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STIRLING COUNCIL THIS REPORT RELATES TO ITEM 21 ON THE AGENDA

STIRLING COUNCIL ASSETS, PROPERTY & FACILITIES MANAGEMENT

11 MARCH 2010 NOT EXEMPT

MCLAREN LEISURE CENTRE - SERVICE LEVEL AGREEMENT

1 SUMMARY

1.1 Following reports to Council in October and December 2009, it was agreed that a final report on the future SLA with McLaren Leisure Centre would be brought to Council in March 2010. Previous papers had noted that costs of running the Centre, and therefore the level of Council financial support, had risen by default in recent years. As a result, alternative models of service provision required to be considered. These were to include options that may include the school’s PPP provider, Stirling Gateway Limited, and Active Stirling, as an alternative to existing arrangements.

1.2 Further work has been undertaken with the Leisure Centre Board, the PPP contractor and with Active Stirling, in order to give these options due consideration. The benefits of each option have been considered against a number of priorities, both financial and non-financial in order to produce a proposed solution. Overall, based on a renewed and positive relationship that is now developing between the revamped Centre Board and the Council, it is proposed that a new SLA is entered into with the Board, albeit with stricter financial controls and parameters of operation.

1.3 As noted in the December report, the October report prompted a programme of more intense and realistic negotiation with the McLaren Centre Board. The Board has accepted that the future SLA must be based on a realistic level of affordability for the Council and that budget management processes require to be improved significantly. Following a number of changes to the structure and membership of the Board, the Board, at its meeting in January 2010 has agreed to progress on the basis of a drastically reduced budget which will see the Centre operate within appropriate financial parameters. Budgetary control mechanisms will need to be put in place to ensure that expenditure is properly controlled.

1.4 Discussions have also been entered into with both the Board and the School Parent Council with a view to submitting a joint application for funding to SportScotland for a new full-size all weather pitch.

1.5 A detailed survey of the Centre is currently being undertaken with a view to establishing ongoing maintenance and life cycle requirements, thus assisting future expenditure planning.

2 RECOMMENDATION(S)

Council is requested to:-

2.1 Agree to the proposal to enter into a 5-year Service Level Agreement with the McLaren Leisure Centre based on an annual payment of £327,500 (2010/11) plus inflation.

2.2 Agree to support a joint submission to SportScotland for the provision of a full size all weather pitch on the site, and in the event that this is unsuccessful, to support the re-surfacing of the existing small all weather pitch from within the 2010/11 capital programme (Education).

2.3 Agree to postpone pursuit of outstanding payments due from the Board in relation to energy bills for the period from August 2008 to 31 March 2010 (current value £137,011), subject to ongoing review of the financial performance of the Centre, but to note that all energy costs incurred from 1 April onwards must be met in full and on time.

2.4 To note the contents of the draft SLA attached in Appendix 4.

2.5 Agree to future reports on the financial strategy and performance of the Centre to be brought to Council or Executive on a regular basis as part of an improved monitoring process. This will include a half year and full year report on performance in 2010/11.

3 CONSIDERATIONS

McLaren Leisure Centre SLA – Recent Background

3.1 In 2003, the Council and McLaren Leisure Centre agreed a 3 year Service Level Agreement (SLA) to run to 2006. The agreement was kept “live” by default in subsequent years. Following a request by Council in June 2009, a report was brought to Council on 29 October 2009 regarding the future of the SLA. The report noted a number of issues, and in particular, highlighted that the expenditure of the Leisure Centre had grown at an alarming rate over recent years as noted in the table below.

Financial Year Total Expenditure £’000

Council Payment £’000

2006/07 460 262 2007/08 497 366 2008/09 577 397 2009/10 702* 477**

*projected. **includes estimate of outstanding energy invoice payments due but not paid.

At the October meeting, the Council rejected a proposal from the Leisure Centre Board to agree a new SLA with annual funding from the Council of £430,000 and tasked officers to look at alternative options for the future operation of the Centre based on an affordable and financially sustainable solution. At the December 2009 Council meeting, it was noted that an affordable solution required to be one that could be contained within existing budget parameters of £327,440 per annum, and this has formed the basis of subsequent discussion and negotiation.

3.2 The report to Council also contained an alternative model of operation which involved use of the school PPP contractor to manage and operate the non-sporting activities within the building. This option is summarised in Appendix 1. This option provided an alternative to current arrangements whereby all operational activity at the Leisure Centre is managed by the McLaren Leisure Centre company. The Council also requested that options involving Active Stirling as a possible partner in running the Centre be explored.

