure) or in support of joint working with others to deliver such services.

Investments for commercial purposes are taken or held primarily for financial return and are not linked to treasury management activity or directly part of delivering services. The code includes the following regarding these investments:

Regarding treasury management and risk, the code states that:

The Government’s statutory guidance on local government investments also states that:

Minimum Revenue Provision (MRP) refers to the statutory accounting provision that local authorities must make each year to set aside amounts in their accounts for the future repayment of debt.

The MRP is an annual charge related to the amount of borrowing that a local authority has taken out. There are several ways in which MRP can be calculated and a local authority is required to select an appropriate one, which can be different for each asset or type of asset.

The Government issued its latest guidance on the minimum revenue provision in April 2024. Where local authorities finance capital expenditure with debt, they must set aside an amount of money each year to ensure that debt can be repaid. This should ensure that local authorities do not take on more debt than they can afford. Local authorities have flexibility to decide how to calculate the minimum repayment provision, but in making that calculation they must be prudent, and they must “have regard” to the minimum revenue provision guidance which includes four “ready-made options” for calculating prudent provision. The aim of prudent provision is to require local authorities to put aside revenue over time to reduce debt used to finance capital expenditure to nil over an appropriate period.

The Government has also issued statutory guidance on local government investments. This states that authorities should disclose the contribution that all investments for service and commercial purposes make towards the service delivery objectives and / or place making role of that local authority. They should also report quantitative indicators that reflect risk, funding, and rates of return.

Local authorities can only borrow or invest as part of ‘prudent management.’ Local authorities cannot trade speculatively in financial instruments.

This guidance is currently being updated.

Capital expenditure is usually funded through capital income sources such as capital receipts and borrowing, though it can also be funded through contributions from revenue. Sources of capital financing are set out in more detail below:

Borrowing

Until 2003/2004 the government operated a system of ‘Credit Approvals’. These were issued to local authorities as a “borrowing allocation” which set a limit of how much a local authority could borrow.

Since 2004/2005 the Prudential Framework has allowed authorities to borrow freely for capital investment, subject to controls that ensure that borrowing is prudent and affordable and that it is not solely for purposes of achieving a financial return.

When borrowing money, local authorities must balance several different considerations including:

• affordability: the level of interest rates
• certainty: fixed vs variable interest rates
• coherence: matching cash flows with debt servicing requirements
• renewability: flexibility to extend loans if required
• redeemability: flexibility to cancel loans if required
• security: ensuring a balanced portfolio in terms of loan types and terms.

Capital Grant Funding

Most capital grants are provided by central government or government agencies such as Homes England.

Local authority capital programmes may be driven by the availability of government grants. Local authorities will often wish to secure all the government grants that are available to them in preference to using their own resources. For example, a local authority may only consider building sea defences where government funding is available. However, consideration should be given to the terms and conditions of the grant, including the timescales for delivery, to ensure that these can be met, and to any shared risk arrangements.

Developer contributions is a collective term mainly used to refer to the Community Infrastructure Levy (CIL) and planning obligations (commonly referred to as ‘Section 106’ or ‘S106’ obligations after Section 106 of the Planning Act 1990). These are planning tools that can be used to secure financial and non-financial contributions (including highways, schools and affordable housing), or other works, to provide infrastructure to support development and mitigate the impact of development. Planning agreements are legal obligations that mitigate the impacts of a development proposal. Developer contributions might also relate to highways works secured under Section 278 of the Highways Act.

Developer contributions are normally a key component of any authority’s approach to developing and delivering an infrastructure strategy for their area. Effective infrastructure planning, prioritisation and governance of spend are critical to supporting the delivery of sustainable development and growth.

Some authorities have implemented a Community Infrastructure Levy (CIL), which sets a prescribed levy from new development in the local area rather than negotiating this individually for each development. The levy only applies in areas where the authority has consulted on, and approved, a charging schedule that sets out its levy rates. Most new development that creates net additional floor space of one hundred square metres or more, or creates a new dwelling, is potentially liable for the levy.

