MANAGEMENT OPTIONS APPRAISAL APPENDIX A

25/11/2013

APPENDIX A
MANAGEMENT OPTIONS APPRAISAL
CHESHIRE EAST COUNCIL
A
REPORT
BY
FMG CONSULTING LTD
APRIL 2013
Page 127
TABLE OF CONTENTS
1. Introduction.............................................................................................. 1
2. Local and Strategic Context ........................................................................... 3
3. Leisure Facilities Performance Overview............................................................ 7
4. Options Review .........................................................................................11
5. Legal Implications......................................................................................33
6. Risk Analysis.............................................................................................37
7. Financial Implications .................................................................................43
8. Evaluation of Delivery Options.......................................................................60
9. Summary and Recommendations ....................................................................69
10. Implementation Plan .................................................................................79
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Cheshire East Council – Management Options Appraisal 1
1. Introduction
Background
1.1 In February 2013 Cheshire East Council (‘the Council’) appointed FMG Consulting Ltd (‘FMG’)
to undertake a management options appraisal for the future delivery of its leisure services,
covering both leisure facilities and development services. The brief was subsequently
expanded to include certain cultural and green space facilities / services.
1.2 Cheshire East is a unitary authority area with borough status which was established in April
2009 as part of the Local Government Reorganisation (LGR) process following the abolition of
Cheshire County Council and the Borough Councils of Congleton, Crewe & Nantwich and
Macclesfield.
1.3 The Council has recently taken the decision to become a “Strategic Commissioning
Authority” to reflect the changed local government landscape of reduced expenditure and a
greater focus on localism. This change has resulted in a need to review the future leisure,
cultural and green space management options across a wide geographical area and ensure
that the chosen management vehicle is fit for purpose to manage the variety of facilities
currently in existence.
1.4 Following on from previous work examining the most appropriate leisure management
options for the Council in 2009, FMG has been commissioned to provide an updated
assessment of the delivery / management options for leisure and how this may link with the
cultural and green spaces services taking into account the need to provide the services in the
most cost effective manner whilst maintaining quality and reflecting Cheshire East’s unique
circumstances. Where relevant, this study therefore draws on information from the 2009
report to supplement the additional work undertaken as part of this study.
Scope of the Study
1.5 This options review considers the most appropriate options for the commissioning of the
leisure service. The following leisure facilities are included within the review:
•
Crewe Swimming Pool;
•
Nantwich Swimming Pool;
•
Barony Sports Complex, Nantwich;
•
Shavington Leisure Centre;
•
Sir William Stanier Leisure Centre;
•
Victoria Community Centre,
Crewe;
•
Middlewich Leisure Centre;
•
Holmes Chapel Leisure Centre;
•
Sandbach Leisure Centre;
•
Congleton Leisure Centre;
•
Alsager Leisure Centre;
•
Macclesfield Leisure Centre;
•
Wilmslow Leisure Centre;
•
Knutsford Leisure Centre;
•
Poynton Leisure Centre.
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Cheshire East Council – Management Options Appraisal 1
1.6 There are currently proposals in place to create new Lifestyle Centres which combine a
range of leisure, library and adult day care services on single sites throughout the Borough.
The proposed phasing and revenue implications of these developments are factored into the
scope of this study and analysed within the financial implications section of the report.
1.7 All of the leisure facilities are currently operated directly by the Council which also funds
the annual operational deficits. In addition to examining the most appropriate future
delivery option for the leisure service, the study considers the viability of packaging the
cultural and green space services (also currently operated in-house) within any potential
commissioning process.
1.8 Following discussions with the Council, the full range of potential services that could be
included within the commissioning opportunity for the leisure facilities are set out in table
1.1 below.
Table 1.1 - Potential Additional Commissioned Services
Service Service Elements Potentially In-Scope?
Lifestyle Centres Yes
Dual-Use Centres Yes
Leisure Facilities
Business Support Team Yes
Sports & Play Development Yes
Health Improvement Unit No – retained within CEC,
due to links with emerging
Public Health remit
Community Halls 5 community halls Yes
Parks and Open Spaces Yes
Countryside Yes
Green Space
PROW Yes
Archives & Local
Studies
No – managed on contract by
Cheshire West & Chester
Council
Youth Theatres Yes
Lyceum Theatre No – managed on contract by
HQ Theatres
Knutsford Cinema No – long lease to Curzon
Cinemas
Arts & Cultural Services
Museums Yes
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Cheshire East Council – Management Options Appraisal 2
1.9 As noted in paragraph 1.1, the study focusses on the leisure facilities as the main income
generator and core focus of the commissioning project. However, the financial analysis and
evaluation of options assesses the viability of packaging the leisure facilities management
together with these other services and facilities.
Methodology
1.10 Our approach to the study comprised the following key tasks:
•
A review of the relevant national and local strategic documentation;
•
Review of the current financial and non-financial performance of the service, including
site visit and a benchmarking exercise to analyse facility performance against industry
benchmarks;
•
An informative options presentation to members to make them aware of the possible
options available and elicit initial feedback;
•
A detailed options appraisal and production of an implementation plan.
Report structure
1.11 The draft report is structured as follows:
•
Section 1 - Introduction;
•
Section 2 – Local and Strategic Context;
•
Section 3 - Leisure Facilities Performance Overview;
•
Section 4 - Options Review;
•
Section 5 - Legal Implications;
•
Section 6 – Risk Analysis;
•
Section 7 – Financial Implications;
•
Section 8 – Evaluation of Delivery Options;
•
Section 9 – Summary and Recommendations; and
•
Section 10 - Implementation Plan.
