Meeting documents
Cabinet
Monday, 5th July, 2004
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Bath & North East Somerset Council |
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MEETING: |
Council Executive |
PAPER |
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DATE: |
5th July 2004 |
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AN OPEN PUBLIC ITEM |
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List of attachments to this report: Appendix 1 Capital Programme Review - Terms of Reference Appendix 2 Price Waterhouse report "Review of Capital Projects" - Executive Summary Appendix 4 Financial Risk Assessment and Funding Review Annex 1 Bath Spa Project Funding Annex 2 EPH Reprovision Project Funding |
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4. THE ISSUE
4.1 Council, on March 25th, instructed that a review of the Council's capital programme be undertaken due to concerns over the degree of financial exposure, mainly relating to the Council's portfolio of major projects. In accordance with the terms of reference for the Review, this report provides
(1) An interim assessment of an adequate level of contingency funding (including adequate risk assessment) for schemes within the programme together with a recommended funding solution and any options for scheme deferral/cancellation; and
(2) measures to improve member/public confidence in the Council's management of major projects and to improve the integration of risk assessment within the Council's financial planning processes, incorporating consideration of the recommendations of the Resources O&S Panel.
for the Council Executive to make recommendations to full Council on July 15th.
5. RECOMMENDATION
5.1 The Council Executive is asked to
(a) note the report and recommendations of the Council's external auditors, Price Waterhouse Coopers (Appendix 2)
(b) note actions already taken by the Projects Programme Board (para 5.3)
(c) receive and consider the comments of the Resources O&S Panel (Appendix 3)
(d) endorse the ongoing work of the Projects Programme Board with measures aimed at improving member/public confidence in the Council's management of major projects and require the Chief Executive, in consultation with the Executive Members (Economic Development & Resources) to put in place the measures set out in Appendix 5 together with additional measures necessary to address the recommendations of the external auditor and the Resources O&S Panel.
(e) consider whether it wishes to retain the £300,000 unallocated capital sum in the 2004/05 approved budget for schemes arising from the Budget Resolution (see para 6.6 j)
(f) Note the assessment of the financial exposure set out at para 6 and note that any capital cost pressures or new proposed schemes highlighted in the next financial plan review will have to be met from existing resources or from additional revenue provision
(g) Note that no additional provision is available to finance current service programmes, and that all future reviews must be contained within the context of their own programmes and priorities
(h) Consider whether to make a recommendation to seek additional revenue funding to relieve resource pressures in highways control and to establish a project team in respect of the Council's input to the Southgate development (additional information to be provided)
5.2 and to recommend to full Council:
a) An interim assessment of an adequate level of contingency (including adequate risk assessment) for schemes within the current programme of £10.5M
b) The contribution to the EPH project from the Council's housing budget should be fixed at £2.84M, with the remaining shortfall of £1.9M to be funded by the Council as additional unsupported borrowing, with the additional revenue financing costs to be borne by Social Services from within its financial planning targets
c) The £250,000 of additional programme management costs approved by Council in March should be funded in 2004/05 by virement from uncommitted funds (see below) and in future years should be treated as an oncost on each major project and their overall funding needs then addressed within the financial plan review
d) Note the accumulation of major projects, including those undertaken directly by the private sector but which are likely to affect the Council's area significantly over the next few years, all point to a shortfall in key skills and resources, and to
o grant authority for the Executive Member (Sustainability & the Environment) to approve the engagement of additional urgent development control resources on a time-limited basis of up to £250,000, to be met from revenue balances.
o (see para 2.1 h above) Consider whether to make a recommendation to seek additional revenue funding to relieve resource pressures in highways control and to establish a project team in respect of the Council's input to the Southgate development (additional information to be provided)
e) Approve the proposal in para 6.6 (g) to increase, over time, the risk contingency funding via cash, short-term borrowing and liquid assets, towards the recommended level, and to earmark specific capital receipts for this purpose.
f) Approve that specific long leasehold properties with short timescales to lease renewal should be additionally earmarked as further financial protection against emergency or other unplanned events
g) Note that any capital cost pressures or new proposed schemes highlighted in the next financial plan review will have to be met from existing resources or from additional revenue provision
h) Note that options for scheme deferral or cancellation are not recommended at this stage, but that no further pressure should be added to the programme at this time, and this should be kept under review.
i) make a recommendation whether it wishes to retain the £300,000 unallocated capital sum in the 2004/05 approved budget (see 2.1 e above)
j) Endorse the general conclusions in para 6.7 for inclusion in the action plan as appropriate
k) Approve the action plan for measures to improve member/public confidence in the Council's management of major projects and to improve the integration of risk assessment within the Council's financial planning processes set out at Appendix 5.
6. FINANCIAL IMPLICATIONS
6.1 Financial implications are fully spelt out in the body of the report. The report concerns the Council's capital programme but there is one recommendation (2.2d) to authorise up to £250,000 for additional development control resources, to be met from revenue balances. In addition there is a need for additional resources in highways development and to provide a project team to support the Council's input to the Southgate project. These have not yet been fully quantified but are estimated at around £150,000 for the remainder of the financial year and will be the subject of an update report.
6.2 The 2003/04 Revenue Outturn is reported to the Council Executive elsewhere on this agenda and shows actual revenue balances of £5.3M against a recommended prudent level of £7M. Approval of the additional resources will therefore draw down on revenue balances. It is likely that there will be further calls on balances during this financial year, due to already identified pressures on the revenue budget, thus placing further pressure on their medium-term build-up towards the £7M figure.
7. BACKGROUND
7.1 Appendix 1 sets out the terms of reference for the Capital Programme Review. This has been endorsed by the Resources O&S Panel and by the Executive Member (Resources).
7.2 The Council first adopted a standard project management methodology following receipt of the report by Pannell, Kerr and Foster (PKF) undertaken in late 2000. The consultants had been commissioned by the Chief Executive to review the project management arrangements on the Bath Spa Project and to make recommendations for improvement. Their findings were reported to full Council on 18th January 2001 and changes agreed.
