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1. Background 1.1 The VFM process was a manifesto commitment which
became a Council policy commitment when Full Council approved the Aim High
Plan in November 2005. A decision to undertake a procurement process for the
service, as part of the VFM test was made in January 2006. To this end, specialist consultants New
Horizons were commissioned to advise on and undertake some elements of the procurement process 1.2 As expected, interest in delivering the services has been
shown by the main leisure management contractors in the country. Seven
pre-contract questionnaires have been returned and evaluated; this is a
pre-requisite prior to embarking on the full tendering process. 1.3 As the process has evolved, the following issues
have been the raised and formed the basis of some detailed debate: 1.
Range of
services. Do those currently under
consideration match the needs of both current and future customers? Will they present an attractive package
for a contractor to operate? 2.
Contract
Specification. Should the contract to
be let request capital investment for refurbishment, development or
replacement of facilities? 3.
Part or full repairing
leisure management contract. What will be the financial impact on the Council
of letting either? 4.
Condition surveys. How
to resolve the outcome of the surveys? 5.
Lifecycle costing
surveys. How to resolve the outcome of the surveys? 6.
Facility
rationalisation. Should the facilities be rationalised prior to the
implementation of any new management arrangement? 7.
The high cost of concluding the procurement process (estimated at
between £90 and £120k) primarily as a result of the need for specialist external legal support. 8.
Increase in
subsidy/management fee. At the end of
the process there is the potential for an increase in either the existing
Council subsidy or the resultant management fee paid to a private operator. 9.
Dual use agreement. In order to improve the authority’s negotiating
position with potential operators the dual use agreement for Medina Leisure
Centre must be concluded; failure to do this may compromise the Council’s
position. 10.
National standard
facility. There is interest from
within the Council in providing a new national standard facility through
either the Private Finance Initiative (PFI) or Public Private Partnership
(PPP) route.
This is of particular relevance given the Island’s successful bid to host the
2011 Island Games. 1.4 To provide a forecast of the potential management fee from the
private sector New Horizons have produced shadow business plans for all of
the facilities within the scope of the review. These are indicative plans and have been based on the
assumptions detailed in 3.9. They are intended to inform the decision making
process and enable Members to see the implications of continuing with the
procurement exercise and give due consideration to the costs and benefits of
so doing. 1.5 Non-intrusive condition surveys of the principal leisure
facilities within the review were commissioned to estimate the current value
of the property maintenance backlog. This has now been calculated at one
million seven hundred and twenty four thousand pounds (£1,724,000). The estimated figure is subject to a
tolerance of +/-20% which provides costs in the range of £1.44M to £2.07M. 1.6 The process is now at a critical point at which it is
appropriate for it to be subject to a ‘gateway review’ in order to determine
the most appropriate way for it to proceed.
The diagram in Appendix 1 illustrates the current position. 2. Shadow financial plans 2.1
The consultants have produced ten-year shadow financial plans for the
following facilities being managed as a single contract by a private sector
provider: ·
The Heights, Sandown ·
Medina Leisure Centre, Newport ·
Medina Theatre, Newport ·
Ryde Theatre, Ryde ·
Waterside Pool, Ryde ·
Westridge squash courts, Ryde ·
Head office, Newport 2.2
The shadow plans are indicative models which forecast how the private
sector would deliver the current portfolio of services and provide estimates
of the associated revenue costs which are informed by known leisure industry
rates. In order to inform the shadow
business plan, it was necessary to ascertain the current value of the
property maintenance backlog. 2.3
A suitably-qualified civil engineering company, Mott Macdonald, was
procured to carry out full non-intrusive condition surveys of the facilities
included in the Review; details are available in the Executive Summary which
forms part of the evidence/background papers. 2.4 Mott Macdonald estimates that, over the next ten years at
today’s prices, the cost of bringing the facilities up to a condition which
is fit for purpose is £1,724;000; fit for purpose means that the building and
structure, mechanical and electrical services and plant are all brought up to
a good standard which performs as intended, operates efficiently and does not
compromise any scheduled use of the facility. This sum includes the actual
building costs, the nominated building contractor’s overheads, preliminaries
and profit which have been calculated at 22.5%. 2.5 The survey has however identified significant issues with the
structure of one of the facilities in particular which will require further
investigation prior to establishing the scope and cost of the necessary
remedial work. 2.6 This sum should be viewed as a budget figure, and is subject
to caveats which could vary the total by +/- 20%. The caveats include: · That all work will be
completed by one contractor on a continuous, and not ad hoc, basis ·
No loss of income arising from any business disruption has been
allowed for 2.7
The Council should decide, which elements of the work identified in
the condition and lifecycle costing surveys they wish to undertake. It should
then decide who should undertake the work.