Basis of information
1.12 It is not possible to guarantee the fulfilment of any estimates or forecasts contained within
this report, although they have been conscientiously prepared on the basis of our research
and information made available to us at the time of the study. Neither FMG as a company
nor the authors will be held liable to any party for any direct or indirect losses, financial or
otherwise, associated with any contents of this report. We have relied in a number of areas
on information provided by the client, and have not undertaken additional independent
verification of this data.
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Cheshire East Council – Management Options Appraisal 3
2. Local and Strategic Context
Introduction
2.1 This section of the report provides background and context to the study by reviewing:
•
local demographic information and future population growth estimates to understand the
current population profile and how this may change in the future; and
•
the national and local strategic context information of relevance to local service
delivery.
2.2 The intention is to identify key factors impacting on the current facilities and services and
understand the future priorities, targets and changes that will impact on the management of
the services / facilities in the future.
Demographic profile
2.3 Cheshire East has a total population of 370,127 over an area of 1,158km
2
. The breakdown of
the ages within Cheshire East in the 2011 Census indicates that the population is ageing, with
the age groups from 45+ years all represented at levels above the national average.
2.4 Cheshire East has a lower than average proportion of both male and females in all age groups
from 15 to 34. The relatively low proportion of people of working age and relatively high
proportion of older people has implications for the housing needs of the population and for
the future economic prosperity of the Borough.
2.5 The Local Plan includes statistics that project an increase in population to 384,000 by 2029.
The forecasts also predict that the population aged 65 and over will increase sharply (by 59
per cent) during the period 2009 to 2029. Additional housing will be required to cater for this
demand with the largest increases in the population number being in the major towns of
Crewe and Macclesfield.
2.6 The Annual Population Survey 2011 calculates that the unemployment rate in Cheshire East is
significantly below the regional and national average. In Cheshire East, 10,600 were classed
as unemployed, this equates to 5.8% which is low compared to an average of 7.8% in the
North West and 7.5% across England.
2.7 Life expectancy in Cheshire East is higher when compared with the national average. Males
have a life expectancy of 79.1 years compared to 78.3 years nationally, while females live to
an average of 82.7 years compared to 82.3 years nationally.
2.8 According to the Census, 82.3% of Cheshire East are classed as being in 'very good health'
(49.1%) or 'good health' (33.2%), with 12.8% classed as being in 'fair health'. This is positive
compared to the national statistics for England where 81.4% are classed as being in 'very
good health' or 'good health'. The statistics also show that 3.8% of the local population are
classed as in 'bad health' with 1.1% in 'very bad health'. These figures are both below the
national average figures for England of 4.2% and 1.2% for 'bad health' and 'very bad health'
respectively.
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2.9 In terms of obesity, data suggests that the number of adults in the Borough that are
classified as obese is circa 63,100 or 21.7% of the adult population. This is below the national
average where it is estimated that 24.2% of the population are deemed to be obese. In
relation to children, the level of obesity is 18.5% in Cheshire East which is also marginally
below the national position of 18.7%.
Sport England Key Performance Indicators
2.10 Sport England, the Governments agency for sport measure 5 key areas in relation to sport
activity in the Active People Survey. The table below sets out the performance of the
Borough compared to the North West and England, taken from Active People 6. (Please note
however that Active People involves telephone sampling a maximum of 500 people in the
Cheshire East area out of a total population of in excess of 370,000, so is an approximate
measure only).
Table 2.1 - Comparison with Sport England KPIs
Cheshire East North West England
KPI1 – 3x30 Physical Activity per
week
16.7%* 17.1%* 16.3%*
KPI2 - Volunteering at least one
hour a week
8.3% 7.3% 7.6%
KPI3 - Club Membership in the last
4 weeks
22.2% 21.7% 22.8%
KPI4 – Received tuition / coaching
in last 12 months
18.4% 15.0% 16.8%
KPI5 - Took part in organised
competition in last 12 months
15.3% 13.2% 14.4%
*This information is from APS5, relevant information from APS6 is not available.
2.11 It can be seen that participation (measured at 3 x 30 minutes per week) at 16.7% is above
the national average (16.3%). However, the figure is below the North West regional average
(17.1%). This trend is reversed for club membership levels. Volunteering, receiving tuition /
coaching and organised competition are all above both the regional and national averages.
When analysed in more detail, receiving tuition / coaching is most significantly above the
averages at 18.4%, compared to 15% in the North West and 16.8% in England.
2.12 Table 2.2 shows the trends between 2010 and 2012 for each of the five key performance
indicators. The colours represent the change from the previous year, with green indicating a
positive increase and red a decrease in performance. The information is only available from
2010 due to the creation of the Unitary Authority Cheshire East in 2009.
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Cheshire East Council – Management Options Appraisal 5
Table 2.2 - Trends for Cheshire East in Sport England KPIs
Indicator 2010/11 2011/12
KPI1 - 3x30 Physical Activity per week observed 19.8%* 16.7%*
KPI2 - Volunteering at least one hour a week 6.3% 8.3%
KPI3 – Club Membership in the last 4 weeks 26.5% 22.2%
KPI4 – Received tuition / coaching in last 12
months
17.9% 18.4%
KPI5 - Took part in organised competition in
last 12 months
14.5% 15.3%
*APS5 data therefore 2009/10 and 2010/11 data.
2.13 It can be seen that in the Active People Survey 5 data for 3 x 30 minute physical activity
participation has reduced from 19.8% in 2009/10 to 16.7% in 2010/11.
2.14 For the remaining KPIs that use the Active People 6 survey (the last published measured year
being 2011/12), volunteering, tuition / coaching and organised competition have all
increased from the 2010/11 results, with volunteering significantly increasing from 6.3% to
8.3% in a space of a year.
2.15 Club membership is the only performance indicator in APS6 that has shown a decrease in the
2011/12 results. The figures have significantly dropped from 26.5% in 2010/11 to 22.2% in
2011/12.
What does this mean for Cheshire East?
