34 03 May 2017
Finance and Performance Committee
05 April 2017
File: (17/603)
Report no: FPC2017/2/121
Response to Fraser Park Business Case
Purpose of Report
1. To provide the commentary, feedback and a recommendation to Council regarding the Business Case presented by Fraser Park Sportsville (FPS).
|
Recommendations That the Committee recommends that Council:- (i) recommends to the Community Plan Committee, subject to Council approval, an operating grant to Fraser Park Sportsville (FPS) of: a) $150,000 for the first full year of operation; b) $125,000 for the second year; and c) $100,000 for every year thereafter; and (ii) agrees for this operating grant to be reviewed after three years of FPS operating; and (iii) agrees that a condition of annual funding will be, that FPS formally report to Council on an annual basis its annual report and in particular progress against the Business Case. |
Report Headlines
2. Fraser Park Sportsville (FPS) has submitted a business case to Hutt City Council as a requirement of obtaining a capital funding contribution. A copy of the business case is attached as Appendix 1 to the report.
3. The business case presented is professional and to a high standard. Information presented is supported by detailed data, analysis and research.
4. Council’s Long Term Integrated Communities Facilities Plan identifies Fraser Park as its major sport and recreation hub – offering significant economic and social development opportunities.
5. Officers conclude the FPS business case financial projections, whilst presenting some challenges, are ultimately achievable.
6. Officers support an annual Council financial contribution towards operating costs – most specifically as a contribution towards increasing community participation and running large regional, national and/or international events.
7. When fully operational FPS will provide Hutt City with a sport and recreational hub of regional and national importance, that will generate significant social and economic benefits, and advance Hutt City as a great place to live, work and play.
Background
8. Council has been proactively working with the Hutt City Community Facilities Trust (CFT) and Fraser Park Sportsville for the last five years to develop a significant sport and recreation hub on Fraser Park.
9. Sportsvilles originated from a Council led initiative in partnership with Sport NZ, Sport Wellington, NZ Community Trust and Pelorus Trust.
10. Fraser Park Sportsville was launched in 2009. The FPS founding clubs signed the Sportsville constitution in April 2010, signalling their commitment to the partnership. In June 2010 an independent Board was appointed to lead the new entity. FPS is an Incorporated Society and also registered under the Charities Act.
11. FPS key responsibilities and work include driving and promoting participation, club collaboration and facility rejuvenation.
12. In 2013 Council approved its Long Term Integrated Community Facilities Strategic Plan that maps out Council’s vision and direction regarding community facilities. Identified in the strategic plan are several significant regional opportunities. These include the Fraser Park/Taita Sport Zone – comprising Fraser Park Sportsville and the Walter Nash Centre.
13. With 27 hectares of land, Fraser Park is Council’s largest recreational ground. With the development of the Walter Nash Centre in close proximity, this represents an excellent opportunity for the City and region. As such Fraser Park was identified as a key strategic asset that will not only support local community sport, but also play an important role in driving participation as well as attracting significant regional, national and/or international events.
14. Fraser Park Sportsville has been identified as a project of regional importance and is the first Sportsville which Council committed capital funding to. Capital funding levels currently allocated by Council are at comparable levels with other Councils on similar projects around New Zealand. Fraser Park Sportsville is Hutt City’s major sport and recreation hub. The same level of Council funding should not be expected for other Sportsvilles.
15. Nationally this is a project of significance, with interest from other Councils and Sport New Zealand on the process and end product.
16. FPS have clearly identified how this project aligns with the strategic vision of Hutt City Council (Healthy Families NZ, North East focus, rejuvenation of community facilities via hubbing), and notes that the plans for Fraser Park are endorsed by the regional sports associations that have member clubs on site.
17. No specific references to regional facility plan documents have been noted, however officers recognise that Capital Football, Wellington Rugby Football Union, Hutt Valley Softball Association, Wellington Hockey Association, Cricket Wellington and Squash Wellington have all contributed to the planning process undertaken by Fraser Park Sportsville.
18. Social outcomes that will be achieved through the high quality delivery of services enabled by the business case are very difficult to quantify in a dollar term, however it is imperative to note that social benefits of participating in sport, recreation and other ancillary activities have been proven to make significant positive impacts on communities.
19. There is clearly intention within the Fraser Park Sportsville board and staff to ensure the facility is well utilised by non-sporting and informal physical activity users. This provides opportunity to improve the wellbeing of the local area using this facility as the driver for change.
