(OPEN TO THE PUBLIC) / ITEM NO.
JOINT REPORT OF THE DIRECTORS OF CORPORATE SERVICES AND DEVELOPMENT SERVICES
TO : THE LEAD MEMBER FOR CORPORATE SERVICES, MONDAY 16th JUNE 2003
SUBJECT: LIFT PROJECT AFFORDABILITY (version 3b)
RECOMMENDATIONS:
Lead Member is asked to note the contents of the report, in particular:
i)the potential cost of LIFT of up to £ (based on the assumptions herein)
ii)the uncertainty of other funding to meet that cost;
iii)that any additional requirements, such as additional Social Services facilities (para ) or community space (para ) will push this cost up.
Lead Member may wish to consider the level of financial commitment
EXECUTIVE SUMMARY:
LIFT represents an opportunity to redesign the Council’s interface with the public and to provide services in high-standard accommodation, while transferring the design, build, finance and operating risks to the private sector. It is hoped that synergies of placing various Council and health services in one location will lead to increased and enhanced public use overall. This report gives an update on the estimated cost to the Council of the LIFT project.
The cost of accommodation for placing services in LIFT centres, at £184/m2/pa, is substantially greater than the comparable current accommodation cost of £99/m2/pa. However, it is less expensive than the Council undertaking the building programme itself (were there funds available), at approximately £200/m2/pa - and therefore, on the face of it, represents good value for money. (para 3.1)
The additional cost to revenue of placing the services in the LIFT centre would be £737,367pa (para 4.4). This cost can be partly addressed by utilising capital receipts received from the sale of land to the LIFT Co and other measures. This would leave an affordability gap of £645,527pa (para 5.3).
There is a case for redesign of the LIFT contract for two specific areas where the contract is disadvantageous to the Council. Adressing these issues would reduce the affordability gap to between £334,580pa and £pa (para 6.1).
The remaining affordability gap would have to be met by efficiency savings across other Council services, unless it is possible to obtain additional funding by pursuit of grant, credit approval or PFI.
BACKGROUND DOCUMENTS:
Various working papers and reports.
CONTACT OFFICERS: Chris Hesketh; Steve Durbar Tel. Nos. 793 2668; 793 3755
E-mail: ;
ASSESSMENT OF RISK: High. The Council will shortly be expected to sign up to a space requirement before the availability of alternative funding can be determined with certainty.
SOURCE OF FUNDING: Revenue budget. PFI is also considered as a possible source of funds.
LEGAL ADVICE OBTAINED: Not applicable for this report. When appropriate, the LIFT officer working group is advised by a Law & Administration Division representative.
FINANCIAL ADVICE OBTAINED: This report has been part-produced by officers of the Finance Division of Corporate Services.
WARD(S) TO WHICH REPORT RELATE(S) All
KEY COUNCIL POLICIES
- Budget Strategy
- Salford Partnership Community Plan 2001 – 2006
- Pledge 3 A Clean and Healthy City
- Annual Library Plan
- Charlestown and Lower Kersal New Deal for Communities
REPORT DETAIL
1. INTRODUCTION
1.1There are six Salford sites in the first wave of LIFT. There is the potential in the project plan for Salford City Council to locate certain services in four of the sites. This includes one-stop shops at each of the four sites, libraries in three and a Social and Community Services team at one. This report examines the cost consequences of so locating the various services.
1.2Owing to developments in joint health and social services, there is a reasonable expectation that further Social Services functions could be located at LIFT sites. The potential cost of this is not covered in this report.
- CHANGES FROM PREVIOUS VERSIONS
2.1Compared to versions 1 and 2, it is possible to be a little more confident about some of the assumptions in the body of the report, particularly in relation to the Swinton scheme, where work is the most developed. However, nothing is certain until financial close, and the figures should still be taken as being indicative rather than exact.