•
The local population will increase over the next 15+ years which will result in
additional potential users for the facilities but also highlights the need to ensure
facilities and services are fit for purpose and can cope with the increased demand.
•
The local population appears to be healthy and relatively active, although there are
still improvements that could be made in participation levels. This emphasises the
need for a modern and efficient management service which continues to offer a
varied programme of activities, in modern and value for money facilities, to
contribute towards increasing the healthy living of residents in Cheshire East further
still.
•
The elderly age profile of the Borough (which is projected to become more
pronounced over the next 15+ years) may impact on income from some activities
and presents specific challenges that need to be addressed in terms of ensuring
programming and facilities cater for all age groups within the Borough. This will be
particularly crucial as the challenge for local authorities to increase participation
and improve public health will be more important (and perhaps more difficult) than
ever in an ageing population.
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Cheshire East Council – Management Options Appraisal 6
Cost of inactivity
2.16 Sport England commissioned the British Heart Foundation Health Promotion Research Group
at Oxford University to prepare estimates of the primary and secondary care costs
attributable to physical inactivity for PCTs across England. This built upon work previously
undertaken on behalf of the Department of Health in 2009.
2.17 The cost of inactivity per 100,000 people in Cheshire East has been identified as £1.79m pa.
Extrapolating this to the total population of 370,000 identifies a cost per annum of £6.62m
for primary and secondary care. There is therefore clearly a significant opportunity to reduce
this annual cost through increasing participation amongst Cheshire East residents.
Strategic Documentation Review
2.18 A headline review of key national and local market context information of relevance to local
service delivery has been undertaken to identify key factors impacting on the suitability of
the different management options locally.
2.19 We have set out below a summary of the key implications for this study from the strategic
documentation review. The detailed analysis of each document and the implications for this
study are contained in Appendix A.
Strategic Documentation Review - What does this mean for Cheshire East?
•
There is a priority, both nationally and locally, to deliver improved services more
efficiently. The government is pushing for decentralisation of service delivery through
commissioning and increased involvement of local community groups. This study needs
to fully consider how best the management vehicles could help enable this.
•
Major financial savings are required across the Council with leisure and culture budgets
and associated management and staff numbers targeted for significant savings over the
next three years. This study will need to identify the management model that is best
placed to deliver these savings whilst still ensuring that the Council’s non-financial
strategic goals can be achieved and the service quality for the community is not
negatively impacted.
•
Leisure has a major role to play in Cheshire East in reducing anti-social behaviour and
improving health, particularly in light of the ageing population profile. Whatever future
management arrangements are proposed need to ensure that this focus is not lost at
the expense of a profit-driven service. The evaluation section of this study should
reflect this priority when assessing the available management options.
•
The population is projected to increase in the Borough up to 2030 so the quality and
range of services and facilities on offer will need to be sufficient to cater for the
increased demand, particularly bearing in mind the need to also improve the financial
cost of the service whilst the population profile becomes older (and potentially less
likely to participate).
•
The Council sees its leisure facilities as a priority and is considering investing in them
through the provision of Lifestyle Centres. Any developments will need to take account
of the town centre first focussed development strategy and the need for investment in
Crewe in particular, as evidenced by the identification of capital funds for the new
Lifestyle Centre within the three year capital budget.
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3. Leisure Facilities Performance Overview
Introduction
3.1 In order to understand how the leisure facilities are performing, a high level analysis of
income, expenditure and performance information has been undertaken. This enables the
identification of any significant trends and comparison of headline figures against FMG's inhouse
performance database, so that we can establish what scope there may be for
performance improvement. This will inform which delivery vehicle may be best placed to
deliver service improvement in the future.
3.2 The section provides an overview of the key findings, whilst the detailed analysis of net
direct cost of operating the facilities and then benchmarks for key income and expenditure
areas against FMG’s in-house database of national key performance indicators (KPIs) are
contained in Appendix C.
3.3 It should be noted that, whilst KPI analysis provides a useful comparison between facilities
and against national benchmarks, it is not appropriate to make decisions based solely on the
KPI outcomes, as the key issue is whether services are being maximised locally, not simply
how they compare nationally. Considering the numbers in isolation does not take into
account site specific issues such as local competition, the operational philosophy, the age,
quality and design of facilities, any wider community programming restrictions due to “joint
use” agreements involving schools, levels of integration of sports development and the
demographics of an area. Also, direct comparison between the Council's leisure facilities
should be treated with some caution as they are located over a wide geographical area with
a diverse range of demographic and economic characteristics within their respective
catchment areas.
Net Direct Cost of Facilities
3.4 This part of the report is intended to focus on the net direct operational cost of the leisure
facilities. This does not cover the whole cost of the service which is dealt with in the
Financial Implications Section of the report (Section 7).
3.5 The figures used to assess the net direct cost of the facilities and to analyse performance
against benchmarks are 2011/12 actuals as these were the most recent figures from a
complete financial year.
3.6 Table 3.1 sets out the net direct cost of the Council's leisure facilities for the 2011/12
financial year.
Table 3.1 – Net Direct Cost of Leisure Facilities
2010/11 2011/12
Total Income (£5,412,510) (£5,615,186)
Total Expenditure £8,586,617 £8,927,514
Net Direct Cost £3,174,107 £3,312,328
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3.7 It can be seen that the net direct cost of the facilities in 2011/12 was circa £3.31m.