7.3 Following receipt of the PKF report, a standard project management methodology was drawn up for use within the Council. This methodology is based on the Prince 2 standard and was designed to be applied to all levels of projects.
7.4 In the period since 2001 the Council has initiated a number of major projects to progress key objectives. At present the Council is actively engaged in a number of major projects including:
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Bath Spa Project |
Combe Down Stone Mines |
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Elderly Residential Care Project |
Western Riverside |
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School Reviews (including Radstock Renaissance and "United for the Future" (Bath Special Project) |
Long Term Office Accommodation |
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Environment Park |
Norton Radstock Regeneration |
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Southgate |
4.1 The Council recognised the importance of major projects when developing its Constitution and established an Overview & Scrutiny panel for major projects. The Panel receives update reports on a number of major projects, although it should be recognised that the Panel has expressed concern about what it feels to be out-of-date or incomplete information.
4.2 Council officers and members have been aware of the increasing complexity and risk on projects, which has implications for management capacity and skills as well as finance. In his 2003 Annual Management Letter the external auditor wrote:
The Authority has in recent years embarked on an ambitious and significant capital programme and at the same time entered into a number of service re-engineering projects to generate efficiencies and improve service delivery. These initiatives have highlighted the need to develop and enhance project management procedures within the Authority and also the need to procure external project management expertise for major projects. In addition they have and will continue to require substantial time commitments from Management. It will be important during this ongoing period of significant change and increased risk to keep management capacity within the Authority under review and to ensure that underlying internal controls and procedures are maintained
4.3 In March 2004 the Chief Executive recommended to full Council the need "to reconsider existing arrangements for major projects. The preferred option is to secure a discrete dedicated resource who will report directly to the Chief Executive. This will allow the existing management to concentrate on the Council's core day to day and strategic business, whilst ensuring adequate senior management capacity for programme managing major projects. The market for such management resource is somewhat different from the normal recruitment market and therefore the proposal is to secure the services of appropriately experienced management on an "Interim Management" basis. This would effectively be by way of a contract for services to be provided to the Council either by an individual or by a firm who would then provide the necessary individual".- Recruitment for this post is progressing with long listing of possible candidates currently taking place. The initial assessment of applications is promising and interview dates have been programmed for July. The interview panel will consist of Councillors Crossley, Haeberling, P.Gay, M. Davies, Darracott, Hanney and the Chief Executive, supported by advisers.
4.4 Alongside the above proposal, the Council Executive has also established a Projects Programme Board (PPB) consisting of the Executive Members for Resources and Economic Development together with the Chief Executive and Resources Director.
4.5 As the Council requested that implementation of its resolution should be progressed as a matter of urgency, the Projects Programme Board has been established in advance of appointing the project officer, although its membership, method of operation, and terms of reference will be reviewed when a postholder is in place.
4.6 The Board's initial terms of reference is to:
· To determine which projects will be subjected to direct management by the Projects Manager and reported to this Board.
· To ensure the establishment and use of appropriate management and reporting processes for all projects and that appropriate levels of resource are available to effect project delivery.
· In consultation with the Risk Scrutiny Panel, to monitor and review the overall risk exposure of the Council from Major Projects and ensure satisfactory actions/plans are in place to manage this.
· To advise the Executive on the overall level of exposure from project risk that should be considered when formulating the Council's budget and financial plan.
· To ensure the various projects are programmed with due regard to the Council's capacity and to minimise disruption to the community.
· To monitor and review projects directly allocated to the Project Manager and to determine the allocation of responsibility between the Project Leader and Project Sponsor.
4.7 The Board's initial Work Programme is:
(a) Review corporate project management processes and reporting arrangements;
(b) Review management structures and reporting arrangements for each major project;
(c) Review risk assessments of the major projects.
The Board is initially focusing on the nine projects listed above. It is recognised that the above will initially only be quick reviews designed to identify any significant gaps and more in depth work will be progressed when the permanent staffing arrangements are in place.
4.8 Additionally the Board has, via the Chief Executive, given instructions that no other projects that could involve commitment of significant Council resources or risk and that have a gross estimated value exceeding £5million (irrespective of source of funding) are to be progressed without the Board's prior approval.
4.13 A further response to the External Auditor's concern is the proposal, within the Finance Service Improvement Programme, to establish a dedicated Major Projects Finance Team to support the new senior management resource and to ensure proper financial project management control processes. It is currently intended to establish the team and recruit to the post of Major Projects Finance Manager in July.
5. MANAGEMENT OF MAJOR PROJECTS - REVIEW ACTIVITIES
.1 A number of activities have been undertaken which can contribute to the Review.
.2 Firstly, the Council's external auditors PriceWaterhouse Coopers have undertaken a review of the Council's major project management arrangements as part of their 2003/04 Audit Plan. This review was initiated prior to the report to Council, and is based on a detailed review of four projects (Combe Down Stone Mines, Western Riverside, Radstock Renaissance and Elderly Persons Homes). The auditor's report is positive in its conclusions regarding the management of individual projects but makes some recommendations regarding improvement in the overall co-ordination of projects and development of skills. The auditor's executive summary is attached at Appendix 2.
.3 In addition, the Projects Programme Board asked the Council's management and Internal Audit to undertake a high-level overview of the general project management arrangements of the Council's projects. It is stressed that this is an initial overview only and, while drawing some general conclusions, time has not permitted detailed review of each of the nine major projects. The general conclusions and initial actions so far identified are as follows (these also incorporate some of the general Internal Audit findings arising from its review of the Bath Spa Project in as far as they are relevant in informing the overall position):
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Corporate issues arising from preliminary review of projects. (a) Some lack of consistency/variation in make up and role of project boards. (b) Some `partnership' projects have adopted a broader based Board including all partners. (c) Some variability in consistency of regular reports (d) The Council's rules on delegation are unclear in terms of when an individual may accept risk as part of their decision. (e) Overview and Scrutiny Role (f) Improved corporate overview of the Council's risk and capacity. (g) Future workload pressures on Planning and other Council Services |
Principal actions already taken by the Projects Programme Board to address these issues are:
· Project Boards are to be reviewed and core composition redefined to ensure the inclusion of a representative of the Resources Director (s151 officer) and the Council solicitor (Monitoring Officer.
