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Waverley Borough Council Committee System - Committee Document

Meeting of the Environment and Leisure Overview and Scrutiny Committee held on 15/01/2008
Leisure Procurement Strategy Implementation



APPENDIX H
WAVERLEY BOROUGH COUNCIL

ENVIRONMENT AND LEISURE OVERVIEW AND SCRUTINY COMMITTEE
15TH JANUARY 2008

Title:

LEISURE PROCUREMENT STRATEGY IMPLEMENTATION
[Portfolio Holder for Leisure: Cllr R Steel]
Portfolio Holder for Finance: Cllr M H W Band]
[Wards Affected: All]


Note pursuant to Section 100B(5) of the Local Government Act 1972
Annexes to this report contain exempt information by virtue of which the public is likely to be excluded during the item to which the report relates, as specified in paragraph 3 of the revised Part 1 of Schedule 12A to the Local Government Act 1972, namely:


Summary and purpose:

In 2007 the Council set out its key objectives for leisure in the Leisure Facilities Procurement Strategy. A key driver of the strategy was to maintain and enhance the Council’s existing leisure facilities over the next 15 years to meet customer needs and expectations. The purpose of this report is to present to members a refined list of improvement schemes, recommended by DC Leisure Ltd (DCL) on the basis that these improvements meet the greatest needs previously identified in the Strategy with the least financial impact. Members are asked to consider these proposals and the financial implications associated with delivering the Leisure Strategy.

Environmental Implications

The Leisure Strategy if fully delivered will bring about significant improvements to existing leisure facilities including updating the plant and machinery, this will have a positive impact on the environment.

Social/Community Implications

Improvements to the sport and leisure facilities will enhance the quality of experience that visitors will have. Increasing participation in physical activity is a key aim and one, which will have a positive impact of improving the health and well being of people in Waverley.

E-Government implications:

There are no direct e-government implications arising from this report. However, DCL’s proposals include improvements to the way in which the leisure centres utilise IT systems to collect management information and marketing systems as set out in the service specification.

1. Introduction and Background

1.1 In July, the Council reaffirmed its policy to continue operating the five existing leisure facilities across the Borough. It approved entering into a single 15 year management contract with DCL (for the five leisure centres) commencing 1 July 2008 subject to the satisfactory agreement of detailed contract terms by the Director of Finance, Solicitor to the Council and Director of Environment and Leisure. It was agreed that the management contract should include responsibility for DCL to implement the basic refurbishment works that had been identified in the strategy.

1.2 Following the July meeting officers were instructed to investigate further with DCL the capital improvement options that had been presented, focussing on those that could be delivered on a cost neutral basis (or better) and to report back to Council in due course.

1.3 The main purpose of this paper is to report back to members the outcome of this assessment and the further negotiations with DCL and to present the refined list of improvement schemes along with the financial implications associated with the proposals. In addition officers have included an update on progress made on securing the contractual terms required in the contract and to set out the timescales for the resolution of the remaining issues between now and July 2008.

2. Resource implications:

2.1 As anticipated, the cost of the new contract for running the centres is higher than the current management fee and the Council approved that additional budget be provided in 2008/09 and future years to meet these costs.

2.2 As well as a new management contract the Council has also approved the capital costs of basic refurbishment of the Farnham and Godalming leisure centres. A full list of the agreed refurbishment works is set out in Annexe 1. A total cost of 4million for these works was reported in July, including estimated closure costs. Since then, officers have worked with DC Leisure to reduce this cost to an estimated 3.4million. Whilst these are significant capital projects, the main elements relate mainly to essential maintenance and replacement items and are not in themselves significant improvements to the existing facilities in terms of enhancements. Given the nature of these schemes they provide limited revenue generation and this is included within the management fees agreed by the Council in July.

2.3 A further set of capital proposals were also presented to members in July that reflected the facility improvement needs identified by the Leisure Special Interest Group during 2006 and set out in the Leisure Facilities Strategy adopted by the Council. Members did not wish to commit to these projects in July and decided that they should be considered alongside Waverley’s other capital proposals within the normal capital programme-setting timetable. Members did not consider that the improved revenue position arising from these further capital works, as presented by DCL, was adequate for the level of resource invested. Consequently, Members asked officers to undertake further work with DCL to identify any capital improvement options that generated sufficient revenue to at least pay for Waverley’s borrowing costs.

