Tariff Risk Management Plan

Transcription

1 Tariff Risk Management Plan June 2012 Table of Contents EXECUTIVE SUMMARY... PRINCIPLES OF THE TARIFF...2 SUCCESS OF THE TARIFF...4 LEGAL REQUIREMENTS FOR DELIVERY...7 CURRENT HEADLINE TARIFF POSITION...7 ONGOING RISKS IN THE TARIFF AND CURRENT ASSESSMENT OF THESE RISKS...7 RISK SHARE AGREEMENT...13 THE COUNCIL S APPROACH TO MANAGING THE TARIFF...14 Strategic Planning and prioritisation 15 Management of the Tariff 16 Management of individual schemes 17 Procurement process 18 Reporting Arrangements 18 STRATEGY FOR MITIGATING RISKS IN THE TARIFF...19 Extending the long stop date 19 Engagement with Land Owners 20 Management of projects 21 Indexation 21 Potential adjustment to schemes in the current Tariff plan 24 Schemes linked to housing delivery 28 Engagement with other public sector bodies 29 Cashflow management 29 ASSESSMENT OF CURRENT CONTINGENCY...30 PROCESS FOR MANAGING RISK USING CONTINGENCY...30 BIENNIAL RISK REVIEW PROCESS

2 Executive Summary The Milton Keynes Tariff is a unique programme designed to forward fund 310m of infrastructure in order to enable development. To enable the new town to expand, the HCA supported by the Council agreed with land owners, that a guaranteed fixed levy per home built or a per square metre of employment land developed created, would be paid rather than negotiating individual Section 106 agreements. The current position on the Tariff is as follows: Cash position ( m) Works in Kind ( m) Total ( m) Expenditure Income (24.299) (24.299) Works in Kind Redeemed (1.346) (1.346) Net position To the end of 2011/12 the HCA have spent or committed through works in kind, 61.7m of expenditure on the Tariff, which is 20% of the total expenditure under the Tariff programme. This excludes any agreements which have been made in relation to the 2012/13 Tariff programme As with any substantial, long-term forward funding arrangement, there are a number of risks inherent in the operation of the Tariff mechanism. The Council has a much smaller capital programme than the HCA, and the potential implications of the risks in the Tariff could not be managed within this resource. As a result in order to transfer the Tariff arrangement to the Council, alongside the Development Control Functions, the potential risks in the Tariff needed to be quantified and a plan developed and agreed with DCLG to mitigate these risks. This plan outlines the potential risks in the Tariff, outlines a strategy to mitigate against these risks and agrees an approach for the Council, DCLG and HCA to regularly review this position. Any proposals to change the Tariff business plan will be subject to consultation with land owners and developers. This consultation is planned for later summer/ early autumn. Before agreeing to manage the operation of the Tariff the Council required a risk share arrangement for any final deficit arising from the Tariff operation. Any final deficit on the Tariff will be shared in the proportion: HCA: 10m DCLG: 5m MKC: 7m Any remaining risk above the 22m risk share above will be met by the Council. The review of the Tariff has resulted in the identification of 49m of potential risks to income or additional costs not included in the current expenditure plan. The most significant risk is due to the potential loss of Tariff income for the Strategic Reserve Areas, which are now unlikely to be fully consented under Tariff, and are more likely to be consented under the Community Infrastructure Levy. As green field sites the infrastructure costs for these sites are likely to be above the average CIL justifiable for the remainder of Milton Keynes, which is also less than the Tariff charge. The Tariff was only intended to fund 75% of the cost of development, with other funding sources contributing the remainder to ensure infrastructure can be delivered. In previous years the majority of the additional funding for the Tariff has been through Government grants. 66m of other funding is required to deliver the infrastructure requirements set out in the Tariff programme to support the delivery of growth in Milton Keynes. The Council, through its LIP will identify how these schemes can be funded to ensure sustainable growth can be achieved. 2