· Require "partnership" projects to have a separate Board with only Council representatives on in order to ensure the Council's interests are protected.
· Instructed an amendment to the Council's rules for delegation to ensure potential risk exposure is included in the terms of delegation.
· Instructed a review of development control capacity in the light of the major projects programme and ensure this is considered as part of the capital programme review.
· Formalised the reporting lines of the risk panel to the Board and reviewing its programme of work and format of reporting
· Required the development of a standard format of reporting to the Board and of assessing the Council's overall risk and capacity in relation to its total programme of work (to be initiated when the Major Projects Officer is in place).
· Instigated a risk review of the identified projects via the risk panel together with a review of the management structures/reporting programmes for the individual projects. Initially, this work was at an overview level and was completed by the end of June.
Specific Projects
· Combe Down Stone Mines - Board to receive detailed risk report on implications of terms of Government grant before Council considers formal report on progressing main scheme.
· Western Riverside - workload will increase significantly in coming months and Council officer resource will be supplemented accordingly.
· Schools Review - Programme Board to be established to co-ordinate the individual project boards.
· Southgate and Long Term Officer Accommodation - These schemes are at an early stage of their project development, but formal structures/operating mechanisms are to be approved by the Projects Programme Board.
· Environment Park - Further work is required to establish risk and funding issues before the scheme is progressed.
· EPH - Minor amendment to project structure to implement an internal Project Board.
.1 The Resources O&S Panel on June 15th conducted a scrutiny review on major projects monitoring, control and reporting arrangements. It received the results of the PWC review and heard from the Chief Executive and Executive Member (Resources) on behalf of the Projects Programme Board. The Panel's comments for consideration by the Board and Executive are attached as Appendix 3.
4. ASSESSMENT OF FINANCIAL EXPOSURE AND IMPLICATIONS FOR THE CAPITAL PROGRAMME
4.1 The Council's Capital Programme forms part of its one-year Budget and four-year Financial Plan which in turn is integrated within the Council's Corporate Plan. Capital expenditure is defined by law and comprises:
· the acquisition, reclamation, enhancement or laying out of land
· the acquisition, construction, preparation, enhancement or replacement of roads, buildings and other structures
· the acquisition or replacement of moveable or immovable plant, machinery and apparatus and vehicles and vessels
Where "enhancement" covers works intended to do one of the following:
· lengthen substantially the life of the asset
· increase the open market value of the asset or
· increase substantially the extent to which the asset can be used for the purposes of the functions of the authority
4.2 As in most local authorities, capital expenditure has risen in recent years as a result of increased government support. At Bath & North East Somerset Council capital expenditure has been further supplemented by resources released as a result of the large scale voluntary housing transfer in 1999. The Council's capital expenditure averaged £16M pa in 1996/97 - 1998/99, £21M pa in 1999/2000 - 2002/03 and is projected to be £27M pa in the period of the current Corporate Plan, 2003/04 - 2006/07.
4.3 Over time, the programme has also changed in its nature. In the early years it was characterised by a large volume of fairly small value schemes. In this situation it was possible to contain any overspendings on individual capital schemes by managing scheme starts between years. In recent years the programme has been increasingly characterised by a series of major projects, each with large values and with much less opportunity to absorb cost increases within the overall programme. This makes the need for a robust overall financial contingency and process for effective management of the programme of far more critical importance.
4.4 In the budget report to Council in February, 2004, the Resources Director (as s151 officer) drew attention to the level of capital reserves in the financial plan as follows.
"... Bearing in mind the extension of the proposed capital programme, the nature of the major projects within that, and the introduction of the prudential guidelines, it would therefore seem appropriate to recognise a substantially higher level of capital reserve in the plan. ...(noting that capital reserves may be in cash or in reasonably high liquidity assets such as parts of the Council's commercial estate)...."
4.5 The current programme has a cash risk contingency of only £2.1M. As part of this Review, all of the major projects have been assessed against financial risk factors and a new contingency determined. The assessment, and the consideration of the options available to finance the recommended level of contingency is set out at Appendix 4. It is stressed that the assessment is an interim one only at this stage, and will be revisited in more depth during the financial plan review.
4.6 The key conclusions of this part of the Review (as set out in Appendix 4) are:
a) The s151 Officer advises that, based on the interim risk assessment, there is a need for a current risk contingency of around £10.5M and that the risk assessment should be re-considered every 6 months as part of the Council's overall risk management processes
b) In addition, the nature of the Council's capital programme is such that further funding sources should be identified against emergency or other unplanned events.
c) The contribution to the EPH project from the Council's housing budget should be fixed at £2.84M, with the remaining shortfall of £1.9M to be funded by the Council as additional unsupported borrowing, with the additional revenue financing costs to be borne by Social Services from within its financial planning targets and hence having a cost neutral effect on the net revenue budget (see also Appendix 4 Annex 2).
d) At this point in time Education still identify a funding gap of around £1m in their programme, specifically relating to the Bath Special School. The Schools programme board need to be clear about their priorities in relation to their funding sources, and ensure that all reviews are contained within the context of their overall programme.
e) The £250,000 of additional programme management costs approved by Council in March should be funded in 2004/05 by virement from uncommitted funds (see below) and in future years should be treated as an oncost on each major project and their overall funding needs then addressed within the financial plan review.
