PART 1
(OPEN TO THE PUBLIC)
ITEM NO.
JOINT REPORT OF THE DIRECTORS OF CORPORATE SERVICES AND DEVELOPMENT
SERVICES
TO : THE LEAD MEMBER FOR CORPORATE SERVICES, MONDAY 16th JUNE 2003
SUBJECT: LIFT PROJECT AFFORDABILITY
(version 3b)
RECOMMENDATIONS:
Lead Member is asked to note the contents of the report, in particular:
i) the potential cost of LIFT of up to £ (based on the assumptions herein)
ii) the uncertainty of other funding to meet that cost;
iii) that any additional requirements, such as additional Social Services facilities (para )
or community space (para ) will push this cost up.
Lead Member may wish to consider the level of financial commitment
EXECUTIVE SUMMARY:
LIFT represents an opportunity to redesign the Council’s interface with the public and
to provide services in high-standard accommodation, while transferring the design,
build, finance and operating risks to the private sector. It is hoped that synergies of
placing various Council and health services in one location will lead to increased and
enhanced public use overall. This report gives an update on the estimated cost to
the Council of the LIFT project.
The cost of accommodation for placing services in LIFT centres, at £184/m2/pa, is
substantially greater than the comparable current accommodation cost of £99/m2/pa.
However, it is less expensive than the Council undertaking the building programme
itself (were there funds available), at approximately £200/m2/pa - and therefore, on
the face of it, represents good value for money. (para 3.1)
The additional cost to revenue of placing the services in the LIFT centre would be
£737,367pa (para 4.4). This cost can be partly addressed by utilising capital receipts
received from the sale of land to the LIFT Co and other measures. This would leave
an affordability gap of £645,527pa (para 5.3).
There is a case for redesign of the LIFT contract for two specific areas where the
contract is disadvantageous to the Council. Adressing these issues would reduce
the affordability gap to between £334,580pa and £pa (para 6.1).
The remaining affordability gap would have to be met by efficiency savings across
other Council services, unless it is possible to obtain additional funding by pursuit of
grant, credit approval or PFI.
BACKGROUND DOCUMENTS:
Various working papers and reports.
CONTACT OFFICERS: Chris Hesketh; Steve Durbar
Tel. Nos. 793 2668; 793 3755
E-mail: chris.hesketh@salford.gov.uk; steve.durbar@salford.gov.uk
ASSESSMENT OF RISK: High. The Council will shortly be expected to sign up to a space
requirement before the availability of alternative funding can be determined with certainty.
SOURCE OF FUNDING: Revenue budget. PFI is also considered as a possible
source of funds.
LEGAL ADVICE OBTAINED: Not applicable for this report. When appropriate, the LIFT
officer working group is advised by a Law & Administration Division representative.
FINANCIAL ADVICE OBTAINED: This report has been part-produced by officers of the
Finance Division of Corporate Services.
WARD(S) TO WHICH REPORT RELATE(S)
All
KEY COUNCIL POLICIES




Budget Strategy
Salford Partnership Community Plan 2001 – 2006
Pledge 3 A Clean and Healthy City
Annual Library Plan
 Charlestown and Lower Kersal New Deal for Communities
REPORT DETAIL
1. INTRODUCTION
1.1 There are six Salford sites in the first wave of LIFT. There is the potential in the
project plan for Salford City Council to locate certain services in four of the sites.
This includes one-stop shops at each of the four sites, libraries in three and a
Social and Community Services team at one. This report examines the cost
consequences of so locating the various services.
1.2 Owing to developments in joint health and social services, there is a reasonable
expectation that further Social Services functions could be located at LIFT sites.
The potential cost of this is not covered in this report.
2.
CHANGES FROM PREVIOUS VERSIONS
2.1 Compared to versions 1 and 2, it is possible to be a little more confident about
some of the assumptions in the body of the report, particularly in relation to the
Swinton scheme, where work is the most developed. However, nothing is
certain until financial close, and the figures should still be taken as being
indicative rather than exact.