Local authorities must spend the Community Infrastructure Levy on infrastructure to support the development of their area, but they decide what infrastructure is needed. They do this through their development plan. The levy can be used to fund a wide range of infrastructure, including transport, flood defences, schools, hospitals, and other health and social care facilities. It can be used to increase the capacity of existing infrastructure or to repair failing infrastructure. However, it may not be used to fund affordable housing.

Specific local restrictions may be applied, for example in London, regulations restrict spending by the mayor to funding roads or other transport facilities, including Crossrail, to ensure a balance between the spending priorities of the London boroughs and the mayor. Different arrangements exist in different mayoral combined authority areas.

Revenue contributions to capital outlay are where a local authority uses its day-to-day income from Council Tax, Business Rates or revenue grants and uses it to fund capital investment. There are no limits on revenue contributions to capital outlay. However, where there are ring-fenced accounts such as the Housing Revenue Account, revenue contributions can only be used to fund capital expenditure that is related to that account.

When a local authority sells a capital asset it generates a capital receipt. Capital receipts must be kept in a separate reserve and cannot be used for revenue expenditure. Capital receipts can either be used to repay debt or to finance new capital expenditure. Where they are used to finance new capital expenditure the usual ‘ring fence’ that separates general fund and housing revenue account resources does not usually apply and local authorities can use the capital receipts to fund either general fund or housing revenue account schemes as they think fit.

Right to Buy receipts from sales of local authority houses have been the subject of complex regulations regarding their use in the past. However, in 2024 it was decided that Right to Buy receipts can be pooled with S106 contributions used to fund 100 per cent of new affordable homes and there is no longer a cap on acquisitions. There is no longer a need to pay a proportion of receipts to the Treasury. Proposals for further flexibilities were made in November 2024.

In local government, the making of grants and loans to third parties is accounted for as capital expenditure and therefore the repayment of any such grants and loans is accounted for as a capital receipt.

A local authority may be able to make use of its existing assets to reduce the cost of a capital scheme. For example, local authorities will sometimes use former garage sites to build new housing; or build a new youth centre on a former school playing field. However, there is an opportunity cost to doing this as an alternative would be to dispose of the land and generate a capital receipt. 

Local authorities often own significant amounts of land and property. Asset management plans aim to identify any land and property that is surplus to requirements and to sell them to generate capital receipts. Asset management plans also review a council’s portfolio of land and property to see if there are any opportunities to rationalise land and property use to free up land and property for disposal. Maintaining a flow of land and property sales is often seen as an important way of resourcing the capital programme. An alternative use for surplus land or property, of course, is to provide sites for the local authority’s own capital schemes.

Authorities with council housing stock account for it within a ringfenced housing revenue account. There is usually a substantial housing revenue account capital programme that includes major repairs and improvements to existing stock and, often, new build and acquisitions of new stock.

Housing Revenue Account capital schemes are funded in a similar way to general fund schemes. Government grants may be available, especially for new build schemes. Revenue contributions can be made from the Housing Revenue Account. Capital receipts can be applied, and prudential borrowing can be used.

There is also a Major Repairs Reserve. This reserve is funded by charging depreciation to the housing revenue account and can be used to fund major repairs to housing revenue account properties. Balances on the Major Repairs Reserve can be carried forward from year to year.

It is important to align capital spending and financing as all capital expenditure must be financed.

Local authorities usually prepare a rolling capital programme in which capital schemes are identified along with their total cost and how that is to be phased over the years. Most schemes, especially the larger schemes, will be phased over several years. The programme should be regularly reviewed and updated to reflect any changes in estimated expenditure or to the anticipated phasing of the schemes. A full review should be undertaken annually and agreed by council as part of the budget process, before the start of the new financial year.