f) The accumulation of major projects, including those undertaken directly by the private sector but which are likely to affect the Council's area significantly over the next few years, all point to a shortfall in key skills and resources. To deal with urgent resourcing issues in development control, it is recommended that authority is given by Council for the Executive Member (Sustainability & the Environment) to approve the engagement of additional development control resources on a time-limited basis of up to £250,000, to be met from revenue balances. In addition there are resource pressures in highways development and to provide a project team to support the Council's input to the Southgate project. These have not yet been fully quantified and will be the subject of an update report.
g) It is possible to increase, over time, the funding, which would need to be accessed in a relatively short timescale from cash, short-term borrowing or liquid assets, for the risk contingency towards the recommended £10.5M as follows:
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Item |
Amount, £M |
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Existing risk capital contingency (cash/borrowing) |
2.1 |
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Add opportunity for additional contingency from within the existing plan parameters. Available now (borrowing) |
3.0 |
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Add "special" capital receipts from property developments in Bath - to be ringfenced on realisation and not made available for reinvestment. Sum not fully achievable in the very short-term but should be fully realised within next 2-3 years. Internal resources will need to be directed towards these development opportunities to ensure that the receipts are realised. |
5.4 |
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Total |
10.5 |
a) In respect of providing financial protection against emergency and other unplanned events (see (b)), it is suggested that specific long leasehold properties with short timescales to lease renewal should be earmarked for this purpose.
b) The implication of the above is that additional capital resources will need to be devoted to building that contingency rather than financing new investment. This will place a major constraint on the Council's development as there are likely to be significant cost pressures from a number of sources over the next 3-5 years (examples listed in Appendix 4). Their inclusion within the programme (over and above existing approvals) will be dependent on either the cancellation or deferral of other schemes, or on additional revenue provision which would put pressure on Council Tax levels. This will therefore form a key issue for the next financial plan review, to be undertaken in autumn/winter 2004 for approval by Council in February 2005
c) Options for scheme deferral or cancellation are not recommended at this stage, but the Council Executive should consider whether it wishes to retain the £300,000 unallocated capital sum in the 2004/05 approved budget for schemes arising from the Budget Resolution.
4.1 In the past the capital programme has tended to play a secondary role in budget-setting with far more attention by officers, elected members and indeed the general public paid to the revenue budget. The Review has highlighted the importance of the capital programme in its contribution to the Council's overall financial management and the need to ensure proper management of the programme, notably the major projects, and ensure its integration within the Council's financial planning and risk management processes. A number of specific conclusions and recommendations can therefore be drawn:
a) That the next review of the financial plan should include an explicit section on capital programmes to ensure proper scrutiny and information on choices and risks
b) The financial planning period should be extended to 2009, to maintain a 4-year forward plan, with the implications to the Council from major projects highlighted for a longer timeframe of ten years
c) The role of the project sponsor (at elected member and officer level) in managing financial exposure is critical and sponsors should seek cost avoidance and/or use of existing budgets as a first call against project cost escalation
d) That each major project must have a feasibility study and full costed business case prior to approval of its initiation, and any new projects in excess of a defined financial threshold or risk assessment should require the approval of full Council prior to project initiation
e) The Budget Management Scheme should be amended to make explicit arrangements for dealing with cost overruns, with a protocol that looks first to Services to absorb overspendings, then to the Executive to exercise overall programme management if the scale of overspending is beyond the ability of a single service to contain; and to ensure that decision-making authority on major projects is clear, particularly in relation to risk and future years' funding.
f) That the quarterly capital programme monitoring report to the Council Executive be reviewed with a view to incorporating an update on the major projects programme including current risks and funding position.
g) That resources continue to be devoted to improving the Council's risk management, which should be mandatory in its application to capital and revenue budget management, and
h) The Council ensure that the adequacy of capital and revenue reserves and sources of contingency funding are constantly reviewed.
5. RISK MANAGEMENT
A risk assessment related to the issue and recommendations has been undertaken, in compliance with the Council's decision making risk management guidance.
6. RATIONALE
6.1 The Review has followed a structured methodology in accordance with its terms of reference. The conclusions arise from evidence regarding current project management arrangements when compared against a "best practice" standard, and from an assessment of the Council's capital resources, commitments and plans, and risks.
7. OTHER OPTIONS CONSIDERED
7.1 The Review draws interim conclusions from a structured methodology and does not, as such, explicitly consider options. The financial plan review will consider funding and programming options.
8. CONSULTATION
8.1 During the course of the Review comments have been received from the Resources O&S Panel, the Projects Programme Board, Directors and project leaders and managers. Resources O&S Panel will have a further opportunity to comment on the Council Executive's recommendations prior to their consideration at full Council.
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Contact person |
Jean Hinks, Resources Director (01225) 477300 Phil Hall, Head of Strategic Resource Planning (01225) 477468 |
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Background papers |
Report to Council, 18th January 2001 http://www.bathnes.gov.uk/Committee_Papers/Council/CO010118/8spa.htm District Auditor's Annual Management Letter 2003 Chief Executive's "Culture Change" report to Council, 25th March 2004 http://www.bathnes.gov.uk/Committee_Papers/Council/CO040325/12 Report Culture Change.htm Report to Council 25th March "Bath Spa Project" Report to Council May "EPH Reprovision Project" Report to Resources O&S Panel, 15th June 2004. "Scrutiny review of major project monitoring, control and reporting arrangements". |
Capital Programme Review - Terms of Reference
Context
The report to Council on 25th March 2004 regarding the Bath Spa Project included the following paragraphs:
6.9 It is therefore recommended that these unresolved items [ie exposure to claims on the Bath Spa Project] are considered within the financial plan and any provision for them is kept within the general reserve. The current level of general reserve for capital projects stands at only £2.145m, however, and it is clear that this sum will prove inadequate should settlements go against the Council. Urgent consideration should be given to increasing this sum, and to the mechanism for funding such an increase by reviewing the capital programme.
6.10 This review should also specifically encompass the level of assessed risk on all other capital projects committed by the Council, as these are substantial in value and potential risks.