2.2 The following are changes from versions 1 and 2 of this report:a) All figures are based on the successful bidder’s (Excellcare’s) submissions.
b) It is now anticipated that the ‘B’ submission option will be built into the
leaseplus agreement. This option involves GPs sub-letting on a PCT headlease and results in a lower unitary charge.
c) It is now anticipated that the final leaseplus agreement will be a contract over
25 years, rather than 20, which results in a lower annual unitary charge but
commits the Council for a longer period.
d) The analysis of space occupied at the Swinton site has been revised. The
Council now has less space directly allocated to it, but more indirect space
apportioned to it. The net result is favourable.
e) Capital receipts re-estimated on latest valuations.
f) Subordinated loan effect recalculated over 25 years.
g) Core team costs now included.
h) Radio mast loss of income now included.
i) Community space and New Deal for Communities introduced.
2.3 PCT and Council officers are currently working on detailed analyses of space to
be occupied at the non-Swinton sites along the lines of 2.2d) above, so further
refinement of the figures will become available. In the interim, less accurate
estimates continue to be used.
3. VALUE FOR MONEY
3.1 Table 1 (taken from Appendix A) compares the accommodation cost per square
metre of the following:a) current service provision;
b) current service provision, after carrying out backlog maintenance to bring the
facilities to a good standard;
c) provision of the services in new accommodation, purpose-built by the Council;
d) providing the services in LIFT centres.
Table 1: Cost per square metre
Alternative
a)
b)
c)
d)
Council existing
Council addressing backlog
maintenance
Council new build Library
Office
One-stop Shop
LIFT lease charge
Cost
£/m2/pa
99.00
106.50
214.00
180.00
186.00
184.00
3.2 It can be seen that the cost per square metre of LIFT is substantially greater than
the existing cost of service provision, but roughly equivalent to the Council
undertaking the building programme itself (were there funds available).
3.3 Note however that the LIFT building plans do contain a greater proportion of
common or circulation space than would be expected of Council buildings.
4. LIFT COST BUILD-UP
4.1 Lease Plus Charge
The LIFT scheme is analogous to a DBFO (design, build, finance, operate) PFI
scheme – the intention being to transfer the risk in all those areas from the public to
the private sector. Rather than owning and operating the building itself, the Council
will lease space. The lease plus is a unitary charge, levied monthly, per square
metre of space let and in return the Council will receive modern accommodation
maintained to a very high standard.
The lease plus cost is calculated at £908,935pa. Comparable revenue and capital
charges of the existing services are £328,902pa (see Appendix B).
4.2 Pass-Through Costs
The Lease Plus Agreement does not provide for the payment of certain
accommodation costs, which will have to be met by the lessees. These include
furniture and fittings, IT equipment and infrastructure, and ‘soft’ facilities management
(FM) services such as cleaning, refuse disposal, security and caretaking. This report
considers the effect of these to be cost-neutral, as they have to be provided in
current service provision. However, in practice it is expected that there will be an
additional cost associated with an upgrade in services.
In addition, the Lease Plus Agreement provides for certain costs to be met by LIFT
Co initially, but to be ‘passed-through’ to the tenants in the form of a supplement to
the lease charge. These costs include insurance, utilities and rates. The invitation to
negotiate specified the levels to be used in the bids, but it is likely that the actual
charges will be different. Bidders resubmissions are to include more accurate
estimates of the likely pass-through costs. It is estimated that there will be an
additional cost over existing services of £264,187pa, partly offset by savings of
£82,961pa (Appendix C).
4.3 One-Stop Shops
The four sites include one-stop shops with associated waiting/information areas.
These are at the same time the front desk of both the LIFT building and other Council
services. This represents a significant redesign and enhancement of existing Council
services at the interface with the public.
It is anticipated that the Council will recharge the PCT for the use of this front desk in
proportion to the number of enquiries taken. In the absence of any accurate data,
this report estimates that the recharges will total 50% of the cost of the space. This
has been reflected in the floor area calculations in Appendix B. It should be
recognised that this is a very rough estimate.
Furthermore, the movement of staff into the LIFT site could result in space savings at
the present location of those staff. For the purpose of this report, these recharges
and savings are estimated at £40,000pa (see Appendix D).
4.4 Net Additional Cost to Revenue
Table 2 below demonstrates that the additional accommodation cost of providing the
services in the LIFT centres is £737,367pa, compared with existing service provision.
