Meeting documents

1.1 As part of its preparatory work on the financial plan review, the Council Executive has commissioned a follow-up review of the funding needs and risk position of the Council's major projects to assist it to prepare a realistic budget for 2005/06 and beyond that takes into account:

B7 The parameters set by the Capital Programme Review

B7 Known unfunded and partially funded projects

B7 The overall financial, risk and capacity position of the Council

1.2 The significance of the financial issues highlighted within the review are such that the Council's statutory officers, in consultation with Council Executive members, advise that they should be considered by Council in advance of the main financial plan report, to enable decisions to be made that will determine the finalisation of the Plan for report to Council in February.

3.1 Financial implications are fully spelt out in the body of the report.

4.1 In February full Council approved its first Corporate Plan, which sets out Improvement Priorities for the Council, together with broad strategies for delivering the financial and organisational headroom and capacity necessary to achieve them, including a financial strategy and integrated financial plan. The Corporate Plan is intended to be a rolling plan, updated annually, and the Council Executive has commenced its first review, which will culminate in a formal update to the Plan.

4.2 The Executive has identified a number of significant financial pressures and activities have therefore been designed to focus energy and time on resolving these issues in time for the Financial Plan and Budget to be set as part of the updated Corporate Plan in February 2005. These specific financial pressures are:

B7 Adults' social services

B7 Customer access

B7 Major projects

4.3 In addition the Capital Programme Review which was reported to Council in July set planning parameters (see Appendix 1 Council resolution). In brief the key conclusions were:

B7 an interim assessment of an adequate level of contingency (including adequate risk assessment) for schemes within the current programme of A310.5M

B7 that 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

B7 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

B7 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

4.4 In November Council received an update on the Capital Programme Review, which

B7 highlighted that approvals already made from the risk reserve will seriously deplete the available cash reserve in the current year

B7 highlighted the concerns of the Resources Director, as the Council's statutory s151 Officer, regarding the Council's risk and funding exposure on its major projects

B7 gained approval that in the short-term all net capital receipts from property sales, other than those approved to be earmarked to a specific reinvestment purpose, should be ringfenced to the risk contingency

B7 approved revisions to the Budget Management Scheme in respect of its application to major projects

4.5 The existing approved financial plan 2004/05 - 2006/07 includes budgetary provision for a number of specific projects plus an indicative block allocation for major projects in general. This has been used as the starting-point for comparing funding needs of the various projects. The comparison needs to be undertaken in the context of the overall capital programme and Council priorities. The Council's Corporate Plan includes an overall financial strategy which states, for capital spending, that:

B7 Capital expenditure will be used, only where thoroughly justified, to help fund Improvement Priorities and to invest in productivity improvements which create future years' revenue headroom. Asset-holding will be reviewed in order to ensure best use of resources whilst borrowing is likely to be the principal source of finance for additional capital spending in the short- to medium-term

B7 Capital expenditure will also be used, again only where thoroughly justified, on a commercial basis, to increase investment to assist the sustainability of the Council's key income streams - notably its commercial estate, museums and car parks

Major Projects are a delivery vehicle for many of the Council's Improvement Priorities. The following projects are within the scope of this Review:

5.1 To inform the Review, information was sought from all of the Council's nine designated major projects on the following:

B7 To identify the funding required by the project in the short, medium and long-term (up to ten years) to meet its objectives, together with expected funding sources which identify clearly the anticipated call on the Council's own resources.

B7 To identify any shortfall compared to existing targets and proposals (with options as appropriate) for how existing budgets can be adhered to.

B7 To show profiled spending and funding over the lifetime of the project, to provide information to rephase existing financial plan provision.

B7 To provide a full risk analysis (which ideally should just be an update to an existing risk register) assessing the full risk exposure in A3m of the project at a low, medium and high risk level.

B7 The impact on supporting services e.g. planning, property, highways, finance, personnel, IT and legal.

5.2 In addition limited information was sought from Transportation regarding three potential major projects (Park & Ride, bus infrastructure and rapid transit development, and "package" improvements).

