When there’s a mad panic on in the Town Hall to find savings and local authorities are short on time, important decisions can often be made with limited information and understanding. With reductions in specialist Leisure senior managers, there are a number of myths we encounter relating to leisure which may lead to missed opportunities. The five key myths are as follows:
- You can’t extend a contract
- Trusts / Private sector operators can’t access capital funding in excess of £3m
- Capital funding is far more expensive than prudential borrowing
- You can’t have innovation without market testing
- New build is always more cost effective in the long run than refurbishments.
Myth 1 – You can’t extend a contract
It is possible to extend a contract, although this depends on a number of factors which will relate to the way a contract was originally tendered and the nature of that contract. For each individual scenario we undertake detailed legal advice from our specialist legal partners to provide clarity on what can and cannot be achieved. Often the potential to avoid going to market will be based on the type of contract being sought to be extended and the perceived risk for the council.
For example, if this includes capital works over a certain threshold, this will not be possible. If it is a straight management contract, then this is often achievable, yet only if both parties wish to explore this. Some readers will feel that we should be letting the market decide value for money. However, if you’re the incumbent you will not want to expose yourself to the risk of losing your contract, or incur the procurement costs associated with rebidding, which on average are in excess of £100,000. Similarly, many councils are intimidated by the prospect of undertaking a significant procurement exercise which can often be a challenge in terms of cost and time.
Councils who have successfully extended their leisure contracts in the last three years include Waverley Borough Council, Winchester City Council and Camden Council. The likelihood of an operator making a challenge is limited, although there is always a risk. Given the level of activity in the procurement market, we believe that most operators are far too busy to get too uptight about some legitimate contract extensions. They will have an opportunity when a council issues a PIN (Prior Information Notice) to engage with the local authority and express their interest to tender.
Basic common commercial sense applies though and if you know a contract or partnership is a happy one, then the chances of removing an ‘incumbent’ are slim. The only way around this is if you are planning on ‘buying’ the contract, for example coming in at a price well below that which would be expected for the level of service specified. Do you remember the rail procurement debacle? Whilst some operators are seeking to secure strategically important contracts, we hope that evaluation processes will flush out the undeliverable and ‘too good to be true’ proposals. We hope in this situation that the advisers to those procurements would highlight these risks. We certainly would.
Myth 2 – Trusts / Private sector operators can’t access capital funding in excess of £3m
One of the other myths we have come across is about access to funding. The key challenge is who underwrites it and, in most instances, this needs to be the local authority. If the local authority is willing to explore underwriting (guaranteeing) the loan, this then enables the operator to either secure funding linked to a long term contract or the authority contacting the Public Works Loan Board to explore prudential borrowing. There are however, a number of hurdles and tests the council will go through prior to securing prudential borrowing.
The interest rates on the capital borrowed are amongst the cheapest available, however private funding partners, such as Alliance Leisure, who have funded around £100m of investment in leisure over the last 10 years, are not far behind and offer a range of value added support linked to their loans. Support linked to project management, design and sales support can often be the ideal mix required by smaller organisations without the capacity or skills to oversee major capital works. Funding terms currently go up to 20 years and we understand that Alliance Leisure are looking at some longer options currently which could unlock the potential for larger infrastructure deals in the future which require a longer payback period.
So how much can be borrowed? This depends on the ability of the project to repay the loan and how much due diligence is undertaken to ensure this can be achieved. Major new developments, additional savings through reduced utilities and increases in revenue can create the return on investment needed to cover the capital and interest repayments. If the business case stacks up and the council is in a position to underwrite it, £10 million of funding will be possible.
Realistic and robust business planning is essential to support future performance projections. The establishment of trust and consistent financial performance of the operator goes a long way to develop confidence in investing in new facilities and repaying some or all of the loan through revenue savings and increases in income. As with house buying, the bigger the deposit and the smaller the actual mortgage the better. Often this will link to the rationalisation of some facilities linked to regeneration of the sites for alternative use.
Councils must now face the reality of having to prop up poor facilities which are strategically well located or seek to focus their resources on hub facilities which are more sustainable. We see an inevitable reduction in facilities over the next ten years, although it will require some political will to see this through.
Myth 3 – Capital funding is far more expensive than prudential borrowing
Partners looking into different funding options often consider private sector funding to be ‘too expensive’ without doing their homework. Our research for some clients shows that there is very little difference between prudential borrowing loan costs and that provided through the likes of private funding partners such as Alliance Leisure.
Loans supporting capital works must be focused on reducing revenue costs, increasing income and customer facing benefits. In the past loans have been focused on energy saving, improved insulation to reduce costs and also on gyms, fitness studios, spas, changing rooms and front of house; areas where revenue will be generated. The biggest challenge when investment of £15 million plus is required is that there needs to be a commitment from the authority to free up value from and utilise other assets to enable a project to be funded.
Myth 4 – You can’t have innovation without market testing
Another myth is that you cannot innovate without market testing, for example with a new design for a leisure facility linked to a funding solution. Often through careful selection of the right partner in the first place, you can maintain a healthy and detailed dialogue with them to ensure you get an innovative solution.
As with our guidance on extending contracts, there may be circumstances where you are unable to pre select your desired partners and we would recommend you taking legal advice on what you can do as a local authority. By investing in some independent advice to support design development you will be able to challenge your design partner to deliver the right solution for you, rather than accept the first option that is proposed.
It is still shocking to us that many in-house architects from local government develop designs and costings for leisure facilities which are often three to four times more expensive than those offered through experienced design teams and supply chains. If you use the right design teams with a strong track record and experience of delivering energy efficient, robust and attractive facilities, you can be confident they will help you deliver realistic and informed numbers to support your business plan.
Myth 5 – New build is always more cost effective in the long run than refurbishments.
Opinions differ on new build versus refurbishment. Often affordability dictates which elements of an original building need to be retained. Yes, refurbishments are a compromise, but often a cost effective one. We recently looked at a facility based options appraisal for a large wet and dry leisure centre which highlighted very little difference in financial performance between a refurbished facility and a new build which would have cost an additional £8 million. Utility costs may be lower, but there is little difference in revenue generation as the facility mix is the same.
A recent example of this is the Deeside Leisure Centre development where the cost of a new build was reportedly £18 million. However, the cost of the refurbishment came in at £6 million. In these times of austerity, leaders need to realise that the days of shiny new builds may need to be put on hold for the moment. Intelligent and well-designed refurbishments are not a panacea but may just do the job and deliver savings and increased participation in sport and physical activity.
New builds are often the domain of wider regeneration schemes and land deals, for example, the redevelopment of Moberly Sports Centre in Westminster. We always need to be realistic about what is affordable. It’s been quite a cathartic exercise exploring these myths, at SLC we don’t like to just keep these insights for the benefit of our clients. We believe it’s important to create a debate on the best way forward for our sector and share learning and good practice (including where things go wrong) with as wide an audience as possible.
I’m sure a number of readers will have an opinion and we welcome you joining the debate in the SLC Online Forum.
Duncan Wood-Allum – Director – The Sport, Leisure and Culture Consultancy For further information, give us a call on 01444 459927.