3 This plan outlines a strategy to develop a contingency fund, through potential efficiency savings in some Tariff contributions, Tariff underspends and unapplied indexation, which will only be released as risks reduce. In addition a couple of large schemes could be deferred until the Tariff funding position identifies that contributions can be made. This strategy will need to be part of the consultation with land owners and developers. At present 46m of potential risk mitigations have been quantified, as follows: Underspends on current Tariff projects Current unallocated indexation Reduction in scheme costs Deferral of lower priority schemes Schemes linked to housing Funding for Tariff running costs Efficiencies in running costs Total proposals to mitigate risks nil at present m 4.382m m 1.365m 2.000m 0.100m m The Council will develop robust procedures for the management of the Tariff alongside its current capital programme, to both provide assurance in the management of delivery of the Tariff and to create efficiencies in public sector processes. This plan also confirms the Biennial Risk Review process which will take place between the Council, DCLG and HCA to review the risks and the mitigation strategy in the Tariff to provide assurance to support the risk share agreement. Principles of the Tariff The Milton Keynes Tariff is a unique programme designed to forward fund 310m of infrastructure in order to enable development. To enable the new town to expand, the HCA supported by the Council agreed with land owners, that a guaranteed fixed levy per home built or a per square metre of employment land developed created, would be paid rather than negotiating individual Section 106 agreements. The Tariff either funds or makes contributions to a wide range of infrastructure investment including expanding capacity on Motorway junctions and the Central Railway Station on the West Coast Mainline, to contributing to schools, voluntary services and community facilities for the new inhabitants while also ensuring that development can proceed by funding drainage works, roads and open spaces. The Tariff was fundamentally designed to ensure that housing and economic growth in Milton Keynes could continue, creating a sustainable and vibrant community which would deliver both local and national policy aspirations. Land owners have agreed to Tariff payments which deliver this long-term vision for Milton Keynes. The objectives of the Tariff as agreed by Treasury in 2005 are to: Provide for sustainable growth at a lower cost to the public purse through private sector contributions to the cost of infrastructure. Provide local communities with stronger assurances that community infrastructure, roads, schools and other facilities will be provided in a timely way as new communities are developed and expanded. Reduce barriers for land owners and developers in obtaining planning permissions and secure from them contributions to community and strategic infrastructure that will support and deliver an increased supply of housing and employment opportunity. 3

4 The Tariff payment profile for residential development is for a contribution of 10% of the Tariff payment when an implementable consent is given, 15% of the Tariff payment prior to start on site with the remaining 75% on completion of the property. For employment development 25% of the Tariff is paid on implementation of a consent, 25% on practical completion and the final 50% on first operational occupation. In return for a fixed Tariff levy the HCA under best endeavours and reasonable endeavours agreements undertook to provide both strategic and local infrastructure based on a Tariff business plan. The Tariff business plan agreed forward funding of infrastructure to enable development to take place, the HCA also agreed to meet the management costs of the Tariff as part of its ongoing role of promoting development in Milton Keynes. The Tariff agreement was signed in 2007, with an end date (long-stop date) of At the long-stop date land owners will need to pay their full Tariff payments regardless of whether an asset has been developed. The operator of the Tariff will have 5 years from the long-stop date to use all income on the Tariff in line with the agreed business plan or Tariff contributions will need to be repaid to land owners. The requirements to pay the Tariff are usually agreed with a developer at the time of granting the Outline Planning Consent (as a condition of the planning consent). As with any section 106 agreement, the Tariff cannot make a surplus only spend the contribution received in accordance with the agreement. Success of the Tariff The principles of the Tariff identify that the Tariff will be successful if: Sustainable growth is achieved, with significant contributions from the private sector. The population continues to grow, and is generally happy with the services available in the area Planning permissions are received and there is sufficient confidence from developers to build, enabling further growth. Milton Keynes has achieved significant growth over the period since the Tariff began. Graph 1 below shows that the population of Milton Keynes has continued to grow, supported by the Tariff. This rate of growth has been consistently high even compared to other areas, which are also considered to be growth areas. 4

5 Graph 1: Total Population 2005 to , , , , , , ,000 Nottingham Milton Keynes York Peterborough Plymouth Luton Bath & NE Somerset Stockton-on-Tees Medway 190, , , Year The Tariff has so far delivered 24.3m of private sector cash funding and 14.9m of works in kind to contribute towards public sector growth. The work the Council has undertaken to start in the planning of its Community Infrastructure Levy shows that the contributions from the private sector through the Tariff exceed the usual S106 contributions from other areas of the country. This is the main reason the introduction of the Community Infrastructure Levy poses a significant risk to the Tariff. Milton Keynes has a track record of high housing growth, a significant proportion of which has been supported by the Tariff. Graph 2 shows the number of new houses built in Milton Keynes compared with its statistical neighbours. It outlines that Milton Keynes has the highest growth amongst its statistical neighbours and while there has been a decrease due to the current economic climate housing growth has continued and has produced more new dwellings than any other district. 5

6 Graph 2: Number of Housing Completions 2005/6 to 2010/11 2,500 2,000 Completed Dwellings 1,500 1, Milton Keynes Nottingham Peterborough Stockton-on-Tees Medway York Plymouth Luton Bath and North East Somerset /6 2006/7 2007/8 2008/9 2009/ /11 Year The Tariff also includes employment space, which is designed to ensure that growth is sustainable, ensuring that additional work is created alongside housing growth. Graph 3 also shows that employment has increased during the period of the Tariff, even when compared with other growth areas. Graph 3: Total Employees 2005 to , , , ,000 Employees 120, ,000 80,000 60,000 40,000 20, Year Nottingham Milton Keynes York Plymouth Peterborough Medway Luton Bath and North East Somerset Stockton-on-Tees The Council under takes a public satisfaction survey on an annual basis. While the results are partially impacted by national economic conditions, the overall level of satisfaction in Milton Keynes is relatively high at 85.9% for 2011/12. Overall satisfaction levels for the last 4 years have been as follows: 6