5.3 The costs of the proposed staffing structures for the new Major Projects Directorate and Major Projects Finance Team have been costed and included within the financial plan. The costs have, for the purposes of this exercise, been apportioned over:

B7 For the Directorate, those projects that the Director is directly responsible for (Spa, Western Riverside and CDSM). The gross cost is A31.67M in 2005/06.

B7 For the Finance Team, the four projects that will initially be directly supported from the team (the three above plus LTOA). The gross cost is A3396,000 of which A3170,000 is included in existing project budgets, leaving a net A3226,000 to be apportioned to projects in 2005/06.

5.4 In July, each of the nine major projects was assessed by the s151 Officer against a set of financial risk indicators. This assessment was undertaken as a reasonably crude exercise, based on existing available information on the current position of each project. In total the assessment identified a need for a risk contingency of £10.5M.

5.5 Since July, approval has been given for the risk contingency to be drawn upon for the acquisition of land at Bath Sports Centre, for costs relating to the Bath Spa Project and for the Rapid Transit Blight Notice. These calls on the contingency have used up the available capital cash sum and highlight the fact that the original assessment produced an inadequate contingency sum. Better information now exists on the risks of each project (and some risks have now been included within project budgets). The Council remains exposed to significant risk on a number of key projects (notably Spa, Western Riverside and Stone Mines) where the Council's funding exposure is either uncapped, or where key financial issues have yet to be fully resolved to the Council's satisfaction.

5.6 Should these projects proceed in the current form, then to be prudent a target capital contingency of c£20M should be considered until risk exposure is reduced. However, if the current draft capital programme is approved, unsupported borrowing of £25M in 2005/06 will already be required, and no additional funding is currently available to build a capital contingency to this level. Therefore if these risks materialise, the Council will need to raise additional sources of funding, either from additional borrowing or from property developments and sales. For planning purposes a modest overall capital programme contingency of £2M pa of borrowing has been included in the draft financial plan, but it should be noted that the additional needs for the Bath Western Riverside project, the Environment Park and the transportation schemes have not been included.

5.7 For the future, it is proposed that each major project is to maintain a risk register in line with the corporate guidelines. The project leader should review this register and clearly define those risks that are project-specific (and are to be managed by the project leader) and those that are corporate (and can only be managed corporately). The financial assessment of project-specific risks on the register can then be used to guide the MP Director on setting a suitable risk contingency that is specific to each project and part of the overall funded budget. The financial assessment of corporate risks across major projects can then be used to guide the s151 Officer on setting a suitable level for a corporate risk contingency that covers major projects in their entirety, and for determining a mechanism for funding this should calls be made against it.

5.8 From an analysis of the projects, it is possible to divide them into the following broad categories, looking at their funding position and risk exposure:

6.1 The draft financial plan for major projects is based upon:

a) Submissions from project leaders for projects in categories A, B & C (per para 5.8) plus that of the Bath Spa Project due to its contractual commitment) and thereby makes good funding shortfalls for those projects - it should be noted that this breaches the financial planning parameter stated in para 4.3 final bullet point)

b) Existing financial plan provision for category D projects other than the Spa (which in some cases means £nil)

c) Council direct cash investment only - excluding 3^rd party (government and other) contributions, land values and cashflow costs - and net of assumed capital receipts

d) Apportionment of the MP directorate and finance team costs per para 5.3; and assumed accounting treatment per note to Appendix 2

6.2 The notional cost of capital financing costs of the nine major projects to the Council's revenue budget is (provision for repayment of principal plus interest):

6.3 However the Council's investment in major projects must be seen in the context of the Council's overall capital programme and its revenue budget position. Appendix 2 shows the 2004/05 capital programme plus the draft programmes for 2005/06 - 2007/08. This shows, by scheme/programme:

B7 Planned government-supported expenditure by year (funded by grant or credit approvals)

B7 Planned Council expenditure (cash, net of capital receipts)

B7 3^rd party contributions

B7 Property planned maintenance (A31.5M pa including schools)

B7 DDA works (A3500k pa)

B7 Public Service Agreements (A3880k in 2005/06 - final year)

B7 The A35M pa unsupported borrowing allocation set within the Corporate Plan

6.4 The planned financing of the overall capital programme is

B7 Inclusion of extra planned spending on Spa, Stone Mines, Southgate, LTOA

B7 Some slippage from 2004/05 - EPHs, schools

B7 The inclusion of the A32M pa contingency funded now by borrowing as all other capital resources are used to fund the main programme.