4.1 Council concluded that it:
4.2 "Notes the position with regard to the level of general contingency reserves held, and their potential inadequacy, and requires these to be reviewed as soon as possible via the Resources Overview and Scrutiny Panel, with a report back to Council at the latest by the 15th July meeting".
4.3 The Council's capital programme is set within the financial plan, which in 2004 was approved by full Council within the Corporate Plan for 2003 - 2007. The total programme is set at £78.3M for the period 2004 - 2007 and includes schemes financed with government or 3rd party support (£34.5M) and those that are purely financed by the Council, either from capital receipts or from borrowing (£43.7M). Within these amounts are the sums allocated to selected major projects (see note for selection).
4.4 Given the need for a report to Council no later than 15th July, the review will need to focus on the level of risk on a selected number of major projects - where financial risk is considered to be greatest - rather than of the entire capital programme. In addition the timescale is such that the report will present interim conclusions and recommendations pending further review and development.
Objective of the Review
4. To provide an interim assessment of the extent of financial risk on selected major projects within the Council's capital programme and, once that assessment is complete, to ensure the adequacy of overall funding
5. To ensure that, based on the interim assessment of financial risk, the programme is affordable (ie that revenue consequences of capital spending can be contained within the approved financial plan parameters).
6. To review the overall management arrangements for the Council's major projects - focusing on costing, risk assessment and monitoring/reporting arrangements - and establish an action plan for measures to improve member/public confidence in the Council's management of major projects and to improve the integration of risk assessment within the Council's financial planning processes.
Scope of the Review
4. Review of monitoring/reporting arrangements and costing and risk assessment and control methodologies on selected major projects (see note);
5. Assessment of an adequate level of contingency funding (including adequate risk assessment) for schemes within the overall capital programme;
6. Review of the overall capital programme 2004 - 2007 to ensure that schemes are affordable within the Council's financial plan parameters
Constraints
4. Deadline for report back to Council is no later than July 2004; the tight timescale means that the review can present interim findings only
5. The review is of the Council's overall arrangements and will not focus on any specific project - it should be noted that the Major Projects Panel will be conducting a separate review of the Bath Spa Project
6. Contractual commitments on specific schemes
7. Government and 3rd party funding approvals - funding cannot be reallocated to other priorities/schemes
Activities within the Review
1. Interim assessment of extent of financial risk and adequacy of funding
a) Project Managers of the selected projects to review and update own risk assessments and project funding requirements for submission to the officer Risk Scrutiny Panel and member/officer Major Projects Board (end-May 2004)
b) Interim assessment of an adequate level of contingency funding (including adequate risk assessment) for schemes within the programme together with funding options (Head of Strategic Resource Planning with Major Projects Board and Capital Strategy & Asset Management Group, June 2004)
2. Resources O&S Panel review of monitoring, control and reporting arrangements on selected major projects - see draft Terms of Reference attached (June 2004) and report findings to Council Executive
3. Report to Council Executive (June 30th 2004) on:
a) Interim assessment of an adequate level of contingency funding (including adequate risk assessment) for schemes within the programme together with recommended funding solution and any options for scheme deferral/cancellation; and
b) an action plan for measures to improve member/public confidence in the Council's management of major projects and to improve the integration of risk assessment within the Council's financial planning processes.
for the Council Executive to make recommendations to Council
4. Review of Council Executive conclusions and recommendations by Resources O&S Panel (special meeting to be arranged, between July 5th and July 15th 2004) for recommendation to Council
5. Full Council to receive recommendations from Council Executive and results of Resources O&S reviews (July 15th 2004)
Resources
The overall Review will require
· Two meetings of the Resources O&S Panel and one report to the Council Executive
· Input of PriceWaterhouse Coopers & Major Projects Panel members
· Project Managers to provide information within a tight timescale
· Review by the Risk Scrutiny Panel and Major Projects Board and input by the Capital Strategy and Asset Management Group
· The collation of information, consideration and presentation of options, and preparation of a report by the Head of Strategic Resource Planning with support from finance officers.
· Overall supervision and responsibility of the Resources Director, Executive Member (Resources) and Chair, Resources O&S panel
Note
Projects to be selected for review of risk assessment and control methodologies:
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Bath Spa Project |
Combe Down Stone Mines |
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Elderly Residential Care Project |
Western Riverside |
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School Reviews |
Long Term Office Accommodation |
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Environment Park |
Norton Radstock Regeneration |
Bath & North East Somerset Council
Review of Capital Projects
Final Draft - June 2004
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Statement of Responsibilities of Auditors and Audited Bodies In April 2000 the Audit Commission issued a revised version of the Statement of Responsibilities of Auditors and Audited Bodies. It is available from the Chief Executive of each audited body. The purpose of the statement is to assist auditors and audited bodies by explaining where the responsibilities of auditors begin and end, and what is to be expected of the audited body in certain areas. Our reports and audit letters are prepared in the context of this statement. Reports and letters prepared by appointed auditors and addressed to Members or Officers are prepared for the sole use of the audited body, and no responsibility is taken by auditors to any Member or officer in their individual capacity, or to any third party. |
©2004 PricewaterhouseCoopers LLP. Unless otherwise indicated, "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a limited liability partnership in the United Kingdom. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.
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Executive Summary
15 The Council currently has a Capital Strategy in place (June 2000), and has produced a revised long term strategy to cover the period from 2002/3 to 2006/7. The aims and objectives of the Council's capital management are set out in its Capital Strategy which has been renewed for the period 2002/3 to 2006/7. We found that members and officers interviewed had a clear understanding and commitment towards achieving these objectives.
16 In relation to the four capital projects reviewed we identified many instances of good practice. In particular we identified that:
B7 individual services such as Housing & Social Services set out the benefits of individual schemes in line with corporate priorities;
B7 project briefs include the important economic, social and environmental benefits expected from the capital projects initiatives;
B7 projects are meeting their delivery aims, with good customer satisfaction on individual projects reflected in feedback from stakeholder reviews, workshops, community forums;
B7 partnering projects with the private sector are selected from option appraisals, documented in the business case;
B7 each project has a project manager and action points have clear timescales and resources;
B7 the Council has made use of external consultants where they have considered this to be advantageous.
