SPECIAL POLICY & RESOURCES COMMITTEE

Subject: &ate #' Meet!ng: Re*# t #': B !g"t#n !3$% $ Ma c" (%1)

Agenda Item 135

Brighton & Hove City Council

E+ecut!,e &! ect# - .!nance & Re/#u ce/ E+ecut!,e &! ect# - En,! #nment &e,e0#*ment & 1#u/!ng 2ame: Ema!0: Ma 3 I e0and 4at"a !ne Pea ce Te0: (56(1)% (56(553

C#ntact O''!ce :

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9a d:/; a''ected:

Note: The special circumstances for non-compliance with Council Procedure Rule !" #ccess to $nformation Rule % and &ection '((B )*+ of the ,ocal -overnment #ct as amended )items not considered unless the agenda is open to inspection at least five days in advance of the meeting+" are that officers were una.le to complete the review of draft documentation and consideration of the financial and legal implications of the recommendations until the /th 0e.ruary1

.OR >E2ERAL RELEASE

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PURPOSE O. REPORT A2& POLICY CO2TE?T This report see2s agreement for an increase in loan financing from that agreed .y the council in 3uly (' to ena.le the Brighton i!4( to commence construction and spur the wider renewal and regeneration of the city5s seafront1 RECOMME2&ATIO2S: To agree that 6ption # referred to in this report is the preferred option" so that the Council will .orrow from the Pu.lic 7or2s ,oan Board )P7,B+ and lend a further 8 '1*9 to Brighton i-!4( ,td in addition to the 8'*1/9 agreed in 3uly (' 1 To authorise the :;ecutive <irectors of 0inance & Resources and :nvironment" <evelopment & Housing" after consultation with the Chair of Policy and Resources Committee" to finalise the revised terms and enter into the proposed loan agreement with Brighton i!4( ,td with a target of financial close .y 9ay ('* and to ta2e all steps necessary or incidental to the completion and implementation of the agreement1 To authorise the Head of ,egal and <emocratic &ervices to complete all necessary documentation and ta2e all necessary action to effect completion of the proposed loan agreement1

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To approve the inclusion of the loan agreement to Brighton i!4( ,td in the Capital Resources and Capital $nvestment Programme ('*='% )and the following two years> capital programmes+ to .e funded through unsupported .orrowing1 #llocate resources generated .y the i!4( towards reinvestment in the wider development of the seafront and its infrastructure1 BAC4>ROU2& $n 3uly (' " Policy and Resources Committee authorised officers to finalise terms and enter into a loan agreement with Brighton i!4( ,td1 This was on the .asis that the council" as the senior lending partner provided 8'*1/m to the pro?ect alongside investment from other partners as set out in Ta.le ' .elow1 Ta.le ': i!4( Pro?ect 0inancing 3uly ('
&enior ,oan 0inance BHCC )through the Pu.lic 7or2s ,oans Board - P7,B+ 9ar2s Barfield Coast to Capital ,:P :@uity Partner Total 8'A1/m 8!1(m 8'%1(m 8 '1(m 8'*1/m 841(m :@uity 0inance Total 8'*1/m 841(m 8!1(m 8'%1(m 8!/1/m

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#t the end of Novem.er (' " 9ar2s Barfield were informed that their principal e@uity partner could no longer commit to the pro?ect1 Council officers and Coast to Capital ,:P agreed to provide time and advisory support to 9ar2s Barfield and their financial advisors to secure a replacement investor1 #s reported to :conomic <evelopment & Culture Committee in &eptem.er ('!" a num.er of alternative leisure e@uity investors e;pressed considera.le interest in the pro?ect1 However" in the current economic climate" e@uity investors )specialising in leisure and tourism+ have considera.le choice in terms of shorter loan term periods and potentially higher returns than the i!4( pro?ect1 Conse@uently" without a council underwrite" an e@uity funding partner has not .een secured1 9ar2s Barfield" Coast to Capital ,:P and their respective financial advisors remain committed to the pro?ect and alongside council officers have .een active in e;ploring alternative financing options1 0or the pro?ect to go forward in ('*" a delivera.le funding solution would need to .e found .y the end of the current financial year1 This would allow a start on site in spring ('*" and an opening in spring ('4 in time for the commencement of the pea2 visitor season1 2e@ .und!ng O*t!#n/

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Three revised funding options emerged since &eptem.er ('! and these are set out .elow:

O*t!#n A P e'e ed

Inc ea/ed P9LB & C#a/t t# Ca*!ta0 LEP A> #@!ng P0ace/B L#an .und!ng To significantly increase the senior loan made .y the council and the length of the loan to A years1 The ,:P remain fully .ehind the pro?ect and are prepared to treat their funding as ?unior to the council loan for a higher return and to increase their loan1 The amounts received .y the council in terms of the one-off arrangement" commitment fees" annual ris2 margin on the loan are commensurate with the ris2 associated with the larger loan and the longer period of the loan1 7ith this option" the council does not ta2e any interest rate ris2 and .y .orrowing from the P7,B accesses the cheapest form of loan finance availa.le1 The council as senior lender has first call on the assets and can e;ercise step in rights should the pro?ect .e significantly less successful than anticipated1 This option affords the lowest ris2 of a state aid challenge1 The council receives %(B of any surplus in order to repay de.t early if the attraction does .etter than e;pected1 There is an option for early refinancing should the i!4( .e more successful than anticipated1 The council would .e compensated for loss of margin on commercial terms and would .enefit from an annual increase in the percentage of the tic2et income from 'B to 1%B which would continue for the life of the attraction1 There is increased ris2 to the council .ecause the loan is larger" for a longer period of time and the finance at greater ris2 than the council5s loan )i1e1 the e@uity and ?unior de.t+ is smaller1 However" the pro?ect can still afford to ma2e the payments due to the council in full with a *(B reduction in the anticipated )Base Case+ visitor num.ers1

Ad,antage/

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O*t!#n B

Unde @ !tten Pen/!#n .und Annu!t< .und!ng & Inc ea/ed C#a/t t# Ca*!ta0 LEP A> #@!ng P0ace/B L#an .und!ng Corporate Pension 0unds providing the funding )for a minimum period of !% years+ with the council acting as guarantor1

Ad,antage/

6ption B provides the highest payments to the council .ecause the annual ris2 margin payments are inde;ed to inflation rather than a fi;ed amount as in option # and the payments are over a longer period1 6ption B presents a range of ta; issues that ma2e the structure overly comple;" restrictive and the financing more e;pensive1 Payments to the Pension 0und are lin2ed to RP$ which is an un2nown varia.le adding to ris2 which together with the more e;pensive .orrowing puts a greater overall strain on the finances of the pro?ect1 Therefore the ris2 is increased that the council would receive insufficient income if visitor num.ers are far lower than anticipated compared to option #1 The agreement with the Pension 0und would .e fi;ed for the period of the loan and could not .e refinanced1 6ption B has a slightly higher ris2 of challenge under state aid1

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O*t!#n C

B1CC Unde @ !tten P !,ate Ban3 L#an .!nanc!ng The council underwrites the visitor num.ers for a period of time until the pro?ect can .e re-financed providing certainty for a .an2 to provide the loan finance in the interim1

Ad,antage/

The ris2 could .e lower than option # and for a much shorter period assuming the pro?ect is successful1 !

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The payments to the council for ris2 guarantee are the lowest of the ! options and are for a potentially much shorter period1 The council will not receive arrangement and commitment fees1 There is a higher ris2 of state aid challenge .ecause the .enefits to the council are lower1 The .an2 will have first call on the assets and step in rights should the pro?ect .e significantly less successful than anticipated1 The .orrowing costs are li2ely to .e higher than option #1

Bu/!ne// Ca/e C#n/!de at!#n/ C P e'e ed O*t!#n A !1A 0rom the ta.le a.ove the .alance of ris2 and return and the added fle;i.ility ma2e 6ption # the preferred option1 By pursuing 6ption #" the proposed senior loan from the council is 8!41 m which represents A/B of the total revised costs of the pro?ect1 The period of the proposed loan is A years" appro;imately half the e;pected life of the i!4( of at least %( years1 Ta.le : i!4( Pro?ect 0inancing <ecem.er ('!
&enior ,oan 0inance BHCC 9ar2s Barfield Coast to Capital ,:P :@uity Partner Total 8!41 m 8'(1(m 8!41 m 841(m 8*1(m :@uity 0inance & 3unior ,oan Total 8!41 m 841(m 8*1(m n1a1 8*41 m

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# ta.le showing a .rea2down of the increase in pro?ect costs since the 3uly (' report is shown at paragraph A1%1 The i!4( remains a priority investment for the Coast to Capital ,:P1 $t meets its criteria for moving ahead swiftly and there.y having a direct economic .enefit in the short to medium term and the pro?ect is also included within their draft &trategic :conomic Plan1 The ,:P have converted their initial 8!m senior loan to a 8*m ?unior loan1 They have also now agreed Heads of Terms for the loan with 9ar2s Barfield and the council1 0inal determination was agreed at their $nfrastructure 9eeting on Ath 0e.ruary ('*1 Bene'!t/ '# t"e C!t< C#unc!0 #' *u /u!ng #*t!#n A1

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Pursuing 6ption # offers the following .enefits for the city council:

The council would receive 8(1C/%m per annum for % years in a fi;ed ris2 premium to reflect the commercial nature of the loan" 8(1(4(m uplift in .usiness rates and 8(1(A(m in &ection '(4 payments1 The fi;ed ris2 premium e@uates to 8 '1 m in total at today5s prices1 The council would receive a further 8'1'm in one-off arrangement and commitment fees1 # significant increase is e;pected of up to 8(1!m per annum in the current 8'1(m income per annum from Regency &@uare car par21 $ncreased income is also e;pected from council owned &eafront properties
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The i!4( would act as a catalyst for new .usinesses in the area generating increased .usiness rate income e1g1 Preston &treet1 The council would receive %(B of any surplus created if the attraction does .etter than e;pected in order to repay de.t early1 There is an option for early refinancing should the i!4( .e more successful than anticipated1 The council would .e compensated for the loss of margin on commercial terms and will .enefit from an annual increase in the percentage of the tic2et income from 'B to 1%B )which would continue for the life of the attraction+1