20. All of these opportunities provide significant economic and social benefits and enhance Hutt City as a great place to live, work and play.
21. Given the opportunity that Fraser Park represents for the city, Council allocated $12 million in its long term plan to FPS, of which approximately $3 million was committed to the stage 1 development completed in 2015.
22. Stage 1 was the development of artificial turfs which the FPS team has done an outstanding job managing and driving participation.
23. Council has thoroughly considered much earlier the many benefits of the Sportsville model. This paper does not address these, rather relates only to the Business Case presented by FPS.
24. A key condition set by Council for the release of the majority of stage 2 funding is the approval of the FPS business case. This has now been presented. This paper has been drafted to provide officers’ response and feedback to this business case.
Discussion
25. Overall FPS has presented a thorough and very professional business case and should be congratulated accordingly. They have assessed and analysed all forecast revenue and expenditure in detail – supported by clear research and assumptions.
26. Their business case includes an economic impact assessment that concludes a significant economic and social return to the City. Officers have reviewed the assessment and conclude it to be robust, perhaps conservative.
27. For the purposes of this report we have focused our attention on the forecast income and expenditure, including a request for annual Council funding support.
Summary of Forecast Revenue and Expenditure
Ø 10 years forecast
Ø Cash deficits are forecast for first four years – not exceeding $50k per annum.
Ø Including depreciation cost, losses are forecast to year 7.
Ø Income includes a Council Community Participation and Events Grant of $150,000 in year 1, $125,000 in year 2 and $100,000 per annum thereafter. This is consistent with FPS briefing to Council during 2016.
Ø There are multiple sources of income forecast. The most significant are:
§ Bar Income $146k - 21% of total year 3 income
§ Council $100k - 15%
§ Facility Hires $140k - 20%
§ Artificial Turfs Hires $80k - 12%
Ø Expenses are broken into the following categories
§ Property Costs $327k - 41% of total year 3 expenses
§ Facility Operating $73k – 9%
§ Employment $299k – 37%
§ Other $65k – 8%
§ Depreciation $40k – 5%
Note: year 3 numbers used as when forecast to be more fully operational.
Ø Depreciation costs relate only to assets that will be owned by FPS, ie the fit-out.
Ø Property costs per annum by year 3 are made up of:
§ Insurance $50k
§ Rates $79k
§ CFT Future Maintenance $62k
§ Artificial Turf Costs $96k
§ Other $40k
Ø CFT Future Maintenance – this relates to an annual payment to the CFT to ensure the asset is maintained and that funds are kept in reserve (by the CFT) to fund future medium term asset replacements – as per approach endorsed by Council.
28. There are several key questions here for Council consideration. These include:
Ø Is the forecast achievable?
Ø Can users pay more?
Ø What are the risks to Council?
Is the forecast achievable?
29. For any new business case there is an element of estimation and making assumptions. FPS have presented very clear and detailed supporting data and analysis behind almost every forecast budget line. This includes formal quotes, benchmarking data from similar operations, existing financial and membership data from current clubs, scenario analysis, professional research and other information.
30. FPS has deliberately and appropriately not forecast ‘best case’ scenarios for both income and expenditure. For some areas of expenditure they have included ‘worst case’ projections.
31. Overall the FPS approach to forecasting has been conservative and responsible.
Expenditure
32. Overall officers consider the expenditure forecasts to be reasonable.
33. Worthy of the most commentary is the forecast property costs which make up approximately 40% of total expenses. These, mostly fixed costs, clearly cause the most pressure to the FPS business case.
34. Council rates have been quoted to FPS at $79k per annum. This is largely attributable to the rateable value of the new asset, representing a real challenge. $79k per annum is approximately 600% greater than the total rates currently paid by all 9 member clubs. Benchmarking other similar sports hubs and facilities, eg Papatoetoe Sports Hub, the tenants are not responsible for paying rates. This is a complex issue and perhaps signals the need for Council to review its rating policy.
35. FPS forecast a $62k per annum expense to the CFT for a future maintenance/capital replacement fund. In addition to this, included in the forecast Artificial Turf Costs ($96K) is a further $20k per annum payment to a CFT future turf replacement fund. This approach is consistent with that endorsed by Council.