When preparing the capital programme budget, the Chief Financial Officer will assess the amount of capital resources that will be available to the local authority. This will focus on the upcoming year but will also look forward to all the years that are included in the medium-term financial plan. Separate assessments will be made for the general fund and the housing revenue account (where the local authority has a housing revenue account). These resources include:

• grants and contributions: the Chief Financial Officer will identify which capital schemes attract grants and contributions and will include these in the capital programme in the years when they will be made available. In some cases, it may also be necessary to identify matching funding.
• prudential borrowing: the Chief Financial Officer will assess the level of prudential borrowing that is affordable. However, there is no necessity for a Local authority to borrow up to the maximum that is affordable. This is a choice that the Local authority must make based on its ambition to deliver capital schemes, its appetite for borrowing and its attitude towards borrowing that will increase the cost to the revenue account in the long-term.
• capital receipts: the Chief Financial Officer will therefore prepare a forecast, often based on the local authority’s Asset Management Plan, of the useable capital receipts that are likely to become available in the medium-term. Again, the Local authority has choices to make about the use and timing of these receipts as they can be used to repay debt rather than to fund new expenditure and there is often discretion over whether they can be used in the general fund or housing revenue account. Unused receipts will be held in a Capital Receipts Reserve for future use.
• revenue contributions: the Chief Financial Officer will prepare a forecast for the revenue account that compares forecast revenues with forecast expenditure and that identifies the scope that exists for making revenue contributions to support capital. This involves the local authority in making strategic choices. If it has ‘headroom’ in the revenue account there is a need to decide whether to spend this on revenue items, revenue contributions to capital or to add resources to reserves. If, as is more often the case, there is no ‘headroom’ and a need to make savings the local authority must decide whether it wishes to make additional savings to enable it to make a revenue contribution to capital. Similarly, the Chief Financial Officer will review reserves. Some reserves may have been set aside to fund capital expenditure while other reserves may contain unallocated resources. If this is the case, the local authority can decide to use these resources to support the capital programme.

Having prepared a forecast of capital resources, the Chief Financial Officer will then compare this with forecast expenditure on approved capital schemes. If there are not enough resources to fund approved schemes there would be a need to cancel or defer some of them. If more resources are forecast than are committed, then the local authority will consider adding new schemes to the capital programme. As it is a rolling programme there is usually scope to add new schemes to later years if not to earlier ones.

There are different models for preparing a business case but HM Treasury advice on the preparation of business cases in the public sector for both programmes and projects is based on a ‘Five Case Model’ that includes strategic, economic, commercial, financial and management cases. Ultimately it is up to the local authority to assess the robustness of any business case put forward for consideration.

The purpose of the strategic case is to make the case for change and to demonstrate how it provides strategic fit. It includes:

• strategic context: organisational overview, business strategy and aims, other relevant strategies
• the case for change: spending objectives, existing arrangements, business needs – current and future, potential scope and service requirements, main benefits and risks, and constraints and dependencies.

The purpose of the economic case is to identify the proposal that delivers best social value to society, including wider social and environmental effects. It includes:

• critical success factors
• l-listed options and the preferred way forward
• short-listed options, net present social cost, benefits appraisal, risk assessment, sensitivity analysis, and identifying the preferred option.

The purpose of the commercial case is to demonstrate that the preferred option will result in a viable procurement and a well-structured deal between the public sector and its service providers. It includes:

• procurement strategy and route
• service requirements and outputs
• risk allocation
• charging mechanism
• key contractual arrangements
• personnel implications
• accountancy treatment.

The purpose of the financial case is to demonstrate the affordability and funding of the preferred option, including the support of stakeholders and customers. It includes:

• capital and revenue requirements
• net effect on prices (if any)
• impact on balance sheet
• impact on income and expenditure account
• overall affordability and funding
• confirmation of stakeholder / customer support (if applicable).

The purpose of the management case is to demonstrate that robust arrangements are in place for the delivery, monitoring, and evaluation of the scheme, including feedback into the organisation's strategic planning cycle. It includes:

• programme management governance arrangements (roles, responsibilities, and plans)
• project management governance arrangements
• use of specialist advisers
• change and contract management arrangements
• benefits realisation arrangements (including plans and register)
• risk management arrangements (including plans and register)
• post implementation and evaluation arrangements
• contingency arrangements and plans.

The estimates and assumptions used in the ‘base case’ – however reasonable they are - may not turn out to be accurate in practice. For example, there may be changes in economic conditions. There is therefore a risk that in practice the scheme may not be delivered as envisaged in the ‘base case.’ The Local authority should therefore carry out robust sensitivity analysis that would identify the key variables included in the appraisal and what the financial and non-financial implications would be if these were to change.