Table 2: Additional annual revenue costs
Item
add
add
less
less
less
LIFT lease
pass-through costs
central costs
current costs, Council library/office provision
Current costs, rates, insurance, utilities
savings on current space
Net additional cost in LIFT
Cost
£pa
908,935
264,187
16,108
(328,902)
(82,961)
(40,000)
737,367
Notes
see appendix B
see appendix C
see appendix H
see appendix B
see appendix C
see appendix D
1.1 Community Space
Each of the four sites contains community rooms. It will be necessary to discuss with
PCT colleagues how this space might be paid for. Appendix J shows that the total
cost of this space amounts to £pa. Pending the outcome of these discussions, no
part of this cost has been included in the affordability calculations in this report.
In addition, the Douglas Green and Lower Kersal sites, which otherwise have no
Council space, contain community space. It is expected that this space can be
funded by New Deal for Communities monies for ten years. Negotiations are
pending to determine if the Council and PCT can underwrite the cost of this space for
the period subsequent to the funded ten years. No part of the potential cost of this
has been included in the affordability calculations in this report.
5. MEETING THE COST
5.1 Capital Receipts
Capital receipts of £2,001,000 are estimated from the sale of Council properties to
provide first phase LIFT sites (see Appendix G). Ways of using these receipts to
help fund the additional revenue costs are being investigated. The simplest method
would be to amortise this receipt over the 25-year life of the project, in the form of a
reduced lease charge. This would result in an amount of £80,040pa to set against
the lease charge.
Of course, the use of capital receipts in this way would preclude their use to support
other capital schemes.
5.2 Subordinated Debt
The Council has approved in principle the purchase of £1,800 of shares in LIFT.
Potentially more significant financially is the opportunity to make a ‘subordinated
loan’ to LIFT Co. Current proposals indicate that the loan on first phase schemes
could be £148,000 at an interest rate of 14%, which is substantially higher than other
investment opportunities, at a relatively insignificant risk.
Appendix E demonstrates that making such an investment could generate £11,800pa
to offset against the loan charge. However, as such a loan is not an 'approved
investment' of the type undertaken for treasury management purposes, £148,000 of
capital receipts would have to be set aside to provide credit cover (diverting
resources from other capital projects).
5.3 Affordability Gap
Table 3 shows that, after applying capital receipts and investment interest to the LIFT
scheme, there would still be a revenue shortfall of £645,527pa to be found from other
measures.
Table 3: The affordability gap
Item
less
less
Net additional cost in LIFT
Utilisation of capital receipts
Assignment of investment interest
Affordability Gap
Cost
£pa
737,367
(80,040)
(11,800)
645,527
6. FURTHER MEASURES
6.1 Negotiation of the lease contract
There are two areas where the LIFT contract is disadvantageous to the Council in
relation to other partners, these being the non-differential lease charges and the
treatment of common space (explained Appendix F).
The non-differential lease charge contributes £101,892pa to the cost of LIFT, while
the excess of floor space contributes £209,055pa.
It appears that the PCT may be amenable to making a payment to adjust the lease
cost in respect of the former, although they may be less inclined to accommodate the
Council over the second issue.
The effect on the affordability gap of a successful negotiation in respect of these
items is shown in table 4 below.
Table 4: Negotiation Points
Item
less
Affordability Gap
Differential lease charge at 11.2%
Cost
£pa
645,527
(101,892)
Notes
less
Common and circulation space at 15%
To be met from grant aid or efficiency savings
(209,055)
334,580
6.2 Central Funding
It may be possible to secure additional resources in the form of grant aid, credit
approvals or PFI funding to help make LIFT affordable. At the moment, no such
assistance is evident so this would require a political approach.
In 2002, ODPM invited applications for PFI funding to support Joint Service Centres,
the nature of which appears to fit with schemes of the nature of LIFT. Unfortunately,
the timescale did not, as the deadline for applications was 3 January 2003. It is likely
that a similar invitation will be extended later in 2003 for 2004/05 PFI schemes, but
this may be too late for phase 1 LIFT schemes. Typically, successful application for
PFI credits results in special revenue grant intended to cover the capital costs of the
scheme – estimated at 70% of the NPV of the total costs.
6.3 Efficiency Savings
The LIFT proposals are not cost-saving measures in their own right. The proposals
represent an enhancement of library and one-stop provision in the City, at a
substantial cost. After other measures to close the affordability gap have been
exhausted, the balance can only be met by making efficiency savings in other
services as part of the budget exercise.