Summary of Leisure Facility Performance
3.8 We have reviewed the financial performance of the leisure facilities based on the figures
provided by the Oracle finance system with cross-reference to the income figures contained
within the onsite system where appropriate. Performance has been compared against
national benchmarks produced from FMG's database of leisure centre operational
performance data. The key findings from this review are as follows:
•
It appears that the net direct cost of operating the facilities in 2011/12 increased by
£139k from 2010/11 to £3.31m. Income increased by £203k during this period however
expenditure also increased by £342k. These figures should be treated with some caution
as there are a number of discrepancies that the finance team are investigating regarding
the recording of income for 2011/12 with circa £200k unaccounted for between the
onsite till system and the Oracle finance system. In addition, the Council also introduced
additional staffing costs (est at £325,000 for 5 months) in the financial year 2011/12
associated with re-introducing paying time and half for hours worked at weekends;
•
The leisure facilities in Congleton, Macclesfield and Wilmslow were the three most
expensive facilities in terms of net direct operating cost in 2010/11 and 2011/12. This is
perhaps not surprising as all three facilities include swimming pools which often result in
increased operational costs and these facilities include higher levels of staffing
(lifeguards etc) for which the costs have also been affected by the costs of implementing
Council single status through paying time and half at weekends. This point is supported
by the fact that the lowest operating cost facilities are Barony Park Sports Centre,
Shavington Leisure Centre and Holmes Chapel Leisure Centre which are all dryside only
facilities.
•
Some facilities, and in particular those that share leisure programme time allocations
with an onsite high school and associated primary schools such as Middlewich, Sandbach
Sir William Stanier & Holmes Chapel Leisure Centres and also Barony Sports Complex
perform below benchmark levels for income generation. With the exception of Barony,
all of these facilities have limited access for community use during the day (Monday to
Friday) throughout the normal school year. None of these facilities have a swimming pool
which always generates higher levels of public use and therefore higher levels of income.
Middlewich was also adversely affected in terms of income in 2011/12 by the lack of any
access to the floodlit astro-turf pitch which had been withdrawn from use by the High
School pending the construction of a new replacement facility. The lower levels of
community use possible at such smaller joint use sites supports the Council’s
considerations in relation to transferring these facilities where possible and appropriate
back to the respective schools following expiry of the existing joint use agreements.
•
The best performing facilities in terms of income generation are those at Crewe
Swimming Pool, Nantwich Swimming Pool, Macclesfield Leisure Centre and Wilmslow
Leisure Centre. None of these facilities have the same restrictions on programming and
income that occur where the facility is jointly provided with a high school.
•
Income per visit is below benchmark across the whole portfolio which is in line with the
Council’s corporate strategic aims to give priority to young people, the elderly and those
with disabilities. We understand that headline prices have been benchmarked against
nearest neighbours and are already at the higher end of comparisons, however, over a
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Cheshire East Council – Management Options Appraisal 9
third of all attendances are young people16 years and under and with a further 150,000
total attendances amongst those 60 years or over. Both high priority target user groups
for the Council and those that receive significant subsidies through discounted fees and
charges for using the facilities.
•
Health and fitness income is generally below expectations however the dual-use nature
of the facilities as indicated above, the small size of the some of the fitness suites and
value for money pricing will be contributing factors to this. The average number of
members per station across the portfolio is only 17 compared to an industry average of
circa 25 which indicates that the majority of gyms have additional capacity (a latent
demand report would need to be procured to confirm this). The exceptions to this are
Crewe and Nantwich Swimming Pools which have 27 and 36 members per station
respectively. These are the two best performing facilities in terms of income per station
and are closer to the £5k - £6k income per station level which we would expect to see
from an in-house operation. However, it is important to note that the Council has
recognised this and we understand that the significant recent developments over the
past 12 months at Wilmslow, Macclesfield, Shavington, Crewe, Knutsford and
Sandbach (alongside minor improvements to equipment at Holmes Chapel, Alsager
and Middlewich) has had a significant positive impact on income generation and
membership levels, such that the 2012/13 financial performance will be in line with
or exceed industry benchmarks in most cases – this clearly supports the benefits of
investing in a ‘quality’ offer and supports the plans for upgrades at nantwich Pool
(nearly complete), Congleton, Poynton and a further more significant upgrade, at
Alsager and Sandbach.
•
Swimming and sports hall income compared to benchmark is reasonable in a number of
the facilities. The leisure centres at Macclesfield and Wilmslow in particular are
performing close to / above benchmark for both of these KPIs. If the additional VAT
benefits that a trust operation can access were factored in, many of the facilities would
be performing close to the benchmark level in these areas. There are however, a number
of facilities (smaller joint use centres in particular, due to the inherent restricted
daytime community access required by the shared arrangements with a high school) that
perform significantly below benchmark for sports hall income which leads to questions
about the need to continue operating all of the dual-use facilities which mainly offer
large, 6 court sports halls. This analysis supports the Council's long-term thinking around
the asset planning for rationalisation and the provision of new Lifestyle Centres.
•
Performance against expenditure benchmarks is below expectation, particularly in
relation to staffing costs which are often over 100% of income at many of the facilities –
however, this is clearly impacted by the decision regarding enhancements, which we
understand added £325,000 for 5 months of 2011/12 and has added c.£750,000 in the
current year. This is also reflected in the fact that the overall cost recovery percentage
is below benchmark across all facilities with the exception of Shavington Leisure Centre
and Macclesfield Leisure Centre.
•
Utilities costs are reasonable at many of the facilities considering the age of the asset
stock however there are some facilities where the utilities costs should be interrogated
to understand the reasons for the high costs compared to the benchmark level.
Knutsford, Poynton and Sandbach Leisure Centres are all dual-use facilities which have
very high utilities costs although this could be partially attributable to the lack of ability
to accurately split utilities consumption / costs between the school and the leisure
centre elements which may lead to some degree of subsidy of the schools premises being
incurred by the Council via the leisure service. The utilities costs for the dual use
Middlewich Leisure Centre in particular are above the benchmark level which is a
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Cheshire East Council – Management Options Appraisal 10
concern because this dual-use facility does not have a swimming pool (although the same
issue may apply as at the other dual-use facilities). Finally, Nantwich Swimming Pool has
high utilities costs at £61 per square metre. These high utilities costs may be partially
related to the provision of the heated outdoor pool.
