Agenda Item No: 8 Meeting of the City Council 18 September 2013 Report Title Approval of Financial Close and Contract Award for Building Schools for the Future (BSF) Phase 3C Scheme Schools Referring Body Cabinet 11 September 2013 Cabinet Member with Lead Responsibility Key Decision In Forward Plan Wards Affected Accountable Strategic Director Originating service Councillor Phillip Page Schools, Skills and Learning Yes Yes East Park, Heath Town Tim Johnson, Education and Enterprise Education and Enterprise, Schools, Skills and Learning, Building Schools for the Future Accountable officer(s) Peter Davies Tel Email Interim BSF Programme Director 01902 55(3773) peter.davies2@wolverhampton.gov.uk Recommendation(s) for action or decision: The Council is recommended to:- 1. Approve the draft Final Business Case (FBC) for the Phase 3C PFI project for Heath Park and Deansfield Community School, noting that the total capital expenditure costs of 42.166million have been included within the PFI financial model. These costs are confirmed as affordable with no requirement of a contribution from the Council and negotiations are currently on-going to reduce this down closer to the Council s revised shadow tarrif target of 40.2million Page 1 of 9
2. Approve the delegation of authority to the Cabinet Member for Schools, Skills and Learning and Cabinet Member for Resources in consultation with the Chief Executive, the Strategic Director for Education and Enterprise, the Assistant Director, Finance Officer (Section 151 Officer), and the Interim Chief Legal Officer to: Complete and finalise the draft FBC, including making amendments and submission of other appropriate documentation to achieve approval by the Education Funding Agency (EFA), Department for Education (DfE) and HM Treasury. Complete and finalise negotiations with the LEP to improve upon the worst case financial position quoted within this report. It should be noted that these negotiations will not be concluded until immediately prior to financial close. Approve the draft Phase 3C Section 151 Letter, attached as an appendix to the report, and authorise the Council s Section 151 Officer to submit the letter to the EFA, subject to any adjustments to reflect final updates to the FBC. Authorise the execution of any of the project documents and ancillary documents by affixing the Council s common seal in accordance with the Council s Constitution and to approve that the Interim Chief Legal Officer and Interim Assistant Director, Education and Enterprise, in consultation with the Council s Section 151 Officer, may take any necessary action (including the execution of legal documents by the Interim Chief Legal Officer) to complete the Project, including any final amendments to the project documents, and give effect to Councillors resolutions and authorised delegated decisions referred to in the report. Approve that in order to give effect to the resolutions set out above, the Interim Chief Legal Officer, in consultation with the Council s Section 151 Officer and relevant Cabinet Member, as necessary, be authorised to approve any variations to the terms of the contractual documentation and any other related documentation and/or other commitments given by the Council at financial close. That the Council s investment in the Private Finance Initiative (PFI) Special Purpose Vehicle (SPV) be approved to the value of 600,000 and authority be delegated to the Assistant Director Finance (Section 151 Officer) in consultation with the Cabinet Member for Resources to agree the final sums to be committed and establish the necessary budgets in the capital programme. 3. Approves that TUPE apply to the transfer of relevant staff from the service commencement date to the PFI service provider and that the necessary on-going consultation and communication taking place in respect of this be continued. 4. Approves that the Admission Agreements for the West Midlands Local Government Pension Scheme be entered into and executed by the Interim Chief Legal Officer to enable those transferring employees to retain their current pension benefits. Page 2 of 9
1.0 Purpose 1.1 The next and final phase of the Wolverhampton BSF programme is due to receive investment as Phase 3C and the Council is now required to submit the FBC in order to achieve financial close and secure the necessary funding. 1.2 The Phase 3C project consists of Deansfield Community School (specialists in media arts) and Heath Park School, part of the Central Learning Partnership Trust. 1.3 This is a PFI funded project and, subject to the approval of the FBC and the Council achieving financial close for Phase 3C, it is anticipated that construction will commence in late 2013 and will deliver a completed project by autumn 2015. 2. Background 2.1 The financial implications of BSF are significant and were initially detailed in the report to Cabinet in October 2008 (Outline Business Case). BSF has provided 270million+ of Government funding to transform Wolverhampton schools for secondary age learners. To date, circa 119M was confirmed in April 2010 for the sample schools phase and the ICT capital grant for the whole programme, of 60M in February 2011 for the phase 1 schemes, of circa 25M in December 2011 for the phase 2 schemes, circa 57M in November 2012 for the phase 3A schemes and of circa 8M for the phase 3B scheme. Each phase requires a detailed project approval process and approval of an FBC that will be subject to Cabinet and Council approval. 2.2 On 11 September 2013, Cabinet considered a report on the Financial close and contract award for BSF - phase 3C school scheme project consisting of Deansfield Community School (specialists in media arts) and Heath Park School, part of the Central Learning Partnership Trust. 