7 Table 1: Public Satisfaction Levels with Milton Keynes /12 Overall/general satisfaction with local area (%) Legal Requirements for Delivery These principles of the Tariff agreed with land owners, are key to the risk mitigation arrangements for the Tariff. Legal advice on the best and reasonable endeavours covenants included in the Tariff Framework Agreement has identified the potential for land owners to challenge the Tariff operator in relation to delivery of infrastructure as set out in the Tariff business plan. There is no clear legal precedent for the outcome of a legal challenge due to the unique structure of the Tariff agreement. However, it is clear that a legal challenge would delay growth and create significant financial and reputational risk to the Tariff operator. This document therefore sets out the proposed approach to mitigating the risks in the Tariff, whilst remaining within the principles of the Tariff agreed with land owners. Changes made to the Tariff will need to be incorporated into a revised Tariff business plan, which is then subject to consultation with land owners/ developers. Under public law duties the Tariff operator must have due regard to any responses to the consultation. Changes to the business plan could not prevent development, where planning permission has already been granted and Tariff contributions are expected. It is intended that future revisions to the Tariff business plan are incorporated as part of the update of the Local Investment Plan (LIP), which covers the total investment needs for growth in Milton Keynes, with the Tariff being part of the potential funding solution. Current Headline Tariff Position The current position on the Tariff is as follows: Table 2: Current Headline Position on the Tariff Cash position ( m) Works in Kind ( m) Total ( m) Expenditure Income (24.299) (24.299) Works in Kind Redeemed (1.346) (1.346) Net position To the end of 2011/12 the HCA have spent or committed through works in kind, 61.7m of expenditure on the Tariff, which is 20% of the total expenditure under the Tariff programme. This excludes any agreements which have been made in relation to the 2012/13 Tariff programme. In comparison only 8% of the income (including the use of works in kind credits) has been collected. While this is entirely consistent with the Tariff profile and the purpose of forward funding infrastructure, the proportion of expenditure already committed and the remaining income profile must be considered in assessing the risks in managing the Tariff. Ongoing Risks in the Tariff and current assessment of these risks The Tariff is a 15 year (currently) 310m forward funding model based on S106 agreements to ensure that adequate infrastructure is provided in Milton Keynes to enable development and deliver a sustainable 7

8 community. The size of the programme and the agreed length of operation, means risk is inherent in this programme. In reviewing the current Tariff position a number of risks have been identified. The majority have and will continue to be present in the Tariff throughout its period of operation. But the changes to the national planning legislation have created an additional risk. This section sets out the risks currently identified in the Tariff and the current assessment of the potential financial impact of these risks. The remainder of this Risk Mitigation Plan sets out how these risks may be managed throughout the remaining life of the Tariff to minimise any financial impact under the Risk Share Arrangement. The level of risk in the Tariff and its potential financial impact will be regularly reviewed by the Council, as part of its robust programme management framework to inform decision making. It will also be formally reviewed on a biennial basis with the HCA and DCLG as part the formal risk review, this process will be referred to as the Biennial Risk Review. Risks can be categorised into those which would create a final deficit on the Tariff and those which will impact on the cashflow funding requirements of the Tariff. The current key risks which could create a deficit on the Tariff, and the current assessment of the resulting financial risks are as follows: Outstanding planning consents and the impact of the Community Infrastructure Levy potentially 92m of income would be at risk under CIL, a risk assessment of this risk reduces the impact to 36m based on the current estimated CIL. Infrastructure needs in Milton Keynes are not met by the 75% Tariff contribution - 66m (which was beyond the original Tariff profile, but will affect the ability to deliver sustainable growth in Milton Keynes). Works in Kind Tariff credits have been allocated at full cost not based on 75% Tariff contribution - 6m. Inflationary pressures on the costs of delivering Tariff projects compared to income no final impact currently estimated. Developer default on payment of Tariff contributions - 5m. Land owner challenge to the Tariff no final impact currently estimated. Requirements of the current funding agreement no final impact currently estimated. Costs of managing the Tariff - 2m. The current key risks which could impact on the cashflow requirements of the Tariff are as follows: Economic context nationally and impact on growth. Demand for employment floor area. Developers elect not to deliver infrastructure through Works in Kind. Total current financial risk in the Tariff = 49m, with a further 66m required to ensure all elements of the Tariff can be fully delivered to meet the sustainable growth of Milton Keynes. Deficit Risks for the Tariff Outstanding planning consents and the impact of the Community Infrastructure Levy The Tariff agreement and business plan agreed with land owners was based on 15,000 houses being built and 500,000 square metres of employment space being developed. The table below outlines the current consents and income received and forecast compared to this initial estimate: 8