•
Maintenance expenditure is below benchmark across the portfolio which could be looked
at as a positive in terms of controlling expenditure however is a concern if the upkeep of
the assets is not being invested in for financial reasons as it will lead to long-term
increases in major maintenance issues and reductions in income due to increased service
disruptions and user dissatisfaction / attrition rates. It is noted that maintenance
expenditure appears to have decreased significantly between 2010/11 and 2011/12. The
responsibility for the maintenance budget now resides centrally with the asset
management team. It is crucial that maintenance expenditure does not decrease further
still (unless there is a clear plan for long-term disposal of an asset) as the resulting
savings in expenditure are likely to be negated by reductions in income and increased
long-term maintenance problems.
•
Although there is some marketing spend in the individual cost centres for some of the
leisure facilities the amounts are negligible and so have not been recorded in table 3.18.
Marketing spend is not allocated per leisure centre as there is a central marketing team
which works across all of the leisure facilities. The marketing team spent £39,353 in
2011/12 on marketing activities (this does not include the cost of the staff time i.e. their
salaries and wages or associated expenses). Adding on the £1,502 spent on-site results in
a total marketing spend of £40,855. This is the equivalent to 0.7% of income and is low
when compared to the benchmark of 2.1%. This may be one of the contributory factors
as to why performance against the income KPIs was predominantly below the benchmark
levels across all of the facilities.
•
It is acknowledged that the financial performance at some of the leisure facilities is
understated because the true level of income and costs relating to school dual-use status
and long-term hire of rooms by the Adult Services team are not accurately reflected in
the levels of income / recharges allocated to each facility. This would impact positively
on a number of KPIs and overall financial performance if accurate recharges were
included.
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4. Options Review
Introduction
4.1 Having outlined in sections 2 and 3 the current ‘offer’ and financial performance, the
remainder of the report focuses on future provision, starting with an overview of the
different options available generally for management of leisure & culture.
4.2 There are a number of different management options available for the Council to consider,
each with their own advantages and disadvantages. It may be that one model covers all the
facilities and services or that specific models will suit some of the facilities / services and
not others.
4.3 We have grouped the management options under consideration as follows:
•
Continued in-house management;
•
Outsourced management – either through a private company or an existing charitable
company (Trust); and
•
Establishing a new company – either charitable or non-charitable trust
4.4 The text in this section provides a description of each option, their key characteristics and
relative advantages and disadvantages.
In-House Management
4.5 This option involves the retention of the Council’s existing management model, potentially
with some operational efficiencies and improvements made in order to generate financial
savings and improve performance. Although this model will be very familiar to the Council,
we have set out the key features and advantages and disadvantages to allow proper
comparison with the alternative options.
4.6 The key characteristics of continued in-house management by the Council are as follows:
•
the Council takes direct responsibility for the management and operation of the facilities
and services;
•
any staff employed in the operation of the facilities are employed by the Council;
•
the Council gathers all income generated by the facilities;
•
the Council is responsible for all expenditure incurred in the delivery of the services;
•
the services continue to use the central support services of the Council;
•
the operating risks of the services remain with the Council;
•
the maintenance of the assets remains with the Council;
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Cheshire East Council – Management Options Appraisal 12
•
there are no set up costs associated with this option and no timescale issues.
4.7 The table below sets out the advantages and disadvantages of in-house management.
Table 4.1 - In-house management – advantages and disadvantages
ADVANTAGES DISADVANTAGES
The Council retains complete strategic and
day to day control of services
The Council misses out on potential revenue
savings from NNDR relief and VAT
The Council retains professional and
operational expertise of services’
management and staff
The Council retains liability for the
operational performance of the services
Workforce remain within the local
government framework and pension scheme
(as appropriate)
The Council retains liability for the capital
maintenance costs associated with the
facilities and any capital funding
requirements
Shares central support costs with other
departments
Misses opportunity to improve management
of the services by accelerating decisionmaking
processes and providing greater
autonomy to staff
Cross-relationships with other local
authority services
Can have limited access to entrepreneurial
spirit and flair (risk and reward)
No set-up costs or lead-in time required
Limited access to the benefits of developing
new opportunities and from economies of
scale
Summary of In-House Management
4.8 Under this option, there is no change, unless the Local authority can consider other selffinancing
investment options, the rationalisation of facilities or an operational review to
improve the financial position. This solution will not address the risk transfer issues, provide
a single focus for the service or protect the service from likely service cuts that will face
local government over the coming years.
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Outsourced Management
4.9 If the Council was to outsource the management of the service(s) through a procurement
process, there would be likely to be two types of bidders:
•
private sector organisations (often using ‘hybrid’ trusts); and
•
existing charitable organisations (trusts).
4.10 These two types of organisations have different structures, characteristics and advantages
and disadvantages, however would be likely to be directly competing for the right to deliver
the service(s) should the Council choose to outsource to an external organisation through a
procurement process.
4.11 The third option to outsource the leisure facilities presented in this section is via a trade sale
of the assets to an existing private sector commercial operator such as Virgin Active. This
would usually be achieved through a property transaction rather than a procurement
process.
Private Sector Management
4.12 Following the introduction of Compulsory Competitive Tendering (CCT) to sport and
recreational services in 1989, a number of companies were set up to respond to the
opportunities of CCT in operating and managing public leisure facilities.
4.13 Since then, there are a number of private companies that have emerged to operate in the
public sector sport and recreation market managing facilities and services on behalf of local
authorities under contract. These include, by way of example, DC Leisure, Parkwood Leisure,
Leisure Connection, SLM and Serco Leisure plus others.