3. Capital Improvement Schemes

3.1 DCL has responded well to the Council’s request to prepare capital proposals that focus on elements with the most beneficial revenue implications. Officers and the Council’s property advisors have spent significant time reviewing and testing these figures in partnership with DCL in an effort to minimise costs and to identify those schemes, which deliver the Council’s priorities but also provide the greatest return for the capital investment. However, it is important to point out that whilst the schemes identified do have the capacity to generate income there are some elements of the schemes, which are deemed necessary but cannot generate sufficient income to cover the full revenue impact of the capital cost.

3.2 It is worth noting that all five centres are of differing age and quality. The centres were built in the following years; Godalming - 1972 (36 yrs); Farnham - 1981 (27 yrs); Cranleigh – 1975(33 yrs); Farnham – 1981(27 yrs); Herons – 1998 (10 yrs); Edge - 2000 (8 yrs).

3.3 Annexe 2 sets out the list of improvement schemes for the facilities in Godalming, Farnham and Cranleigh. In determining the schemes, the assessment had to take into account the current age and condition of the centres, customer needs and expectations set against the greatest return for capital investment that the schemes would derive. Having done this assessment, capital schemes have been identified for the centres in Farnham, Godalming and Cranleigh.

3.4 It is important in the early stages of any major capital procurement that the Council does not compromise its financial position by making potential tenderers aware of capital estimates. The Council is also still in the process of negotiating contract terms for the contract. Therefore, whilst the details of what is included in the improvement options can be shown and are detailed in an open annexe, the financial proposals both revenue and capital are included in Exempt Annexe 3. The existing management fees are compared to the new contract in Exempt Annexe 4.

3.5 Improvement schemes for the Herons had been identified in the July report, however given the relative age and condition of the centre it was felt that this was not a priority at the current time. Also the estimated revenue savings arising from the proposed capital improvement works at the Herons fell significantly short of meeting the borrowing costs therefore, given the Council’s decision in July and the financial pressures on the budget, it is considered that any capital development works at the Herons should be reconsidered in future years and not at the current time.

3.6 For Godalming the improvement schemes proposed focus on the identified need to improve the health and fitness facilities at the centre, which currently fall short in terms of size and quality in comparison to the other centres operated by the Council. The Leisure Strategy identified the need to provide affordable good quality health and fitness facilities in Godalming available throughout the day. Options for the development of a new teaching pool and spectator seating were presented in July. However the cost of undertaking these works was considerable and the revenue generated was minimal with a significant cost falling on the Council’s revenue budget, and is therefore not being recommended.

3.7 With regard to Farnham and Godalming given that the Council has already committed itself to undertaking major refurbishment works at these centres it would be more cost effective, should the Council decided to carry out any additional improvement works to do so at the same time so as to limit the disruption to users and minimise the cost of any required closures.

4. Financial Analysis

4.1 In approving the new 15-year contract with DCL in July 2007, the Council committed to a significant additional revenue cost (shown in Exempt Annexe 4). Whilst this can be partly offset by the saving in business rates, the government could change its policy in the future, leaving the full cost to fall on the General Fund budget.

4.2 The Council can meet the costs of the basic refurbishment from its own capital resources, however it would need to prudentially borrow to fund any further capital improvement works. Before approving capital expenditure that requires borrowing, the Director of Finance must demonstrate to the Council that the borrowing is both prudent and sustainable. Any impact on the council taxpayer must also be clearly reported. In this case, a prudent borrowing period is deemed to be 15 years. Any external borrowing would need to be on the basis of the full repayment of interest and principal over the period, leaving no outstanding liability beyond the estimated life of the capital works.

4.3 At its October meeting, the Council revised its Discretionary Rate Relief policy to include the Council’s leisure centres provided that they are operated under a Community Trust model. DCL will be required to operate in this way and apply for NNDR relief under the new contract arrangements. It is estimated that a saving in management fees of up to 200,000 pa may be achieved in a full year.

4.4 Exempt Annexe 3 shows that the proposed capital improvement works at Farnham, Cranleigh and Godalming will have an overall net annual impact on the general fund revenue budget of some 157,000, after borrowing costs. Whilst it may be possible to offset some savings negotiated in the base management fee, the revenue cost that Members will need to take account of when considering the extent of any capital works and consequential borrowing requirement is 157,000pa.