17 We did however identify some areas where there was scope for some further improvement to the Council's approach to capital projects as follows:
B7 the Council should take a more formal and co-ordinated approach to capital projects ensuring that the different services work together on the planning, funding, development and implementing projects;
B7 the Council's capital projects are delivered without consistency of approach between projects. It is therefore important that the Council harmonises processes to bring together the best practice already evident in the Council. In particular there needs to be a standard approach to project initiation and feasibility;
B7 the Council should continue to develop its processes and procedures to co-ordinate risk management assessments of general corporate risks and project specific risks;
B7 the Council should ensure the provision of consistent regular clear reports to members and public on progress, including reasons for any variances and monitoring spend against budget;
B7 the Council should implement a consistent framework for developing, monitoring and reporting of capital projects. This should build on the draft criteria already developed, and ensure that capital schemes are evaluated corporately in accordance with the Council's priorities;
B7 staff morale in project teams is low primarily as a result recent events;
B7 Whilst Members are involved at key stages in the decision making on capital projects, there is a need for further training in respect of capital management. This may include improvements to the induction members receive when they are either new to the Council or taking on different roles. In addition the Council should provide training for staff and members as to their respective roles and responsibilities in the management of capital projects.
18 The Council has recognised the need to address a number of the issues impacting on capital projects and has recently completed a management restructuring to provide more prominence and focus to major capital projects and to resolve several general, political, managerial and partnership issues. In addition the Council has also commenced an internal review to learn from the lessons of the Bath Spa project and to review its approach to major capital projects. Going forward it will be important for the Council to:
B7 continue to develop feedback and joint working with stakeholder groups to further improve the quality and efficiency of each project;
B7 sustain improvement of capital projects quality and delivery to customers and stakeholders, by continuing to:
19 We also support the action taken by the Council in recent months in respect of major capital projects and highlight the importance of the Council implementing its own proposals:
B7 to introduce a consistent framework for developing, monitoring and reporting of capital projects. This should build on the draft criteria already developed, and ensure that capital schemes are evaluated corporately in accordance with the Council's priorities;
B7 to ensure that the corporate objectives continue to be developed in a form to enable the evaluation of capital allocation and expenditure in line with priorities;
B7 to appoint a Major Projects Manager and set up a Major Projects Board with agreed terms of reference. It will be essential that the Major Projects Manager, once appointed, is provided with sufficient and adequately skilled resource to support this individual and the project management officers in their work; and
B7 ensure that members are fully trained to play an effective role in the capital management process.
Comments of the Resources O&S Panel
Scrutiny Review of Major Project Monitoring, Control and Reporting Arrangements
Conclusions
The Panel welcomed the presentation by Jacqueline Banton from the Council's external auditors, Price Waterhouse Coopers and noted its conclusions.
The Panel also noted the contributions of the Chief Executive and Executive Member (Resources) on the work to date of the Projects Programme Board.
The Panel wished the Board to take account of the following comments in its further work:
· That there would be value in reviewing some completed projects for lessons learnt as well as current projects
· There must be clarity over how a project is to be funded prior to approval to its initiation
· Recognising the critical importance of the appointment of the major projects senior manager, support for that manager should be properly resourced, and his/her role should be clearly defined, and achievable.
· There needs to be a more corporate approach to project management, particularly in relation to single service projects, and more regard to teamwork and liaison on cross-service projects. This should be backed up with appropriate training of key project staff and members.
· Good stakeholder participation exists on most projects but more needs to be done to improve public communications and boost overall public confidence in the Council's management of major projects
· There should be an urgent review of the membership, structure and role of the Projects Programme Board with a view to adding external challenge, legal advice and wider democratic involvement.
· The process for approving projects needs to be reviewed to manage public expectations, with 93sign-off94 at each key stage
Financial Risk Assessment and Funding Review
B7 Each of the nine major projects has been assessed by the s151 Officer against a set of financial risk indicators:
· Effectiveness of project management structure (management capability, skills, resources)
· Liability of Council to development risk through project / deal structure
· Certainty over the project lifetime - legislation, litigation, EU etc
· Complexity, innovation etc
· Evidence of cost escalation and/or known financial liabilities
· Ability of Service to contain any cost over-runs
· Lack of effective options
B7 This assessment should be recognised as a reasonably crude exercise, based on existing available information on the current position of each project. In total the s151 Officer advises that the assessment produces a need for a current risk contingency of around A310.5M. This assumes:
B7 A 93medium-risk94 position on most projects, producing figures of up to A31M on individual projects, reflecting current relatively low risk assessments because of the nature of the development or stage of project.
B7 that service programmes should be contained within the resources available to those programmes.
B7 A low assessment of the relatively low risk but immensely high potential exposure of the Council on projects such as Western Riverside, Combe Down Mines, and Southgate, where costs should in the main be externally funded. Stringent monitoring, management and risk mitigation and management is crucial to maintain this exposure as minimal risk.
B7 A low assessment of the potential for other more generic risks to the Council, in particular the potential for a major emergency situation
B7 Adopting the 93high-risk94 position on the Bath Spa Project (which, as reported to Council in March 2004 currently has an assessed high risk position on pool paint of A328M plus up to A37.5M for contractor claims, compared to existing financial plan provision of A328.7M. (See Appendix 4 Annex 1)
B7 Additional provision for the anticipated financial liability arising from the establishment of a trust for the management of the Recreation Ground in Bath
It should be stressed that the risk assessment should be regarded as being interim only, pending further in-depth investigation to be carried out as part of the financial plan review. Risks change on a project depending on its progress and therefore, while the aim will be to reduce the overall level of risk by mitigating actions, it is inevitable that the accumulated value of risk will rise and fall depending on the position on individual projects.
In addition, the nature of the Council's capital programme is such that further funding sources should be identified against emergency or other unplanned events.