Progress Since October 2009 – SLA Renewal

3.3 Following the October Council meeting, discussions of a more positive nature commenced, with the Leisure Centre Board recognising the need to change their approach to the Council including the need to halt the escalation of cost and to make significant reductions in their annual expenditure, if they were to continue to operate in their current form. Clear parameters for a way forward were agreed based upon a position which was both:-

a) Affordable – Council’s maximum funding contribution for 2010/11 to be at existing budget levels.

b) Sustainable – budget set by the Centre must be realistic and deliverable and appropriate budgetary control and reporting mechanisms must be put in place to guard against overspend as experienced in recent years.

3.4 Following a number of changes on the Board, a meeting of the Board in late January 2010 was able to agree a proposed budget for 2010/11 as laid out in Appendix 2. A comparison of the proposed budget with figures for 2009/10 includes:-

• a reduction in the cost base of around £140,000

• an increase in income of around £40,000

• the inclusion of an operating surplus of £32,000.

The Board has taken/is taking the following steps to ensure that the budget is deliverable:

• Changes to VAT accounting. A change to the Memorandum and Articles of Association that had been made in 2007 should have allowed the Centre to retain all income received without charging VAT. However, the Centre had chosen to charge VAT, thus reducing its retained income level by around £35,000 per annum. This position was corrected in January 2010.

• Significant reduction in staff costs through a combination of retirement/post reduction at managerial level, removal of bonus payments for senior staff and some level of redundancy.

• Reduction of accounting and legal overheads through use of Board expertise to bring some of the accounting function in-house, and through resolution of issues by non-legal means.

• Allocating Board members, with relevant expertise and skills, to provide specific support; this relates to staff and building maintenance budgets.

• The introduction of a planned operating surplus to provide a level of contingency, particularly during 2010/11 which will be a key year of transition from previous operational arrangements. Adherence to budget would also allow the Centre to make some contribution towards life cycle cost requirements.

3.5 Discussions with the Leisure Centre have also, by agreement, involved a representative from the Community Council who have expressed a desire for more active involvement in determining the future direction of the Centre. This input has been crucial in bringing forward the current proposal from the Centre Board. Throughout, the Community Council have expressed a strong preference for continued local control, but have understood and supported the Council’s position with regard to the affordability and sustainability of any solution.

Further Consideration of the PPP Option

3.6 Discussions have also continued with the PPP provider, although the proposed business model has not been developed further as it was felt that sufficient work had already been undertaken to allow the option appraisal to be completed. As part of the dialogue, however, a full building survey has been commissioned and completed, with the report due imminently.

3.7 While the October report to Council identified that the proposed PPP model could be delivered within a budget likely to be both affordable and sustainable in the long term, and would transfer the ongoing maintenance burden of the building, further work has identified a number of issues and concerns; in particular:-

• The one-off costs of making a change to the nature of the PPP contract would be considerable (estimated at circa £250,000) and could not be capitalised.

• There would be an immediate requirement for investment from the 2010/11 Capital programme to bring the building up to the required level to be taken on by the facilities management operator. These costs are not yet known.

• The model would put at risk the current level of community use of the building, with likely reduction in amenity over time.

• Further changes to the PPP contract may be required in the future in the event that the nature of services provided from the building changed. In particular this may relate to the Callander Indoor Arena, a large space within the building (previously an indoor bowls area) which is currently under-utilised.

Discussion with Active Stirling

3.8 Following the October meeting of the Council, discussions with Active Stirling on their possible involvement in the running of the Centre took place. Active Stirling have reviewed the existing budget for the Centre and existing income levels, and have expressed confidence that they could deliver the same level of amenity, from within the existing budget, should they be invited to do so. However, they have noted that they would see the support of the local community to them replacing the existing operational arrangement as a key factor to future success and are aware that this is not currently the case. Therefore, while Active Stirling would be interested in an involvement in provision at Callander, they did not feel that the current environment represented best opportunity. Should, however, the Council find that it was running into difficulties with the operation of the Centre again in the future, and assuming local support, Active Stirling would view future involvement positively.

3.9 As part of the discussions, Active Stirling have also offered to provide direct support in the form of consultancy to the current Leisure Centre management. The offer has been received positively by the Leisure Centre Board, and the Active Stirling Business Development Manager has provided 2 days consultancy support to the Centre at no cost. The consultancy has focused on pricing structure at the Centre and on staffing structures and rotas.

Consideration and Evaluation of Options

3.10 On the basis of discussion held, an appraisal of the options has been carried out based on a consideration of financial and non-financial considerations. A summary of the factors considered, and a comparison of the relevant strengths and weaknesses of the 3 options, is outlined in Appendix 3. A full consideration of the Active Stirling option has not been pursued for the reasons outlined in 3.8 above.