4.5 The precise timing of any of the capital works cannot be determined until the legal work is completed and DCL has appointed its preferred contractors. Waverley and DCL are both keen to complete the works early in the contract and it is hoped that all works can be delivered within the first 2 years of the contract. The timing of the closure costs, revenue savings and any borrowing costs will be determined by the construction timetable. As the procurement process is likely to take a number of months following the start of the management contract in July 2008, it is unlikely that there will be any additional revenue cost in 2008/2009. However, in agreeing to any capital works, the Council would be committing to a major revenue cost in future years. There will be closure/business disruption costs that are budgeted for in the capital estimates.

4.6 Officers would also aim to identify on an ongoing basis alternative sources of funding the capital costs of the improvement works including from the leisure element of the planning supplement and S106 agreements. This would reduce the level of borrowing required but would not avoid Waverley needing to raise significant debt to pay for the works.

4.7 There are potential financial and procurement advantages of committing to any additional capital works at the outset of the contract rather than negotiating part way through the contract. The costs of delivering capital improvement schemes are likely to increase over time and should the Council wish to carry out any improvement schemes in the case of Farnham and Godalming it would be preferable and less costly to undertake these works at the same time as the refurbishment works thus reducing disruption to customers and business.

5. Future Capital Repairs

5.1 In addition to the major capital works, the Council will need to continue to operate a programme of repairs, maintenance and replacement at the five centres over the 15-year contract period. The report to Council in July 2007 alerted Members to the fact that the current annual capital budget of 105,000 is insufficient to meet Waverley’s landlord obligations for the leisure centres in the medium to long term. In July, the Council agreed not to set up a specific fund to finance these works in favour of meeting each years’ obligations as they arise. Exempt Annexe 5 shows the Council’s estimated repairs, replacement and maintenance requirements over the 15-year contract period. The table shows that the average provision required over the 15-year period is 200,000pa, including estimated capitalised staff costs. The Annexe also shows that the peaks of expenditure fall in the latter years of the contract.

6. Prudential Borrowing and Implications for the Future Financial Strategy

6.1 Local authorities have been able to undertake prudential borrowing since 1 April 2004. To date Waverley has not undertaken any borrowing, although it has agreed in principle to undertake prudential borrowing where there is a sufficient financial return to justify the initial investment.

6.2 Whilst achieving self-financing has been the objective in funding the leisure centre improvements, the fact that this is not possible does not preclude the Council from undertaking prudential borrowing.

6.3 Prudential borrowing is allowed for schemes where it is:

Affordable
Prudent
Sustainable, and
Achievable

6.4 In Exempt Annexe 3, the net additional costs (capital financing charges less management fee savings) result in a significant additional revenue cost of some 157,000 pa. In terms of scale, this represents an additional 2% increase on council tax. However, given the presence of capping, other pressures on the revenue budget and the Council’s desire to reduce the current use of balances, this additional cost cannot be added to Council spending without funding alternative sources of savings in future years. If Members agree to the capital improvement spending and acknowledge this extra pressure in the Financial Strategy, accepting that alternative savings will need to be identified, prudential borrowing can be appropriately undertaken.

6.5 Whilst borrowing of 5m is indicated in the report as the likely amount needed to find the capital improvement, officers will look to reduce this by using S106 and planning development supplements as appropriate.

6.6 This, together with the negotiated reduction in the management fee already achieved (Exempt Annexe 3), should also reduce the impact on the General Fund, thereby reducing the amount of future savings to be identified.

7. Contract terms

7.1 There are two key elements to the proposed contract with DCL:

the management of the facilities; and
the refurbishment and capital improvement building works.

7.2 Members will be aware from previous reports to the Executive and SIG that the main principles of the management contract have been negotiated between the Council and DCL. These principles have now been agreed and the contract for the management of the facilities has been drafted and forwarded to DCL for approval.

7.3 The capital works contract is the more specialist and resource-intensive element of the contract and the Council is currently procuring specialist legal assistance to manage it. The legal input will have been procured by the start of 2008 and the drafting of this contract element will begin promptly after that.

7.4 The Council has agreed that the major capital works will be procured and delivered through DCL as management contractor and it is essential that the appropriate safeguards are in place for Waverley and that the risk mitigation measures are balanced against the need to secure good value for money. With this in mind, officers have already prepared draft principles for procuring the capital works under the contract with DCL and these will be incorporated into the contract terms and agreed with DC Leisure, assisted by Waverley’s specialist construction legal advisors.