Irrespective of who undertakes the work there will interruptions to
the business which will impact on income and profit/loss. 2.8
The shadow plans do not include
any allowance for this sum. Should a
contractor be required to undertake any or all of this work, this will result
in an increased base contract price. 2.9 Should the Council choose to fund the works from prudential borrowing
over a 10 year period then with interest this would cost £2,120,751; this
equates to an average cost of £212,075 per year. Prudential borrowing is likely to be the cheapest way of
funding the works other than by using capital receipts which themselves have
an opportunity cost associated with them. 2.10 The shadow plans make the following key
assumptions: (i) The Council has brought
the facilities up to a condition which is fit for purpose prior to the
contract start date. The cost of this
is estimated to be £1,724,000 (+/- 20%) at current prices. (ii) The contractual
arrangement is based on a ‘part repairing’ basis. This means that the contractor is responsible for day-to-day repair/maintenance
of the facilities, fixtures, fittings and equipment. (iii) The Council remains
responsible for the structure and fabric of the buildings together with major
mechanical and electrical equipment and all of the associated lifecycle
costs. (iv) The lifecycle costs have
not been calculated or included.
These are the costs of a system or product over its entire lifespan;
typically include planning, research and development, purchase, installation,
operation, maintenance and disposal. This remains the liability of the
Council; any alteration in this liability would affect the costs in any
contract. (v) They include the leisure
contractor’s profit element which has been calculated on the industry
standard of 10% (vi) The £1,723,999 includes
the actual building costs, the nominated building contractor’s overheads,
preliminaries and profit which have been calculated at 22.5%. (vii) They do not reflect any
capital investments. (viii)They are based on the
2005/6 financial year for comparative purposes. (ix) New Horizons have not produced
shadow plans for the seasonal facilities as based on their knowledge and
experience of private sector operators they consider that the contractor
would be unlikely to improve the financial performance of these sites. (x) The full cost of any
redundancies is borne by the Council (estimated cost £76,000). (xi)
All swimming lessons will be managed by the contractor. 2.11
The Council’s 2005/6 (actual) income and expenditure have been
compared with the annual average of the ten-year shadow plans, by facility
and as a cumulative total. This
provides benchmark annual subsidy requirements, which are shown in table 1.
Details of the major differences can be seen in Appendix 2. Table 1 : Comparative annual
subsidy requirement for provision of leisure services
2.12
As can be seen from the table,
if a contractor was to operate the existing portfolio of services then an estimated annual saving of
£116,557 could be realised. 2.13 However,
when the cost of addressing the property maintenance backlog to bring the
facilities up to a standard which
is more fit for purpose is added in, then a minimum additional estimated
annual cost of £95,518 would
arise Table 2 : Effect of offsetting the cost of
addressing the property maintenance backlog against the annual revenue cost
2.14
The figure of £95,518 represents the minimum additional annual revenue
cost as the lifecycle costs need to be established and added onto this to
obtain the actual annual operating cost. 2.15 On
the basis of these costs it can be seen that the Council would not receive a
positive financial benefit from such an arrangement for 19 years
(£93,832). After 20 years the total
benefit to the Council could be as much as £210,389 or approximately £10,500
for each contract year. These figures
are however probably on the high side as further reinvestment would be
required in the facilities after the initial 10 year programme. A table
illustrating the year on year illustrating the year on year financial
position is included in appendix 3.
