SPORT & LEISURE TRUST

ASSUMPTIONS USED WHEN COMPILING FINANCIAL MODEL

1.0 BASE ASSUMPTIONS

1.1 Facilities

The 14 leisure facilities are transferred to the Trust. Indicative preliminary figures reported to Adult Services Committee on the 27^th October 2006 estimated a capital cost of £36m. Further work has been undertaken to assess the likely capital costs and this indicates an all inclusive total cost of £50m. This revised sum has been used within the financial model that has been developed for the Trust.

Carnegie Leisure Centre to be refurbished

Estimated capital cost £17.2m

Facility to be closed for 18 months commencing April 2008

FIPRE to be replaced by a new facility on the same site

Estimated capital costs £21.1m

It is anticipated that the project will commence in April 2009 and the facility will be closed for the final 3 months of the 18 month development period.

Kirkcaldy Swimming Pool to be replaced by a new facility on a suitable site.

Estimated capital cost £11.7m

Should the facility require to be rebuilt on the existing site then it will be closed for 18 months commencing April 2010. The location has still to be determined and for the purposes of the financial model it is assumed that this will be on the existing site.

1.2 Financing the Capital Cost

The proposal that was presented to the Adult Services Committee on the 27^th October 2006 was that the project would be funded from a combination of: prudential borrowing; external funding; and the Council's capital programme. A financial model has subsequently been developed to assess the scope for savings to be made by the Sport and Leisure Trust in order to fund additional prudential borrowing. The scope, and other assumptions that have been made, are outlined in the following sections.

1.3 Budgets

The 2007/2008 budgets for all of the transferring facilities were amalgamated and then the budget heads were reviewed in order to ascertain which budgets would remain with the Council and which budgets would form part of the new Trust. The Council is retaining responsibility for the buildings and continuing to deliver central support services to Community Services (as the client function for Leisure) hence the need to retain certain budgets.

The total for all of the amalgamated budgets was £10,851,560

The budgets remaining with the Council:-

£

Building Repairs & Maintenance 657,976

Cleaning 234,151

Property Insurance 60,504

Non Domestic Rates (as reduced) 48,240

Rents/Leases 39,500

Support Service Costs 74,875

Capital Charges 2,753,906

3,869,152

All other budget heads were deemed to be part of the Trust.

The difference between the £10,851,560 and the £3,869,152 (i.e. £6,982,408) would be the initial Management Fee payable to the Trust, by the Council, for managing the facilities. This sum included £916,561 in respect of Non-Domestic rates which represents the net saving after taking account of the cost that the Council would continue to bear from granting full exemption to the Trust. Since the Trust would be exempt from paying non-domestic rates, the £916,561 would be used to help offset the cost of Prudential Borrowing.

The impact of the VAT savings has been estimated in consultation with the Council's VAT Accountant. It is estimated that the Trust's charitable status will result in a favourable vat position of approximately £200,000 per annum. This sum has been built into the financial model but will need to be reviewed for each year in detail.

The Trust will need to allow an annual sum in order to pay for finance/legal/HR advice and other `new' costs. Such advice may or may not be provided by the Council. At this time, £100,000 (indexed) has been built into the financial model.

1.4 Inflation

Budget Heads for the Trust would be uplifted each year by the following percentages:-

Pay 2.5% per annum

Non-Pay 1.0% per annum

Income Targets 5.0% per annum

1.5 Management Fee

The initial Management Fee of £6,982,408 (para 1.3 above) is moved forward each year on a pre-determined formula.

Example:-

£

Fee at 2007/2008 price base 6,982,408

add back inflation uplift on expenditure 213,891

7,196,299

less inflation uplift on income 196,028

7,000,271

add back 1.5% income adjustment (note 1) 58,808

7,059,079

Note 1: This adjustment compensates the Trust for the difference between

the Council's requirement to achieve an income target of 3.5% and anticipated increases in programme and levels of use which would support an income target of 5% being achievable.

Over the period, the Council will reduce the management fee paid to the Trust when it starts to incur the additional prudential borrowing costs. Within the financial model the following amounts have been deducted from the management fee:-

£

2009/2010 409,612

2010/2011 1,201,917

2011/2012 329,995

Total 1,941,524

1.6 Scope of Financial Appraisal

The likely financial position of the Trust was looked at over a period of 5 financial years commencing April 2008, i.e.

2008/2009

2009/2010

2010/2011

2011/2012

2012/2013

1.7 Savings

Identified savings fall into two categories. Those which relate to the periods when 3 facilities are closed for rebuild or refurbishment work and those which have been identified by Community Services as pure `efficiency' savings.

