Financial Viability

Princes Parade Business Case

FHDC’s cabinet approved the PP business case on Wed 13th Feb at 5pm. They  excluded the public from some of the meeting and  withheld most of the agenda papers from the public. We believe that this is unlawful and made representations to the council to that effect but the council claimed they had a legal opinion to support their action. They declined to show us that legal opinion.

There is a link to the agenda and the officer’s report here: https://saveprincesparade.org/news/cabinet-wed-13th-february-5pm/

You can read our response to this here: https://saveprincesparade.org/news/email-to-councillors/

Towards the end of January we sent an email to all councillors on behalf of the members of SPP summarising our concerns about the financial viability calculations. Our comments were based on the Betteridge & Milsom calculations published in the summer of 2018 shortly before the determination of the planning application. We were aware that there is an updated version of this but as it is not in the public domain we were not able to refer to it. (see below for discussion of the previous version of these calculations.)

You can read the council’s response to that email here: https://saveprincesparade.org/news/fhdc-response-to-spp-re-financials/

From the papers we have been able to see the council believe that the costs of the project will be £29m and that they will have enough capital receipts to cover this. We believe that the costs have been seriously underestimated and the proceeds from land sales overestimated so the council could be left with a multi million pound loss. The council’s own consultants admit this is a risky project. Councillor Monk states that the project is financially viable but the truth is the council is not yet in a position to be sure of that. Even if the project was financially viable, it will require a considerable amount of up front funding. It seems that the council are proposing to cover that by means of internal borrowing.

Dr Geoff Burrell has done a huge amount of work on the financial viability calculations which you can read here:Critique PP Cost Viability – GB

He provided this to the council who asked their consultants to respond – perhaps because the council officers don’t understand the calculations well enough themselves. You can read their responses here BM Response to GB Critique Feb 19  and here Savills response to GB Critique Feb 19

Dr Burrell also produced this report which shows that contrary to the claims of the council and their consultants, the alternative site for the leisure centre is not more expensive than Princes Parade. Why NQ is Cheaper than PP

Financial Viability and Planning

The agenda papers for the cabinet meeting on 7th February 2017 included next to no information on the many risks of developing Princes Parade  nor did they include a feasibility study for the leisure centre as we were promised at the exhibitions in November 2016. Despite this they voted to submit the planning application to themselves and the planning application was published in September 2017. Planning permission was approved in August 2018 but has not yet been granted.

In response to the planning application, the planning officer asked the applicant to submit a viability assessment to demonstrate how the leisure centre will be funded including demonstrating the need for 150 residential units and to outline the additional cost of delivering the leisure centre at Nickolls Quarry.

This viability assessment was published but was so heavily redacted that we couldn’t see how the costs have been calculated.However we suspected the figures have been skewed so show make NQ look less favourable and that the costs/risks of developing Princes Parade may have been underestimated.

You can see the redacted  report here additional – financial viability report

However, shortly before the day when the planning application was due to be put in front of the planning committee the council published this unredacted version Financial Viability Report – unredacted.

And with thanks to ShepwayVox here are some “confidential”  pages from the officer’s report (which the council did subsequently publish)  restricted-pages-145-148   

The council have also published the Savills report from which the £14.3m figure for the value of the housing land used in the FV report is derived. Savills Viability Assessment Report – 13.07.17

They have published some other reports here under latest documents The council have quietly released some other documents here under latest documents http://www.princesparade.co.uk/plans.html

Analysis of the Financial Viability Reports

We have been studying the financial viability reports as published in the summer of 2018. There are lots of inconsistencies in these reports so this has not been an easy task.

Clearly the consultants have inflated the costs of the leisure centre on Nickoll’s Quarry to make it look less viable than PP. In reality building the leisure on Princes Parade will mean the council incurring a lot of costs (and risk) that wouldn’t apply to Nickoll’s Quarry and means that the revenue from selling  the housing will largely be used up covering these costs.

They claim that the leisure centre on PP will need a contribution from the council of £2m after taking into account the income from the housing but that figure has been calculated by cobbling together figures from two different reports which were prepared using different bases and assumptions.

The calculation of how they came to the cost of £2m is shown in the bottom left hand corner of p53 of the unredacted financial viability report – link above.

This shows income from the s106 from the Nicolls Quarry/Martello Lakes development of about £5m; £5m from the sale of the existing pool site; CIL of £1.184m ; (controversially) £1.4m being the off site affordable housing contribution from the Imperial Green development (all Betteridge & Milsom figures) and the sale of the residential land £14.3m (as valued by Savills).