For example, if the project that is being appraised is a mixed tenure housing development, a sensitivity analysis would consider what the effects would be of variations to land prices, construction costs, inflation rates, interest rates, rent policies, unforeseen delays and the demand for market housing. This would enable a local authority to see which variables would have the potential to have a serious adverse impact on the scheme if they were to change. There would then be a need to consider how these risks could be mitigated and how they could be monitored to ensure that the local authority could take early and appropriate action if these risks were to materialise.

Reference is sometimes made to ‘optimism bias.’ What is meant by this is the natural tendency for people to be optimistic about a scheme that they believe will be beneficial. In these cases, there may be a tendency to over-estimate the beneficial effects of a scheme, under-estimate its costs, under-estimate its complexity and the time and resources that would be needed to deliver it, and to over-estimate any income that would result. It is sometimes considered that optimism bias is most likely to occur where there is a strong commitment to the scheme from elected members or senior management. There is therefore a need to carry out robust testing of assumptions and sensitivity analysis in all potential schemes.

The Green Book recommends applying specific adjustments for this at the outset of an appraisal. The aim of adjusting for optimism bias is to provide a more realistic assessment of the initial estimates of costs, benefits and time taken to implement a project. As the appraisal develops, more accurate costing of project or programme specific risk management should be undertaken. Accordingly, adjustments for optimism bias may be reduced as more reliable estimates of specific risks are made. Any reductions should be presented transparently and tested with sensitivity analysis where appropriate.

Whether capital projects are managed by a central team, in individual service departments or externally, there is a need to ensure that project management teams are adequately resourced, both in terms of the number of people and their relevant experience and expertise.

External delivery

Local authorities will often use external agencies such as local architects to manage capital schemes. This may be because there is limited in-house capacity to deliver the capital programme, or because a particular scheme needs a project manager with expertise in that sector. However, the local authority retains a client role and will monitor the progress of the project and needs appropriate expertise and capacity to do this.

In-house delivery

Local authorities that are starting capital projects in aspects of local government work where they are not familiar should be especially careful here. For example, local authorities that start new build programmes for the first time in several years should not assume that staff who have expertise in housing management will necessarily make good project managers in a housing development.

Work with partners including development vehicles

Local authorities often transfer significant resources into partner organisations including development vehicles. This is necessary if the local authority wishes to carry out commercial activity. Under both the Local Government Act 2003 and Localism Act 2011, the power to trade must be exercised through a company. There are different definitions of ‘company’ in the relevant legislation but there appears to be no substantive difference between the types of entity permitted as trading companies, namely companies limited by shares, companies limited by guarantee or industrial and provident societies: Partner organisations are sometimes seen as having greater capacity to manage resources in a commercial way and to work in partnerships with other organisations than the local authority itself would have.

Transferring resources to a company or partnership can be an effective way of progressing a capital project. From the local authority’s point of view, expenditure is incurred when resources are transferred to the partner organisation, and this may be especially important to achieve if grant conditions require expenditure to be made before a particular date. However, the partner organisation may neither incur the expenditure nor deliver the scheme until a later date.

Before transferring resources to a partner organisation, a local authority should satisfy itself that the partner organisation has the capacity to deliver the scheme. A partner organisation will need appropriate board members and staff to enable it to deliver the scheme as required. There is also a need for appropriate liaison between the company and the local authority as the shareholder including realistic targets and regular reporting. More information on the governance arrangements required for local authority trading companies has been published by Local Partnerships.

Local authorities have significant convening power. Councillors and council officers develop extensive networks that enable them to understand the needs of communities, the opportunities that exist and the range of organisations that work in an area. This enables local authorities to bring together public bodies, commercial undertakings and voluntary and community organisations and encourage them to work together to deliver projects including capital schemes.

Sometimes this can involve the local authority providing small grants to pump-prime a project that will be delivered by another organisation. At other times, the local authority may assist with advice including support in preparing claims for grant from central government or other agencies. The local authority may simply function as a convenor, bringing together organisations that can work together to realise a project. Local authorities can help to deliver significant capital projects by acting as a facilitator rather than providing significant amounts of funding.