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# 2ey .enefit of the revised funding proposal is the opportunity for the i!4( to act as a catalyst for the wider renewal and regeneration of the city5s seafront1 The new revenue stream secured of 8'1'm per annum" plus additional par2ing income and .usiness rate revenue would place the city council in a .etter position to address urgent and essential maintenance and repair wor2s to the &eafront infrastructure as outlined in paragraphs !1 * to !1 A .elow1 9!de ec#n#m!c and egene at!#n bene'!t/ t# t"e C!t<

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The 7est Pier site is located in a part of the city which has long .een recognised as in need of renewal1 The final regeneration of the 7est Pier site and delivery of i!4( will .e hugely .eneficial for the e;isting .usinesses in Preston &treet and along the &eafront as well as the many small and large hotels which rely upon tourism for their income1 $t is estimated that the i!4( will attract A(("((( to A%("((( visitors in a sta.le year" including an increase of new visitors to the city of '4%"(((-!(%"(((1 These additional visitors to this part of the city will encourage new .usinesses to set up which will have 2noc2-on positive .enefits in the wider area1 The &eafront is regarded as of vital importance to the tourism industry and plays a ma?or role in attracting .usiness visitors and the promotion of the wider city region1 The i!4( will support the delivery of an estimated % of the !% 2ey o.?ectives within the draft &eafront &trategy including ma2ing .est use of the remaining seafront development sites and ensuring they deliver .alanced" high @uality development which meet the needs and aspirations of the city1 The i!4( will generate activity all year round" providing new impetus and support for retail" catering" and hotels .y attracting an estimated A"((( to *C"((( additional overnight visitors to the city1 6vernight visitors spend / times more than day visitors and it is estimated this new additional spending alone will create a potential % new ?o.s1 The i!4( will act as a focal point around which other .usinesses can .egin to thrive and this in turn will support growth for the city5s tourism economy1 The overall ?o. impact of regeneration proposals can depend upon a num.er of varia.les" .ut has .een calculated as delivering from '4C full time e@uivalent ?o.s )e;cluding ?o.s created .y additional tourism income+ to a ma;imum of **( ?o.s" if ?o.s created .y wider additional tourism spend )of .etween 8'!1Cm to 8 %1*m per annum+ are included1 $n summary" the economic and regeneration .enefits of the Brighton i!4( will:

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Provide a high-@uality visitor attraction for an estimated A(("((( -A%("((( people each year" ma2ing it the most visited paid for attraction in Brighton and HoveD <raw additional investment into its immediate vicinity acting as a catalyst for regeneration of the &eafrontD 6ffer spin-off .enefits to the local economy .y attracting .etween '4%"((( to !(%"((( additional visitors to Brighton & Hove" representing a B to !14B increase in visitor num.ersD $ncrease tourist revenue .y .etween 8'!1C million to 8 %1* million per annum from year ' onwardsD Help deliver high value overnight stays worth eight times more to the local economy than day visitorsD Help deliver high value .usiness tourism visitors - conference delegates spend on average 1% times as much as leisure visitorsD 6perate all year round" helping to even out fluctuations in tourism revenueD Raise Brighton & Hove>s profile as a vi.rant" modern cityD Help to deliver the vision of the draft &eafront &trategy to EFFcreate attractive" sustaina.le" high @uality environments for residents" .usinesses and visitors throughout the yearG1

C#mmun!t< bene'!t *ac3age !1'A The developers have also committed to a num.er of community .enefits1 These include: Percentage of tic2et revenue in perpetuity to the city council to .e used for community .enefit1 <iscounts for local residents )e;cept pea2 season+1 0ree entry for Brighton & Hove state schools to ensure that every child can visit once during their school career1 #n allocation of free tic2ets for local charities and community groups1 Percentage of revenues to 7est Pier Trust for heritage wor2s1

T!c3et P !c!ng !1'/ Tic2et pricing has .een set .y drawing upon compara.le attraction pricing and research conducted .y 9&B Consultancy to produce a lead admission price of 8'*1(( .y today5s values )8'%1(( for adults in ('4 values rounded or 8' 1%( e;clusive of H#T+1 This price is compara.le with local and .enchmar2ed attractions1 Children under % will not .e charged and a range of concessionary prices for groups and pre-.oo2ed tic2ets will apply" including the discounts outlined a.ove1

(%1) Adm!//!#n * !ce at e0e,ant att act!#n/ ,ondon :ye Blac2pool Tower :ye &pinna2er Tower Brighton &ealife Centre Brighton i!4( Brighton Royal Pavilion )from 'st #pril ('*+