4.14 The key characteristics of private contractor management are as follows:
•
the Council would be the "client" and would manage operations under a contract agreed
by both parties which would include a specification and performance measurement
system;
•
the management opportunity would typically be defined by a number of key heads of
terms, including:
−
a fixed contract term (typically ten to fifteen years);
−
a management fee payable by the local authority to the contractor (potentially
incorporating surplus share arrangements); and
−
a service specification setting out the Council 's requirements in respect of the
delivery of the management services (typically including aspects such as pricing,
programming, customer care, cleaning, opening hours, maintenance and quality
management).
•
the contractor undertakes management of the facilities, gathering all income generated
by the facilities and being responsible for the majority of costs incurred by the facilities;
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Cheshire East Council – Management Options Appraisal 14
•
typically, the Council would retain some responsibilities (usually in respect of structural
repairs and maintenance) and incur costs in respect of these responsibilities;
•
staff are employed by the private contractor via a transfer under the TUPE regulations;
•
the operating risks of the services are transferred to the contractor. The contractor
would incorporate its own profit (risk) margin within the management fee agreed with
the Council and achieves this profit margin by delivering the projected financial
performance;
•
the Council would monitor the operational performance and service standards delivered
by the contractor, such that any failures to perform may be subject to financial
deductions;
•
the private contractor will use their own central support costs and will not need to use
those of the Council, which potentially has an impact on the central resources of the
Council.
Hybrid NPDO Management
4.15 In recent years, most of the established private management contractors have started to
offer a "Hybrid NPDO" management model (and some also offer charitable models). This
model is a legal vehicle with charitable objectives, which can access discretionary NNDR
benefits, but is not a charitable company or provident society and not recognised by the
Charity Commission, thus removing the opportunity for any significant VAT benefits.
4.16 As with private sector contract management, the Council could enter into a management
arrangement where some of the management of the facilities and/or services are
subcontracted to the NPDO. Under such circumstances, the Council could benefit from
revenue savings provided by this model through discretionary NNDR relief (75% saving on
NNDR costs).
4.17 However, discretionary rate relief, as accessed by the Hybrid Trust option, provides a lower
level of NNDR savings than the Charitable NPDO option (as outlined later in this section).
Further to this, it should be noted that, due to the government’s Business rates Retention
Scheme which is being introduced in April 2013, the fiscal benefit from NNDR savings is likely
to be less of an advantage to local authorities over the next 7 years until 2020. This issue is
discussed in more detail in the financial implications section of this report.
4.18 The hybrid organisation may also benefit from additional grant and sponsorship opportunities
as external organisations are probably more likely to grant-aid and/or sponsor a NPDO than
the local authority itself.
4.19 Currently, the hybrid structure would not benefit from the potential savings generated by
the different treatment of VAT within a charitable management structure due to the fact
that the Hybrid NPDO is not viewed as a registered charity.
4.20 The advantages and disadvantages of the Hybrid NPDO option are broadly the same as the
private contractor management option, as set out in the table overleaf. The only discernible
difference is that the hybrid option offers additional NNDR savings as detailed above.
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Table 4.2 - Advantages and disadvantages of private contractor management
ADVANTAGES DISADVANTAGES
Contractor likely to maximise opportunities
for income generation and economies of
scale
The Council no longer manages day to day
operation of the facilities and services
(reduced control)
The Council is likely to be able to transfer
considerable operational risk over to the
private contractor
Contractor may prioritise commercial
rather than social objectives e.g. profit
(unless stipulated in the contract)
Broader expertise and experience of the
private contractor
Potential loss of community focus (unless
stipulated in the contract)
Access to capital finance to provide
investment into facilities and services
Staff are transferred to the private
contractor under TUPE, although pension
benefits may be comparable only
The Council can enter into a long-term
contract with performance guarantees
Capital finance can be more expensive
than that provided by the public sector
The Council has greater certainty of cost in
relation to the on-going revenue subsidy
Use of an Existing NPDO
4.21 Where the Council decides not to set up a new NPDO but wishes to obtain some of the fiscal
advantages associated with a NPDO structure an alternative option is to use an existing NPDO
that has already been set up by another party.
4.22 There are many existing leisure trusts that have been set up by other local authorities and,
once established, have started bidding for new contracts in other local authority areas.
Examples include Greenwich Leisure Limited, North County Leisure, Fusion Lifestyle Ltd and
Freedom Leisure. Many of these organisations also operate cultural facilities such as
community halls and theatres and some, such as Wigan Leisure and Culture Trust or Rochdale
Link for Life, were specifically set-up to offer a full range of leisure, cultural and green
space services.
4.23 This option provides a similar fiscal solution to the new NPDO option (which is outlined later
in this section) without the set up costs, but also provides the benefit of sharing risks across
other leisure contracts that the NPDO holds and their associated economies of scale (similar
to the private management option but normally on a smaller scale).
4.24 The key characteristics of management by an existing NPDO are as follows:
•
responsibility for the management of the leisure facilities is transferred using a contract
and specification;
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•
the NPDO would typically be a registered charity with a board of voluntary trustees and
is independent of the Council;
•
the Council would lease the facilities to the NPDO and would typically provide an annual
management fee to the NPDO, reflecting the likely operational subsidy of the facilities;
•
any staff employed to manage and supervise the facilities would be employed directly by
the NPDO and transferred under the TUPE regulations;
•
the NPDO undertakes management of the facilities, gathering all income generated by
the facilities and being responsible for the majority of costs incurred by the facilities;
•
typically, the Council retains some responsibilities (usually in respect of structural
repairs and maintenance) and incurs costs in respect of these responsibilities;
•
the operating risks of the services would transfer to the NPDO.
4.25 NPDOs have become very popular for the public sector seeking to achieve VAT and NNDR
savings. A Charitable NPDO would be able to access mandatory NNDR relief which can be
topped up with discretionary rate relief which the Council have the option to grant.