Effective capital programme delivery involves ensuring appropriate capacity and capability to deliver the capital programme, including programme management and governance. The capital programme should be closely aligned with corporate objectives.

Good governance is the starting point of effective capital programme delivery. The capital programme is one of the important means by which the authority can realise its strategic objectives. Therefore, it is important to use business cases and project appraisals to put together capital programmes and schemes that address the local authority’s strategic objectives. It is also important to identify the outcomes that the capital programme and individual schemes are intended to deliver and to monitor and assess the extent to which these outcomes are achieved.

Clear accountability is important. Roles and responsibilities for taking decisions and managing projects should be clear. This should include responsibility for ensuring that schemes are delivered, progress is monitored, and outcomes are achieved.

Good financial information is also important. Business cases and project appraisals should be based on robust data so that decisions are soundly based. Effective budget monitoring depends on accurate information about expenditure and commitments being available so that schemes can be managed and monitored, and potential overspends identified well in advance so mitigating action can be taken if necessary.

The establishment of a dedicated contracts and project/ programme management unit should be considered so that schemes can be managed by people with specialised skills in project management. This should result in standardised and effective processes being followed, for example in procurement and project management.

A long-term view should be taken of capital programme management. Many schemes will take several years to deliver. Asset management plans should take a long-term view, and financial forecasts should likewise take a long-term view of expenditure that will be needed and how it will be financed. Spending up to capacity in the short-term may seem like an attractive option, but if this approach consumes resources that will be needed in the long-term, it would not be the most beneficial approach.

Project management focuses on three goals: time, quality and cost. A local authority will wish to see its capital projects delivered according to plan; meeting their objectives and achieving their outcomes; and within budget.

It is quite common for local authorities to under-spend their capital programmes and the main reason for this is often ‘slippage’ where a scheme is delayed and delivered later than was originally planned.

The three main reasons why ‘slippage’ is thought to occur are:

• inadequate project appraisals and / or project plans: Local authorities have not thought through what would be involved in delivering the project with the result that unanticipated problems emerge that delay the scheme
• under resourced project management teams that lack the capacity, either in terms of staff numbers or the level of expertise and experience to deliver the schemes on time.
• lack of capacity in the construction industry to deliver capital projects.

Another frequent problem is schemes where costs exceed budget. The causes of this may be the same as those that can cause ‘slippage.’ These include under-estimating the complexity of the scheme when doing the project appraisal and project planning; and having a project management team that lacks the resources, expertise, or experience to deliver the scheme effectively. Where schemes are delayed costs usually increase due to inflation. Overspending can also be caused by optimism bias (see above).

When it becomes clear that a scheme is not progressing according to plan, either because it is delayed, is coming in over budget, or may not achieve its objectives; a local authority should consider whether it still wishes to continue with the scheme.

People and organisations often tend to persevere with a project when difficulties are encountered, especially if they have already invested time, money, and other resources. However, this may not always be appropriate.

The ‘sunk cost’ fallacy is the argument that, if significant resources have already been invested in a project it should continue as otherwise these will be wasted. However, this is not a logical argument as the resources that have already been incurred are already lost. The question that should be asked is whether completing the project would be preferable to an alternative option or to terminating the project completely. Stopping the project and writing off the ‘sunk costs’ may be preferable to investing more in a project that would fail to deliver its objectives in a cost-effective way A revised project appraisal should enable the local authority to take the right decision.

Effective risk management

Risk management is an important aspect of capital programme management. Each course of action, including a decision to do nothing, has its risks. It is therefore important to identify and quantify risks; take decisions based on the local authority’s appetite for risk; and devise ways to monitor and mitigate those risks.

A local authority should have a corporate risk register. This will include the key risks that the local authority faces along with an assessment of the likelihood of that risk occurring and its severity if it does occur. Attention will then focus on the most likely and most severe risks. It will also include the mitigating measures that the local authority will take.

The capital programme may play an important part in a local authority’s plan to mitigate its corporate risks. For example, if flooding is identified as a potentially likely risk with severe impact the local authority’s mitigating measures may include investing in flood prevention schemes.

