HERTFORDSHIRE COUNTY COUNCIL
CABINET
MONDAY 19 FEBRUARY 2007 AT 2.00 P.M.
PRIVATE FINANCE INITIATIVE (PFI) CAPITAL PROJECT: FINAL BUSNESS CASE
Report of the Director of Children, Schools and Families
Author: Lindsay Martin, Head of School Access
Tel: 01992 556718
Executive Member: Jane Pitman
1. Purpose of the report
To seek agreement to the Final Business Case for submission to the Department of Health (DoH).
2. Summary
The County Council is required to submit a Final Business Case to the DoH as sponsoring department. The Executive Summary of that Business Case is attached as Appendix 1. The financial implications of the project are set in out section 5 below.
3. Conclusions
Cabinet is asked to agree the Final Business Case.
4. Background
4.1 The Final Business Case (FBC) for the Children’s Services PFI Project needs to be approved by Cabinet on 19 February. The timescale is determined by the need to obtain the approval of the Department of Health (DoH), as sponsoring department, in time to achieve financial close with the private sector contractor during March 2007.
4.2 The benefits to the County Council of the project are considerable. The project will provide:
· fit for purpose residential accommodation for children in care and with disabilities;
· increase local residential capacity, thereby reducing the reliance on out of county provision;
· increase capacity for preventative services to support earlier intervention with vulnerable children and families, in line with the Hertfordshire Children and Young People’s Plan (CYPP) and provisions in the Children in Care Green Paper.
4.3 The project includes:
· the re-provision of existing four residential homes
· the expansion of residential provision by delivering a new Disability Resource Centre, two Adolescent Support Centres and a six-bedded home for 11-16 year olds
· the refurbishment of five Family Support Centres and the development of a new centre
· the relocation of the Family Assessment Centre;and
· the provision of a new Children’s Centre.
4.4 Whilst the timetable for the project is still subject to financial close, we anticipate that the first refurbished Family Support Centre (FSC), Crossbrook, will re-open in November of this year. The first new building will be the Children’s' Home at Six Hills Way, Stevenage in January 2008. The project will complete in 2009 with a new Childrens' Home at Stanfield in April and the refurbished Otley FSC in December.
5. Revised financial implications
5.1 The PFI scheme provides an opportunity for the Authority to deliver a package of provision for services to children and their families in Hertfordshire through the use of PFI credits totalling £21.5m. The PFI scheme is well developed with the timetable for financial closed planned for 21 March 2007.
5.2 The scheme also incorporates capital contributions from the Authority, developer’s contributions and DfES grant in respect of the Family Assessment Unit and Children’s Centre totalling £3.1m. This comprises:
· Capital Programme - £1.6m (including 2007/08 proposed bid of £0.950m)
· Sure Start Grant - £0.6m
· Section 106 Developer Contributions - £1m
5.3 The financing of the scheme has always been predicated on revenue savings from repairs and maintenance costs and out county placements, which the scheme would provide in house.
5.4 The scheme will deliver a net increase in 16 placements from:
· A new Disability Resource Centre delivering 6 places
· Two new Adolescent Resource Centres providing a total of 8 places
· A new six bedded home for 11-16 year olds which, with the closure of the 4 bed independence unit at Burydale, will provide a net increase of 2 beds.
5.5 A number of other changes have had an impact on affordability:
· an increase in the estimated operating costs of the Adolescent Resource Centres to take account of the more intensive short-term respite support to enable these children to return home;
· more efficient procurement of out county places, as part of the LAC strategy, which has reduced the cost of out county placements. This change reduces the savings from out county places.
5.6 The County Council’s in-house finance team and ABROS, external financial consultants, have been commissioned to update the financial modelling to take into account the changes since the business case was last considered.
5.7 Looking at the revised project over its 25 year life there would be a cumulative net cost to the authority of £11.2m (including start up costs and contingency). This calculation takes account of the availability of the DoH PFI grant.
5.8 The contingency provision within the contract is to allow for variations in the contract price as a consequence of the legal and commercial negotiations with the preferred bidder. For example as a result of extra asbestos or other abnormals. Disturbance costs for getting staff in place for the new homes and the ancillary costs from the decanting arrangements for the family support centres are allowed for in the start up provision.