2.16 A
sensitivity analysis has been calculated to indicate the potential range of
variances to the base figure of £1,505,118. Variations of up to 10% in shadow
plan income and expenditure were chosen to illustrate their effect. These
have only been applied to the areas that would potentially have the greatest
fluctuation and therefore present the highest risk. At the extremes this
analysis reveals the following possible costs:
·
Income -10%; Expenditure +10% Estimated Revenue Costs £1,673,369 (annual increase in revenue costs £51,674) ·
Income +10%; Expenditure –10% Estimated Revenue Costs £931,838 (annual reduction in revenue costs £689,857) 3. Issues identified
3.1 In the view of New Horizons the gap in between
current financial performance and that shown in the shadow plans for income
and expenditure could be narrowed by the Council’s in-house team although
they are not able to realise potential economies of scale enjoyed by the
private sector through multiple site management and operation. 3.2 Income could be further improved through capital and ongoing
revenue investment. There are clearly a number of revenue generating schemes
that the Council or a contractor could consider. 3.3 Before a commitment is given to significant capital expenditure
on condition survey and lifecycle survey works (when established) there is a
significant benefit in reviewing the leisure needs of the community and
whether or not the current facilities portfolio satisfies them. The leisure
needs review would identify whether or not the current provision meets the
Council’s service objectives and consider whether the Council could obtain
better value by changing the existing scale and scope of provision. 3.4 The whole Island’s leisure needs, relating to leisure provision,
have not been clarified. These would clearly
need to be considered, particularly in relation to the development of a
national standard facility and any PPP/ PFI process. In addition, this would clearly identify
which facilities the Council wishes to refurbish, maintain and/or renew. 3.5 The condition survey has identified the
investment which is required in the facilities over the next ten years to
bring them up to a condition which is fit for purpose, regardless of the
method of delivery agreed for the service. 3.6 Investment in facility life cycle
replacement is required over ten years to maintain them in a condition which
is fit for purpose. This has not been addressed. 3.7 If the authority opts to
continue with the current procurement process, there are a number of key considerations
and decisions which it needs to address. 4. Options
4.1 There are three options
which arise from the work that has been completed in this review thus far: A Continue with the procurement process Selection of this option will then require
consideration of the following factors · Proceed with the procurement
of a management contractor accepting the process costs of £90 to £120k; after
deciding on the service specification but without undertaking a leisure needs
analysis; ·
Undertake a whole island leisure service review in order to assess
the feasibility of a national standard facility prior to making a PFI
application or inviting partnerships
from the private sector B Suspend the
procurement process Selection of this option will then require
consideration of the following factors · Undertake a leisure needs
analysis related to current service provision at a potential cost of £50k ·
Procure a management contractor after deciding on the service
specification and informed
by the leisure needs analysis; ·
Undertake a whole island leisure service review in order to assess
the feasibility of a national standard facility prior to making a PFI
application or inviting partnerships from the private sector C Stop the procurement
process Selection of this option will then
require consideration of the following factors · Undertake a leisure needs
analysis related to current service provision; · Undertake a whole island
leisure service review in order to assess the feasibility of a national
standard facility prior to making a PFI application or inviting partnerships from the private
sector ·
Stop the procurement process and manage in-house with improvements to
service performance, capital investment in the condition and lifecycle survey
works and facility developments. · Stop the procurement
process and manage in-house with improvements to service performance and
capital investment in the condition and lifecycle survey works · Stop the procurement
process and manage in-house with improvements to service performance; · Stop the procurement
process and manage in-house with no changes to the service; 5
Customer consultation and impact 5.1 Customer consultation 5.1.1 The Policy Commission has consulted with
its stakeholders through both formal meetings and surveys; details of this
are shown below: ·
Heights Leisure Centre and Rew Valley Sports Centre – Thursday 27
April 2006 · Waterside, Westridge and Ryde Theatre – Thursday 27 April
2006 · Medina Leisure Centre and theatre and Osborne MUGA – Monday 24
April 2006 · Town and Parish Councils – Thursday 20 April 2006 · Internal partners and stakeholders – Wednesday 19 April
2006 · Leisure facility staff – Friday 28 April 2006 ·
User/non-user survey – iwight.com and the Isle of Wight County Press, April/May
2006 5.1.2 The principal outcomes from this
consultation are as follows: ·
The need for increased health and fitness provision as the gyms are
not of sufficient capacity to accommodate the current and anticipated
increase in demand · Continue with in-house delivery ·
Protect the existing fees and
charges structure, in particular the leisure access One Card · Improved levels of maintenance and investment · Improve accessibility/transport to facilities ·