Adu0t D 'C1 ( ' 1C% /1%% 'A1*( '*1(( ''1((

C"!0d D ' 1!( C1C% 41A% 'A1*( A1(( %1C(

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MA2A>I2> RIS4 TO T1E COU2CIL !1'C #s part of the further due diligence wor2 underta2en since &eptem.er ('!" the underlying .usiness case for the pro?ect has .een re-reviewed and audited .y < and 3 $nternational Consulting1 Ris2 to the council has also .een mitigated in the following ways: !1 ( $ndependent commercial legal advice to ensure the council5s interests as senior lender are fully protected1 $ndependent auditing of the financial modelling to ensure this is of industry standard and all assumptions are correctly catered for within the model1 Technical monitoring and due diligence from -ardiner & Theo.ald" a world renowned company who specialise in independent chec2s and oversight for ma?or government departments and agencies as well as the .an2ing sector1 # separate and independent due diligence on the part of the Coast to Capital ,ocal :nterprise Partnership1 0inancial advice from -H#" advisers to many pu.lic sector clients including Croydon Council and others" providing e;pertise in .ro2ering partnership agreements .etween the private and pu.lic sectors1 $ndependent review of visitor num.ers from #ecom ) (''+ in terms of comparator attractions in the IJ and worldwide as well as the methodology for assessing visitor pro?ections1 0i;ed price contracts with lead contractors" .uilt in contingencies and cost over run guarantee of 8'm1 #n esta.lished team with a proven trac2 record to deliver the Brighton i!4(1 The Council and the ,:P will also .e represented on the Board of Brighton i!4(1

7ith regard to the council5s position" the preferred option increases the council5s e;posure from 8'*1/m to 8!41 m1 Hence the .usiness case has also .een further evaluated ta2ing into account a range of 2ey factors1 These include the construction ris2s" pro?ected income earning performance" management and maintenance" and also the wider economic implications and investment opportunities for the city5s seafront1 These headline ris2s are mitigated in the following ways:
R!/3 C#n/t uct!#n !/31 Ris2 that the construction does not complete to timeta.le and runs over .udget M!t!gat!#n -ardiner and Theo.ald )-&T+ will act as the Technical 9onitor for the pro?ect and their remit is to ensure that ris2 mitigation in relation to the construction process has .een properly addressed1 Before final contract signature a thorough due diligence process and review of contractual terms and costs will .e finally completed1 Throughout the construction process a formal monitoring process will also .e set up which will inform contract payments to Brighton i!4(" to .e released only after sign off .y -&T1 -&T5s responsi.ility is to ensure that all aspects of cost and technical ris2 on the pro?ect are ade@uately managed1 &ign off .y -&T will .e a Condition Precedent to the final loan agreement1 The council has already wor2ed with -&T and they are familiar with the pro?ect to date1 0i;ed Price Contracts will .e in place with each contractor and the lead A

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M!t!gat!#n contractor" will .e ta2ing overall cost ris2 allowing little scope for variation1 #s well as contingencies within the .udget" <avid & 3ulia 9ar2s have also provided a 8'm fund to call upon should costs overrun1 Brighton i!4( is an innovative design .ut uses tried and tested technology1 Built .y one of :urope>s leading steel manufacturers the tower follows standard construction for the modern design of tu.ular steel wind tur.ine towers1 The pod" .uilt .y P69# )who also .uilt the ,ondon :ye pods+ is driven .y tried and tested ca.le car technology1 -round conditions have already .een su.?ect to significant testing with on-site .oreholes1 The design and construction team for the i!4( pro?ect have worldwide e;perience in design and engineering1 The design proposals are well developed and are .eing signed off on .ehalf of the council as part of the due diligence from -&T1 -&T are a world renowned company with involvement in a num.er of high level infrastructure pro?ects in the IJ and a.road including: Cross Rail" ,ondon 6lympic &tadium ,egacy Conversion" -reenwich Peninsula Regeneration" -reat 6rmond &treet Hospital and heritage pro?ects such as the Cutty &ar2 Conservation Pro?ect1 The pro?ected visitor num.ers and visitor pricing level are fundamental to the .usiness case and have remained ro.ust over the life of the pro?ect1 Ipdated visitor num.ers )<ecem.er ('!+ have .een supplied as part of the overall refresh of the Business Case and these are accompanied .y latest pricing figures1 #ppendi; ' )<&3 $nternational Consulting K Brighton i!4( Business Review+ contains latest information on visitor num.ers and methodology1 #ppendi; '( LPart M contains information on all revenues including catering" tic2eting" merchandising and other income streams" all of which have .een updated since 3uly (' 1 $t is also important to note that the Business Case for i!4( relies upon several sources of funding in addition to tic2eting receipts1 # significant guaranteed annual rental per annum from a catering concessionaire" income from the hire of the pod for events" retail spending" pac2age deal commissions" and sponsorship all contri.ute to revenue streams1 These have .een carefully reviewed as part of the due diligence process .y council officers and officers at the ,ocal :nterprise Partnership1 ,:P mem.ers are e;perienced .usiness leaders in their own right and accustomed to reviewing .usiness proposals from an industry perspective1 The pro?ect is a.le to continue to operate and pay the council .oth the margin and the amount due to the P7,B even if visitor num.ers are *(B less than anticipated1 There would .e sufficient money to pay the P7,B even if visitor num.ers were %%B less than anticipated1 Pro?ect reserves will also .e set aside to provide a .uffer should income for any reason in future years not .e as high as anticipated1 $f the i!4( does .etter than e;pected then the additional cash will .e swept into a reserve and the council will receive %(B of this cash /