2.2The following are changes from versions 1 and 2 of this report:-
a)All figures are based on the successful bidder’s (Excellcare’s) submissions.
b)It is now anticipated that the ‘B’ submission option will be built into the leaseplus agreement. This option involves GPs sub-letting on a PCT head-lease and results in a lower unitary charge.
c)It is now anticipated that the final leaseplus agreement will be a contract over 25 years, rather than 20, which results in a lower annual unitary charge but commits the Council for a longer period.
d)The analysis of space occupied at the Swinton site has been revised. The Council now has less space directly allocated to it, but more indirect space apportioned to it. The net result is favourable.
e)Capital receipts re-estimated on latest valuations.
f)Subordinated loan effect recalculated over 25 years.
g)Core team costs now included.
h)Radio mast loss of income now included.
i)Community space and New Deal for Communities introduced.
2.3PCT and Council officers are currently working on detailed analyses of space to be occupied at the non-Swinton sites along the lines of 2.2d) above, so further refinement of the figures will become available. In the interim, less accurate estimates continue to be used.
3. VALUE FOR MONEY
3.1 Table 1 (taken from Appendix A) compares the accommodation cost per square metre of the following:-
a)current service provision;
b)current service provision, after carrying out backlog maintenance to bring the facilities to a good standard;
c)provision of the services in new accommodation, purpose-built by the Council;
d)providing the services in LIFT centres.
Table 1: Cost per square metre
Alternative
/Cost
£/m2/paa) / Council existing / 99.00
b) / Council addressing backlog maintenance / 106.50
c) / Council new build / Library / 214.00
Office / 180.00
One-stop Shop / 186.00
d) / LIFT lease charge / 184.00
3.2It can be seen that the cost per square metre of LIFT is substantially greater than the existing cost of service provision, but roughly equivalent to the Council undertaking the building programme itself (were there funds available).
3.3 Note however that the LIFT building plans do contain a greater proportion of common or circulation space than would be expected of Council buildings.
4.LIFT COST BUILD-UP
4.1 Lease Plus Charge
The LIFT scheme is analogous to a DBFO (design, build, finance, operate) PFI scheme – the intention being to transfer the risk in all those areas from the public to the private sector. Rather than owning and operating the building itself, the Council will lease space. The lease plus is a unitary charge, levied monthly, per square metre of space let and in return the Council will receive modern accommodation maintained to a very high standard.
The lease plus cost is calculated at £908,935pa. Comparable revenue and capital charges of the existing services are £328,902pa (see Appendix B).
4.2 Pass-Through Costs
The Lease Plus Agreement does not provide for the payment of certain accommodation costs, which will have to be met by the lessees. These include furniture and fittings, IT equipment and infrastructure, and ‘soft’ facilities management (FM) services such as cleaning, refuse disposal, security and caretaking. This report considers the effect of these to be cost-neutral, as they have to be provided in current service provision. However, in practice it is expected that there will be an additional cost associated with an upgrade in services.
In addition, the Lease Plus Agreement provides for certain costs to be met by LIFT Co initially, but to be ‘passed-through’ to the tenants in the form of a supplement to the lease charge. These costs include insurance, utilities and rates. The invitation to negotiate specified the levels to be used in the bids, but it is likely that the actual charges will be different. Bidders resubmissions are to include more accurate estimates of the likely pass-through costs. It is estimated that there will be an additional cost over existing services of £264,187pa, partly offset by savings of £82,961pa (Appendix C).
4.3 One-Stop Shops
The four sites include one-stop shops with associated waiting/information areas. These are at the same time the front desk of both the LIFT building and other Council services. This represents a significant redesign and enhancement of existing Council services at the interface with the public.
It is anticipated that the Council will recharge the PCT for the use of this front desk in proportion to the number of enquiries taken. In the absence of any accurate data, this report estimates that the recharges will total 50% of the cost of the space. This has been reflected in the floor area calculations in Appendix B. It should be recognised that this is a very rough estimate.
Furthermore, the movement of staff into the LIFT site could result in space savings at the present location of those staff. For the purpose of this report, these recharges and savings are estimated at £40,000pa (see Appendix D).
4.4 Net Additional Cost to Revenue
Table 2 below demonstrates that the additional accommodation cost of providing the services in the LIFT centres is £737,367pa, compared with existing service provision.