9 Table 3: Planning Consents and Income Received Original Agreement Original Agreement ( m) Actual Income Received ( m) to 31 st March 2012 Forecast Income detailed consents granted ( m) Forecast Income outline consents granted ( m) Forecast Income no consent granted ( m) Housing 15,000 homes Employment 500, 000 m Land Total Table 3 shows that 280m of income on the Tariff is still to be received, of this amount 202m is relatively low risks as detailed planning consents are in place, while 75.7m is only subject to outline planning consent. 1.8m has no planning consent in place. This is consistent with a forward funding arrangement where houses and employment space are delivered following the investment of strategic and local infrastructure. There is a risk that the final consents for houses and employment space do not match the forecast position for the Tariff. There are a number of reasons planning consents may not match the original estimate. For example, land surveys may affect housing density; the profile of the population and the resulting anticipated demand for housing may affect size of housing and resulting consents; the trend for home working and minimising office space will reduce the demand for employment space and changes to local planning policy can impact on development plans. This risk has always been part of the Tariff management position and has been monitored and managed as individual schemes have progressed. However, the potential financial risk of planning consents not being given has increased, due to the change in national Government planning policy which means that by April 2014 the Council should have introduced a Community Infrastructure Levy (CIL). By this date a CIL charge is the only arrangement where new contributions to strategic infrastructure can be collected from developers. This means any outstanding detailed planning consents in April 2014, will not be subject to Tariff contributions even though they had been planned as part of the Tariff programme. The Council will determine its levy under CIL arrangements. While the actual level of charge has not been confirmed current modelling suggest the charge will be less than the current Tariff levy. While the Council has yet to set a policy on affordable rent, it is likely that under current national housing policy at least 30% of all properties will be affordable housing and so exempt from the CIL charge, whereas no housing is exempt from the Tariff. This means the overall return from CIL is likely to be less than the Tariff contributions forecast. The risk of income reducing due to CIL applies to housing and employment land which either has an outline planning or no consent. In theory developers could also apply for new detailed consents, even where a previous consent has been given if the CIL is more beneficial in these areas and there is no incentive to begin work before Annex A, shows an initial assessment of the financial risks in the Tariff income model due to CIL. While the final CIL charge has yet to be set for the Council, current research suggests it is likely to be slightly below the level of the Tariff. Annex A shows the current income model for the Tariff, which an assessment of the potential reduction in funding if a CIL was applied to the remaining sites rather than the current Tariff rate. This assumes that the Tariff income from 30% of homes would be lost, as affordable housing is not subject to a CIL charge. It also assumes 9

10 that the CIL charge is 4.5k less than the Tariff (this reflects a forecast CIL of 20k, compared to Tariff of 22.5k per home, and 2k, which is the loss of indexed income, as the income model is still at 2005 prices). This gives a total potential income loss of 92m. A weighting has then been applied to these financial losses to reflect the information known about the site, reflecting the likelihood of income being lost. The weightings applied were 100% for high risk areas, 50% for medium risk and 20% for low risk, gives a potential risk to income of 35m. As sites are consented before CIL is implemented and work begins the income risk will reduce. This risk assessment simply reflects the current uncertainty at present and the need to plan to manage the potential consequences. The main area affected by the potential move to CIL is the Strategic Reserve Area, which was expected to contribute 49m to the Tariff programme. The local infrastructure in the Strategic Reserve is only 17.8m. So while the potential loss of income due to CIL is approximately 22m, the contribution of CIL income to the strategic infrastructure already largely delivered in the Tariff is more beneficial than not delivering development in the Strategic Reserve and ceasing the local infrastructure. This position assumes that the Council contributes the CIL received for these sites to the Tariff expenditure plan. It is worth noting that the HCA would not have been a CIL charging authority, so the reduction in funding due to CIL would have had a significantly higher impact on the Tariff programme. While this plan will consider ways of mitigating the overall position on the Tariff, it is important to note that a proportion of this projected income contributes to funding of strategic infrastructure which has already been delivered. Infrastructure needs in Milton Keynes are not met by the Tariff contribution - 66m When the Tariff agreement was being discussed and agreed with land owners the background economic context was positive, with high levels of growth and public sector funding. Government contributions to Milton Keynes to provide infrastructure were substantial. For this reason the Tariff was only seen as contributing of 75% to the local infrastructure requirements of Milton Keynes, with the remainder of funding coming from alternative sources including Government grants. Other large infrastructure requirements in transport, education and health were to be central Government funded with either small or nil contributions from the Tariff. Since this time the economic context has worsened and the Government grant contributions to enable growth have ended. The risk is that the Tariff will not be able to deliver the infrastructure requirements expected by land owners and developers to enable growth. This may mean funding contributions to schemes are delayed or are not available for the operation of the Tariff. To date 45m of the Tariff programme has been delivered, leaving 265m remaining, which based on the principles of the Tariff will require at least 66m additional investment to deliver infrastructure requirements. This demand for additional funding will need to be carefully managed to ensure that delivery is sufficient to meet the principles and objectives of the Tariff even if funding contributions have been reduced. The Council is already planning to commit a significant level of its own resource to ensuring that growth in Milton Keynes is sustainable. This will include using Government grants for Education and Transport to develop schools and highways and using its prudential borrowing powers to invest 125m of funding into a residual waste treatment facility to ensure the impact of population growth can be managed. These commitments to investment along with the need to replace and regenerate ageing infrastructure limit the Council s capacity to mitigate Tariff risks and add additional resources to the programme. Works in Kind Tariff credits have been allocated at full cost not based on 75% Tariff contribution - 5m 10