Proven technology and design ris2

R!/3 t"at !nc#me * #ject!#n/ 'a00

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M!t!gat!#n reserve as an early de.t repayment1 Ising the P7,B funding option also ena.les the pro?ect to .e refinanced early using private sector finance1 #lso" the draft loan agreement contains protection clauses providing for the financial protection of the council should this opportunity arise1

R!/3 t# management and ma!ntenance

,ife Cycle )long term+ and day to day maintenance costs are .uilt into the .usiness plan costings1 6perational :;penditure to replace capital items" fit out and systems elements has .een calculated at %B )e@uivalent to 8!/"((( per annum+1 # maintenance contract will .e entered into with P69# the manufacturer of the pod1 P69# are a well esta.lished international company and will have contractual o.ligations in relation to ongoing maintenance re@uirements1 # ETerm &ervice Contract #greementG with P69# will also re@uire C/B of planned operating time to .e made availa.le in any one calender month1 # 9aintenance Reserve #ccount will also .e formed as a condition of the loan with the council1 This will serve to ensure a secure funding mechanism for maintenance remains in place for the period of the loan1 The design life of the i!4( is presently set at %( years for the purposes of all contract documentation1 This is a design life" and therefore it is e;pected that if the attraction continues to perform well its lifespan can e;ceed this1 #ll moving parts and structural components are capa.le of replenishment1

P9LB L#an .und!ng R!/3 C Inte e/t ate !/3

The financial implications for the council are set out elsewhere in this report1 :@uity and ?unior loan funding will .e used to fund the capital costs prior to the senior loan .eing called upon1 The council will then enter into a num.er of fi;ed rate loans from the P7,B to meet the e;penditure incurred as and when it is approved .y an independent surveyor employed .y the council1 The council will .e reim.ursed the costs of the actual loans entered into and therefore will not ta2e any interest rate ris21 To ensure state aid compliance the loan from the council must .e at a mar2et interest rate and .e su.?ect to a suite of terms and conditions which do not offer any more favoura.le terms than those offered .y a commercial lender1 The council is wor2ing with legal advisers 6s.orne Clar2 to ensure it ma;imises the commercial nature of the deal and therefore mitigates this specific ris21 0inal terms will .e negotiated which .alance this ris2 with the overall re@uirements of the pro?ect" with comparator pro?ects also used to limit any possi.ility of meaningful challenge of the final terms1

State A!d

R!/3 and O**# tun!t< Reg!/te !1 ' The 2ey ris2s are outlined in the main .ody of the report1 #ppendi; * also itemises all the areas of due diligence1 Council officers have also updated the Ris2 and 6pportunity register for the pro?ect which is attached as a Part #ppendi; '' and applies the council5s approved Ris2 9anagement &trategy methodology1 $t should also .e noted that the &eafront &tructures are an item on the council5s &trategic Ris2 Register1

