MAYORAL RECOMMENDATION CITY PUBLIC M/6. Director: Ged Fitzgerald Chief Executive. Cabinet Member: Joe Anderson OBE Mayor of Liverpool

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1 MAYORAL RECOMMENDATION CITY PUBLIC M/6 Cabinet Member: Joe Anderson OBE Mayor of Liverpool Director: Ged Fitzgerald Chief Executive Becky Hellard Director Finance & Resources Date of submission: 24th October 2014 Subject: Transition of Liverpool Direct Ltd to City Council Ownership Report No: DFR/25/14 Contact Officer: Becky Hellard Director Finance & Resources 1.0 Executive Summary 1.1 This report sets out the arrangements for the transfer of ownership of Liverpool Direct Ltd (LDL), in accordance with the Cabinet decision of 28 February 2014, and outlines the transition plan and model for the future delivery of services currently provided by the Company. 1.2 The LDL partnership with BT was established in 2001, it was founded on a basis that would set new standards in public service performance, thinking and innovation. 1.3 The contract was refreshed in 2011 which provided an opportunity to re-invigorate the partnership between BT and Liverpool City Council. The partnership has continued to develop and deliver effective services to Liverpool customers as well as delivering strong financial performance. 1.4 In December 2013 both parties agreed to close down the partnership and to transfer ownership of LDL to Liverpool City Council. The mutual agreement by both BT and Liverpool City Council has led to the ability to terminate the partnership without incurring any consequent liabilities. It was seen as being in both parties interests to reflect BT business focus shift away from the public sector service provision market over coming years whilst it also reflected Liverpool City Council s requirement to make further significant budget savings.

2 1.5 LDL has successfully delivered services and service improvement throughout its life. The relationship with BT has been central to this success. BT remains committed to serving residents and businesses in Liverpool and is recruiting a further 240 staff in Liverpool to support the growth of high speed broadband services as well as being a major sponsor of ICT in schools, the Arena Convention Centre and BT sponsored the International Festival of Business this year. 1.6 Liverpool City Council has benefitted from a revenue share of all third party work delivered by LDL. Since the inception of the partnership in 2001the third party contracts won amount to 58.9m earning a 1.9% revenue share for the LCC of 1.54m in accordance with the partnership agreement. This income has been invested in a number of projects benefitting the people of Liverpool including the provision of e- libraries and the benefits maximisation service which helps to ensure that vulnerable people have full access to the benefits that they are entitled to. 1.7 Negotiations have been successfully completed over a 6 month period to complete the transfer of ownership of LDL to Liverpool City Council. This has been underpinned by full validation of the 2013/14 LDL Statement of Accounts and scrutiny of all transactions and charges between BT, LDL and Liverpool City Council for the first 6 months of 2014/15, supported by external advisors KPMG in both the negotiations and the validation process. 1.8 This validation process has led to a revised set of accounts for LDL being submitted to the company s auditors which has significantly increased the level of provisions within the company and ensured that expenditure has been fully accounted for in that year which has in turn been offset against the BT management fee for that period. 1.9 The negotiations have ensured that the company has sufficient cashable assets to cover liabilities as at the balance sheet date 31 March 2014, and further to this, the completion accounts for the 6 month period to 30 September 2014 to ensure that the correct levels of cash are held within the company at the point of transfer of ownership. This has been independently verified by KPMG Following the transfer of ownership, it is anticipated that the integration of services from LDL to Liverpool City Council will deliver budget savings over a 3 year period from totalling 30m. This delivers the best value option for Liverpool City Council, reflecting an internal service delivery model with no further investment requirement from BT and hence no return needing to be paid to BT for such investment A separate legal entity in the form of a company would only be required for significant levels of third party trading. It should be noted that

