Head of Procurement and Development

BLACKPOOL COUNCIL

REPORT

of

HEAD OF PROCUREMENT AND DEVELOPMENT

to the

EXECUTIVE

(Report previously considered by the Corporate Leadership Team)

REVIEW OF BLACKPOOL OPERATING COMPANY LTD

1.0Introduction

The formal legal lease arrangements in place between Blackpool Council and Blackpool Operating Company (BOC) expired at the end of June 2011. A decision on the future of the Company was deferred by 6 months in view of the pending election. This deferral was subsequently extended by a further 15 months until the findings of a report on the most suitable options going forward were known.

A report was taken to the Council’s Leadership Team on 21st March 2012 outlining a process for reviewing Council-owned companies. The review was undertaken in line with this process.

This report sets out the review framework, findings to date and recommendations following the key lines of enquiry identified .

The process to undertake a review of BOC has included three key phases:

Phase 1 - Research and document review

Phase 2 - Stakeholder interviews

Phase 3 - Report to the Treasurer.

The purpose and objectives of the review are detailed below:

• Establish the legal status and powers of Blackpool Operating Company
• Confirm governance, support and monitoring arrangements
• Clarify roles and responsibilities
• Test value for money
• Consider alternative delivery options.

A number of key stakeholder interviews have taken place including with Blackpool Council Accountancy and Legal Services staff, BOC Board Members as well as with the Managing Director (MD) of BOC. A range of plans, reports and associated documentation have also been considered.

2.0Background Information

2.1Brief description of the operation

The Sandcastle opened in 1986.At that time its operating company, Blackpool Operating Company Ltd,was privately managed by Sunley Turriff. In 2003 following falling visitor numbers, regarded as a consequence of a considerable lack of investment in a highly competitive market, BOC was purchased by the Council for £1.

BOC has an operating lease for the Sandcastle premises with Blackpool Council.

Since ownership of BOC transferred to the Council theSandcastle Waterpark has been developed into a facility comprising over 18 water slides and attractions ranging from fun pools and themed areas to wave machines and thrill rides. In addition there are retail units, an amusement arcade and catering facilities.

The Sandcastle Waterpark is the UK’s largest indoor waterpark making it a destination attraction for visitors within a 2-hour radius of Blackpool. It is open to the public between February and November, although during off-peak periods opening is sometimes restricted to weekends and school holiday periods. The Waterpark attracts over 300,000 visitors per year and at peak periods employs 115staff both on a permanent and temporary basis.

3.0Asset Information

3.1SouthBeach Car Park

Adjacent to the Sandcastle Waterpark is a surface pay and display car park with 125 spaces. A legal agreement is in place between BOC and the Council in respect of the car park and this agreement expired in June 2011 (in line with the lease between Blackpool Council and BOC).

The agreement outlines the responsibilities to be held by each party with respect to the car park. Duties associated with the management and maintenance of the car park are split between the Council and BOC. The income collected is split such that the Council pays BOC two-thirds of the income from the machines after deductions for VAT.

In line with the agreement BOC has influenced the pricing mechanism in operation at the car park in order to influence visitor behaviour at the Sandcastle.

The MD of BOC would like BOC to take complete control of South Beach Car Park.

3.2Grosvenor Casino

The adjoining Grosvenor Casino (which is part of the same building) comprises gaming areas, restaurant, bar and offices. The Casino and associated arrangements do not form part of this review, however there is some overlap as currently BOC collects rent from Grosvenor on behalf of Blackpool Council. This arrangement was due to end in December 2011 with the lapsing of the lease between BOC and Grosvenor. BOCagreed that they would continue to collect the rent on behalf of Blackpool Council until March 2012when a new agreement between Blackpool Council and Grosvenor was finalised. A new agreement has however not yet been finalised and therefore the arrangements for payment of rent remained unchanged until 24th December 2012.

3.3Carnesky’s Ghost Train

Carnesky’s Ghost Train is located opposite the Sandcastle Waterpark. It is not part of BOC, it is leased by Blackpool Council and is sited on Blackpool Council land. It is however managed by the BOC MD and performance is reported to the BOC Board. BOC took over the operational management of Carnesky’s Ghost Train in 2010 at which time it was making an operational loss. The Ghost Train is now on target to make a small profit in the current financial year.There is no formal Management Agreement in place between Blackpool Council and BOC in relation to Carnesky’s Ghost Train.

4.0Links to Corporate Priorities

Blackpool Council has launched its priorities for 2012/13. The operation of the Sandcastle Waterpark directly contributes to the delivery of a number of these priorities. Links to Blackpool Council’s priorities include to:

• Expand and promote our tourism, arts, heritage and cultural offer;
• Improve health and well-being especially for the most disadvantaged;
• Attract sustainable investment and create quality jobs.

5.0Governance

5.1Board Composition and Functions

The Board of Directors currently consists of 5 Councillors, 2 Council officer representatives and a Managing Director employed by BOC.