5.9 Given the improvements required to ensure that the accommodation at the children’s residential homes meets national standards, ‘do nothing’ is not an option. Based on the schemes within the PFI for replacement of the existing four homes, the capital costs of redeveloping the existing homes would be £9.7m, with an average annual financing cost of £647k over 25 years based on county borrowing. This would have a total net cost to the authority of £8.2m (NPV). Whilst it may be possible to produce a scheme with a lower specification, this would need to be subject to a feasibility study – which would incur further costs. Comparisons of the estimated net costs of the total PFI scheme with the costs of replacement of the 4 residential homes are shown below with further detail in Annex 1.
2007/08 / 2008/09 / 2009/10 / 2010/11 / 2031/32 / 2032/33 / TotalPFI - NPV / -272 / 312 / 1306 / 597 / 276 / 483 / 11,023
County Borrowing - NPV* / 242 / 870 / 851 / 812 / 425 / 406 / 8,162
* Based on replacement of 4 existing homes
5.10 Whilst the total cost for the PFI is greater than that for county borrowing, these are outweighed by the overall benefits of the PFI scheme described in paragraph 4.2. In particular, the enhanced preventative capacity would support the authority in meeting the overall net cost to the PFI.
5.11 Ultimately, alongside other LAC strategies, the development of the more preventative provision will impact on the future numbers of children needing to be accommodated but this will need to be developed over time. In particular the two Adolescent Resource Centres working in tandem with foster care services, CAHMS team and residential services will substantially reduce the need for teenage children being placed in out county provision. Once the homes are fully operation we estimate there will be capacity to further reduce out county foster placements recycling them to in house provision. From 2011/12 we estimate there will be capacity to make a reduction in 19 foster care placements out of county, with 9 of these recycled to in-house placements (a further net reduction of 10 places). This would provide a further annual saving of £875k and would reduce the overall net cost to the PFI to £386k as shown in Annex 2.
5.11 The financial analysis shows that until the new facilities become operational there will be a cost to the council of:
Year / Cost (NPV)£000s
2008/09 / 312
2009/10 / 1,306
2010/11 / 597
If the PFI scheme is approved by Cabinet this funding would need to be considered in the context of future budgets and would be a first call on any savings made by the CSF department or any growth allocated.
5.12 Whilst the savings related to the use of the 16 additional residential places are relatively secure, any further reduction in the cost of out county placements would impact on the cost of the scheme. We are undertaking further financial evaluation to quantify the level of this risk.
5.13 There are also risks to the scheme if the additional savings arising from the preventative strategies to reduce the number of children in care are not realised. These risks will be mitigated by strategies which will be in place to reduce the need for the use of out of county placements, namely:
· Area based Placement Monitoring Meetings offering close scrutiny of placements, especially in the first six weeks.
· Family network meetings operating more robustly
· Preventative services developing to increase the number of young people on the edge of care remaining with their families.
· Future developments in Fostering leading to a more flexible and specialised service.
· The Central placement Service effectively using resources available
5.14 The risk of the longer term LAC strategy reducing the need for residential homes is mitigated by making the homes readily convertible into other care use, for example elderly care.
5.15 There are also risks with PFI procurement from failure by the contractor. This risk can be mitigated by careful selection of the contractor, a robust contract, and the ability to withdraw or transfer to another should the contractor fail. The project has also benefited from using a project manager drawn from the private sector with PFI experience and from the experience of other authorities with similar but more advanced PFI projects.
5.16 There have been significant costs already incurred by the authority in reaching the final business case of £0.925m. If the scheme were to be aborted at this stage this investment would be lost. In addition there would be other intangible costs in terms of the reputation of the authority.