Since Carnegie, FIPRE and Kirkcaldy Swimming Pool will be closed for 18 months, 3 months and 18 months respectively, expenditure at those facilities during such periods will be reduced. These savings however, are offset by the loss of income. In summary, the estimated position is:-

Carnegie £

Reduced Expenditure 459,051

Lost income 900,972

Net (adverse) -441,921

FIPRE £

Reduced Expenditure 44,878

Lost income 233,728

Net (adverse) -188,850

Kirkcaldy £

Reduced Expenditure 241,645

Lost income 214,162

Net (favourable) 27,483

Efficiency savings (reduced expenditure or increased income) to the value of £537,501 have been identified by the Service, profiled as follows:-

£

2008/2009 54,936

2009/2010 172,161

2010/2011 107,232

2011/2012 63,770

2012/2013 139,402

537,501

In addition to this there are non domestic rates savings of £916,561, the VAT saving of £200,000 and an increase in income above 3.5% that equates to £300,000. This equates to a total saving of £1.953m. The Trust will continue to make savings over and above this to meet pressures such as incremental progression.

All Services are required to make annual efficiency savings as part of the Council's revenue budget process. There is no provision in the financial model for annual efficiency savings over and above the savings identified by Community Services that have been factored in to cover the additional prudential borrowing costs. This may impact on Community Services ability to meet future savings targets and this could have a consequence on other parts of Community Service's budgets. There is scope for additional savings to be made within sports and leisure but this would involve rationalization of services. Such savings are currently excluded from the model as further work and consultation would be necessary.

2.0 RESULTS FROM THE FINANCIAL MODEL

2.1 Results

The financial model was run to assess the level of prudential borrowing that the savings identified previously would finance. This indicated that the savings would finance £29.4m of additional prudential borrowing. The management fee was therefore reduced to reflect this within the financial model. This resulted in a `favourable position' for 3 of the 5 years, i.e.

£

2008/2009 688,383 favourable

2009/2010 546,591 favourable

2010/2011 9,786 adverse

2011/2012 211,827 adverse

2012/2013 943 favourable

The cumulative net position over the 5 year period is £1,014,304 (favourable) which reflects the fact that the Trust delivers savings in the early years prior to the management fee being reduced to fund the additional prudential borrowing costs. There is scope for non recurring savings to be made by the Council (£1.014m) as the management fee payable to the Trust could be reduced to reflect the period of closures and thereby reduce the Trust's cumulative surplus.

2.3 Implications for the Council's Capital Programme

There is a funding gap for the project due to the impact of the increase in estimated capital construction costs along with the identification of the savings that can be achieved. However, in order to maintain the level of planned investment, the identified shortfall would have to be financed via another source outwith the Trust e.g. by making more funds available from the Council's Capital Programme.

3.0 CONCLUSION

3.1 This paper has examined the scope for the Sport and Leisure Trust to deliver sufficient savings that will finance the additional prudential borrowing requirement. Further work is required on certain aspects of the financial modeling and these are detailed below. The Trust can deliver £1.953m of savings which will finance £29.4m of the capital construction costs, £2m will be sought from external funding, leaving a balance of £18.6m to be funded from the Council's capital programme.

FURTHER WORK

1. Capital Costs

The £36m was arrived at by the Consultants estimating a `range basis' per m2 of spatial requirements. Final costings will only be ascertained when more detailed designs have been produced and agreed.

The price base for the £36m is August 2006 and, taking into account an estimated 5% annual uplift, it is estimated that this could rise to £42.5m.

The £36m excluded certain items for which separate budgetary provision would need to be made e.g. furniture, fixtures & equipment (FF&E); car parking; footpaths; landscaping; external lighting; professional fees; etc. At this point in time £6.0m has been incorporated for fees. Further work would be required on the FF&E element and externals, but at this stage an estimated sum of £1.5m has been included. The overall cost of the project would be managed within the £50m by considering the specification if necessary as per discussions with the Head of Community Services.

2. Prudential Borrowing Costs

Borrowing costs are affected / based on market interest rates and the estimates which are included within the financial model may change before contracts are signed.

3. VAT

The Council's Vat Accountant estimated vat savings based on the Trust's budget for 2007/2008 and this sum was included in the financial model for each of the 5 years under review. This approach is viewed as prudent as the income is projected to increase, which will have a favourable impact on the VAT position. This will need to be revisited in order to calculate an individual saving for each of the 5 years.

Appendix 2