Risk management techniques should also be applied to the capital programme itself. For each scheme, it is important to identify the risks that may threaten the local authority’s ability to deliver the scheme within timescale and budget and the ability of the scheme to deliver the local authority’s objectives. These risks must be monitored and mitigating strategies identified.

The LGA has published a ‘Must Know’ guide on risk management. This guide identifies several possible project and programme risks. These can range significantly in overall size, complexity, cost, timeframe, and methods of delivery and so there is ‘no one size fits all’ approach to managing risks in projects and programmes. However, there are some standard areas of risk that are worth considering:

• Scope creep: A type of project risk that occurs when tasks are added to the project scope without the proper approval of the project management team, causing the scope to grow without control, which has a direct impact on the project schedule and budget.
• Performance risk: This occurs whenever work is not progressing as expected, and deliverables and milestones are not accomplished. This can compromise project completion as more resources are potentially needed to complete the project plan.
• Financial or cost risk: This occurs when the project goes over the budget initially set. Cost risk can occur because of an unrealistic budget or lack of detailed budgeting in the project planning phase and then subsequent poor financial control, procurement, and supply chain management.
• Schedule risk: This is the risk of individual tasks in the project taking longer than expected. Delayed task timelines often impact other things like the budget, completion date or overall performance. This is the most common risk in projects, particularly where there are many participants and understanding the dependencies and careful scheduling is critical. Projects are also often over optimistic or set unrealistic timescales by senior management or external funders, for example.
• Resource risk: This occurs if insufficient resources have been allocated to complete the project. Resources may include time, skills, money, or tools. Again, along with the project timeline, the resources needed are often underestimated.
• Operational changes: This involves unplanned changes such as in project staffing, changes in senior management, structure changes, savings requirements, or new processes. Such changes can create distractions, require significant adjustments in workflows, and impact on project timelines.
• Lack of clarity: This may come in the form of miscommunication from stakeholders, vague project scopes, or unclear deadlines. The result can be a lack of visibility due to siloed work, going over budget, falling behind project deadlines, changing project requirements, having to change project direction, or disappointing project outcomes.

The guide notes that a large and increasing proportion of local authority spend is through contracts. This highlights the importance of ensuring procurement and contract management are efficient and effective, to deliver value for money, maximise added social value and consider environmental factors (to name three critical areas). This is another category of risk that needs careful consideration and assurance.

This guide suggests five roles for project / partnership managers as follows:

• Ensure that the appropriate risk management arrangements are created and maintained relevant to the project or partnership arrangements.
• Promote conversations about risks and their management within the project or partnership arrangements governance arrangements.
• Ensure regular reporting to the relevant senior management / project board / partnership board.
• Communicate risk issues to all staff within the project or partnership.
• Lead by example in embedding risk management within the project or partnership.

Internal audit and the Audit Committee should review the overall arrangements to manage these risks. There should also be specific assurances provided for individual and major procurements that carry a higher risk should they fail to deliver the intended outcomes.

A local authority’s audit committee should be constituted in accordance with recommended practice as outlined in the CIPFA Position Statement on Audit Committees in Local Authorities and Police 2022[1].

The purpose of an Audit Committee is to provide independent assurance of the adequacy of the risk management framework and the associated control environment, independent scrutiny of the authority’s financial and non-financial performance to the extent that it affects the authority’s exposure to risk and weakens the control environment, and to oversee the financial reporting process.

The remit of the audit committee will include governance, risk, and controls; internal audit; external audit; financial reporting; accountability arrangements; and related functions. The audit committee therefore considers the processes that the local authority uses for preparing, financing, and implementing the capital programme to ensure that it is appropriate. This may include reviewing and monitoring the local authority’s treasury management arrangements in accordance with the CIPFA Treasury Management Code of Practice.

Risk management is a key concern of the audit committee, and they should satisfy themselves that all risks have been identified, evaluated, and mitigated against.

Watford Borough Council

The LGA’s Corporate Peer Challenge at Watford Borough Council in November 2023 found that the Local authority was an example of good practice in the way that it manages its capital programmes albeit there were some challenges to address, including historic slippage of the capital programme.

