- Meeting of Resources and Governance Scrutiny Committee, Thursday, 8th November, 2018 2.00 pm (Item 58.)
Report of the Strategic Director (Development) and City Treasurer
This is the Executive report which updates Members on the progress with the delivery of The Factory Arts Centre, including the terms for the Notice to Proceed to construction of the main works under the executed Management Contract for the delivery of The Factory and progress with the redevelopment of St John’s.
The Committee considered a report of the Strategic Director (Development) and the City Treasurer, which updated Members on the progress with the delivery of The Factory Arts Centre, including the terms for the Notice to Proceed to construction of the main works under the executed Management Contract for the delivery of The Factory and progress with the redevelopment of St John’s.
The Leader referred to the main points and themes within the report which included:-
· In line with other key cultural institutions in Manchester, The Factory committed to increasing the positive social impact of culture in the city;
· The Factory Project and the transformation of St John’s offered a strategic opportunity to create and attract over 6,000 jobs to the city with new technological, digital and creative businesses attracted by the facilities, the high quality public realm and the wider place-making benefits being developed in St John’s;
· The existing total Capital Budget for The Factory construction was £111.65 million;
· The Council had previously committed £21.6million to the capital costs of the project;
· £78.05million had been secured from HM Treasury, following the approval of the 5-case business case in January 2017 and the project had also secured stage one approval for a £7million Arts Lottery Grant in June 2017;
· The original budget was set in 2015, based on benchmark costs, to secure government funding packages. This was prior to any detailed site investigations or design work;
· A review of all project costs and potential risks to bring to light any issues that may impact on costs during the construction phase had taken place and had concluded that to deliver the vision and long-term benefits to Manchester and the wider cultural ecology, the project costs needed to increase;
· During the review period serious consideration was given by the Strategic Board to reduce the size of the building as a way to achieve the original budget, however, this would have further delayed the opening date, and the amount of shrinkage required would have fundamentally undermined and devalued the integrity and concept of what The Factory would be;
· As the original budget was set in 2015, it did not take into account the higher rates of construction inflation experienced since then and land values in the City had also risen significantly during this period;
· The original project budget also did not take into account the longer design and construction periods necessitated by the complexity of the design, the unique challenges posed by the site and the need to resolve these before commencing permanent works;
· As such, budget increase of £18.97million, funded by capital receipts and a Manchester Mortgage Corporation dividend, providing a total capital budget of £130.62million was proposed;
· A virement of £4.3million from the Sustaining Key Initiatives Capital Budget was also requested to fund £1.286million land acquisition costs;
· To date over 90% cost certainty has been reached; and
· A fundraising committee has been established, chaired by Sir Howard Bernstein, with a target of raising a minimum £5 million to support the increase in capital costs
The Committee had been invited to comment on the report prior to its submission to the Executive on 14 November 2018.
Some of the key points that arose from the Committees discussions were:-
· The Committee expressed concern that the projected costs now proposed, to be incurred by the Council, were to almost double, especially at a time where the Council was required to be making savings across departments and services and the message this would give to Manchester residents;
· There was strong reluctance by all Committee Members to support this additional increase being met through an increase in the use of capital receipts and it was questioned as to why the increase in costs could not be met through prudential borrowing instead;
· It was felt that the proposal to sell Council land assets to meet this increase was not a ‘no cost’ solution, but rather a lost opportunity as the Council would be unable to use these receipts for other projects and it was questioned why the majority of this additional funding was coming from the sale of Council land assets;
· Members felt that it was difficult to support the proposed increase being met from the sale of Council land assets without being advised of where these assets were located;
· Clarification was sought as to why HM Treasury and Arts Council England were not part funding this additional increase in costs;
· Had the Business Plan agreed in 2017 changed following the increase in costs;
· What was the original and current budget contingency for the Factory project and was it felt that this was at an adequate level;
· Had the cost element associated to the public realm aspect of the project increased and was this cost factored into the overall cost of the project;
· Given that the Council was now being asked to agree an increase in costs, it was questioned whether it had been appropriate for preparity work to take place;
· There was dissatisfaction from Members that at the time the original budget was set, a detailed acoustic solution was not in place and now to fully satisfy these requirements a further £4.5million to the cost of the project was required;
· Clarification was sought as to the number of FTE opportunities the project would provide as there was a marked discrepancy between the level originally projected and the figures now reported;
· There was a need to understand what Social Value would be delivered from the project; and
· Concern was expressed that the progress of the Factory project had not received regular Scrutiny and that going forward this Committee should receive quarterly updates on its progress against agreed costs.
The Leader commented that the situation now before the Council was not ideal and acknowledged that it did not portray a good picture to Manchester residents. He advised that consideration had been given to scaling the project back, value engineering and even scrapping the project completely but these options would have taken away some of the projects purpose, putting grant funding from central government at risk, not delivered sufficient savings in the budget to make it deliverable and to axe the plans altogether would have still incurred costs to the Council in the region of £23million, with little left to show for it but an empty piece of land.
The Leader advised that if the Committee were minded to recommend that the Executive considered meeting the costs through prudential borrowing, then this would be given appropriate consideration. This was supported by the Executive Member for Finance and Human Resources who added that revenue implications would also need to be taken into consideration if the Council was to borrow any monies.
The Leader provided some reassurance to the Committee that the Council was in a financial position to carry the increase in cost within existing budgets for some time which would ultimately be offset through capital receipts. He added that the Council was prohibited from selling its assets to fund the delivery of services. He also explained that it was not possible at this stage to provide details of which assets were earmarked for sale due to commercial confidentiality, but clarified that the Council was not intending on disposing of any assets that were not already earmarked for disposal.
The Leader advised that as part of the original agreement, the Council had secured £78million funding from HM Treasury and a £7million Arts Lottery Grant from Arts Council England towards the project. Both of these were set amounts. All additional funding, including any increases would have to be met by the Council.
The City Treasurer advised that the increase in costs had had no material impact on the business plan and agreed that the 5 case Business Plan could be shared with Committee Members. The Committee was also informed that the original contingency budget for the project was £6.5million which had now reduced to £5.8million, equivalent to 5% of the total cost, which was not an unreasonable level for a development of this scale.
The Director of Capital Programmes advised that the costs associated to the Public Realm aspect of the project had not increased and were included in the total increased costs. He also advised that in terms of increased costs associated to acoustic works, due to the scale of the project, detailed design had to be developed over time which had resulted in unprecedented acoustic treatments being required.
In relation to the delivery of FTE opportunities, the City Treasurer agreed to share information with the Committee on the projected GVA and job creation over the 10 year assessment period. She also suggested taking a report through the Ethical Procurement and Contract Management Sub Group on the delivery of Social Value from the project.
(1) Recommends that the Executive consider meeting the additional costs of the project through prudential borrowing rather than through increasing the capital budget;
(2) Agrees that the Ethical Procurement and Contract Management Sub Group receive a report on the delivery of Social Value form the Factory Project;
(3) Agrees that the Committee receives quarterly updates on the progress of the project against agreed costs;
(4) Requests the City Treasurer to provide Committee Members with a copy of the 5 case Business Plan;
(5) Requests that Officers arrange a site visit for the Committee to the Factory Project at an appropriate time; and
(6) Requests that Officers submit a report to the next meeting of the Committee on all the Council’s capital projects that are valued over £10million detailing the original costs agreed, current spend and anticipated final spend for each project.