Report of the Executive Director, Development, Environment and Leisure to the Cabinet on 10th September, 2008

1.1 This report seeks Cabinet approval to the business plan for SIV Enterprises Limited (SEL). SEL is a wholly-owned subsidiary of Sheffield International Venues (SIV). SIV operates ten major sports and leisure venues in the city (and sub-contracts the operation of the Sheffield Arena). The primary purpose of SEL is to seek new business outside Sheffield which will then generate profit back to SIV in order to support additional investment in SIV's Sheffield-based facilities, thereby benefiting residents of the city. In other words, the success of SEL will have a positive impact on the quality and sustainability of sports and leisure opportunities offered within Sheffield.

1.2 This report follows on from a Cabinet report on June 11 of this year which sought Cabinet endorsement of SIV establishing its new trading company (SEL) and seeking Cabinet approval for delegated officer authority to grant consent to SIV for it to enter into parent company guarantees or other forms of security on behalf of SEL.

1.3 A copy of the SEL business plan is included with this report as an appendix.

2.1 On June 11 2008, Cabinet gave in principle approval to the following: -

a) endorse Sheffield International Venues (SIV) establishing the subsidiary trading company SEL and give approval to the future operation and widening of SEL's activities within the parameters set out in this report;

b) give delegated authority to the Interim Executive Director of Development, Environment and Leisure in consultation with the Assistant Chief Executive Legal and Governance and the Director of Corporate Resources to grant consent to SIV for it to enter into parent company guarantees or other forms of security on behalf of SEL. This is to include both guarantees and other forms of security required for SEL's contracts for services as well as loan agreements or other contractual arrangements which are required by SEL as a means of financing capital or other investment related aspects of any of its potential contracts. It is however to be limited to UK contracts and to contracts which carry a potential financial risk of no more than £300,000;

c) agree that the delegated authority under recommendation (b) above be conditional upon the Interim Executive Director Development Environment and Leisure in consultation with the Assistant Chief Executive Legal and Governance and the Director of Corporate Resources requiring, in all cases where they consider it appropriate to do so, that a prior professional assessment of each contract being sought by SEL must be carried out and that these assessments are to be undertaken by independent consultants. The cost of such assessments to be met by SIV and/or SEL;

d) agree that recommendations (a), (b) and (c) be conditional upon SIV/SCT first satisfying the Interim Executive Director Development, Environment and Leisure in consultation with the Assistant Chief Executive Legal and Governance and the Director or Corporate Resources that the preconditions set out at paragraph 3.8 of the June 11 Cabinet report have been fully complied with;

e) agree that the authority granted under recommendations (a), (b) and (c) will be conditional upon SIV, SCT and SEL complying with and continuing to adhere to the conditions detailed at paragraph 3.9 of the June 11 Cabinet report;

f) give delegated authority to the Interim Executive Director Development Environment and Leisure in consultation with the Assistant Chief Executive Legal and Governance and the Director of Corporate Resources to:

(i) formally approve the agreed form of Memorandum and Articles of Association of SEL on behalf of the Council;

(ii) formally approve and enter into a written agreement (and or agreements as appropriate) with SEL, SCT and SIV to regulate the giftaiding of SEL's profits to SCT;

(iii) to appoint and contract with the independent consultants in accordance with recommendation (c) above;

(iv) to grant where it is considered appropriate to do so the necessary consents required to be given by the Council as detailed in paragraphs 3.8 and 3.9 of this report and no consents given by the Council under these delegations are to be binding unless they are given in writing and are signed by the Assistant Chief Executive Legal and Governance.

2.2 However, all of the above recommendations were approved in principle subject to a further report back to this Cabinet to endorse SIV's overall business plan in relation to SEL.

3.1 The business plan submitted by SIV is included as an appendix to this report. The plan has recently been approved by the SEL and SIV Boards. The key points to note are as follows: -

a) section 1.2 of the plan recognises that in recent years, the Council has increased the core funding of SIV by £2.5M. This was in recognition of substantial cost increases experienced by the company which were largely beyond their control such as insurance, pensions, buildings repairs and energy;

b) the plan in section 1.3 indicates that there is an expectation by SIV in the medium term of the Council grant remaining fixed i.e. no increase but as a consequence of this there is a forecast funding gap through to 2011/12;

c) the plan then summarises the key points of the strategy agreed between the Council and SIV in 2007, namely: -

d) SIV has produced a balanced budget for 2008/9 and their track record suggests that this will be achieved;

3.2 Section 2 of the plan summarises the strategy for SEL and offers a range of financial projections. The key points to note are as follows: -

a) the company expects to make significant profit towards the end of the projected five-year period with a net present value over this period of £802K;

b) the plan re-iterates that the primary purpose of SEL is to deliver profit to it's parent company in the form of SIV and Sheffield City Trust (SCT) - the latter being the charitable parent body of SIV. The Cabinet report of June 11 2008 confirmed that the Council's support for SIV and SEL is conditional on the proposed gift aiding of SEL's profits back to SCT in order to fund investment to the Trust's Sheffield venues;

c) the business plan identifies a number of key business streams including consultancy, facilities management and the development of SIV's successful Fitness Unlimited brand;

d) the plan makes reference to business opportunities in China. However, it is important to note that business by SIV and/or SEL outside the UK is not covered by the approvals being sought in this report. Item 2.1 (b) above makes it clear that Cabinet on June 11 2008 were asked only to consider contracts limited to the UK.