The current composition of the BOC Board is as follows:

Councillor Gary Coleman, Chairman

Councillor Graham Cain, Board Member

Councillor Fred Jackson, Board Member

Councillor Christian Cox, Board Member

Councillor Lily Henderson, Board Member

John Child, Managing Director

Steve Thompson, Company Director and Company Secretary

Philip Welsh, Company Director.

Two documents comprise the BOC constitution – the Memorandum of Association and the Articles of Association. These documents were created in 1983. They set out the powers, restrictions and internal regulations under which BOC should operate, including the way that BOC should be run.

These documents do not outline the roles and responsibilities of Board members. There is no statutory duty to define specific roles and responsibilities for board members; the Company’s Act 2006 does outline general duties of a company director based on common law rules and equitable principles. Part 10: Chapter 2, sections 172 – 177 outlines the following duties of a company’s director:

• Promote the success of the company
• Exercise independent judgment
• Exercise reasonable care, skills and diligence
• Avoid conflicts of interest
• Not to accept benefits from third parties
• Declare interest in proposed transactions or arrangements.

At the BOC Board meeting in March 2011 a paper was presented for discussion titled ‘Directors’ Duties, Responsibilities and Rights’. The paper was presented in response to a clarification raised at a previous Board meeting. Whilst there are no statutory roles and responsibilities for Board members a number of duties were highlighted, namely:

• Directors should act in good faith towards the company
• Any information acquired in a capacity as a director should not be used for personal gain
• Directors should act in the best interest of the company and avoid conflict between personal and company interests

It should be noted that whilst there is no statutory duty to define specific roles and responsibilities for board members there is a duty to ensure that board directors are aware of their responsibilities. It should be noted that the composition of the Board at the time roles and responsibilities were tabled is different from the current composition.

The paper presented to the Board in March 2011 also defined in broad terms what may constitute a conflict of interest. In essence it was noted that where there are dual roles being fulfilled with different entities directors should ensure a separate and distinct fiduciary duty to both entities.

The role of the Board is seen by Board Members to offer strategic direction, challenge for delivery and performance and support to progress development. The onus for ensuring that the Sandcastle accounts are accurate also rests with the BOC Board. There is a reliance by the Board on Steve Thompson to assist in the understanding and interpretation of the financial information presented.

Under the Operating Agreement BOC is required to produce quarterly management reports, weekly cash balance statements, a statement of gross turnover, operating expenses and net surplus/deficit figures to the Council.

Regular items reported by the MD to the Board are:

Financial information

Visitor numbers

Health and Safety

Marketing

Operational matters.

The Board operates on a two-tier approach. The Board, which meets quarterly, is supported by an Officer GroupcomprisingSteve Thompson, Philip Welsh and John Childwhich meets up to six times per year and provides a “no surprises” approach for the Board. This approach is felt to work well and ensures that the Board can focus on strategic matters. Members of the Board feel it adds value and provides strategic direction; challenges operational delivery; monitors and challenges performance and offers support to enable development.

5.2 New Corporate Governance Model

A review has recently been undertaken into the governance arrangement of all Council-owned companies. One of the key lines of enquiry was to review the governance structure and this will have an impact on the existing structure of the BOC Board. The review sought to ensure that the best interests of the Council are served and that no conflicts of interest exist. This will be achieved through the establishment of a Shareholder Panel.

5.3Legal Status and Leases

There are various legal arrangements in place in relation to BOC. The complexity of the legal arrangements in place was a necessary requirement at a time of scarce capital funding prior to the availability of Prudential borrowing.

The property comprises the Sandcastle Waterpark and an adjoining building currently operated as a casino. The Council owns the land on which the buildings are located.

The property was originally let to City Leasing Limited on a 51-year lease at a peppercorn rent from 7 October 1983. The whole of the property was then leased back to the Council on a 51-year lease on a complex rent arrangement. Confirmation has been received from City Leasing that early termination of the lease prior to 2034 would be £103,252 plus legal fees.

The Council then let the property (excluding the casino) to BOC on a 25-year lease which expired in June 2011. The BOC tenancy is now held over on the same terms as detailed in the lease as a short-term arrangement whilst future options are explored.

5.3.1 Equipment Lease

It is understood that a 40-year equipment underlease is in existence between Blackpool Council and BOC.Currently Blackpool Council ischarged in the region of £7,000 per year.

The Council’s Legal Services Department made an attempt to negotiate with City Leasing to have the lease terminated but it was deemed not to be financially viable.

6.0Value for Money

6.1Business Planning

The Business Plan for April 2012 to March 2013 was approved at the March 2012 Board meeting. The Business Plan is prepared by the MD with guidance from the Officer Group and the Board.

The business planning process does appear to be working effectively and the plans are being used to monitor and update on progress against objectives, including the MD’s pay.

Budgets and targets for the coming year are set out in the business plan, these are proposed by the MD based on previous years’ figures and through benchmarking with other waterparks. The Board has the opportunity to question and challenge these targets before they are approved.

When measuring financial success stakeholders have different views relating to the most appropriate measures. Visitor numbers, residents visiting the facility, spend per head and surplus in the Blackpool Council budget for the Sandcastle were all noted as legitimate measures.