Table 2: Additional annual revenue costs
Item / Cost / Notes£pa
LIFT lease / 908,935 / see appendix B
add / pass-through costs / 264,187 / see appendix C
add / central costs / 16,108 / see appendix H
less / current costs, Council library/office provision / (328,902) / see appendix B
less / Current costs, rates, insurance, utilities / (82,961) / see appendix C
less / savings on current space / (40,000) / see appendix D
Net additional cost in LIFT / 737,367
1.1Community Space
Each of the four sites contains community rooms. It will be necessary to discuss with PCT colleagues how this space might be paid for. Appendix J shows that the total cost of this space amounts to £pa. Pending the outcome of these discussions, no part of this cost has been included in the affordability calculations in this report.
In addition, the Douglas Green and Lower Kersal sites, which otherwise have no Council space, contain community space. It is expected that this space can be funded by New Deal for Communities monies for ten years. Negotiations are pending to determine if the Council and PCT can underwrite the cost of this space for the period subsequent to the funded ten years. No part of the potential cost of this has been included in the affordability calculations in this report.
5. MEETING THE COST
5.1 Capital Receipts
Capital receipts of £2,001,000 are estimated from the sale of Council properties to provide first phase LIFT sites (see Appendix G). Ways of using these receipts to help fund the additional revenue costs are being investigated. The simplest method would be to amortise this receipt over the 25-year life of the project, in the form of a reduced lease charge. This would result in an amount of £80,040pa to set against the lease charge.
Of course, the use of capital receipts in this way would preclude their use to support other capital schemes.
5.2 Subordinated Debt
The Council has approved in principle the purchase of £1,800 of shares in LIFT. Potentially more significant financially is the opportunity to make a ‘subordinated loan’ to LIFT Co. Current proposals indicate that the loan on first phase schemes could be £148,000 at an interest rate of 14%, which is substantially higher than other investment opportunities, at a relatively insignificant risk.
Appendix E demonstrates that making such an investment could generate £11,800pa to offset against the loan charge. However, as such a loan is not an 'approved investment' of the type undertaken for treasury management purposes, £148,000 of capital receipts would have to be set aside to provide credit cover (diverting resources from other capital projects).
5.3 Affordability Gap
Table 3 shows that, after applying capital receipts and investment interest to the LIFT scheme, there would still be a revenue shortfall of £645,527pa to be found from other measures.
Table 3: The affordability gap
Item / Cost / Notes£pa
Net additional cost in LIFT / 737,367
less / Utilisation of capital receipts / (80,040)
less / Assignment of investment interest / (11,800)
Affordability Gap / 645,527
6. FURTHER MEASURES
6.1 Negotiation of the lease contract
There are two areas where the LIFT contract is disadvantageous to the Council in relation to other partners, these being the non-differential lease charges and the treatment of common space (explained Appendix F).
The non-differential lease charge contributes £101,892pa to the cost of LIFT, while the excess of floor space contributes £209,055pa.
It appears that the PCT may be amenable to making a payment to adjust the lease cost in respect of the former, although they may be less inclined to accommodate the Council over the second issue.
The effect on the affordability gap of a successful negotiation in respect of these items is shown in table 4 below.
Table 4: Negotiation Points
Item / Cost£pa
Affordability Gap / 645,527
less / Differential lease charge at 11.2% / (101,892)
less / Common and circulation space at 15% / (209,055)
To be met from grant aid or efficiency savings / 334,580
6.2 Central Funding
It may be possible to secure additional resources in the form of grant aid, credit approvals or PFI funding to help make LIFT affordable. At the moment, no such assistance is evident so this would require a political approach.
In 2002, ODPM invited applications for PFI funding to support Joint Service Centres, the nature of which appears to fit with schemes of the nature of LIFT. Unfortunately, the timescale did not, as the deadline for applications was 3 January 2003. It is likely that a similar invitation will be extended later in 2003 for 2004/05 PFI schemes, but this may be too late for phase 1 LIFT schemes. Typically, successful application for PFI credits results in special revenue grant intended to cover the capital costs of the scheme – estimated at 70% of the NPV of the total costs.
