APPENDIX 1

POLICY COMMISSION BLUE PAPER

RESPONSIBLE BODY Policy Commission for Economy, Tourism, Regeneration and Transport
PROJECT NAME Value for Money (VFM) Leisure (Part 1)	REFERENCE NUMBER E4/05 (part 1)
PURPOSE OF THE ENQUIRY AND THE PROPOSED OUTCOME The proposed outcome of the Review, as specified in the revised scoping document dated 3 January 2006, was to recommend to Cabinet a service delivery mechanism for the current portfolio of leisure services, which would: · Provide for an increase in service standards · Meet customer expectations · Provide value for money to the Council
RECOMMENDATIONS Stop the procurement process (option C) And also: - · Undertake a leisure needs analysis related to current service provision at a potential cost of £50k; · 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
This body of work was agreed and accepted by the Members of the Policy Commission for Economy, Tourism, Regeneration and Leisure on 9 August 2006. Cllr George Brown Commissioner

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

	Annual subsidy requirement
The current Council department 2005/6	£1,621,695
Private sector contractor (figure from the shadow plans)	£1,505,118
Reduction in Annual Revenue Cost	-£116,557

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

	Annual subsidy requirement
The current Council department 2005/6	£1,621,695
Private sector contractor (figure from the shadow plans)	£1,505,118
Reduction in Annual Revenue Cost	-£116,557
Annualised cost of addressing property maintenance backlog through prudential borrowing over ten years	£212,075
Increased annual revenue cost	+£95,518

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 at a potential cost of £50k;

· 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.

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

Nature of risk	Option A	Option B	Option C	Possible controls
Reputational - It is not possible to report back to Cabinet and conclude the process in accordance with the original timetable	1x4 = 4	1x4 = 4	N/A	Prepare a detailed project plan which clearly shows the new process
Reputational – By stopping the process the authority loses credibility with the companies that have submitted expressions of interest and Pre-Qualification Questionnaires	N/A	1x2 = 2	1x3=3	Contact all companies and clearly set out the reasons for stopping the process. Detail the potential future opportunities
Financial – There is no identified budget to address the maintenance backlog before the commencement of a management contract	4x3=12	4x3=12		A prudential borrowing bid is prepared; the cost of which will be offset over ten years against the annual revenue saving
Financial – There is not an identified budget to fund the costs associated with continuing with the procurement process	1x4 = 4	1x4 = 4	N/A	The specification is reviewed to ensure that there is maximum flexibility for potential operators without compromising the needs of users. The cost of the process should aim to be recovered over the lifetime of any agreement to manage the facilities
Financial – There is not an identified budget to fund the costs associated with completing the leisure needs analysis	N/A	1x3=3	1x3=3	The cost of the analysis should aim to be recovered over the lifetime of any proposals to amend the facilities and services available
Financial - The procurement process results in an annual revenue cost for managing the existing portfolio which is higher than that anticipated through the shadow bid and therefore exceeds the Council’s agreed affordability limit	3x3 =9	1x2=2	N/A	The tender submissions are reviewed and negotiated at the best and final offer (BAFO) stage to ensure affordability

Risk score methodology:

Impact over 10 year contract period	x	Likelihood	= Risk
1 – Low, under £250,000		1 – Very unlikely
2 – Medium, under £500,000		2 – Possible
3 – High, under £1m		3 – Probable
4 – Catastrophic, over £1m		4 – Very likely

7 Operational risk assessment

Nature of risk	Option A	Option B	Option C	Possible controls
The backlog of property maintenance within the facilities is not addressed; subsequently plant and equipment fails. This results in closures and loss of income which has to be absorbed within the leisure service budget	N/A	N/A	1x3 = 3	In conjunction with Property Services revised maintenance schedules are prepared to reflect the priorities within the condition surveys Capital bids/prudential borrowing applications are prepared to address the backlog of repairs
Opportunities are not realised to both develop facilities and revise programming which would result in increased revenue streams. This could result in the establishment of national brand competition and loss of customers and revenue.	2x3 = 6	N/A	N/A	Identified development opportunities are re-evaluated and business cases presented to cabinet for consideration
Staff morale suffers as a result of continued uncertainty regarding the future of facilities	N/A	3x3 = 9	N/A	Regular meetings arranged with the staff representative groups to cover all C&LS facilities within the review

Risk score methodology:

Impact	x	Likelihood	= Risk
1 – Low		1 – Very unlikely
2 – Medium		2 – Possible
3 – High		3 – Probable
4 – Problematic		4 – Very likely

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

Prepared by

John Hobart, Lead Member and John Metcalfe, Lead Officer

Date:

9 August 2006

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
	-116,557	38,250	-78307	-78,307
	-116,557	265,389	148,832	70,525
	-116,557	256,889	140,332	210,857
	-116,557	248,389	131,832	342,689
	-116,557	239,889	123,332	466,021
	-116,557	231,389	114,832	580,853
	-116,557	222,889	106,332	687,185
	-116,557	214,389	97,832	785,017
	-116,557	205,889	89,332	874,349
	-116,557	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.