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>ene at!ng ne@ !nc#me t# !n,e/t !n Sea' #nt ene@a0 !1 * The &eafront anchors our economic" cultural and community identity and well.eing and is a sym.ol of our city5s confidence1 The preferred funding option generates an anticipated revenue stream for the city council of 8'1'm per annum for % years which can .e used to help finance essential capital investment in wider &eafront renewal1 9uch of the &eafront is currently in a fragile condition and in need of repair and urgently re@uires a programme of ma?or renewal and sustained investment1 The overall condition of the seafront structures" which support the # %C road and upper promenade" has .een gradually declining over many years1 The ma?ority are over '(( years old and are at or .eyond their servicea.le life1 Current estimates indicate that appro;imately 8A( million worth of investment could .e re@uired to repair and strengthen all the arch structures" other structural items such as retaining walls" and &eafront railings1 Current e;amples of restoration wor2 include the reconstruction of the arch structures that are located either side of the i!4( site )programmed to lin2 with the i!4(+" and the need to close and underta2e urgent structural wor2 to the former &helter Hall at the ?unction of the # %C and 7est &treet1 The most recent e;ample )<ecem.er ('!+ is the need for closure of sections of the 9adeira Terraces which are no longer considered suita.le for pu.lic access and will re@uire very significant e;penditure to resolve1 These e;amples demonstrate that failure to invest at an appropriate level in our &eafront infrastructure results in lost .usiness opportunities" potential closure for occupiers and mem.ers of the pu.lic" reduction in the level of rent attaina.le from e;isting premises and a potentially further .lighted &eafront in future years1 #reas of .oarded up shop fronts or fenced off closures will .ecome more commonplace without the right investment1 P #ject P0an 6 T!me/ca0e/ !1 / # timeta.le for financial close and pu.lic opening of the i!4( has .een agreed .y all the parties and is attached as #ppendi; 1 # 0inancial Close .y 9ay ('* should lead to a planned site commencement date in 3une ('* and an opening to the pu.lic in 3une ('41 $n the event of the Committee agreeing the recommendations" a letter of intent will .e issued to the main contractor to allow for final detailed design to commence before financial close is achieved in 9ay ('*1 #lthough this will attract a cost for the developer )estimated to .e in the region of 8'((2+ it will ensure site commencement in 3une ('*" which in turn will allow for an opening to the pu.lic in 3une ('41 M#n!t# !ng and e*# t!ng !1 C Policy and Resources will .e provided with regular TB9 monitoring reports on construction progress .ased upon reporting from the council5s own technical monitor -ardiner and Theo.ald1 -eneral progress reports post opening will also .e reported as part of TB9 reporting1 $n addition" pro?ect updates will .e given to the :conomic <evelopment and Culture Committee as part of the regular 9a?or Pro?ects Ipdate reports to each meeting of that committee1
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Aud!t !1!( # report on the original loan structure was considered .y the #udit and &tandards Committee on 4 3une (' 1 This set out the approach .eing ta2en to ris2 management and due diligence and set out the assurance role for $nternal #udit over the pro?ect1 The revised pro?ect will continue to .e overseen .y $nternal #udit who will underta2e more wor2 leading up to 0inancial Close in 9ay ('*1 $nternal audits will then .e scheduled throughout the pro?ect lifecycle1 A2ALYSIS & CO2SI&ERATIO2 O. A2Y ALTER2ATIEE OPTIO2S 6fficers together with the Coast to Capital ,:P and e;pert financial advisers have considered a range of options that might ena.le funding to .e raised to allow the i!4( pro?ect to move forward and these are set out in the main .ody of the report1 #t present no alternative preferred funding options have .een identified" other than those e;plored in paragraph !14 a.ove1 $f the council determine not to proceed" it is li2ely that the starting date would continue to remain uncertain until the economic recovery allows new investors to .e secured1 #s a conse@uence the 7est Pier site could remain sterilised for the foreseea.le future with conse@uences for the vitality of the seafront which anchors the city5s visitor and tourism economy1 $mplications of a further delay to the development" might include: Higher pro?ect financing costs1 $ncreased construction costs1 <eferred=loss of" future income to the city council1 No new Einvestment potG to protect seafront infrastructure and to protect and grow .usiness and investment income for future years1 ,oss of .usiness rates income1 ,oss of funds to implement permanent landscaping scheme1 :;isting scarce resources have to .e re-prioritised from current and future revenue and capital service .udgets1

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9!de Im*0!cat!#n/ #' n#t * #ceed!ng *1% $f the council were to consider not proceeding with the i!4( pro?ect for the foreseea.le future there would .e significant implications for the &eafront" for the city and also for the owners of the site" the 7est Pier Trust1 These impacts are listed more fully in #ppendi; / .ut would include: The &eafront" as the shop window of the city" and a 2ey economic driver for tourism" remains .lighted .y a derelict site at its centre and all that this entails in terms of image" income and amenity issues1 Resolution of the site remains uncertain" and the council is faced with the possi.ility of having to manage this decline1 Irgent maintenance wor2s to the derelict arches are still re@uired and also wor2s to the root end of the 7est Pier )owned .y the 7est Pier Trust+1
''

There is an adverse impact upon &eafront .usinesses due to e;posure to closure and=or .usiness interruption1 The former &helter Hall at 7est &treet and 9adeira Terraces are recent illustrations of the impact of closure and costs associated1 The loss of circa A((-A!%"((( visitors to the western seafront area impacts upon the a.ility to create thriving new .usiness5s here" particularly within the western arches1 &eafront landscaping remains unresolved for the old .oating la2e )west of the site+ and paddling pool area )east of the site+1 There is a ris2 of potential closure of the section of Ipper Promenade a.ove the redundant arches in the future if they are not a.le to .e restored1 The cost for this would most li2ely .e re@uired from council .udgets instead of .eing funded as part of the i!4( overall .uilding wor2s1

57

COMMU2ITY E2>A>EME2T & CO2SULTATIO2 Bu/!ne// C#n/u0tat!#n

%1'

9ar2s Barfield #rchitects remain active in the city and have attended many .usiness events to provide tal2s and information a.out the i!4( pro?ect1 The :conomic Partnership and the .usiness community in general remain very supportive of the i!4( proposals1 9any .usinesses will derive a direct economic .enefit from the presence of the i!4(" and these include the .usinesses in Preston &treet and the immediate surrounding area as well as hotels and other tourism related .usinesses who will see a direct .enefit from the additional estimated '4%"((( K !(%"((( new visitors each year and the increase in higher spending overnight visitors1 P e6C#n/t uct!#n

%1

9ar2s Barfield have continued to wor2 .ehind the scenes whilst funding is secured to ensure that all licences and permissions are in place to achieve a start on site within wee2s should a funding resolution .e secured )#ppendi; C+1 Consultation will continue with all .usinesses affected .y the construction process including with the council team in relation to proposals for sections of the i!4( tower to .e delivered .y sea1 <iscussions relating to future wor2s such as installation of the temporary .each access road and ongoing arches reinstatement wor2s will continue up to and including a start on site1 CO2CLUSIO2 #lternative funding options have .een fully e;plored .y all parties .ut at the present time no alternative option is availa.le to ena.le a start on site in ('*1 $t is ?udged that an alternative @uality pro?ect would ta2e several years to put in place ta2ing into account scheme design" pu.lic consultation and a planning process1 # new proposal would in all li2elihood still need to address a potential private-pu.lic funding arrangement1 7ere an alternative future scheme to .e achieved" the council will still .e faced with having to find a resolution to the derelict arches and &eafront landscaping" potentially from its -eneral 0und1 There are no cheap or short term options for this challenging &eafront site1
'

$7 41'

41

41!