B7 A significant factor in the adoption of relatively low risk assessments on some projects was the use of 93partnering94 contracts. Partnering Contracts such as PPC 2000 and ECC are now being adopted as the norm in major public sector procurement projects as they are seen and promoted to represent the best way in which to deliver maximum benefits to all parties. Some of the reasons for this are that they improve:
B7 Trust/Fairness/Common Goals/Understanding of expectations and values
B7 Designs/Timetables/Prices/Supply Chain
B7 Innovation/Efficiency/Cost-Effectiveness/Waste reduction
B7 Completion to agreed Time/Price/Quality
B7 Measurable continuous improvements/KPI Targets
However it will be important to keep these 93best practice94 models under review to ensure that they deliver the required benefits.
4 Whilst it is recognised that the Council has a fairly sophisticated risk management strategy and process, it is also recognised that this is essential given the nature of the ambitious capital programme on which the Council is embarking, and given the nature of the reliance of the Council on revenue income streams. The above assessment is therefore highly dependent on the Council providing and continuing to improve its risk management process.
5 The existing capital programme has been reviewed. At this stage the review has been limited to adjustment for known changes only. Annex 3 summarises the revised programme. Key issues that emerge from the review are:
B7 Council in May deferred consideration of the source of funding for the EPH project shortfall. Officers have calculated that the housing budget contribution to the project should be fixed at A32.84M, based on standard unit costs for Social Housing Grant, adjusted for the numbers of net additional housing units, together with the actual cost of adaptation at St Johns Court. Approval of this sum would leave a residual deficit of A31.9M (excluding risk) to be funded by the Council as additional unsupported borrowing, with the additional revenue financing costs to be borne by Social Services from within its financial planning targets (see Annex 2 for more detail).
B7 Council in March agreed the inclusion of A3250,000 of estimated costs of programme management, to support the appointment of the Major Projects senior management resource. This has provisionally be funded in 2004/05 by virement from uncommitted funds (see below) and in future years should be treated as an oncost on each major project and their overall funding needs then addressed within the financial plan review.
B7 The accumulation of major projects, including those undertaken directly by the private sector but which are likely to affect the Council's area significantly over the next few years, all point to a shortfall in key skills and resources. These include:
B7 A severe shortfall in resources for development control and highways control, exacerbated by the major developments planned at Southgate and Western Riverside. The Head of Planning Services estimates the shortfall in planning resources at A3220,000 - A3300,000 over the next 12 months. Authority is sought for the Executive Member (Sustainability and the Environment) to approve the engagement of additional development control resources on a time-limited basis of up to A3250,000 at this stage. Because this is not a capital cost, it will need to be met from revenue balances. In addition there are resource pressures in highways development and to provide a project team to support the Council's input to the Southgate project. These have not yet been fully quantified and will be the subject of an update report.
B7 Pressure on key internal resources in property, finance, legal and in project management to ensure robust control of the projects
· With the introduction of the new Prudential Framework in 2004, the critical parameter for the capital programme is the bottom-line impact on the revenue budget. Under the Framework, councils are now free to spend as much as they wish on capital expenditure subject only to their ability to pay for the financing costs from their revenue budgets. The Corporate Plan approved in February 2004 set the medium-term parameters for the capital programme and, pending the review of the Plan in 2005, all decisions should be within the terms of those parameters.
6. Options have then been considered for increasing the capital risk contingency from its current A32.1M towards the A310.5M recommended by the risk assessment.
(1) The 2004/05 capital programme has the following uncommitted or unallocated resources:
B7 Headroom (A3900,000 remaining from A31M allocation) - but the Plan assumes that capital financing charges are financed by savings so cannot be used to fund non-savings schemes
B7 Long-Term Income Sustainability (all A3495,000 remaining) - there is no prospect of commitment in short-term although both Heritage Services and Property Services are actively preparing schemes for 2005/06. It is recommended that the A3250,000 approved by Council for programme management is funded as a virement from this budget.
B7 Unallocated (all A3300,000 remaining) - this heading was left unallocated to provide funding for items specifically referred to in the Budget resolution (incl parks play equipment, 93alleygates94 and streetscape improvements). There is an option to freeze this sum and transfer it to the risk contingency, but the Executive's views are sought.
(1) As a result of some overall delays in the programme and changed financing assumptions, there is some scope for providing additional contingency without breaching the financial plan revenue parameters. It is estimated that approximately £3M could be provided in this way.
(2) Capital receipts projections have been reviewed. The Plan currently assumes non-housing uncommitted capital receipts at £750,000 pa from sale of surplus land and properties and this is still considered realistic. However the Head of Property & Legal Services considers that there is potential for significant additional receipts over the next 2 years from specific development sites in Bath which may amount to in excess of £5M. It is stressed that, with any development opportunity, receipts are never guaranteed until they are received and so such figures should be treated with caution. They do, however, present a substantial potential funding stream for the Council, and should be earmarked towards the risk contingency. Internal resources will need to be directed towards these development opportunities to ensure that the receipts are realised. In addition, a few properties exist within the commercial portfolio which currently provide relatively low returns as they have previously been let on long leasehold which is nearing review. It is possible to earmark such properties as fall back funding options should either further funding above the £10.5m be needed, or should the above receipts not materialise.
(3) Options for scheme deferral or cancellation have been considered but are not recommended at this stage. Much of the programme is funded from government approvals which cannot be transferred easily or, in some cases, at all to other schemes. Schemes funded from the Council's own resources are the result of financial plan allocations and make a significant contribution to the Corporate Plan Improvement Priorities.
7. While the recommended contingency figure is £10.5M, this need not be wholly held as cash. What is important is that, if called upon, resources can be accessed in a relatively short timescale, from cash, short-term borrowing or liquid assets. It will be prudent for the Council to identify some property interests within its commercial estate for which disposal would not have a major revenue impact but which would produce significant capital receipts, and to ringfence these.