11 To date 12.4m of works have been delivered by developers as Works in Kind. This is part of 51.5m of total works in kind projected in the Tariff. However, the Tariff Framework Agreement states that developers can claim Tariff credits to meet the total cost of the works rather than limiting the credits to the indicative average 75% contribution. Works in Kind have a beneficial impact on the cashflow for the Tariff as credits are reduced from future income payments expected on the completion of housing, but the practice of allowing full costs to be credited against the Tariff contribution has created a potential deficit. On the works completed to date the shortfall is in the order of 3.3m. If all works in kind continue to be allowed as Tariff credits, this would create a deficit of 12.9m. Inflationary pressures on the costs of delivering Tariff projects compared to income no final impact The Tariff index is based on Retail Price Index; average earnings and re-building cost index. The cost of delivering infrastructure schemes will be based on the re-building cost index. This means the Tariff costs could potentially increase at a rate which is different to the index applied to income. However, this currently presents an opportunity as the combined Tariff index has increased by more than the building cost index. The forward funding of infrastructure also offsets this risk as income is likely to be indexed by more than expenditure. Developer default on payment of Tariff contributions - 5m The Tariff is based on developers/ land owners paying 310m of contributions to the Tariff over a 16 year period. While there is no current reason to believe that developers or land owners will default on these payments, it is prudent to assume that there may be some default, or additional costs in chasing debts owed. This could also impact on cashflow costs if payments are delayed, potentially through lengthy legal action. The contributions from developers will not be fully paid until homes are completed and employment space is occupied, so the highest risk will be for those projects at the end of the Tariff period. At which point expenditure projects will have been largely completed or committed, so flexibility to reduce cost will be limited. Tariff contributions will also need to have been fully spent within 5 years of the long-stop date. Land owner challenge to the Tariff - no final impact HCA and the Council have obtained legal advice on the best endeavours and reasonable endeavours covenants in the Tariff to determine the level of flexibility there may be in the operation of the Tariff. Legal advice has differed in the relative flexibility and requirements to deliver the strategic infrastructure based on the Tariff business plan as agreed with land owners. However, there has been a consistent view that there may be a legal challenge at some point in the future if the Tariff does not deliver against the key principles as set out in the agreement and if consultation on potential changes is not adequate. So while the Tariff operation may have some flexibility, it will be important to ensure that any adjustments and risk management strategies are implemented whilst considering the potential of a legal challenge. Therefore any changes to the operation or use of the Tariff must be risk assessed against the principles and commitments made to land owners and subject to consultation. Requirements of the current funding agreement no final impact 11

12 The current Tariff funding agreement is based on S106 legislation. This means the contributions must be spent in accordance with the agreed business plan. The 62m of expenditure (and works in kind) already undertaken in the Tariff has funded a number of strategic infrastructure projects, which benefit the whole of Milton Keynes. The funding calculated as being available for strategic infrastructure projects was based on the original total projected consents in the Tariff. A proportion of all Tariff receipts contribute to these schemes. Any reduction in the total Tariff receipts will lead to a deficit against these strategic infrastructure projects, where the funding has already been spent. Costs of managing the Tariff - 2m The Tariff agreement does not explicitly permit the costs of managing the Tariff to be funded from Tariff contributions. This is because the operation of the Tariff was intended to be in accordance with the functions of the HCA and the cost of managing the scheme were going to be met by the HCA. The Council is not able to meet the costs of administering the Tariff. In accordance with usual S106 procedures these cost should be met from Tariff receipts. This is an additional pressure for the Tariff, and is still subject to legal opinion to determine if this is a change to the Tariff agreement. Cashflow Risks Economic context nationally and impact on growth In setting up the Tariff the HCA agreed to forward fund infrastructure to meet both local and national aspirations to drive growth. The business plan outlined the investment and income profile required. Much of the major infrastructure has been delivered in the years of the Tariff with local infrastructure being delivered in advance of development in specific areas. The slow-down in the housing market has meant that while substantial infrastructure has been delivered the income has been and is likely to continue to be delayed. It is likely that while the overall programme of growth will cause the total Tariff programme to extend beyond the 16 years first agreed, the timing between the investment in local infrastructure and the delivery of housing will be longer than originally planned. This will mean the cashflow cost will be higher than originally expected. The Tariff business plan needs to be reprofiled to reflect the likely expenditure and income profile. Demand for commercial floor area The Tariff was based on the delivery of 500,000 square metres of floor space for commercial purposes, largely distribution (B8) uses. Just over 20% of this floorspace has already been delivered. The slow down in the economy means that demand for commercial floor area has fallen in recent years. This will delay the potential income for the Tariff and increase the risk of developments being consented under CIL. Reductions in Works in Kind offers 12