36. Basically FPS is being challenged to make a significant annual payment to fund future asset replacements. Very few sports and other community organisations would operate this way, ie very few sports clubs/ community groups have cash reserves to fund future asset replacements or medium/long term maintenance. Officers acknowledge the challenge this represents to FPS, however conclude that Council’s/CFT’s approach is entirely responsible and fair.
37. The other major expenditure forecast is for staff salaries. FPS will be managed by professional staff, led by a General Manager. Adequate operational staff are budgeted for, including a caretaker. All of the salary and hourly rate assumptions are reasonable. Given the Hub will be open seven days per week with extended hours, this is one area where the FPS Board have expressed some concern, indicating that more staff would be ideal. Officers conclude that staffing levels are adequate and ultimately all that can be afforded. Officers also suggest that moving forward under the new model efficiencies will be possible through even greater collaboration with paid staff of the member clubs.
Income
38. FPS is forecasting revenue from multiple sources including: bar, memberships, Council, catering, facility hires, rental, pay for use and other.
39. As listed in the summary above the most significant of these are for bar, membership fees, Council, facility hires and artificial turf usage.
40. Net income from the bar is initially set at $120k in the first year of operating. This is based on a gross bar income of $400k. $400k is slightly greater than the existing combined total bar income for the existing member clubs. On this basis and given the significant additional activity the new facility will generate, this forecast appears reasonable.
41. Membership fees are presented in some detail – including projections for increased membership to existing clubs as well as new clubs joining. The basic fee structure is that each adult member will pay an annual affiliation fee of $50 to FPS as part of general club membership fees. The junior affiliation fee is $25 per member.
42. Note: in addition to affiliation fees to FPS, each club member will also pay a regular membership fee to their respective club – this is to cover regional and national sport affiliation fees, programmes, uniforms, equipment, entry fees, travel, and other club specific related costs.
43. Affiliation fees have been carefully structured according to the total cost per club member as well as the overall financial viability of clubs. Given the ongoing pressure on club membership numbers, FPS is motivated to ensure fees are affordable and don’t significantly exceed what is currently paid. This is especially relevant given the local community demographics.
44. Total income to FPS from affiliation fees from Founding Members based on existing player numbers (2,404 members) is $59k per annum. Based on the attraction of a new facility, programmes and services FPS have assumed 3% growth per annum in members. This equates to an additional $1,700 per annum. In light of current club trends, 3% growth appear ambitious, although given the quality of the new offer, Officer’s believe 3% to be possible, if not a minimum expectations. Note: a significant variation to the 3% target does not have a material impact on the overall business case.
45. FPS also forecast membership growth in the first 3 years from new clubs of 1000 members. i.e. new clubs will seek to join the new facility. By year 3 this equates to an additional $35k per annum in income. Officer’s agree that new clubs will be motivated and attracted to join the new facility, however find it difficult to assess the likelihood without directly talking to clubs.
46. Artificial Turf income is forecast at $80k per annum. FPS now has two years of actual income analysis to support this. Based on current usage this income projection is very reasonable.
47. Facility Hires include rental of social spaces, meeting rooms, indoor activity spaces and mutli-purpose rooms. In year 1 this is forecast to be $64k rising to $170k by year 5. The charge rates have been benchmarked on other like facilities in the region and are reasonable.
48. Year 1 Facility Hires is based on 50% of the desired occupancy of target. The target is 3500 hours across the facility. Some hire spaces, especially activity spaces are expected to be close to capacity and other spaces (non activity eg meeting rooms) are more conservative.
49. Facility Hire income projections are reasonable although represent some challenge, especially in the participation/activity spaces. FPS has a proven track record and managing participation spaces as demonstrated by the results being achieved from the artificial turfs.
50. It is worth noting that reducing the overall business case risk is that FPS income is forecast to come from a number of different sources, ie they are not simply relying on one source of income. A reduction in one income stream doesn’t have a material impact on the overall business case.
51. Is the forecast achievable? Yes. Officers acknowledge some areas of risk and challenge, however overall agree that the business case is achievable.
Can users pay more?
52. A fair question and expectation is that given the quality of the new facility, shouldn’t its members and or users pay more?
53. FPS has carefully structured fees and charges to ensure they are transparent, fair and affordable. An obvious pressure of simply increasing fees is the likely impact that then has on membership numbers and therefore consequently participation.
54. Given the pressure and general national trend of declining membership to sports clubs, FPS has structured its fees to generally ensure club membership fees will not significantly exceed current membership fees.