4.26 However, the ability for NPDOs to generate significant capital funding, without a track
record, is not yet established and therefore capital funding from local authorities is likely
(and normally cheaper to finance) if major capital investment is required.
4.27 The ability to access external funding grants is cited as an advantage of the NPDO model.
However, it should be noted that grant funding streams in general are limited for leisure
facilities at the present time.
Table 4.3 - Advantages and disadvantages of an existing NPDO
Advantages Disadvantages
Savings on NNDR costs (although limited by
the new Business Rates Retention Scheme –
see Section 7)
The Council loses direct control of services
and manages through a lease and contract
Savings from the different treatment of
VAT
Difficulty in attracting significant capital
investment
Greater financial and managerial autonomy
Capital finance can be more expensive than
that provided by the public sector
Potential benefits from additional external
funding opportunities
The Council retains ultimate liability for
the operational performance and capital
liabilities of the services
Opportunity for considerable community
and staff involvement in the management
of services
Staff are transferred to the NPDO under
TUPE, although pension benefits may be
comparable only
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Advantages Disadvantages
Benefits of having a single issue focus for
the leisure team
Potential loss of local community focus
(unless stipulated in the management
contract) due to its lack of local
representation
Operational risks potentially transferred to
the NPDO from the Council
May have access to capital finance, but this
will be subject to levels of security and
trading history
Trade Sale
4.28 We have assumed that a Trade Sale in this context is the disposal of the leisure assets and
thereby local authority leisure provision to a third party to operate as they see fit. This could
include operators in the commercial leisure market, such as Fitness First, Virgin Active etc.
who may be looking for leisure premises in this area. In this instance some form of leisure
services are likely to be continued and staff may be transferred under TUPE arrangements.
4.29 However, this option is unlikely to be applicable to the Council’s cultural and green space
services as these services do not particularly involve the operation of income-generating
assets to the extent that leisure does (particularly since the outsourcing of the management
of the Lyceum Theatre to HQ Theatres and the outsourcing of the Knutsford Cinema to
Curzon Cinemas).
4.30 It is also possible that other private equity companies or businesses would take an interest in
the acquisition of these sites to provide either alternative or complementary services (e.g.
sports retailer etc.). It could also cover the acquisition of the land for other commercial
uses.
4.31 The key characteristics of trade sales are as follows:
•
the local authority would receive a capital receipt from the disposal of the assets;
•
the sale could be a freehold sale or a long leasehold (for example 125 years);
•
staff may transfer under TUPE to the new owner, subject of course to the continuity of
sport and recreational services;
•
all operating and asset risks would be transferred away from the Council to the third
party;
•
the value of the purchase would take into account the potential income stream to be
generated from the operation of the facilities, any covenants on the land and for the
future land value that may be achieved in current or alternative uses;
•
the purchaser will need to finance the cost of the acquisition as well as the operating
deficit, unless revenues can be improved from a change in the business model or
priorities i.e. a more commercial focus offering facilities at a premium price.
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4.32 It should be noted that it is very unlikely that a commercial operator would be interested in
acquiring more than one or two of the Council’s leisure facilities at most. This is because the
major commercial health and fitness operators require a significant catchment area
population that only large towns and cities can provide.
4.33 Further to this, it is highly unlikely that any form of concessionary pricing scheme will
continue, given the need to generate a return on investment. This will likely result in
exclusion of a number of target groups due to their inability to pay commercial rates.
Table 4.4 - Advantages and disadvantages of a trade sale
ADVANTAGES DISADVANTAGES
Local authority receives a capital receipt
Local authority has no leisure facilities
under its control from which to provide
public sport and leisure services.
Local authority transfers all the risks of
operating the facilities to the new owner
New owners may seek to remove any
leisure facilities and services in the
future and replace with more commercial
focus
Allows the new owners to manage the
business on a commercial basis that may
increase investment and employment
May be politically difficult to achieve
Access to future capital investment for the
facilities and provide leisure services on a
commercial footing
Likely to be unpopular with users on
lower incomes as new facilities may incur
a premium price
Staff will transfer to the new owner under
TUPE for as long as the leisure facilities are
provided
Focus on the provision of a commercial
facility offering around health and fitness
at a premium rate at the expense of a
subsidised community leisure offering
Staff are transferred to the NPDO under
TUPE, although pension benefits may be
comparable only
Establishing a New Company
4.34 The third overarching option for the Council is to establish a new organisation to run the
leisure facilities (and potentially also take on some or all of the cultural and green spaces
service areas). There are many forms which the organisation could take including:
•
Unincorporated Charitable NPDO;
•
Industrial and Provident Society (IPS);
•
Company Limited by Guarantee (CLG);
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•
Charitable Incorporated Organisation (CIO);
•
Limited liability partnership (LLP);
•
Community Interest Company (CIC).
4.35 The text below explains the key features, advantages and disadvantages of these options in
more detail. It is worth noting that these different types of company structure are often
classified under the umbrella of Social Enterprises. A social enterprise is a company which:
•
has a clear social and/or environmental mission set out in their governing documents;
•
generates the majority of their income through trade;
•
reinvests the majority of their profits;
•
is autonomous of state;
•
is majority controlled in the interests of the social mission; and
•
is accountable and transparent.
4.36 All of the different structures discussed in this section can therefore be termed social
enterprises – indeed, Greenwich Leisure Limited (which manages leisure services in the south
east of England) is often used as a case study of a successful social enterprise.
4.37 The majority of the vehicles noted above are considered to be NPDO’s – non-profit
distributing organisations, for which there are a number of common characteristics.
Non Profit Distributing Organisations
4.38 A Non Profit Distributing Organisation (NPDO) is an organisation that is not able to distribute
profits or surpluses to a third party, for example shareholders, but must use these profits or
surpluses to reinvest in the organisations objectives to improve services.