13 The Tariff business plan has identified that 51m of works will be delivered through works in kind contributions from developers. This means that initial expenditure will be undertaken by the developer offset against future Tariff payments, which would otherwise have needed to be made once housing was completed. So the Tariff is avoiding paying out cash for a scheme upfront, as this is being offset against receipts which would not be been due until several years in the future. However, the current economic conditions mean developers have less cash available to invest in developments upfront and may therefore be less willing to undertake works in kind. A reduction in the expected level of works in kind will mean more investment will need to be made up front, impacting on the cashflow. Risk Share Agreement The Tariff is a large and complex forward funding programme, which (from the risks outlined above) creates significant potential exposure for the operating organisation. The HCA has been managing the risks on the Tariff as part of an 205m annual programme of investment and funding. As the Tariff has been consistent with the objectives of the HCA, timing and resources for projects have been managed within the overall funding available. In contrast the Council has a 78m annual capital programme, of which 17.4m is ring-fenced for the Housing Revenue Account and 14.6m is funded from other ring-fenced sources. While one of the key objectives for the Council is the delivery of growth in Milton Keynes, the Council also has a number of other statutory requirements it must deliver. A proportion of its funding also provides contributions to part Tariff funded schemes to enable delivery (e.g. School place funding and highways infrastructure). The timing and flexibility of resources available to mitigate the risks in the Tariff and manage the cashflow impact is considerably less than was available under HCA (and DCLG). Due to the identified risks and the relative ability to manage the potential resulting impact, the agreement for the transfer of Development Control and the Tariff arrangements from the HCA has included a risk share arrangement. The Tariff risks have a risk mitigation approach to ensure the final deficit is below 22m before the Council will agree to undertake the management of the Tariff, and the formal contractual transfer can be approved. Once the transfer has occurred a risk share arrangement will operate. Any final deficit on the Tariff will be shared in the proportion: HCA: 10m DCLG: 5m MKC: 7m Any final cost above the 22m agreed risk share will be met by Milton Keynes Council. The level of risk in the Tariff will be subject to a formal Biennial Risk Review, which will be led by the Council (as the operating organisation) with the involvement of the HCA and DCLG. The purpose of the risk assessment is to: Formally review the risks in the Tariff For DCLG and HCA to challenge and gain assurance on the management of the Tariff; 13

14 Refresh the risk mitigation strategy and inform the financial provision each party should maintain, to meet the risk share agreement on the final deficit. While this formal risk review will be under taken every two years, the Council will inform all parties in a timely manner of any event which significantly changes the relative risk assessment on the Tariff. As the risk assessment will form the basis for financial provision, it must be robust enough to meet external audit requirements. However, each organisation will make its own decision on the relative provision required in their accounts. As such the three parties do not need to be in total agreement about the absolute risk in the Tariff and its level of provision. While the Biennial Risk Review will be a joint process, HCA or DCLG are entitled to ask for an independent review. This could either be by HCA/ DCLG officials or an independent third party, but the cost of doing this will be met by the commissioning body. Alternatively HCA or DCLG could ask an independent third party to complete a risk assessment of the Tariff as a comparison to the MKC risk assessment; again this would be at the cost of the commissioning body. Alternatively all three parties could ask for a joint external risk assessment to inform future planning and management of risk, in which case the costs would be divided equally amongst the organisations. As the HCA had already agreed with land owners that they would provide forward funding for infrastructure as set out in the Tariff business plan, the agreement with MKC includes an up to 8m loan to meet this cashflow commitment 1. Funding will be paid to the Council in accordance with the agreed Tariff business plan (at the date of transfer of the Tariff). This funding will ensure that the Council need only manage the additional cashflow risks highlighted above, or meet the costs of any reprioritisation of expenditure. Further detail on the Biennial Risk Review is set out later in this document. The loan from the HCA will fund infrastructure investment in accordance with profiled spend. As costs will be incurred in line with the funding there will not be financial benefit for the Council. The funding received by the Council (through revenue support grant, or retention of business rates) from central Government provides no allowance to meet cashflow costs of running the Tariff, or for forward funding investment. A requirement to meet these forward funding costs would have resulted in a real additional financial cost to the Council. Ending the forward funding potential in the Tariff would not only lead to likely legal challenge, but would also effectively hinder the capacity for growth in Milton Keynes. The three parties have agreed that this Risk Mitigation Plan will form the basis of the management of the Tariff for future years, in order to mitigate the potential financial impact of any final deficit on the Tariff and the potential cashflow risks to the Council. The Biennial Risk Review will refresh this plan, incorporating new opportunities for mitigating risk within the Council s overall management arrangements for the Tariff. The Council s approach to managing the Tariff The Council will undertake the management of the Tariff as part of its overall responsibilities for promoting growth, improving economic well being and creating a sustainable community in Milton Keynes. In order to maximise the benefits of a single organisation leading the growth aspirations and planning functions, the Tariff will be integrated into current strategic and operational management areas. However, robust controls will be created around the Tariff, which will be maintained as a ring-fenced source of funding in order to meet the 1 The level of this loan will be finally agreed once the reprofiling of income and expenditure has been completed as part of the Tariff business plan refresh. 14