The peer challenge team found that Watford Borough Council was delivering hugely ambitious plans for Watford, with an unwavering focus on the outcomes for its residents. To enable this to be delivered, they had forged strong external relationships and was an organisation underpinned by a culture of pride, ambition, and empowerment.

The local authority was delivering some ambitious large-scale place shaping programmes, for example, the ‘Town Hall Quarter’, a £200 million highly complex ten-year programme that seeks to regenerate the northern end of Watford High Street. The programme will provide the opportunity for culture, heritage and the arts alongside new homes, and community and business space. The cultural offer will be improved through the ‘Watford Colosseum’ refurbishment as part of the Town Hall Quarter programme.

The local authority has a relatively large capital programme that is subject to inherent risks associated with external factors such as interest rate changes, construction cost inflation, demand for residential and commercial premises and the cost of living. The Peer Challenge Team recommended that the local authority should continue to monitor these external factors, manage these risks and implement appropriate mitigating actions to ensure that it is not overly exposed to new financial pressures.

The local authority has implemented robust arrangements for project and programme management through the Enterprise Project Management Office (EPMO). The EPMO has an assurance board, with Corporate Management Board (CMB) attendance and each attendee takes the lead on quality assurance and challenge of allocated projects, this is thoroughly documented in the form of a report that goes to the CMB meeting and a subsequent short report is used to brief the portfolio holders and cabinet ahead of the formal quarterly public report focussing on outcomes against the plan. The EPMO also signs off the performance measures for each project ensuring they are meaningful and demonstrate impact. This was seen by peers as notable good practice and providing good rigour and discipline on project and programme management.

In January 2024, a comprehensive review of the local authority’s capital programme was completed as part of the budget-setting process, employing a risk-based approach to prioritise projects with robust business cases and significant benefit potential. The Corporate Risk Register, which now includes major capital projects, is now reviewed quarterly by the Corporate Management Board and Cabinet, providing increased oversight and challenge.

In January 2025 a capital programme of £37.1 million was agreed for 2025/26, funded mainly by reserves (£9.2 million), capital receipts (£6.4 million) and borrowing (£6.2 million).

Merton Borough Council

The LGA’s Corporate Peer Challenge at Merton Borough Council in November 2024 found that the local authority was an example of good practice in the way that it manages its capital programmes.

The local authority has capital growth opportunities, not available to many other local authorities, afforded to them from their unique and entrepreneurial history with the creation of CHAS over 20 years ago, a wholly owned subsidiary company which delivered external services. The sale of CHAS in 2023 resulted in the local authority generating over £186 million. The sale enabled the local authority to reduce a proportion of its historic debt and to use these funds to support their redevelopment and renewal ambitions with most earmarked to invest in the local authority’s place making objectives including supporting large capital projects.

The local authority has a history of working well with partners to help deliver regeneration. It is now embarking on a larger local authority led regeneration programme to include Morden town centre, alongside other town centres. Plans have been drawn up for Morden town centre and engagement with the development sector and businesses is underway.

The local authority has ambitious regeneration plans that are either in place or emerging. The regeneration of Morden town centre is a big economic growth opportunity and critical to meeting important housing supply targets. The local authority is set to break ground on the delivery of ninety-three local authority-built homes. The team recognised that the local authority does not have recent experience of directly delivering major housing and regeneration programmes but sees the development of the 93 homes as a valuable opportunity to build capacity and expertise that will serve the local authority well as it embarks on its more ambitious regeneration plans. The peer team encouraged the local authority to increase the pace, intensity and resources behind delivery of this regeneration.

The local authority has a good level of financial resilience and good financial reporting and management systems overall. Financially the local authority is in a relatively strong position with low levels of borrowing and debt to manage through inflationary pressures. While the CHAS funds provide the local authority opportunities to expand their capital ambitions, the team considered that there is a need to build in-house capacity, capability and skills to enable delivery of regeneration and transformation programmes and reduce the reliance on external advice.

Capital spending in public services (Institute for Government)

LATCo guidance 2023 edition, (Local Partnerships)

Introducing the PMO Guide (Local Partnerships)