Offset against that against that are the Betteridge & Milsom costs for phases 1 & 2 leaving a net cost of £2m.

However, page 53 also sets out the costs for phases 3 & 4 (ie the housing phases) as assessed by B&M. Some of these costs will have been taken into account by Savills in their calculation of the £14.3m but we are convinced that a considerable amount of costs have fallen into the gap between the 2 consultants’ calculations and so not been taken into account.. We also suspect that the consultants have not fully understood the complexity of the site and have therefore significantly underestimated some costs and completely omitted others.

The calculations have apparently been updated for the cabinet meeting on 13th February but the updated versions are not in the public domain. The officer’s report for that meeting claims that another set of consultants, Arlingclose, have examined the calculations but so far the council are refusing to release the full Arlingclose report. The officer’s report now claims that there is a capital surplus of £1.2m. The council have now obtained grant funding from Homes England of £1,977,879. But as the officer’s report concedes “the financial estimates remain indicative”; the project is based on “a number of assumptions” and the project carries ” a number of risks.”

Is it right for a council to risk council tax payers money on such a risky and uncertain project?

What is clear is that the council will have to fund a considerable amount of the work upfront including preparation of the site, remediation of the contamination and moving the road and will have to borrow to cover those costs as well as the costs of building the leisure centre at least until the monies from the sale of the residential plots and the existing pool site come through.

Despite the lack of detail we were able to piece together enough information to submit these comments on the redacted documents:

SPP Comment on Appendix 3

We submitted a further comment on the unredacted document which you can read on the council’s planning website.

Dr Geoff Burrell approached the problem from a different angle and came up with this Dr Burrell – ANALYSIS of Sports Centre Viability Cost Appraisal

On 31 May 2018 we submitted a Freedom of Information request, via the What Do They Know website, for all the correspondence with Betteridge & Milsom – the consultants who prepared the financial viability calculation. FHDC decided that it was an Environmental Information Request not an FoI and so they were entitled to charge us for the time it would take to supply the information which they estimated at 4 hours – £100. One of our supporters kindly paid the fee. FHDC then said it would take too long to supply the information in the required 20 working days and gave themselves another 20 days. When we did finally receive the information most of the figures had been redacted.

You can read FHDC’s justification for redacting the figures here: LS-006757-AN – response

You can read the information they did release here. http://saveprincesparade.org/betteridge-milsom-foi/

At the cabinet meeting on July 19th 2017 cabinet authorised officers to commission some further work including a business plan for the leisure centre and a capital funding strategy but surely these are things that should have been done before they spent so much public money preparing a planning application. Cabinet are due to discuss this but as at July 2018 they have not done so – at least not in public.

Worryingly the risk assessment on the 7 Feb agenda papers identifies that the risk that the scheme to be submitted to the planning authority (ie Shepway themselves) will not be financially viable has a high seriousness and medium likelihood.

In October 2017 we asked Martin Arnold ,a firm of Chartered Surveyors, to do a financial viability calculation for the project using publicly available data. They calculated the residual value of the land as being minus £7.6m and the cost of the project as a whole as £67m. This means that despite claims from the council that the project “washes its face” and “covers its costs” in fact the proposals to develop Princes Parade including a leisure centre are not financially viable.

You can read the report here.Martin Arnold Financial Appraisal 

Another Chartered Surveyor, Derek Maynard, carried out his own calculations which he has agreed to share with us here. He identifies a loss of £30m and significant cash flow problems.

In October 2018 the council have announced that they have received a grant from Home England’s Accelerated Development fund. https://www.folkestone-hythe.gov.uk/news/government-backing-for-development

Business Plan for the Leisure Centre

There is very little information in the public domain about the business plan for the leisure centre itself and it has not been discussed in any detail at any public meeting of the council’s cabinet.

However, we do have these slides from the March 2018 meeting of the Princes Parade Working Group.

Princes Parade Working Group – March 2018 version A (1)

Slide 6 claims there will be 351276 users per annum ie 960 per day which seems somewhat optimistic. It also claims a “revenue turnaround” of £332779. What does that mean?  profit? turnover? The plan seems to be to outsource the management of the facility to a 3rd party with the 3rd party paying the council £61009 per annum. Slide 7 says that 5 trusts have shown interest in running the new leisure centre but have they been shown realistic figures?

Slide 11 lists some developers who have been approached re the housing land. Slide 12 claims a high level of interest from these developers but states that they would prefer to acquire the land for the whole 150 new homes. (The council’s  Financial Viability calculations assumed that it would be sold off as two separate plots.) The slide also says that the developers would prefer a joint venture/structured land sale rather than a straight land sale.