Property Services would prefer to see a full repairing lease for the
properties as this avoids any ambiguity regarding responsibility for
maintenance · Review the suitability and locations of the existing
facilities · Protect Ryde Theatre as a live music venue 5.1.3
The detailed outcomes from the consultation are detailed in the
evidence/background papers 5.1.4
A leisure needs analysis would require the completion of a more
detailed consultation process 5.2 Customer Impact 5.2.1
The options were reviewed using the Council’s
Value for Money checklist (see Supporting Background Information). 5.2.2
Option A will ensure that the process is
concluded in the short term and will potentially see the delivery of
development projects by the new operators within the facilities which will
increase the range and standard of services available. 5.2.3
Option B
will ensure that the resources required to deliver the original process are
initially targeted to a leisure needs analysis that will ensure the
facilities and service are fit for purpose and meet both the current and
future needs of communities. It will result in a consolidated portfolio of
services and facilities and potentially deliver significant revenue savings;
these can be re-invested to ensure increased service standards and
accessibility making the service easier to use. A service specification can
then be produced for the revised portfolio and the procurement process can
then be pursued. However, the completion of this process will require
considerable additional stakeholder consultation and the production of both robust
project and business plans which will extend the process beyond the original
December 2006 deadline for the review. 5.2.4
As with
option B, option C will enable the costs which were going to be incurred on
the procurement process to be utilised to deliver the leisure needs analysis
to ensure that the there is s portfolio of service which will meet both
current and future needs. It will also facilitate improvements which will
raise service performance. 5.2.5
Both options can therefore be judged to offer
improved the value for money for the Leisure Services of the Council. 6 Financial /
Reputational Risk Assessment
Risk
score methodology:
7 Operational risk assessment
Risk
score methodology:
8. Legal implications 8.1 None identified by leisure
professionals, with reference to leisure legislation. 9. Evidence/background papers/additional information · New Horizons - Report on
the evaluation of the Pre-Qualification Questionnaires, June 2006 · Mott Macdonald -
Condition survey executive summary, May 2006 · New Horizons - Shadow
bid, June 2006 ·
Isle of Wight Council - Focus groups, April 2006
Facility users internal partners, town and parish councils, staff · Isle of Wight Council –
User/non-user survey, April 2006 · Isle of Wight Council –
Meetings with leisure contractors, April 2006 · Isle of Wight Council’s
Value for Money Checklist |
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Prepared
by |
John
Hobart, Lead Member and John Metcalfe, Lead Officer |
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Date: |
9
August 2006 |
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APPENDIX 1
Leisure Provision VFM Process
APPENDIX 2
Financial differences
The
table below details all financial differences which are in excess of £50k;
|
Variance |
Amount |
Explanation |
|
Income - increase |
|
|
|
Instructor
income |
£126,834 |
Increased
number of aerobics and aqua aerobics classes, children’s holiday activities
and parties. |
|
Swimming |
£317,972 |
Increased
number of swimming lessons. Removing
the option of any swimming clubs running their own lessons |
|
Food
and beverage |
£95,491 |
Increased
secondary spend which reflects the increased footfall above |
|
|
|
|
|
Expenditure - increase |
|
|
|
Repair
and maintenance |
£73,301 |
This
represents a realistic annual budget for repairs and maintenance |
|
Instructor
costs |
£253,757 |
This
is the additional staffing costs required to deliver the increases in income
detailed above |
|
Equipment
rental/leasing |
£88,391 |
This
is for the replacement of all of the health and fitness equipment which is at
the end of its serviceable life and the set up of the support/head office. |
|
Expenditure - decrease |
|
|
|
Human
resources |
£279,722 |
Reduction
in HR levels resulting from restructuring |
It can be seen from this analysis that a contractor
would be prepared to take greater risk in the appointment of staff to deliver
new income streams and would be able to cover a number of central functions
from within the head office of its organisation
APPENDIX 3
Year on year financial
profile for service delivery by a Private Contractor
|
Contract Year |
Annual saving |
Annual cost of prudential borrowing |
Annual net figure |
Cumulative additional cost/saving |
|
|
55,822 |
38,250 |
-78307 |
-78,307 |
|
|
55,822 |
265,389 |
148,832 |
70,525 |
|
|
55,822 |
256,889 |
140,332 |
210,857 |
|
|
55,822 |
248,389 |
131,832 |
342,689 |
|
|
55,822 |
239,889 |
123,332 |
466,021 |
|
|
55,822 |
231,389 |
114,832 |
580,853 |
|
|
55,822 |
222,889 |
106,332 |
687,185 |
|
|
55,822 |
214,389 |
97,832 |
785,017 |
|
|
55,822 |
205,889 |
89,332 |
874,349 |
|
|
55,822 |
197,389 |
80,832 |
955,181 |
|
|
-116,557 |
|
-116,557 |
838,624 |
|
|
-116,557 |
|
-116,557 |
722,067 |
|
|
-116,557 |
|
-116,557 |
605,510 |
|
|
-116,557 |
|
-116,557 |
488,953 |
|
|
-116,557 |
|
-116,557 |
372,396 |
|
|
-116,557 |
|
-116,557 |
255,839 |
|
|
-116,557 |
|
-116,557 |
139,282 |
|
|
-116,557 |
|
-116,557 |
22,725 |
|
|
-116,557 |
|
-116,557 |
-99,832 |
|
|
-116,557 |
|
-116,557 |
-210,389 |
It should be noted that the table includes the costs of addressing the property maintenance backlog (£1,723,999) financed through prudential borrowing spread over 10 years. However it does not include any lifecycle costs.