4.39 The key characteristics of the operation of services by a new NPDO are as follows:
•
the Council will enter into a contract and specification for the management and
operation of the service / facilities;
•
the assets, as per other options, will be transferred under a lease to the new NPDO;
•
in return for the services and management of the existing facilities, it will receive an
agreed fee from the local authority, probably in the form of an annual grant or perhaps
a management fee;
•
the operating risks of the services would theoretically transfer to the new NPDO.
However, in reality, the new NPDO may not have the financial resources to absorb
unforeseen operational losses and may request additional funding from the Council;
•
the new NPDO may be a charity to take advantage of the fiscal benefits including VAT
and NNDR relief;
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•
the NPDO will often have limited opportunity to raise capital finance, as it may have
limited security and no trading history;
•
a new NPDO will be likely to include many of the existing management team but may
attract other senior officers to the team (finance, HR or legal for example).
Table 4.5 - Advantages and disadvantages of a new NPDO
ADVANTAGES DISADVANTAGES
Management team are likely to understand
the business, demographics and market
together with the opportunities that this
provides
The Council loses direct control of the
services and facilities and it uses the
contract and lease as a control
mechanism
Opportunity for considerable community and
staff involvement in the management of
services
Staff are transferred to the NPDO under
TUPE, although pension benefits may be
comparable only
Operational risks potentially transferred to
the NPDO from the Council
Capital finance can be more expensive
than that provided by the public sector
May have access to capital finance, but this
will be subject to levels of security and
trading history
If the NPDO gets into difficultly, it is
likely that the Council may have to
support the NPDO
Benefits of having a single issue focus for the
management team
Asset risk is likely to remain with the
Council
May access VAT and NNDR benefits if
structured correctly
Lengthy and complex NPDO set-up and
transfer process
Greater financial and managerial autonomy
of the NPDO
New NPDO may not be able to
demonstrate track record of expertise to
potential customers and investors
Potential benefits from additional external
funding opportunities
Difficulty in recruiting trustees of suitable
expertise and calibre
4.40 Over recent years the market has seen substantial growth in the use of these organisations to
operate sport and recreational services for local authorities. There are a number of NPDO
structures available to operate and manage sport and recreation facilities and services as set
out in paragraph 4.34.
Unincorporated NPDO
4.41 The NPDO is a made by a declaration of trust and a trust deed that sets out the terms,
objectives and functions of the NPDO together with the names of the trustees. It is
registered with the Charities Commission who regulates the NPDO. The objectives are
created so that they cannot be amended without the approval of the Charities Commission.
The NPDO has tax benefits associated with VAT treatment of sales and purchases and NNDR
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relief (although the benefits from NNDR relief are not as significant for the Council following
the introduction of the Business Rates Retention Scheme - see Section 7).
4.42 It should be noted that under the Unincorporated NPDO, the Trustees have personal liability
and they are jointly and severally liable for any liability that accrues to the NPDO. Although
it is possible to obtain insurances for these liabilities, this particular option is not seen as
being appropriate for the management and operation of sport and recreation services due to
the potential liabilities that may occur. For this reason we have not examined this trust
structure in any further detail.
Industrial and Provident Societies (IPS)
4.43 These societies are corporate bodies which have limited liability and are registered under
the Industrial and Provident Societies Act 1965. To be registered, the business must fall
within the conditions of the Act in that the IPS is set up to carry on an industry, business or
trade and is a bona fide co-operative society or the society is for the benefit of the
community.
4.44 They were previously regulated by the Financial Services Authority although this changed on
1
st
April 2013 to the newly formed Financial Conduct Authority following the implementation
of the Financial Services Act 2012.
4.45 Where an IPS is formed for charitable purposes, it will be deemed to be an exempt charity
and enjoy the benefits available to other charitable bodies. The IPS does not need to register
with the Charity Commission.
4.46 Under the IPS, each member has only one vote which can impact on the decision making
process and where a local authority wishes to have a level of control through "shareholding"
this option dilutes the voting rights of the local authority as more individuals become
members.
4.47 This structure obtains the benefits of NNDR relief and VAT treatment where it is formed for
charitable purposes.
Company Limited by Guarantee (CLG)
4.48 A charitable company limited by guarantee is a legal entity incorporated under the
Companies Act 1985. Unlike the most common company structures, it does not issue shares
but instead the members of the company undertake to guarantee to contribute a sum of
money (normally a nominal value) in the event that the company is wound up,
4.49 The members of the company have limited liability to the level of their guarantee. These
companies are regulated by the Charity Commission and are also subject to the requirements
set out in the Companies Acts. It is considered that this approach offers flexibility compared
to other NPDO models and they are able to change their rules to meet the needs of the
business.
4.50 The Directors of the Company are called the Trustees and it is they that are responsible for
compliance with the Companies Act and Charities Act and this requires a higher level of skill
and knowledge in the company's administration.
4.51 This structure has the benefit of receiving NNDR relief and VAT benefits as registered
charities.
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Charitable Incorporated Organisation (CIO)
4.52 The CIO is a new legal form for a charity. It was first introduced in Chapter 8 of the Charities
Act 2006, but applications to register new organisations as CIOs were not accepted until
December 2012 due to the complexities of the new legislation and the resources to
implement these changes. The legal framework for the CIO is set out in the Charities Act
2011 and in two sets of regulations and an Order from 2012.
4.53 The CIO is a new corporate structure designed specifically for charities. Most charities have
been choosing to adopt a corporate structure (company limited by guarantee) because this
can offer several benefits over unincorporated structures. These benefits include:
•
the members and trustees are usually personally safeguarded from the financial
liabilities the charity incurs, which is not normally the case for unincorporated charities;
and
•
the charity has a legal personality of its own, enabling it to conduct business in its own
name, rather than the name of its tr