2.3 This is a Private Finance Initiative (PFI) project and total expenditure for the two schools is circa 42.2M, which is fully affordable and requires no contribution from the Council. 2.4 The PFI project requires a maximum Unitary Charge of 5.677M per annum, which is fully affordable within the available resources combining PFI credits that the local authority will receive from the Government and contributions from the two schools. 2.5 The exempt report can be accessed by Councillors on line on the Committee Management Information System (CMIS) on the Council s website by following the link:- https://wolverhampton.cmis.uk.com/decisionmaking/calendar/tabid/73/ctl/viewmeetingpublic/mid/410/meeting/8398/committee/1446/default.aspx 2.6 Cabinet approved the recommendations contained within the report which are now referred to Council for approval. 2.7 Council is therefore recommended to:- (i) Approve the draft Final Business Case (FBC) for the Phase 3C PFI project for Heath Park and Deansfield Community School, noting that the total capital expenditure costs of 42.166million have been included within the PFI financial model. These costs are confirmed as affordable with no requirement of a Page 3 of 9
contribution from the Council and negotiations are currently on-going to reduce this down closer to the Council s revised shadow tarrif target of 40.2million (ii) Approve the delegation of authority to the Cabinet Member for Schools, Skills and Learning and Cabinet Member for Resources in consultation with the Chief Executive, the Strategic Director for Education and Enterprise, the Assistant Director, Finance Officer (Section 151 Officer), and the Interim Chief Legal Officer to: Complete and finalise the draft FBC, including making amendments and submission of other appropriate documentation to achieve approval by the Education Funding Agency (EFA), Department for Education (DfE) and HM Treasury. Complete and finalise negotiations with the LEP to improve upon the worst case financial position quoted within this report. It should be noted that these negotiations will not be concluded until immediately prior to financial close. Approve the draft Phase 3C Section 151 Letter, attached as an appendix to the report, and authorise the Council s Section 151 Officer to submit the letter to the EFA, subject to any adjustments to reflect final updates to the FBC. Authorise the execution of any of the project documents and ancillary documents by affixing the Council s common seal in accordance with the Council s Constitution and to approve that the Interim Chief Legal Officer and Interim Assistant Director, Education and Enterprise, in consultation with the Council s Section 151 Officer, may take any necessary action (including the execution of legal documents by the Interim Chief Legal Officer) to complete the Project, including any final amendments to the project documents, and give effect to Councillors resolutions and authorised delegated decisions referred to in the report. Approve that in order to give effect to the resolutions set out above, the Interim Chief Legal Officer, in consultation with the Council s Section 151 Officer and relevant Cabinet Member, as necessary, be authorised to approve any variations to the terms of the contractual documentation and any other related documentation and/or other commitments given by the Council at financial close. That the Council s investment in the Private Finance Initiative (PFI) Special Purpose Vehicle (SPV) be approved to the value of 600,000 and authority be delegated to the Assistant Director Finance (Section 151 Officer) in consultation with the Cabinet Member for Resources to agree the final sums to be committed and establish the necessary budgets in the capital programme. (iii) Approves that TUPE apply to the transfer of relevant staff from the service commencement date to the PFI service provider and that the necessary on-going consultation and communication taking place in respect of this be continued. Page 4 of 9
(iv) Approves that the Admission Agreements for the West Midlands Local Government Pension Scheme be entered into and executed by the Interim Chief Legal Officer to enable those transferring employees to retain their current pension benefits. Page 5 of 9
Please Ask For Mark Taylor Direct Line 01902 554496 Facsimile 01902 556609 Delivery E-mail Minicom Mark.taylor@wolverhampton.gov.uk Civic Centre St Peter s Square Delivery Mike Coleman Head of Capital Delivery Education Funding Agency 33 Greycoat Street LONDON SW1P 2QF Civic Centre St Peter s Square Wolverhampton WV1 1RL Main Switchboard (01902) 556556 Website www.wolverhampton.gov.uk Your Ref. My Ref. MT September 2013 Dear Mr Coleman, Wolverhampton City Council Wave 5 BSF Programme Section 151 Letter at Final Business Case (FBC) Submission for the Phase 3C Scheme Schools This letter provides the formal Section 151 Officer approval required to accompany the City Council s Final Business Case (FBC) for the final Phase 3C of its Building Schools for The Future (BSF) Programme. I have reviewed the current affordability and risk profile of the project and have discussed the financial implications of this project in detail, with Councillors, officers and other key stakeholders. In addition, my membership of the Strategic Partnering Board (SPB), BSF Programme Board and BSF Advisory Group has provided opportunities to challenge assumptions and judgements made by the BSF Programme Team. Cabinet approved the Outline Business Case (OBC) on 1 st October 2008 and have been updated on a regular basis throughout the various phases of the programme. Cabinet and Council have formally approved the Final Business Case (FBC) and Contract Award of: the Sample Schools Scheme at the Special Cabinet and Extraordinary Council meetings held on 14 th April 2010 Phase 1 Schools Scheme at Cabinet on 26 th January 2011 and Council on 2 nd February 2011 Phase 2 Schools Scheme at Cabinet on 7 th December 2011 and Council on 21 st December 2011 Page 6 of 9