15 requirements of the legal agreement and to mitigate the risk profile. The framework for the management of the Tariff will address the following areas: Strategic Planning and prioritisation Management of the Tariff Management of individual schemes Procurement process Reporting arrangements Strategic Planning and prioritisation The Council has been closely involved with the development of Milton Keynes, jointly chairing the Programme Management Board for the growth agenda. Milton Keynes Council has also chaired the Joint Delivery Teams for Transport, Community Infrastructure and Environment since they have been established. The Council has also supported HCA and Milton Keynes Partnership in the continued development of Central Milton Keynes. The role of the Chair of the Programme Management Board and the Centre MK Programme Board is now with the Chief Executive of Milton Keynes Council. The Joint Delivery Teams continue to be run by Milton Keynes Council. The Council has also recently taken over the leadership of housing delivery, Economic Development and Inward Investment. The transfer of Tariff functions is entirely consistent with the remainder of the Council s increased responsibilities in relation to the growth of Milton Keynes. As part of the role of leading housing growth and chairing the Programme Management Board, the Council has already taken on the production of the Local Investment Plan (LIP) from the HCA, which will be used to update the Tariff business plan in future years in order to plan and lead further development across Milton Keynes. The development of the LIP includes identifying investment requirements for the whole of Milton Keynes across a range of partners. The Council has already experienced the range of priorities and demands for funding that this role can produce. There have also been clear advantages of ensuring that a single organisation is responsible for strategic and local planning and identifying and co-ordinating investment requirements across the Borough. For example, an agreement has been reached with the University of Bedfordshire to create a University in Milton Keynes. The clarity over land ownership, planning priorities and potential Tariff funding has provided sufficient assurance to secure the development of a University, with substantial investment from external organisations. This is entirely in line with the objectives of the Tariff. The refreshed LIP available for consultation in June will set out the shared priorities and vision for Milton Keynes. As the first time that Milton Keynes Council has the clear leadership role for the Borough, this document will provide a key framework for future priorities and resource allocation, not only for the Tariff but also for the Council s own future investment. The development of the projects to be included in the detailed project plan for the LIP and the Tariff business plan will be developed and prioritised alongside the Council s long-term Capital Programme resulting in a published detailed LIP in February. This consistency reduces duplication and ensures that the knowledge of individual schemes; planning policy; the likely rate of development and the resulting demand for infrastructure is consistent between the Tariff business plan and the Council s Capital Programme. Bringing together the planning responsibilities of the HCA and the Council, will also streamline and clarify planning processes and remove the requirement for two Development Control Committees. This will create efficiencies in the public sector and improve clarity for developers and land owners. 15

16 The Council currently delivers a large proportion of Tariff schemes, as many Tariff schemes have simply been a contribution to Council resources to deliver infrastructure requirements. Some of the major projects managed by the Council, with Tariff contributions include M1 J14 improvements, East West Bus Services, primary and secondary schools, community pavilions, Bletchley Leisure Centre and a second Crematorium. As the Council currently delivers a large proportion of the Tariff projects, this streamlining of processes is beneficial. The detailed management of the schemes will also ensure value for money across the public sector continues to be achieved. The Council has a process of identifying future investment needs, reviewing asset management needs and considering potential areas for future investment. The demand for funding is in excess of the resources available. Therefore schemes must be prioritised to deliver the best value for money and to meet statutory requirements. This includes ensuring that funding is only used in accordance with the terms of the funding available. By coordinating the development of the LIP and Tariff business plan with this process, the resources available will be clearly identified, and a process of developing a plan by prioritising projects will be followed. The revenue implications of all schemes must be considered as part of the development of the Capital Programme, this requirement will also be applied to Tariff business plan projects, ensuring funding is only used in a sustainable manner. A draft LIP and Tariff business plan will be produced alongside the Council s Capital Programme for consultation in November/ December. The consultation takes place along with the revenue budget and is well publicised with partners and the public. The feedback on this consultation determines the final budget proposed and approved by Members in February. The proposed strategic planning process for the allocation of the Tariff resources is as follows: June the Local Investment Plan Strategy Document outlining the strategic priorities and vision for Milton Keynes is published, to support the Core Strategy July Sept review of funding available and collation of potential schemes for investment in Milton Keynes Oct/ Nov prioritisation of schemes, confirming schemes funded from Tariff and Council resources and future areas for where funding may be secured. November Draft LIP (incorporating detailed Tariff business plan); long-term Investment Programme and detailed Medium Term Capital Programme for the Council published for public and partner consultation February outcome of public consultation reviewed and final LIP (incorporating the Tariff business plan); longterm Investment Plan and Medium Term Capital Programme published. This formal approval stage is known as Resource Allocation in the Council. Schemes are still not able to progress until they have been through a gateway process for practical assurance prior to financial commitments being made. Management of the Tariff As part of the publication of the LIP the Council will refresh the expenditure and income model for the Tariff, refreshing the individual schemes and the likely timing of both future expenditure requirements and income from development. This model will be managed through a reporting and management system developed to control expenditure and income on these projects. This system will also be used to manage S106 and CIL resources to create consistency when working with developers and land owners across Milton Keynes. 16