3.11 On balance, it is recommended that a new Service Level Agreement with the existing Leisure Centre Board on the current format as outlined in Appendix 4, should be agreed but with the following provisos:-

• The Board must provide a regular financial update to the Council via the Head of Assets, Property & Facilities Management who will attend Board meetings in an advisory capacity. The Council or Executive will receive regular reports on the Centre’s financial performance.

• In the event that the Centre’s financial performance does not enable it to perform within its agreed budget, then the Council will consider taking action to protect its long-term position. This may involve pursuit of outstanding energy-related debts from the Centre to the Council for the period from August 2008 to March 2010. In the event that the Centre is unable to operate within appropriate financial parameters, then the Council would not be prepared to provide additional funding and may seek alternative service delivery solutions, possibly as outlined in the report.

All Weather Pitch

3.12 Since the commencement of discussion with the Leisure Centre Board in late 2008, the Council has given a verbal commitment to fund the replacement of the surface of the small all weather pitch owned by the Leisure Centre. This verbal commitment was confirmed in the recommendation and subsequent decision made by the Council following the report in October 2009. The estimated cost of a new surface is £60-70,000.

3.13 The Centre, the High School, and the Callander community have long expressed a preference for the replacement of the existing pitch with a full size all weather pitch. A previous funding application for a pitch, submitted by the Centre to the Big Lottery, was, however, rejected. The problem that the PPP contractor has experienced in completing works to the grass pitches on site have exacerbated concerns, and the community and school have now re-expressed their desire for the site to have a full size all weather pitch. This would cost a minimum of £300-350,000.

3.14 Consideration could therefore be given to an application to SportScotland under the Sport Facilities Fund for funding for a full size all weather pitch. Under this scheme, up to £250,000 may be available. Should this option be pursued, it would mean delaying investment in re-provisioning the existing all weather pitch to avoid wasted expenditure. The disadvantage of this approach is that it would delay essential expenditure and improvement of facility while an application is being submitted and considered. If an application is to be made, it should therefore be submitted as quickly as possible.

3.15 At a recent meeting of the School Parent Council, parents were asked if they would prefer to see the small pitch re-surfaced this summer, or would be prepared to wait to see if an application for funding for a full size pitch would be successful. A strong preference was expressed for supporting an application to SportScotland. It is therefore proposed to pursue this option, seeking formal support from the Centre, the school and the community.

4 POLICY/RESOURCE IMPLICATIONS AND CONSULTATIONS

Policy Implications Diversity (age, disability, gender, race, religion, sexual orientation) No Sustainability (community, economic, environmental) No Corporate/Service Plan No Existing Policy or Strategy No Risk Yes Resource Implications Financial Yes People No Land and Property or IT Systems No Consultations Internal or External Consultations Yes

Policy Implications

4.1 The Leisure Centre budget for 2010/11 and onwards will require significant discipline from both the Centre Board and management to deliver. Risk will be minimised through careful observation by Council officers and by the introduction of appropriate budget management practices previously absent.

Resource Implications

4.2 If approved, the funding for the Leisure Centre will be contained within existing budget parameters, which will reflect a significant reduction on the level of deficit funding provided by the Council over the past 3 years (see table in 3.1).

4.3 It is proposed that the Council does not, at present, pursue outstanding energy invoices for the period to March 2010 (estimate £150,000) to allow the Centre to gain a sounder financial footing, and that this position is reviewed on an ongoing basis.

Consultations

4.4 Discussions with McLaren Leisure Centre, Active Stirling, representatives of Callander Community Council, McLaren High School Parent Council and Headteacher, and officers across Council services.

5 BACKGROUND PAPERS

5.1 Stirling Council 10 December 2009 – McLaren Leisure Centre – Service Level Agreement.

5.2 Stirling Council 29 October 2009 – McLaren Leisure Centre – Service Level Agreement.

5.3 Stirling Council 30 October 2008 – McLaren Community Leisure Centre Financial Support.

Author(s) Name Designation Tel No/Extension

Bob Gil Head of Assets, Property & Facilities Management

2643

Approved by Name Designation Signature

Bob Gil Head of Assets, Property & Facilities Management

Date 1 March 2010 Reference

APPENDIX 1

Description of Option 2 – the PPP Model This option would involve Stirling Gateway taking on responsibility for an initial refurbishment of the Leisure Centre, and then agreeing to provide a full Facilities Management (FM) service to the Centre on the same basis and to the same or similar specification to that provided at the school. Under such an arrangement, the Council would need to provide initial capital funding to bring the Centre building and all weather pitch up to an acceptable standard. During the refurbishment, Stirling Gateway/FES would start delivering services to an agreed services specification, which would then step up to a full services specification on completion of the refurbishment works. If necessary the timing of upgrade works could be spread over a longer period, to match Council capital funding availability. Stirling Gateway, would then take on full responsibility for a fully facilitated Leisure Centre for a period to be agreed, but most likely, for a period to match the length of the existing Stirling Schools PPP Project Agreement, ie to August 2039. Under this alternative business model, the Council would pay Stirling Gateway to operate and maintain a fully facilitated building, and directly meet a share of the energy costs, but would no longer make any direct payment to MLC. MLC would then be responsible for running sports activities at marginal cost, from a fully facilitated building. The model would be similar to that recently agreed with Active Stirling in relation to the use of the sports facilities at the Council’s secondary schools.