6.3 Efficiency Savings
The LIFT proposals are not cost-saving measures in their own right. The proposals represent an enhancement of library and one-stop provision in the City, at a substantial cost. After other measures to close the affordability gap have been exhausted, the balance can only be met by making efficiency savings in other services as part of the budget exercise.
Appendix A: Value for Money
Table 1: Comparisons on a Cost per Square Metre Basis
Alternative
/Cost
£/m2/paa / Council existing / 99.00
b / Council addressing backlog maintenance / 106.50
c / Council new build / Library / 214.00
Office / 180.00
One-stop Shop / 186.00
d / LIFT lease charge / 184.00
Notes
1) The LIFT cost is the lease charge per square metre of bid B (GP sub-leases, 25-year contract). While the cost per sq m is similar to Council build, it should be noted that the LIFT buildings will be less ‘efficient’ than Council buildings in their proportion of circulation space.
2) The Council costs include revenue costs and capital costs. The capital costs have been amortised and include the cost of borrowing.
3)The figures exclude insurance, utilities and rates. See Appendix C.
4) The figures exclude soft FM services, i.e. cleaning, refuse disposal, security & caretaking.
5) The LIFT Lease Plus contract allows the lease charge to be increased each year by RPI. The Council figures would increase each year as running costs increase each year.
6) There are some differences in the Council’s existing costs between this and Appendix B, owing to different sources used. These differences are not material to the overall outcome.
Sources
Costings of Group Leader (Quantity Surveyors)
Working papers of Principal Strategic Property Surveyor
LIFT bid submissions
Appendix B: Accommodation Cost
Projected Additional Revenue Budget Requirements
Existing / Existing / Current / LIFT / LIFT leaseLocation / Services / Area / Costs / area / cost
m2 / £pa / m2 / £pa
Walkden / library / 597 / 37,476 / 1,104 / 203,216
Pendleton / library / 860 / 68,445 / 1,495 / 275,077
Swinton / library / 1,500 / 190,992 / 1,477 / 271,750
Eccles / offices / 650 / 31,989 / 864 / 158,892
Total / 3,607 / 328,902 / 4,940 / 908,935
Notes
1)For all schemes, the LIFT site includes the additional provision of a one-stop shop and waiting area/information lounge. It is expected (based on Swinton floor area analysis) that these will take up 270m2 of space at each site. However only 50% of this space has been included, as costs will be rechargeable to the PCT in proportion to enquiries handled. There is no data to support this split, so 50% is a very rough estimate.
2)LIFT floor areas include estimates (based on Swinton floor area analysis) of overhead space chargeable to the Council.
3)The LIFT cost is the lease charge of bid B (GP sub-leases, 25-year contract).
4)For the Social Services offices in the Eccles scheme, it is assumed that space reduction down to 8m2 per person will be achieved.
5)The figures exclude insurance, utilities and rates. See Appendix C.
6)The figures exclude soft FM services, i.e. cleaning, refuse disposal, security & caretaking.
7)The LIFT cost figures will be increased each year by RPI.
8)There are some differences in the Council’s existing costs between this and Appendix A, owing to different sources used. These differences are not material to the overall outcome.
Sources
Working papers of Principal Strategic Property Surveyor
SAP GL
LIFT bid submissions
Appendix C: Pass-Through Costs
The figures in Appendixes A and B exclude soft FM services, i.e. cleaning, refuse disposal, security & caretaking. These are assumed to be cost-neutral between Council and LIFT provision.
The figures in Appendixes A and B exclude insurance, utilities and rates. These are ‘pass-through’ costs, which LIFTCo will settle, then add on to the Unitary Charge in order to obtain reimbursement from the tenants. Within the LIFT assessment process these were given estimated costs shown as ‘LIFT estimate’ in the table below. However, it is considered that the figure estimated by Council officers and shown as ‘LIFT revised’ is likely to more accurately reflect the actual charge. The table also shows estimated ‘current’ costs.