 

Earlier Financial Information

At the beginning of the project the council commissioned several reports from a company called Strategic Leisure as well as GVA. SL have now been replaced by another company called The Sports Consultancy  and GVA haven’t been involved for some time. You can read the update to the original SL report here:

https://www.whatdotheyknow.com/request/update_to_the_strategic_leisure?nocache=incoming-928115#incoming-928115

Looking at appendix 1 the demand for health & fitness in 2016 Strategic Leisure apparently identify a shortfall of 166 peak time gym stations in Shepway. That didn’t tally with our experience so we started looking more closely.

SL calculate a demand of 323 vs a supply of just 157 = shortfall of 166. However on the same spreadsheet they show that there are in fact 735 gym stations in Shepway.The 157 are what they refer to as “community accessible stations”; the remaining 578 they are not counting are commercially operated gyms – but these gym stations are accessible by the general public as Strategic Leisure themselves agreed when they did a similar analysis in 2010 and included the commercially operated gyms. So there is no deficit of peak time gym spaces.

The 2010 Analysis can be found as Appendix 3 at the bottom of this page

http://www.princesparade.co.uk/plans.html

It shows a demand then of 510 stations and a supply of 514 (this figure included commercial operated gyms) = a surplus of 4 places.

If you now compare the 2016 and 2010 assessments they appear to be saying that demand has actually gone down but supply has gone up.

Further their projection forward for 2031 (appendix 2 from the first link) shows demand for just 348 spaces.

These numbers beg the question – is there any need for the additional gym stations in the new leisure centre?

(Note that the updated SL report now shows that there is no need/demand for the sports hall in the leisure centre so it has been deleted from the proposals.)

Of course Strategic Leisure may have got their numbers wrong or have adopted a different means of calculation to suit a particular purposes – but how can Shepway Council place any faith in this assessment and base its decision making on it?

We accept the need for a new pool in Hythe provided it is in the right place and we accept that a pool on it’s own won’t make enough money but we are not at all convinced that there is a demand for the additional services being proposed alongside the pool and therefore we are not convinced the leisure centre will be able to run without a contribution from council funds.

The initial consultant report from Strategic Leisure came up with a cost for the new pool on Princes Parade of about £12m.   This  assumed that there were no unusual ground conditions and that piling, ground stabilisation or measures to deal with contamination would not be necessary. This is obviously not true. The report discussed at length the need for a new leisure centre rather than just a replacement pool and concluded that it would require the income from the additional gym facilities to be viable but no revenue/cost forecast were or have yet been published to justify this. In their response to the Places & Policies consultation Sport England say that there is not enough evidence of the need for a leisure centre.

Shepway thought £12m was too high so in their second report SL recommended the ARC model at a cost of £7.5m. This figure also excluded significant costs. In their report GVA suggested budgeting for an additional £1.125m costs which we don’t believe is sufficient.

At the council meeting on 28th May 2014 Jeremy Chambers admitted that the consultants’ figures were “high level” and undertook to ask them for more detail. This was never done.

In preparation for the cabinet meeting on 4 November 2015, Savills were instructed to prepare some land valuations for all the sites involved in the proposals. Not surprisingly they concluded that the new primary school was not viable unless Kent County Council was prepared to invest significant sums. The value of the land at Princes Parade varied from £2m (high density – 36 new home s-  with affordable housing) to £4.470m (low density – 12 new homes – , no affordable housing). They used a building cost 0f £170psf compared to a more usual £130psf to take account of the abnormal ground conditions. Is this enough?

Since Shepway had finally got around to commissioning a contamination study of the site, the remediation costs according to the officer’s report for the Nov cabinet meeting were now estimated at £2.15m ie nearly double the previous estimate. However, as the report made clear, this is just a “preliminary remediation strategy”. The report also points out that there would also be other significant costs associated with mitigating the harm to the Royal Military Canal.

The report says “It is clear however, that the site can accommodate more than 36 dwellings and if this was accepted it would this provide a significant margin of security for the project.” However it was confirmed at the cabinet meeting that the number of houses will be limited to 36.

So it was rather surprising that at the cabinet meeting on 13 April 2016 it was revealed that Shepway are now looking at 150 houses.

Nevertheless , given that the land available on Nickoll’s Quarry (which Shepway can purchase for £1) would be ready prepared with services, easier to develop and with no threat to the RMC, it still doesn’t make financial sense to put the new leisure centre on Princes Parade.

You can access the various reports here.