Option 3 – ACTIVE STIRLING

Option 3 would be based on a similar model, but with Active Stirling fulfilling the role taken by the PPP provider in Option 2 and providing a full Sports Management service from the Centre. This would leave the McLaren Leisure Centre company and Board with a basic enabling rather then an active operational/managerial role in providing services from the Centre.

APPENDIX 2

Leisure Centre Budget 2010/11

Forecast

2009/10 £’000

Draft Budget 2010/11

£’000 Sales:

Sport and Leisure Other Council Payment

Cost of Sales Gross Profit Costs:

Staff – Pay Repair and Maintenance Other Building Related Costs (eg Energy) Training, Admin and Consumables Equipment Hire (on Lease) Accountancy and Legal Bank Charges

Surplus/(Deficit) (excluding depreciation)

197 54 327 578 10 568 391 78 141 42 12 25 3 692 (124)

222 57 327 606 17 589 300 50 151 24 10 11 2 548 41

Depreciation is included at £13,530

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APPENDIX 3

Evaluation Factor

Option 1 Continuation of Existing Arrangements

Option 2 Use of PPP Provider* (see Appendix 1)

Option 3 Use of Active Stirling** (see Appendix 1)

1. Solution within existing Council budget parameters – affordability.

Yes. Centre Board have produced a workable management budget for 2010/11.

Yes. Figures provided by the PPP provider indicate model is well within the affordability parameters.

Yes. Active Stirling have indicated that current budget allocations would allow full operation of the facility.

2. Solution is sustainable in terms of governance arrangements.

Changes to the operation and membership of the McLaren Board and the establishment of a stronger working relationship with the Council. Proper budget management practice now introduced will require close monitoring based on recent experience.

Yes. Management through existing PPP contract management arrangements.

Yes. Management through existing Active Stirling governance arrangements.

3. Sustainable solution – management of life cycle costs of building.

Draft budget for Centre indicates a surplus which could be used to fund life cycle maintenance if achieved. However, significant likelihood that some further capital funding will be required in the future.

PPP Provider would take on full life cycle responsibility. However, some initial capital involvement would be required by bringing the building up to a required standard for operational handover.

Not tested due to reluctance of Active Stirling to consider option further while local community support for status quo strong – see 4 below.

4. Supported by the local community including Community Council.

Strong statement of support from the Community Council (CC). CC now represented at Board meetings and have assisted in managing change at Board level.

Not supported by the local community. Some level of support indicated by the local community. Proposal that Board take up offer of “consultancy” support from Active Stirling strongly supported.

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Evaluation Factor

Option 1 Continuation of Existing Arrangements

Option 2 Use of PPP Provider* (see Appendix 1)

Option 3 Use of Active Stirling** (see Appendix 1)

5. Negative impact on non-school use.

Minor reduction in opening hours likely to reduce costs in quiet periods, eg Saturday evening.

Model likely to mean significant reduction in non-school opening hours due to limited funding remaining from external income generation.

Not known, but likely to be similar to Option 1.

6. Any impact on School use. Change of approach by Board likely to lead to improved relations with School.

None. Not known, but unlikely to see any change.

7. Impact on staff. Some redundancy being sought at present.

Likely to lead to a higher level of redundancy, although some staff would be protected by TUPE arrangement.

Not considered.

8. Costs relating to change of management arrangements – one-off costs, and risk to business continuity.

None. Significant. Requirements to undertake due diligence required by PPP senior debt provider, plus legal costs relating to contractual change – possibly in excess of £250,000 which would be difficult to capitalise.

Not tested, but likely to be relatively low as could be managed as a change to existing SLA arrangements with Active Stirling.

9. One-off up front capital cost requirements.

All weather pitch surface replacement as a minimum. Possibly some further requirement depending on outcome of building survey.

All weather pitch surface replacement. FM provider likely to require a higher level of up front capital investment if Council require operator to take on full life cycle risk.

Same as Option 1.

10. Future flexibility especially re use of Callander Indoor Arena.

Reasonably flexible. Possibly more limited due to long-term nature of PPP contract.

Reasonably flexible depending on the length of any agreement put in place.

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APPENDIX 4

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