B7 The conclusion of the Review is that it is possible to increase, over time, the risk contingency towards the recommended A310.5M as follows:
|
Item |
Amount, A3M |
|
Existing risk capital contingency (cash/borrowing) |
2.1 |
|
Add opportunity for additional contingency from within the existing plan parameters. Available now (borrowing) |
3.0 |
|
Add 93special94 capital receipts - assuming these are ringfenced on realisation and not made available for reinvestment. Sum not achievable in very short-term but within the next 2-3 years (liquid assets / cash when realised). Internal resources will need to be directed towards these development opportunities to ensure that the receipts are realised. |
5.4 |
|
Total |
10.5 |
B7 While the above shows that it is possible to achieve a significantly higher level of contingency funding, the implication is that additional capital resources will need to be devoted to building that contingency rather than financing new investment. This will place a major constraint on the Council's development as there are likely to be significant cost pressures from a number of sources over the next 3-5 years:
B7 Projects such as office accommodation, customer access and environment park where to meet the Council's stated objectives significant investment will be needed;
B7 Additional costs arising from new legislation such as the Disability Discrimination Act, existing risks such as legionella and health and safety, and the backlog of building and highways repairs.
B7 Further school reviews and major spending needs arising from the Government's Building Secondary Schools of the Future (BSF)
B7 Corporate Plan priorities such as the urban public realm and the long-term income sustainability of museums and the commercial estate
These spending pressures have yet to be quantified, and should be considered within the financial plan review against other spending priorities. Their inclusion within the programme (over and above existing approvals) will however be dependent on either the cancellation or deferral of other schemes, or on additional revenue provision which would put pressure on Council Tax levels. Members will also be aware of significant pressures on the revenue budget, partly from revenue spending on projects. This will therefore form a key issue for the next financial plan review, to be undertaken in autumn/winter 2004 for approval by Council in February 2005.
Bath Spa Project
1.1 At its meeting in March 2004, Council received a report on the Bath Spa Project, identifying that the solution recommended to resolve the pool paint problem could cost between A33.2m and A34.3m. This potential increase in cost above that which was included within the Council's budget was the primary reason for this Review.
1.2 At that time, it was noted that the base project costs were estimated to be between A322.9m and A324.3m, the Pool paint costs were in addition as noted above, and in addition, unsubstantiated claims had been received from the building contractor of up to A37.5m.
1.3 It has been recognised by the Council in relation to this project that it is prudent to include the average risk estimates within the fixed budget for the project, but to encompass the high risk estimates within the risk contingency arrangements.
1.4 This Review has provided for a high risk position, incorporating within the contingency recommended sufficient funding to cover the high risk total of A328.3m, and to enable the Council to fund any claims which may be proven against the project.
1.5 Since March, however, the Major Projects O&S Panel in May received an update report stating that upon review, Gardiner Theobold Management Services (the Project managers GTMS) advised that a further A3930,000 for a number of issues had been identified. In their view, at that time, they did not consider that this cost would add to the high risk estimates.
1.6 At the same meeting, GTMS also advised that there were a substantial number of identified defects, continued snagging issues, and other problems relating to the chosen pool paint solution which were being further examined. One specifically which has not as yet been resolved relates to the provision of lifts into the pools, and another relates to the positioning of heat generators within the building. Experience of this project therefore suggests that the current estimates for completion should be treated with the utmost caution, as this project continues to be fraught with difficulty in determining not only correct and best solutions to such problems, but also in defining with any accuracy the expected costs of such actions.
1.7 In the absence of an appointment to the post of Major Projects manager, the Chief Executive has taken on responsibility as Sponsor to this project personally. The review of major projects undertaken by him and others as part of this review has identified the urgent need to
o review the project management and reporting arrangements for the project in order to ensure appropriate and effective reporting, and monitoring.
o enhance client management support to the project, specifically a temporary project manager has been appointed in support of the Project leader.
o Undertake a full review of the remaining issues on the project, with assessment of the options for solutions and costs and benefits thereof
o Determine an appropriate claims strategy for the project, recognising the need for dedicated resource to be devoted to this to ensure this is developed without interference with the management of other projects, or to the detriment of the current programme of work to reach practical completion.
1.8 Whilst it is recognised therefore that the current provision within the programme should be sufficient to cover any eventuality on the Spa, there does appear still to be substantial uncertainty over the actual costs which the project may incur, and it would be unwise therefore to suggest that further costs will not materialise, or that the final cost will not rise. This fact needs to be borne in mind by Council when considering the recommendations in this report.
EPH Reprovision Project Funding
The funding shortfall identified to the May Council meeting was A33.9M. This has been reviewed and the latest estimate is for a total project cost of A325.58M, to be funded as follows:
|
A3000 |
|
|
Total Cost (incl day centre provision, estimated land purchase cost, inflation and contingency @ 15% but excl risk assessment) |
25,581 |
|
Funding: |
|
|
Capital Receipt from sale of EPHs |
4,500 |
|
Capital Receipt from sale of hostels |
463 |
|
RSL capital input |
4,916 |
|
Contribution from Council & Housing Corporation housing programmes (see below) |
5,840 |
|
Financial Plan provision for EPH reprovision project (increased from A38.0M) |
9,862 |
|
Total Funding |
25,581 |
This assumes a contribution to the project from housing resources of A35.84M, calculated as follows:
|
A3000 |
|
|
60 new extracare units @ A3100,000 per unit |
6,000 |
|
Less Adjustment for 22 lost units @ A3100,000 per unit, net of investment by RSL partner |
-1,600 |
|
Add Cost of adaptations in order to provide extracare at St Johns Court, Bath |
1,400 |
|
Equals Funding from Housing resources |
5,840 |
|
Less funded by Housing Corporation 2004/05 |
-1,500 |
|
Less likely to be funded by Housing Corporation in future |
-1,500 |
|
Equals Balance to be funded by Council from its Social Housing Grant programme |
2,840 |