Appendix A: Value for Money
Table 1: Comparisons on a Cost per Square Metre Basis
Alternative
a
b
c
d
Council existing
Council addressing backlog
maintenance
Council new build Library
Office
One-stop Shop
LIFT lease charge
Cost
£/m2/pa
99.00
106.50
214.00
180.00
186.00
184.00
Notes
1) The LIFT cost is the lease charge per square metre of bid B (GP sub-leases, 25year contract). While the cost per sq m is similar to Council build, it should be noted
that the LIFT buildings will be less ‘efficient’ than Council buildings in their proportion
of circulation space.
2) The Council costs include revenue costs and capital costs. The capital costs
have been amortised and include the cost of borrowing.
3) The figures exclude insurance, utilities and rates. See Appendix C.
4) The figures exclude soft FM services, i.e. cleaning, refuse disposal, security &
caretaking.
5) The LIFT Lease Plus contract allows the lease charge to be increased each year
by RPI. The Council figures would increase each year as running costs increase
each year.
6) There are some differences in the Council’s existing costs between this and
Appendix B, owing to different sources used. These differences are not material to
the overall outcome.
Sources
Costings of Group Leader (Quantity Surveyors)
Working papers of Principal Strategic Property Surveyor
LIFT bid submissions
Appendix B: Accommodation Cost
Projected Additional Revenue Budget Requirements
Location
Walkden
Pendleton
Swinton
Eccles
Total
Existing
Services
library
library
library
offices
Existing
Area
m2
597
860
1,500
650
Current
Costs
£pa
37,476
68,445
190,992
31,989
3,607
328,902
LIFT
LIFT lease
area
cost
m2
£pa
1,104
203,216
1,495
275,077
1,477
271,750
864
158,892
4,940
908,935
Notes
1) For all schemes, the LIFT site includes the additional provision of a one-stop
shop and waiting area/information lounge. It is expected (based on Swinton floor
area analysis) that these will take up 270m2 of space at each site. However only
50% of this space has been included, as costs will be rechargeable to the PCT in
proportion to enquiries handled. There is no data to support this split, so 50% is
a very rough estimate.
2) LIFT floor areas include estimates (based on Swinton floor area analysis) of
overhead space chargeable to the Council.
3) The LIFT cost is the lease charge of bid B (GP sub-leases, 25-year contract).
4) For the Social Services offices in the Eccles scheme, it is assumed that space
reduction down to 8m2 per person will be achieved.
5) The figures exclude insurance, utilities and rates. See Appendix C.
6) The figures exclude soft FM services, i.e. cleaning, refuse disposal, security &
caretaking.
7) The LIFT cost figures will be increased each year by RPI.
8) There are some differences in the Council’s existing costs between this and
Appendix A, owing to different sources used. These differences are not material
to the overall outcome.
Sources
Working papers of Principal Strategic Property Surveyor
SAP GL
LIFT bid submissions
Appendix C: Pass-Through Costs
The figures in Appendixes A and B exclude soft FM services, i.e. cleaning, refuse
disposal, security & caretaking. These are assumed to be cost-neutral between
Council and LIFT provision.
The figures in Appendixes A and B exclude insurance, utilities and rates. These are
‘pass-through’ costs, which LIFTCo will settle, then add on to the Unitary Charge in
order to obtain reimbursement from the tenants. Within the LIFT assessment
process these were given estimated costs shown as ‘LIFT estimate’ in the table
below. However, it is considered that the figure estimated by Council officers and
shown as ‘LIFT revised’ is likely to more accurately reflect the actual charge. The
table also shows estimated ‘current’ costs.
Table C
Current
£/m2/pa
LIFT estimate
£/ /pa
5.00
12.00
12.00
29.00
LIFT revised
£/m2/pa
7.00
12.00
28.00
47.00
Insurance
Utilities
Rates
Total
£/m2/pa
£/m2/pa
£/m2/pa
£/m2/pa
5.00
6.00
12.00
23.00
Floor area*
m2
3,607
5,621
Total cost
£pa
82,961
264,187
*Appendix B
Appendix D: One-Stop Shops
a) (Re)charges
This section of the report has now been removed. Recharges of one-stop shop
space are dealt with in note 1 to Appendix B.
b) Savings on existing use
The one-stop shops do represent a service enhancement and growth item.