7.5 The contract will need robust terms around closure periods and will need to include arrangements for dealing with the financial consequences of any closure period or business disruption arising from any capital or maintenance work during the contract. Members should be aware that DCL’s business plan allows for the refurbishment works to be started and completed as soon as practically and financially possible after the contract start and that both the Council and DCL want any additional capital improvement works to take place at the same time as the refurbishment – thus ensuring only one closure period.

7.6 DC Leisure will be responsible for the procurement process and for letting and managing the works. The contract would set out the terms and conditions regarding, amongst other issues, the procurement route to be followed by DC Leisure. To award the contract for the letting and management of the capital works to DC Leisure is beyond the original approval to waive Contract Procedure Rules that was given when the decision to enter into single tender negotiations was taken.

7.7 It is central to the viability and success of the DC Leisure contract that the responsibility for the capital works is passed to that same company. Therefore an additional waiver of Contract Procedure Rules (CPRs), under CPR W101, is sought to allow this additional contract to be awarded without competition to DC Leisure.

7.8 The capital expenditure involved represents the single largest construction related project undertaken by Waverley for many years. It is absolutely vital that the Council takes steps to ensure value for money in the procurement of the works. If Waverley were letting the contract direct with the construction contractor, Contract Procedure Rules would be applied to govern and direct officers’ actions. In this instance, Contract Procedure Rules will not be directly applicable because the main contract has already been let to DC Leisure under the new waiver.

7.9 The contract terms and conditions will specify the requirements of Waverley. This will be to ensure that the spirit of Contract Procedure Rules is followed:

At least three tenders to be sought through sealed bids
Application of the “best value solution” option as prescribed in CPRs
Involvement of Waverley’s officers or agents in the procurement process including the assessment of tenders.

7.10 The ultimate decision as to which construction contractor(s) are to be awarded the work will rest with DC Leisure. It is important that they are able to select a firm in which they have confidence and are able to work with successfully. Waverley will be appointing an agent to act on its behalf in monitoring the process, from inception through to completion of the construction works. Expressions of interest are currently being sought for this contract.

7.11 It is recommended that Contract Procedure Rules are waived in accordance with CPR W101 to allow a contract to be awarded to DC Leisure without seeking alternative tenders for the management and undertaking of the construction works to refurbish and improvement of the Council’s sport and leisure centres

8. Summary and Conclusion

8.1 Waverley has an approved Leisure Strategy, which aims to improve the range and quality of leisure provision to the Borough’s residents. Waverley has a Financial Strategy that aims to balance the budget in the medium term, after taking account of unavoidable cost pressures and competing service demands. The Council has approved the continued future provision of its 5 existing leisure and has already committed additional revenue and capital funding in future years’ budgets to achieve this.

8.2 Waverley would have to go into debt to deliver the capital improvements and, whilst the proposals identified in this report show the best position achieved by officers through negotiations with DCL in terms of resultant revenue savings, there is still a significant net additional cost falling on the Council’s budget.

8.3 Given the pressures on the budget and the restrictions on council tax levels, Members will need to consider the relative priority of delivering these capital improvement works at this time against the other competing service demands and the need to reduce the Council’s dependency on using balances. The main options for the Council are: Give no commitment to any capital improvement works at this time and monitor the use of the facilities over the contract period
Commit to improving only one or two centres or reduce the scale of the capital works to aim to reduce the net revenue cost
Commit to all of the works and identify other savings in the general fund budget to offset the additional costs

8.4 A summary of the key risks will be presented to the Executive to consider at its meeting in February.

9. Recommendation

9.1 Members of the Environment and Leisure Overview and Scrutiny Committee are requested to:

i) note the progress made to date on the implementation of the leisure procurement strategy;
ii) consider the additional capital improvement schemes identified in the report in the light of Waverley’s strategic leisure and financial objectives and make any observations to the Executive, noting in particular:

a. the additional revenue impact over the next 15 years
b. the requirement to undertake prudential borrowing of up to 5million
c. the ongoing demand for future capital repairs and renewals that will be pressures on future capital programmes
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Background Papers (DORL)

There are no background papers (as defined by Section 100D(5) of the Local Government Act 1972) relating to this report.
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CONTACT OFFICERS:

Name: Julie Maskery Telephone 01483 523432
E-mail jmaskery@waverley.gov.uk

Graeme Clark Telephone 01483 523236
E-mail grclark@waverley.gov.uk