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Annex 1 – Financial Details
Table 1 – PFI
2007/08 / 2008/09 / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / 2030/31 / 2031/32 / 2032/33 / Total£'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000
PFI Payments / 396 / 1949 / 2642 / 2670 / 2699 / 2729 / 2760 / 3415 / 3463 / 3511
Less External Funding (DoH) / -736 / -1607 / -1607 / -1607 / -1607 / -1607 / -1607 / -1607 / -1607 / -736
-340 / 341 / 1034 / 1063 / 1092 / 1122 / 1152 / 1807 / 1855 / 2775
New Homes Staffing / 705 / 2704 / 2846 / 2917 / 2990 / 3065 / 4664 / 4780 / 2244
Start Up Costs / 300
Contingency / 100 / 103 / 105 / 108 / 110 / 113 / 116 / 176 / 181 / 85
Total Net Cost / 60 / 1149 / 3844 / 4016 / 4119 / 4225 / 4333 / 6647 / 6816 / 5104
R&M and other premises savings / -350 / -359 / -368 / -377 / -386 / -396 / -406 / -618 / -633 / -297
-290 / 790 / 3476 / 3640 / 3733 / 3829 / 3927 / 6030 / 6183 / 4807
OOC Savings / -436 / -1895 / -2869 / -2941 / -3014 / -3090 / -4701 / -4819 / -2262
Net Cost (Saving) / -290 / 354 / 1581 / 771 / 792 / 815 / 838 / 1329 / 1364 / 2545 / 27140
NPV / -272 / 312 / 1306 / 597 / 576 / 555 / 536 / 287 / 276 / 483 / 11023
Table 2 - HCC Traditional Procurement for Replacement of Existing Residential Homes (4) not fit for purpose
£'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £’000 / £’000
Capital repayment data
Capital / 9670 / 9670 / 9283 / 8896 / 8510 / 8123 / 7736 / 1160 / 774 / 387
HCC Cashflows
Repayment (as above) / 0 / 387 / 387 / 387 / 387 / 387 / 387 / 387 / 387 / 387
Interest / 242 / 484 / 464 / 445 / 425 / 406 / 387 / 58 / 39 / 19
Net HCC Outflow / 242 / 870 / 851 / 832 / 812 / 793 / 774 / 445 / 425 / 406 / 16197
NPV / 227 / 766 / 702 / 644 / 590 / 540 / 495 / 96 / 86 / 77 / 8162
Assumptions
Inflation for savings / 2.5%
Interest rate / 5.0%
Repayments based on MPR of 4% - equal repayments of / £387k
Discount rate for NPV / 6.6%
Annex 2 – Financial Details based on an additional OOC savings from foster care placements
£'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000 / £'000
PFI Payments / 396 / 1949 / 2642 / 2670 / 2699 / 2729 / 2760 / 3415 / 3463 / 3511
Less External Funding (DoH) / -736 / -1607 / -1607 / -1607 / -1607 / -1607 / -1607 / -1607 / -1607 / -736
-340 / 341 / 1034 / 1063 / 1092 / 1122 / 1152 / 1807 / 1855 / 2775
New Homes Staffing / 705 / 2704 / 2846 / 2917 / 2990 / 3065 / 4664 / 4780 / 2244
Start Up Costs / 300
Contingency / 100 / 103 / 105 / 108 / 110 / 113 / 116 / 176 / 181 / 85
Total Net Cost / 60 / 1149 / 3844 / 4016 / 4119 / 4225 / 4333 / 6647 / 6816 / 5104
R&M and other premises savings / -350 / -359 / -368 / -377 / -386 / -396 / -406 / -618 / -633 / -297
-290 / 790 / 3476 / 3640 / 3733 / 3829 / 3927 / 6030 / 6183 / 4807
OOC Savings / -436 / -1895 / -2869 / -3931 / -4029 / -4130 / -6284 / -6441 / -3024
Net Cost (Saving) / -290 / 354 / 1581 / 771 / -198 / -200 / -202 / -254 / -258 / 1783 / -531
NPV / -272 / 312 / 1306 / 597 / -143 / -136 / -129 / -55 / -52 / 339 / 386
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Appendix 1
1.0 Executive Summary
1.1 Introduction
Hertfordshire County Council initiated a bid for 19.4 million of PFI credits from the Department of Health in 2002 and the proposal was finally approved by HM Treasury’s Project Review Group in June 2004.