3 trading with BT to deliver the Security Industry Authority contract to the Home Office will cease on 31 December On this basis Liverpool Direct Limited will cease to trade after the 31 March 2015 (and after the end of the financial year) reflecting the legal periods required to wind down a trading entity. 2.0 Background 2.1 Transfer of Ownership and Cessation of the Company The Cabinet decision of 28 February 2014, endorsed continued discussions and negotiations with BT to secure full ownership of LDL. This has now been completed The ownership of LDL will be fully transferred to Liverpool City Council as at 31 October The timescales have been set to accommodate the detailed legal and financial arrangements required to be fully implemented by that date In order for the transfer of ownership to take place the signed and audited accounts for the financial year 2013/14 and completion accounts for the 6 months up to 30 September 2014 are anticipated to be formally approved by the LDL Board on 29th October External Financial Validation and Due Diligence The Council s acquisition of LDL has been subject to a due diligence and validation process, supported by external specialist advisers. The KPMG report is attached in Appendix 1. This has included: Due Diligence Review of LDL s balance sheet as at its financial year end 31 st March 2014 (as the agreed basis for the acquisition of the BT shareholding in LDL) to ensure that the assets and liabilities of the Company are properly represented at that date, supported by KPMG. Completion of due diligence scrutiny of transactions and charges in Quarters 1 and 2 of 2014/15 and all necessary adjustments made to the accounts The KPMG report identifies that all financial adjustments to the LDL balance sheet as at 31 March 2014 have been resolved and the revised accounts have been submitted to the LDL auditors (PWC). In addition the report confirms KPMG s support in the successful outcomes of the commercial negotiations underpinning the transfer of ownership.

4 2.3 Financial Context The original service delivery model which was refreshed in 2011 was based upon levering in investment needed to achieve the following aims: Reducing costs. Improving the delivery of core services to the citizens of Liverpool. Improving the ICT infrastructure of the Council to enable more efficient working. Increasing investment in services. Creating employment opportunities Local government has seen the largest reduction in public spending since the 1920s at a time when demand for services is increasing significantly due to the impact of economic recession and national policy changes. Liverpool has been among the hardest hit by the reductions in Government funding On 5 March 2014 the City Council set a 3 year balanced budget for the years 2014/15 to 2016/17 approving budget savings options to close a 156.8m budget gap. This is on top of successfully bridging a budget gap of 173.4m from 2011/12 to 2013/14. The result is a total budget saving of 330.2m over the six year period 2011/12 to 2016/17, which is equivalent to a 58.2% reduction in Central Government general grant funding over this period Reductions in Central Government general grant funding for the City Council are almost certain to continue after 2016/17 as both main political parties have committed to further reduce the size of the national budget deficit whilst committing to protect some public services such as Health and Education. Coupled with an increased demand for social care services this will mean that further substantial budget savings will be required from 2017/18 onwards In response to this, reshaped service models are required, particularly for back office functions, focusing on delivering significant ongoing revenue budget savings. 2.4 Next Steps for Services Integration The Company was established with the primary objectives of; reducing costs and building a strong ICT infrastructure with enhanced performance levels. Any future service model must retain the excellent performance levels but continue to reduce costs. Over recent years Liverpool Direct Limited has reduced costs of its own and those of the Council, on a regular basis as set out in table one below and this is planned to continue under the new model:

5 Cash savings Year from m per annum 1 April April April April Table One: Reduced Costs These savings have been achieved in spite of continuing pressure on key services such as Benefit Maximisation received 35.9% increase in referrals in 2013/14 Establishment of the Liverpool Citizens Support Scheme following abolition of crisis loans by the DWP Processing restrictions on benefits for 11,500 Liverpool tenants regarding numbers of bedrooms Processing 14,350 Discretionary Housing Payments amounting to 2.5m reflecting impact of welfare reform Introduction of Council Tax Support Scheme for 45,400 customers Reduction in Council Tax arrears of 34.2m Careline exceeded call answering performance targets answering 92% of calls, with a 5% increase in calls in 2013/14 Contact centre exceeded call answering performance targets answering 93% of calls including a 5% increase in calls in 2013/ Further significant budget savings will now be required going forward. An additional budget saving of 5m in 2015/16 is now required increasing to 10m in 2016/17 and future years. This is in addition to the 5m budget decision in 2014/15. This can only be achieved by; reducing any form of duplication, stripping the organisational costs of running a business, reduced financial impact of being a BT subsidiary and reduced management capacity By 2016/17 the previous LDL Services will operate, in real terms, at 21.5m pa less than A roadmap of full integration into the City Council (to be achieved by 31 March 2015) has been set out within Table (Two) this will be underpinned by transition plans and dedicated resources to ensure successful integration of services from the company to Liverpool City Council:

6 Service Proposed Service Transfer Target Dates Careline Adult Services 31 December 2014 Revenue Service Benefit Service Payroll Service Customer Access ICT Digital Service Human Resources Finance and Resources Office of Chief Executive 31 December March 2015 Commercial Finance and Resources 31 March 2015 Remainder Finance Team Finance and Resources 30 September 2015 Table Two: Roadmap of Integration of Services to Liverpool City Council At this point in time (31 March 2015) it is intended operationally that Liverpool Direct Limited will cease to function as a wholly owned subsidiary operation. The roadmap set out in table 2 above reflects the timeframes required to achieve a successful integration of services to Liverpool City Council over the period to March Further to this, it will take some time to wind up the Company. This is forecast to be completed by the 30 September The Chief Executive of LDL will remain in post until the Company ceases to operate. The costs of the Chief Executive post will be charged to LDL until the point when the post will be disestablished alongside the cessation of operations around March Further rationalisation of the LDL management team will take place in line with the transition of services to Liverpool City Council. The first step in this process has occurred with the integration of the Revenue and Benefits Service under a single Assistant Director post. It is envisaged that other senior management roles will also be disestablished as the transition unfolds A small Team will continue to operate until the 30 September 2015 to complete the close down of the Company.

7 Mayoral Recommendation: That (i) (ii) (iii) (iv) Cabinet confirm approval to the transfer of ownership in accordance with the financial and legal arrangements set out in the report submitted; Cabinet note the service transition and integration roadmap as set out in table 2 of the report submitted; Cabinet note that the Company will be wound up following cessation of trading, with all associated costs to be met from within LDL with a further report to be submitted to Cabinet at that stage; and this report be referred to a special meeting of the Mayoral Select Committee to be held on 29 October Mayor s Priorities This report supports our priority to ensure services are efficient, effective and offer value for money. Corporate Aim(s): We will ensure services are efficient, effective and offer value for money by encouraging innovation and making the best use of our assets and resources. Key Decision: Yes 28 Day Notice: No. Reason if not in 28 Day Notice: The proposal for consideration reflects ongoing commercial and technical discussions, the process and outcome for which has meant that there has been insufficient opportunity to provide 28 days notice of the proposed decision. Inclusion in Urgency Notice: Yes. Implementation effective from: 31 October 2014

8 Timescale for action: 31 October 2014 and in accordance with the timetable set out in the report submitted. Reason(s) for Recommendation: Both parties have agreed to close down the partnership and to transfer ownership of LDL to Liverpool City Council reflecting the business needs of BT s business shift from the public sector service market and the city council s requirement to make significant budget savings. The mutual agreement by both BT and Liverpool City Council has led to the ability to terminate the partnership without incurring any consequent liabilities. The most effective service delivery model for the delivery of services will be the in-house delivery model, given that there will no longer be a requirement for a trading vehicle to be in place and there will be sole ownership by Liverpool City Council. Alternative options considered: 1. Continuation of the Joint Venture Company. This would be required if joint ownership were to continue. 2. Local Authority Trading Company model. This would be required if significant levels of trading were to continue. Neither of these options would deliver the level of budget savings identified in this report. Consultation including consultation with Ward Councillors and outcome: Consultation has been undertaken with the Mayor and Cabinet Members. Financial implications (Efficiency Savings): Liverpool City Council will pay consideration of 60 for BT s 60% shareholding in LDL, based upon the balance sheet as at 31 March The Council s acquisition of LDL has been subject to a robust due diligence and validation process supported by external specialist advisers KPMG who endorse that the Council is meeting its best value obligations in this regard. This has included: Due diligence review of LDL s balance sheet as at its financial year end 31 st March 2014 to ensure that the assets and liabilities of the

9 Company are properly represented at that date. KPMG s executive report is attached at Appendix 1. Full due diligence scrutiny of transactions and charges in Quarters 1 and 2 of 2014/15. All transactions have been validated and all necessary adjustments have been made. A tax covenant will provide the Council with indemnity against the potential for any tax liabilities relating to periods before it took control of the LDL. All costs associated with the change (including staff reductions and transition) will be funded by LDL. Legal implications: The cessation of the Joint Venture and the transfer of ownership of LDL to the Council requires the execution of a number of legal documents which have been drafted on behalf of the Council by external legal advisers, DLA Piper, in conjunction with the City Solicitor Further legal documentation will be required to be filed at Companies House at the time of the winding up of LDL. Risk Management: External advisers (KPMG and DLA Piper) have been engaged to identify any financial or legal risks attached to the transfer of ownership and have advised in order to minimise such. Operational risk has been addressed by the drawing up of detailed transition plans. Equality implications/equality Impact Assessment: There are no direct equality implications from the transfer of ownership. All equality implications associated with service integration will be addressed within the transition plans. Climate Change Strategic Framework and Climate Change Adaptation Framework: None. Budget and Policy Framework: This has been addressed within the financial implications. The implications are within the budget and policy framework.

10 Report attached: Appendix 1 KPMG Final Report LDL