6.2Non-Financial Value

It is important to acknowledge the non-financial benefits that the Sandcastle Waterpark offers.

The Sandcastle offers significant community benefits including working with charities, with residents and with other local and minority groups, including disability groups, naturists and Muslim women. Representatives from the Sandcastle attend many community fetes and fares over the course of a year to promote the facility. Prizes are often donated, generally in the form of admission vouchers.

The Sandcastle is utilised by groups that may otherwise not have opportunities to use such attractions, for example the Waterpark is on occasion opened outside of normal working hours to enable a local charity ‘Aiming Higher’ access for families with disabled children. The Waterpark promotes itself and has been recognised as providing excellent access to all.

The Sandcastle is a significant employer of local people and in particular young people. The low turnover of staff means consistent employment is offered and should be taken to indicate that a significant level of job satisfaction is received. A great deal of emphasis is placed on developing and up-skilling staff.

The Sandcastle has strong links to local schools and colleges. In the past they have been actively involved in the ‘walk to school’ initiative and have links to apprenticeship schemes with Blackpool and the FyldeCollege. In part as a result of the amount of work done locally a good relationship exists with residents who make up in the region of 20% of admissions.

The Sandcastle Waterpark is the recipient of numerous awards and accolades which reflect the quality of the work undertaken, particularly in respect of customer services.

6.3 Funding / Budget

A considerable amount of financial data has been provided for this review.

Operational accounts were made readily available and appear to be thorough and clear. The BOC auditors, Moore & Smalley, in the 2012 year-end accounts confirmed that the accounts give a true and fair viewof the state of the company’s affairs as at 31 March 2012 and of its loss for the year then ended.

KPMG has confirmed that the support subsidy which Blackpool Council provides to BOC can be treated as consolidated support and is not regarded as state aid.

Table 1 below outlines the level of consolidated group support that Blackpool Council has provided to BOC since the Company was purchased.Also shown are the years in which capital investment has taken place and the subsidy level by Blackpool Council per visitor to the Sandcastle.

Table 1 – Blackpool Council Consolidated Support to BOC

Consolidated Revenue Outturn (£) / Capital Investment Profile (£) / Subsidy per visitor (£)
2003/04 / n/a / 347,839
2004/05 / n/a / 672,574
2005/06 / n/a / 3,595,218
2006/07 / 570,730 / 808,737 / 2.51
2007/08 / 274,487 / 73,268 / 1.12
2008/09 / 250,055 / 5,450 / 0.85
2009/10 / 24,029 / 0 / 0.07
2010/11 / (8,725) / 315,494 / -0.03
2011/12 / 238,071 / 2,073,893 / 0.74

The financial support from Blackpool Councilin the early years took place in order to improve the Sandcastle and address thehistorical lack of investment in the facility. The periods in which capital investment took place are shown in table 1 above. It can be seen that following the early capital investment after a short period the level of support required reduced significantly. The level of subsidy per head can also be seen over the years to have reduced significantly from £2.51 in 2006/07 up to the point in 2010/11 where there is a negative subsidy of -£0.03. There has been a reducing net cost to Blackpool Council of BOC over the last 5 years. It should be noted that the subsidy per visitor level increased for 2011/12 as a consequence of increasing energy, water and chemical costs. The annual cost of these commodities in 2010/11 was £459,800 increasing to £668,708 in 2011/12, an increase of over 31%. This situation is being addressed via the recent Executive approval to invest in a boiler replacement scheme for a combined heating and power system.

During 2011/12 a short-term loan was made to BOC to cover cashflow shortages during the winter months. KPMG produced an ISA 260 report in September 2011 which identified that future loans should have formal repayment terms attached to them and that consideration should be given to applying an appropriate interest rate to represent the risk of default and cost of capital to the Council. It is understood that these arrangements are now in place.

If Blackpool Council withdrew support to BOC, BOC would have to borrow at commercial levels and this would increase costs.

Moore and Smalley, in the 2012 audit of year-end accounts, have noted that the company (BOC) is currently dependant upon financing (underwriting)from its parent undertaking. The company has plans in place to reduce the support needed from Blackpool Borough Council, and in the meantime the Borough Council has indicated its ongoing future support to the company in order to enable it to continue trading for the foreseeable future. A letter is provided to Moore & Smalley annually to guarantee that the Council will continue to under-write BOC.

6.4Capital Investment

Under Blackpool Council BOC has adopted a business model which requires periodic capital refresh in order to sustain and grow visitor numbers by providing new attractions to the facility which will both attract new visitors and draw back previous visitors. The MD aspires to small-scale investment every 2-3 years with a larger investment every 5 years.

Since 2004 three phases of capital investment have taken place at the Sandcastle to provide new attractions. A total of £7.9 million has been funded by the Council from Prudential borrowing. The capital spend profile is shown in table 1 above. The investment has resulted in increased visitor numbers and revenue as well as a consequential requirement for increased staffing of the facility.

In an item to Executive in 2010 it was noted that unused Council group supportbudget relating to the Sandcastle would be ringfenced and this along with increased revenue contributions from the Sandcastle would cover the Prudential debt servicing costs over its 15-year lifespan.