4.1 The business plan includes a mid-case scenario which represents the target being aimed for by SEL. This shows a net present value (over 5 years) of £802K. It should be noted that this will make only a part contribution to the projected funding gaps (referred to in 3.1 (b) above) over the same period.

4.2 It is clear therefore that the wider strategy summarised in 3.1 (c) above will be required to be employed in all aspects in order for SIV to manage the forecasted funding gaps. It is important to note that SIV fully recognise this and, as an example, their recent redevelopment of the Ponds Forge fitness suite is intended to generate significant increases in membership income.

4.3 Council officers are currently working with all leisure/culture trusts on 3-year plans and funding requirements. In the case of SIV, a further detailed examination of the respective contributions of the four strands of the strategy will be undertaken.

4.4 It should be borne in mind that, if SEL had not been formed, SIV might well have entered into similar contracts in its own right and would have been exposed to direct risk, rather than through guarantees in respect of its new subsidiary. It could be argued therefore that the running of contracts through SEL represents a reduction in risk, because not all of SEL's activities are likely to be the subject of guarantees from SIV. This assumes that, had SEL not been formed, SIV itself would have entered into contracts similar to those being pursued by SEL.

4.5 Cabinet agreed on June 11 2008 that SIV's guarantee of SEL's contracts be approved by the Council on a case-by-case basis, and that external professional advice be obtained, where appropriate, in respect of such risk. This should help to limit SIV's exposure to risk, and also provide the Council with a structured means of monitoring SIV's activities in respect of its new commercial ventures. It should be noted that in some cases SIV's financial commitment in respect of SEL would not necessarily be restricted to the amounts covered by the formal guarantees. This would be taken into account in the assessment made of individual cases.

4.6 In summary, the need by SIV to seek the Council's permission for the provision of guarantees should not present the Council with an unmanageable level of additional risk. As noted above, had SEL not been formed, SIV might well have entered into new contractual ventures on its own account. It is possible that, because SEL is a separate entity with limited liability, SIV will be more adventurous in the scope of contracts it seeks to enter into, but the need for guarantees, and Council approval for such guarantees, should act as effective constraints on the undertaking by SIV of inappropriate commercial ventures.

5.1 The Funding Agreements dated 22nd February 2000, 13th March 2002 and 19th May 2004 each between the Council (1), SCT (2) and SIV (3) relating to the Major Sports Facilities, Ice Sheffield and the Sheffield City Hall require the consent of the Council:

(a) for SIV/SCT to set up a subsidiary company; and

(b) for SIV to enter into a Parent Company Guarantee, loan, collateral charge or any other form of security in respect of any contract entered into by SEL requiring such a guarantee or other form of security.

5.2 The Council's authority to enter into and subsequently comply with and enforce the terms of the Funding Agreements are derived from the following statutory powers:

(a) S19 (3) of the Local Government (Miscellaneous Provisions) Act 1976 which provides local authorities with general powers in respect of the funding of sports and recreational facilities used in conjunction with the incidental power contained within s111 of the Local Government Act 1972 which allows a local authority to do anything which facilitates or is incidental to another statutory function;

(b) S145 (1) of the Local Government Act 1972 which gives local authorities the power to do itself, arrange for the doing or contribute towards the expense of doing anything including anything incidental to this function; and

(c) The Well-Being powers under section 2(1) of the Local Government Act 2000 which give local authorities the power to do anything which it considers is likely to promote or improve the social, economic or environmental well-being of its area or some or all of its inhabitants. In exercising this power, regard has to be had to any guidance issued by the Secretary of State. In preparation of this report the issued guidance has been considered and the current proposals are not at variance with this. In addition, prior to the use of the power under s2(1) regard must be had to the Council's Community Strategy prepared pursuant to section 4 of the Act. The exercising of the Well-Being powers for this purpose would be consistent with the cultural strategy which forms part of the strong economy theme of Sheffield's City Strategy.

5.3 In addition to the Council's specific powers it should be noted that the Council also has both a duty to achieve Best Value by continuously striving to improve the efficiency and effectiveness of the way in which its functions are exercised and a fiduciary duty to act prudently and in the best interests of its Council Taxpayers.

6.1 There are no specific human relations implications arising from this report.

7.1 This report relates specifically to work by the subsidiary company outside of Sheffield. However, the company, as a subsidiary of SIV and therefore SCT, must act in the best interests of its ultimate shareholder i.e. SCT. Given this, together with the Council's relationship with SCT, there are clear expectations on the company to operate a satisfactory equal opportunities policy.

8.1 There are no specific environmental issues arising from this report.

9.1 Cabinet is recommended to: -

(a) endorse the business plan submitted by SIV on behalf of its subsidiary trading company SEL (attached as an appendix) in so far as it relates to SEL's proposed contracts and business opportunities within the UK;

(b) require the Executive Director of Development, Environment and Leisure, in conjunction with the Director of Corporate Resources and the Assistant Chief Executive Legal and Governance to work closely with SIV in monitoring the progress of SEL against its business plan and to conduct quarterly reviews together with a report back annually to Cabinet with a progress report;

(c) require the Executive Director of Development, Environment and Leisure, in conjunction with the Director of Corporate Resources and the Assistant Chief Executive Legal and Governance to work closely with SIV in order to ensure that its wider funding strategy summarised in 3.1 (c) of this report is actively pursued in order to address the forecast funding gaps over the next 3-5 years.

David Curtis

Executive Director, Development, Environment and Leisure

6th August 2008