6.5 The figures above exclude funding shortfalls on category D projects (other than the Spa) and any other potential schemes. If their additional costs were to be approved then these would add to the projected borrowing requirement for 2005/06 and beyond.

6.6 The Council's ability to borrow under the new Prudential Framework relies on it demonstrating that it can afford to bear the financing costs within its revenue budget. The full borrowing programme (including the category D projects) at current levels of cost and risk, is neither affordable nor prudent. Both risk and expected costs are higher than can be accommodated within prudential guidelines and expected capping limits.

6.7 To lessen the need for borrowing it would be necessary to:

a) Reduce spending within major projects or elsewhere in the programme - this should be considered but clearly there are limited options for doing so, given the risk of not investing in planned maintenance / DDA etc, commitments to projects, and the contribution to Council priorities of programmes such as schools, highways, housing etc; and/or

b) Increase other sources of funding - this too should be considered but assumptions have already been made about RTB sales (at £6M pa, but some evidence that sales are declining) and property developments (£7.5M over the period 2004 - 2007, but there is limited capacity). Sale of income-generating assets may be more expensive than borrowing.

7.1 The Resources Director, as s151 Officer, and Chief Executive, as Head of Paid Service, are highly concerned at the Council's risk and funding exposure on its major projects. The analysis in this report has been discussed with the Projects Programme Board (Councillors Darracott and Hanney) and it has been agreed that, because of the significance of the issues, an early report should be made to the Executive and Council in order to gain a steer for the financial plan.

7.2 It is however important to recognise that the Council has made significant progress in the management of its major projects. In the past year it has:

§ Taken the decision to secure the provision of the services of a Major Projects Director (Mr John Betty who takes up his position full-time from January 2005)

§ Established the Projects Programme Board to oversee and co-ordinate the Council's individual major projects

§ Established project boards for each major project, with non-executive councillors appointed to most individual boards

§ Put in place revised budget management rules for major projects

§ Enhanced its risk management procedures

Indeed lessons have been learnt from the Council's experience with the Bath Spa Project where the Council is exposed to uncapped financial risks. It is imperative that in any future major projects the Council is able to control and limit its risk exposure. Hence it is critical that wherever possible those projects that are currently subject to high risk exposure are reduced to a low level risk before further significant expenditure is committed; and that arrangements are put in place to ensure that lower risk projects remain so.

A risk assessment related to the issue and recommendations has been undertaken, in compliance with the Council's decision making risk management guidance.

9.1 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.

10.1The Review highlights issues for consideration by the Council Executive. Options are described in the body of the report.

11 CONSULTATION

11.1Consultation has been undertaken with Directors, members of the Projects Programme Board and members of the Council Executive.

Appendix 1

Capital Programme Review July 2004 - Resolution

See http://cis/committee_papers/Council/CO040715/10capital.htm

a) To endorse an interim assessment of an adequate level of contingency (including adequate risk assessment) for schemes within the current programme of £10.5M

b) To agree that 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) To agree that 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) To note that 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

e) 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.

f) Note that a recommendation will be made 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)

g) To 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.

h) To 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

i) To 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

j) To 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.

k) To note that the Council Executive wishes to retain the £300,000 unallocated capital sum in the 2004/05 approved budget

l) To endorse the general conclusions in para 6.7 for inclusion in the action plan as appropriate

m) To 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.

Nb: Paragraph numbers and appendix references are to the July Capital programme Review report.