# Ndo-nothing5 option has considera.le negative reputational" physical and financial impacts on the city long term and the regeneration" .usiness uplift and ?o. impacts will not occur1 The current proposal meets important o.?ectives for the city that are included within the :conomic" Tourism and draft &eafront &trategies1 There remains a serious underfunding of &eafront $nfrastructure which sits on the council5s &trategic Ris2 Register and which this proposal could assist with resolving1 .I2A2CIAL & OT1ER IMPLICATIO2S: .!nanc!a0 Im*0!cat!#n/

41*

F7

A1'

The council can underta2e .orrowing under the prudential regime if the loan repayments are afforda.le1 The i!4( is pro?ected to generate a net income stream that is sufficient to cover the Pu.lic 7or2s ,oans Board )P7,B+ .orrowing costs appro;imately ! times over and therefore meets the afforda.ility test1 The loan to the i!4( must .e on commercial terms and principally to achieve this the council will receive a margin over and a.ove the cost of .orrowing from the P7,B1 #s the loan is self financing it does not limit the council in terms of other investment decisions such as providing new school places and in fact provides a significant new net income stream which 9em.ers can decide how to use1 :armar2ing this income for investment in essential wor2s to the &eafront means that e;isting scarce resources do not have to .e re-prioritised from current and future revenue and capital service .udgets1 The proposal does not come without ris2 .ut everything has .een done to mitigate those ris2s and thorough due diligence has .een carried out on the .usiness case and the supporting financial model has .een su.?ect to independent chec2s1 #ll the e;ternal costs incurred .y the council of developing the funding arrangements of this pro?ect to date and in the future have and will .e met in full .y the developer1 C#/t #' t"e /c"eme

A1

A1!

A1*

A1%

The total cost of the scheme is 8*41 m an increase of 8A1*m in the '/ months since the 3uly (' report1 The ta.le .elow e;plains the cost increase1 :stimated pro?ect cost 3uly (' $nflation on construction costs and impact of currency movements $ncreases in fees Net changes in arrangements feesP Net changes in financing costsP 6verall pro?ect contingency Re,!/ed * #ject c#/t &ecembe (%13 P9ost of the increase reflects the higher payments to the council 8!/1/m O8!1(m O8(1%m O8(1%m O8 1*m O8'1(m D)$7(m

'!

P #*#/ed .und!ng A14 #n analysis of the different funding options e;plored .y officers is included in the .ody of the report and the senior loan route preferred1 The proposed senior loan from the council is 8!41 m which represents A/B of the total costs of the pro?ect1 The period of the proposed loan is A years which is appro;imately half the e;pected life of the i!4( of at least %( years1 The senior loan ta2es precedence over all other funding streams should the pro?ect run into financial difficulty1 The funding of the pro?ect would .e as follows1 &enior loan from the council 3unior loan from the ,:P :@uity from 9ar2s Barfield and associates Total funding A1A 8!41 m 8*1(m 841(m 8*41 m

The e@uity and ?unior loan funding would .e used to fund the capital costs prior to the senior loan .eing called upon1 The council will enter into a num.er of fi;ed rate loans from the P7,B to meet the e;penditure incurred as and when it is approved .y an independent surveyor employed .y the council1 The council will .e reim.ursed the costs of the actual loans entered into and therefore will not ta2e any interest rate ris21 # ris2 contingency has .een provided for in the construction costs and a further contingency of 8' million has .een provided in the overall pro?ect .udget1 The council loan will .e limited to 8!41 m and any pro?ected overspend in cost over and a.ove the contingency provisions must .e valued engineered out of the pro?ect or will .e met .y a cost over run guarantee of 8'm from 9ar2s Barfield1 Inc#me /t eam/ and '!nanc!a0 !/3 m!t!gat!#n

A1/

A1C

The council will charge a margin to the pro?ect on top of the cost of the P7,B loan to reflect the commercial nature of the loan to the i!4(1 The other terms and conditions associated with the loan have .een negotiated on commercial terms using independent e;ternal legal advice1 The ta.le .elow shows an income stream .ased on the agreed !1A%B margin1 Annua0 e,enue /t eam/ #greed margin of !1A%B &'(4 income share from 'B of tic2et sales Council share of i!4( .usiness rates T#ta0 *e annum Total over the % year loan at today5s prices assuming an inflation discount of 1%B per annum #dministration Costs One6#'' !nc#me #rrangement and commitment fees