17 The overall Tariff Programme will be managed by the Infrastructure Co-ordination and Delivery Team in the Council. This team will be responsible for: Developing and agreeing the LIP which will define the Tariff schemes, which is a key control for the Tariff. Reviewing and monitoring the forecast and actual income receipts from the Tariff, through co-ordination with Planning and Housing Delivery colleagues. Programme managing the delivery of Tariff schemes, through the infrastructure developed and supported by the HCA and the Council, involving area and service based joint delivery teams. Ensuring project managers are accurately and robustly managing individual projects in the Tariff, where delivery remains with the Council Collating feedback and challenging delivery for projects where delivery is with separate organisations. Ensuring all Works in Kind is value for money and appropriately approved before expenditure commences. Working with the Parks Trust and Open Spaces officers to plan and manage the delivery of the open space programme in the Tariff. Reporting on the delivery of the Tariff programme compared to the forecast outcomes. Managing engagement with land owners and developers. Managing engagement with other stakeholders. The overall cashflow management of the Tariff will be integrated with the Council s cashflow management to ensure funding is available as required. Management of individual schemes The Council currently manages a significant proportion of the Tariff schemes on behalf of the HCA. Any scheme under the management of the Council is already subject to a number of controls which are regularly reviewed and developed to ensure effective and timely delivery of projects, which are within budget and deliver good value for money. The key controls for Council controlled projects are as follows: Every scheme must have a named project manager responsible for delivering, reporting and managing the scheme. An agreed approach to the management of projects will be applied (this is known as the MK approach) A gateway review must be passed to ensure funding and appropriate project and risk management arrangements are in place before any expenditure can take place on a scheme. Approval for projects is given in appropriate stages to ensure that risks of abortive costs are reduced and to ensure adequate control and planning is in place for each stage of the process. Funding is only allocated to the specific scheme, managers are not allowed to vire funds between schemes. All reallocation of funding has to be formally approved by the Cabinet. The Cabinet are only allowed to move funding between schemes, they cannot add to the overall programme. Any changes to the programme must be fully funded. Project managers are required to report on the progress of a scheme on a monthly basis, this includes financial forecasting and the projected delivery. Transparent and robust procurement arrangements must be followed to ensure value for money and project objectives are achieved. A proactive risk management approach is in place and supported by specialists 17

18 All schemes are required to review and document lessons learned and complete a benefits realisation review after a year. For schemes being managed by external partners the gateway process will be applied, to ensure that sufficient funding is in place for the whole scheme before a Tariff contribution is made and the adequate management and control arrangements are in place to ensure that funding is only used for the purposes allocated. External partners will be required to sign a funding agreement (as with the Council s current S106 schemes) to provide assurance to the Council on the proper use of funds. This includes agreeing access to accounting records and audit rights. Works in Kind will be approved through the Council s gateway process to ensure they continue to deliver value for money for the Tariff. Appropriate officers (e.g. highways, transport, and open space) will need to provide assurance that the level of Tariff credits is appropriate based on the likely cost of the scheme. Procurement process The Council has recently improved its procurement processes, to deliver greater challenge and Value for Money. This means that any project under the Tariff being delivered on the Council s behalf by an external provider will need to develop a clear specification for the works required, with public visibility through the Cabinet Procurement Committee before the tender process begins. The award of the tender is a second approval stage to ensure that the process is open, transparent and makes best use of existing contracts and frameworks available to the Council. Award of the tender is also a public process through the Cabinet Procurement Committee. These formal challenge arrangements are to ensure that works are appropriately specified to the requirements of the Council and that value for money is achieved. These processes are applied to all Council procurement regardless of the funding source. This means projects funded by the Tariff will be subject to the same scrutiny and challenge as any other tender in the Council. Reporting Arrangements The overall Tariff position will be regularly reported, to ensure that delivery is in line with the expected outcomes, the financial position matches the resources available and risks are being proactively managed. The following reporting will take place on the Tariff: Individual project managers will monitor projects on a monthly basis, and will be subject to challenge by the Growth Team, Finance and Joint Delivery Teams. The overall financial position on the Tariff will be reported as part of the Council s budget monitoring arrangements on a monthly basis to the Corporate Leadership Team, Cabinet, Scrutiny and the Audit Committee. The LIP Programme Management Board (which includes the HCA) will meet quarterly to review progress against forecast outcomes, overall risks and issues for the Tariff and the forecast outcome position. The whole of this process is subject to internal audit and the formal presentation of the Tariff position in the Council s accounts is subject to external audit. 18