Phase 3A Schools Scheme at Cabinet on 24 th October 2012 and Council on 7 th November 2012 Phase 3B School Scheme at Cabinet on 5 th March 2013 and Council on 20 th March 2013 Cabinet also endorsed the Council s response to the BSF efficiency review exercise on 8th December 2010 and will seek formal approval of the FBC and Contract Award for Phase 3C at Cabinet and Council on 11 th September 2013 and 18 th September 2013 respectively. Affordability Phase 3C PFI Project Phase 3C is currently affordable and is not dependent on any external funding, outside of the BSF funding envelope and does not require any additional contribution to the annual PFI Unitary Charge beyond that envisaged at Stage Zero. The PFI Affordability Model reflecting agreed positions with the Education Funding Agency, is set out in Appendix 2.5 to the FBC. PFI funding and affordability of the Phase 3C Schools is summarised below: a. The Phase 3C scheme is affordable as confirmed by Ernst & young in their report dated 20 th August 2013. There remain some specific areas that require further attention to bring them in line with the shadow model target costs and these will be identified within the body of this report. The LEP s financial model is based upon the funding terms provided by their proposed funder Aviva. b. This is a PFI project and the financial modelling indicates that a maximum Unitary Charge of 5.677 million per annum will be payable based upon April 2012 prices. The bulk of this cost will be covered by the PFI credits for this project that will be received by the Council throughout the 25 year term. These credits received from the DfE reduce the Authority annual revenue contribution to 1.366 million. To this we need to add a pass through allowance of 0.184 million for utility costs giving a total Authority contribution of 1.55 million per annum. These figures are well within the estimates provided by Ernst & Young (the Council s financial advisors) from their Shadow Tariff Model target figures of 6.03 million and 2.03 million respectively. c. The project is therefore fully funded through a combination of PFI Credits and School Contributions. There is therefore no further funding requirement from the Council for this PFI project as it is fully self funding. d. The Authority annual contribution of 1.55 million will be split between the two schools on a 40% Deansfield and 60% Heath Park basis. This will result in a cost to Heath Park of 930,000 per annum and to Deansfield 620,000 per annum. This is based upon an analysis of gross floor area for each of the schools. It should be noted that an analysis based upon anticipated student numbers on roll reveals a very similar result. Page 7 of 9
Value for Money (VfM) Assessment Phase 3C Scheme Schools As required under VfM guidance, our external financial advisors, Ernst and Young have reviewed VfM for the Deansfield and Heath Park PFI Project for the Final Business Case (FBC). I can confirm that, in continuing to adopt the latest Treasury guidance, the Council is proceeding to financial close with a PFI solution, which is within the same VfM NPV envelope as that submitted at OBC and a VfM assessment that has not materially changed from that set out in the OBC. Council Investment in the LEP and Phase 3C Schemes Special Purpose Vehicle ( The PFI SPV ) The Council will be adopting the standard BSF LEP Structure developed by the EFA under which it will become an equity partner in the LEP taking up a 10% share of equity. The Council will also become an equity investor, through the LEP, in the PFI project company (PFI SPV). The Council intends to invest in the LEP s share of the PFI Special Purpose Vehicle (SPV) subordinated debt and will invest directly in the PFI SPV subordinated debt. The table set out in paragraph 6.14.1 to the FBC shows the estimated level of investment to be made by the Council, at financial close, which subject to change as we approach financial close, would see a combined mandatory and optional investment by the Council of 600,000. Risk Management and Accounting Treatment We have a well-developed programme management system within the Council which has been deployed within the BSF Programme. A standard approach is applied to the identification and mitigation of risks, supported by a reporting mechanism through the programme s governance structure. Our financial and legal advisors have adopted the standard form documents and derogations to these have been raised and agreed with the Education Funding Agency (EFA), prior to their incorporation in final form documents. In doing so, we have ensured that an appropriate and balanced risk profile has been adopted between the SPV Project Co and Council. Based upon the latest Treasury guidance and in accordance with International Financial Reporting Standards (IFRS), the PFI projects at Highfields/Penn Fields (Sample Phase Scheme), Deansfield Community School and Heath Park (Phase 3C Schemes) will appear on the Council s balance sheet. Conclusions I confirm that the Council has reviewed and analysed the Phase 3C PFI project in detail, as set out at Stage Zero and updated in its FBC submission. The Council is satisfied with the affordability and VfM position of the project and is committed to reaching financial close once a final contractual and financing position is reached. Should you wish to discuss the letter, require clarification or further information please do not hesitate to contact me. Page 8 of 9
Yours sincerely Mark Taylor Assistant Director Finance, Delivery (Section 151 Officer) Wolverhampton City Council Page 9 of 9