55. When considering the total capital investment in the new facility, another fair question also concerns some sports getting greater benefit over others so should they pay more, eg squash.
56. Given the large number of other income streams, a significant increase in member fees does not have a large impact on the overall business case.
57. Can users pay more? FPS would argue strongly ‘no’. Officers think there is potential for greater user charges although note that it would not have a material impact on the overall business case. Given the motivation behind FPS is to drive participation, officers generally support the proposed fee structure and accept the forecast user charges are reasonable.
What are the risks to Council?
58. Ultimately FPS will be the tenant of a Council owned facility – albeit through the CFT. If FPS is unsuccessful this may place pressure on their ability to fund rent and other related costs to the CFT. Or worst case place pressure on their ability to even operate the facility – keeping the lights on.
59. Should FPS be unsuccessful Council would be unlikely to let such a significant facility fail. It could choose to operate the facility itself or seek interest from other external organisations experienced at running such facilities.
60. In assessing this risk perhaps the most significant consideration needs to be given to quality of leadership and governance. FPS to date has operated with incredibly strong governance with a very skilled and experienced Board. They have established sound governance systems and policies including demonstrating clear plans to ensure continuity. FPS operations to date have been professionally managed by very capable talent.
Council Operational Funding
61. FPS has requested as part of their business case operational funding from Council. There is a precedent within other Councils to provide operational grants to external organisations to manage Council owned facilities across a range of industries. In Hutt City this has not occurred previously within the sport and recreation sector outside of Walter Nash Stadium and our aquatic facilities.
62. Comparing the evidence presented in this business case and previous documentation supplied to Council from FPS to best practice planning processes, FPS have demonstrated an ability to conduct robust planning in line with industry requirements.
63. Good practices are observed in capital work planning and project management via establishment of a tripartite PCG group comprised of Council, FPS and CFT.
64. Fraser Park has requested an ongoing operational grant ($150,000, $125,000 respectively for years 1-2, then $100,000 each year after) to achieve the following outcomes for Hutt City Council and local residents:
· Proactively address the issue of deteriorating facility standards at Fraser Park
· Increase non-organised physical activity at Fraser Park
· Enable this facility to host national sports events, and increase the number of local events
· Strengthen member clubs processes, policies, and financial sustainability
· Increase formal membership levels
· Deliver new services and activities to the local community
· Be a destination sports ground for the region
· Assist the community to build positive relationships between players, coaches and other local leaders
· Development of networks of peers and colleagues
· Building personal skills in emotional control, confidence, discipline
· Improving children’s academic achievement
· Improving mental health and wellbeing of the community
· Improving life satisfaction
65. The request for operational funding can be compared to the management costs Hutt City Council has for the new Walter Nash Centre, aquatic facilities or libraries. In these instances Council manages the facilities internally, however all have associated operating budgets.
66. Officers support the request made by FPS for operational funding on the basis that:
· Council would be ensuring return on investment for a significant capital contribution;
· Fraser Park is noted as a regional/national facility which offers a variety of community benefits through high quality management;
· A robust business case has been supplied to Council detailing why an operational contribution is required and;
· There are precedents nationally and locally where community services and activities relating to physical activity and/or provision are funded by Councils.
67. If FPS is successful in achieving Council’s desired outcomes and the benefits highlighted above, arguably an annual investment of $100k per annum can be considered high quality value for money.
68. Theoretically the annual cost of depreciation and finance costs (associated with Council’s $12m investment) should also be considered. Estimated at $150,000 per annum this makes the notional contribution per annum to $250k. Again in consideration of the likely benefits and outcomes to the City this can be considered value for money.
Options
69. The alternative option is for Council to not agree to ongoing operational funding requiring FPS to be self-sufficient. This would represent a significant problem for FPS and they would be likely to not agree lease terms with the CFT accordingly.
Other Considerations
70. In making this recommendation, officers have given careful consideration to the purpose of local government in section 10 of the Local Government Act 2002. Officers believe that this recommendation falls within the purpose of the local government act.
|
No. |
Title |
Page |
|
1View |
Fraser Park Sportsville Business Case - March 2017 |
45 |
Author: Matt Reid
General Manager Community Services
Reviewed By: Brent Kibblewhite
Chief Financial Officer
Approved By: Tony Stallinger
Chief Executive