However, it is assumed that the relocation of staff from existing locations will result in
some accommodation savings at those locations. A notional saving of £40,000pa, in
line with earlier versions of this report, is used herein.
Appendix E: Calculation of Additional Interest on LIFT Subordinated Loan
Loan
Interest
Base Int
RPI
Interest
Receivable
£
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Total
Average
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
20,720
£148,000
14.0%
4.0%
2.5%
Less
Interest
at Normal
Rate
£
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
5,920
Additional
Income
NPV
£
£
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,800
14,439
14,087
13,743
13,408
13,081
12,762
12,451
12,147
11,851
11,562
11,280
11,005
10,736
10,474
10,219
9,970
9,726
9,489
9,258
9,032
8,812
8,597
8,387
8,183
279,498
11,180
£11,180 represents the average extra annual income (at current costs) that would be
generated by placing £148,000 investment in LIFT Co at 14% for 25 years, as
compared with an investment elsewhere at 4%.
Appendix F: Non-differential lease charge and common space
a) Differential Lease Charges
The cost to LIFT Co of constructing and maintaining certain complex spaces (such as
specialist health theatres) is greater than simpler spaces (such as offices). Equitably,
this difference would be passed on to lessees by differential charges depending on
the type of space let. However, instructions from Partnerships for Health for LIFT
projects nationally are that the unitary charge is to be applied equally to all spaces
within the buildings. Work done by Salford PCT suggests that the effect of this will
be that Salford City Council pays more than would otherwise be the rate for its space
and effectively subsidises other lessees by 11.2% of its lease cost. The cost of this
is £101,892pa, incorporated into the lease charge.
b) Common and Circulation Areas (Overhead Space)
Because of the nature of their respective buildings, the PCT normally expect the
proportion of overhead space (toilets, corridors etc) in new build to be about 30% of
gross internal floor area, while Salford City Council would expect only about 15%.
Current findings suggest that the sample-bid LIFT designs incorporate a proportion of
38%.
As the cost associated with this space is absorbed into the unitary charge, this
means that the Council would effectively be paying for a space provision it would not
have had to make had the building been a Council-purpose-only design. The cost of
an extra 23% of space is £209,055pa, incorporated into the lease charge.
It is not now expected that it is viable for the PCT to consider rebating the Council for
this space.
Appendix G: Estimated Capital Receipts
Site
Swinton
Eccles
Walkden
Pendlebury
Total
Estimated Receipt
Comment
£
1,100,000
268,000
198,000 In dispute.
435,000 Own estimates of library plus police
building. Car park excluded
because of potential issues
2,001,000
Over 25 years, equivalent to £80,040pa.
Note
Valuation negotiations are still proceeding. At sites where the anticipated value of
the total receipt is least certain, a figure has been included which is lower than the
Council ultimately expects to receive.
Appendix H: Central Costs
Core Team
A MAST LIFT Central Project Team is to be created to support the LIFT Strategic
Partnering Board and local partners generally. The budget for 2003/04 is £345,100,
to be funded by the partners. The accepted option for apportioning the budget
results in a cost of £6,858 to Salford City Council in 2003/04. Future commitment is
certain but costs are as yet unspecified. For the purpose of this report, future costs
are anticipated to remain the same ie £6,858pa.
Telephone Masts
The Council has a contract worth £pa to allow telephone masts on the current
Lancastrian Hall site. Originally, it had been assumed that the masts would be
transferred to another Council building so that the Council would retain the income. It
is now anticipated that the masts will be replaced on the new LIFT building and
LIFTCo will gain the benefit of the income of £9,250pa.
(There is no Appendix I)
(There is no Appendix I)
Appendix J: Community Space
Projected Costs
Location
LIFT area
base
m2
LIFT area
incl overhead
Walkden
Pendleton
Swinton
Eccles
200
160
160
160
Total
680
LIFT lease
cost
£pa
Notes
1. Overhead space is included in the proportion of that applicable at the Swinton
site.
2. Space at Douglas Green and Lower Kersal is not included. It is anticipated that
there may be a cost to the Council (and PCT) after the ten years’ of New Deal
funding expires.