8(1C4m 8(1(Am 8(1(4m D17%5m 8 '1 (m

8(1( m

8'1(Cm

'*

A1'(

The council can use the arrangement and commitment fees to complete the refur.ishment of the &eafront around the i!4( at the same time as the construction wor2s are ta2ing place1 $n addition the council should .e a.le to generate higher rents and therefore additional .usiness rates from the &eafront arches and additional car par2ing income of up to 8(1!m per annum from increased usage of the Regency &@uare car par21 0urther .usiness rates should .e generated .y new and e;panded .usinesses setting up in the surrounding area for e;ample anuplift in .usiness rates of (B from Preston &treet would generate a council share of a.out 8(1(%m per annum1 The following chart compares the total pro?ected income stream from the i!4( with the payments due to the council .ased on the most li2ely estimate of visitor num.ers with an average attendance of A!C"((( per annum1 Note pro?ect years ' and cover the construction period of the i!4(1

A1''

A1'

A1'!

The pro?ect is a.le to continue to operate and pay the council .oth the margin and the amount due to the P7,B even if visitor num.ers are *(B less than anticipated1 There would .e sufficient money to pay the P7,B even if visitor num.ers were %%B less than anticipated and it is only if num.ers fall .elow this level would there .e any possi.le contri.ution from local council ta;payers1 Pro?ect reserves will also .e set aside from operational income to provide a .uffer should income in future years not .e as high as anticipated1 Ising P7,B funding option also ena.les the pro?ect to .e refinanced early using private sector finance and the draft loan agreement contains protection clauses providing for the financial protection for the council should this opportunity arise1 $f the i!4( does .etter than e;pected then the additional cash will .e swept into a reserve and the council will receive %(B of this cash reserve as an early de.t repayment1 $n this circumstance" the council would also .e compensated for loss of margin on commercial terms and will .enefit from an annual increase in the
'%

A1'*

A1'%

A1'4

percentage of the tic2et income from 'B to 1%B which would continue for the life of the attraction1 A1'A Para *1! to *1% sets out the li2ely conse@uences" financial and otherwise" if the pro?ect does not proceed1 Broader $mplications are also set out in #ppendi; /1 Finance Officer Consulted: Lega0 Im*0!cat!#n/: C#unc!0B/ Statut# < P#@e / A1'/ #s per the previous report" the ,ocal #uthorities ),and+ #ct 'C4! will .e relied on in terms of the main power for the proposed loan and &ection ''' of the ,ocal -overnment #ct 'CA and the general power of competence under the ,ocalism #ct ('' will .e relied on in respect of the incidental arrangements1 &ection ! of the 'C4! #ct provides that a local authority may advance money for .uilding wor2s" where it is satisfied that it would .e for the .enefit or improvement of its area1 &uch an advance" together with interest thereon" must .e secured .y a mortgage of the land and the amount of the principal of the advance must not e;ceed nine-tenths of the land5s value or nine-tenths of the estimated value of the completed .uilding1 This re@uirement will .e satisfied as will the other standard loan provisions set out in the #ct1 $n deciding whether and how to e;ercise its powers in relation to this proposal" the committee must consider the council5s fiduciary duty to conduct its administration in a fairly .usiness-li2e manner with reasona.le care" s2ill and caution" and with a due and alert regard to the interest of the council ta; payers1 However" it is in the council>s discretion to determine what the interests of the council ta; payers are and how they are .est served following its analysis of the relevant costs and .enefits1 Thus in considering this matter" in terms of fiduciary duty" the council must disregard all irrelevant matters and have regard to issues such as the .urden of the terms of the arrangement and the e;penditure involved for the council ta; payers" as well as the .enefits it will .ring1 This needs to .e considered .oth generally and specifically to those who will directly gain or suffer from the proposal1 This .alancing e;ercise is for the council to determine after having given due consideration to the appropriate weight to .e afforded to the relevant factors1 State A!d A1 ' To ensure state aid compliance the loan from the council must .e at a mar2et interest rate and .e su.?ect to a suite of terms and conditions which do not offer any more favoura.le terms than those offered .y a commercial lender1 These re@uirements are considered to .e met" so that no state aid is involved in the proposed transaction1 T"e B !g"t#n 9"ee0 A1 The legal agreements relating to the Brighton 7heel at <altons Bastion allow for the council to give 4 months notice to the wheel5s operators" Paramount" to
'4

Mark Ireland

Date: 28/02/14

A1'C

A1 (

cease operation of the wheel once wor2s start on site for Brighton i!4(1 7ithout notice" the current lease will e;pire on !(1(/1 ('41 Consideration as to the implications of concurrent operation of the two attractions is not considered pertinent to the present purpose of this report" and it is therefore proposed that at the present time" the current lease is left to run its course with Paramount" as planned1 $f Paramount choose to as2 for an e;tension to their lease and the i!4( is operational" a decision will need to .e made at this time with regard to any renewals or e;tensions .y the council7 Law er Consulted: EGua0!t!e/ Im*0!cat!#n/ A1 ! The i!4( will .e accessi.le throughout to people with disa.ilities and will improve access to the seafront lower promenade1 # new lift to the east of the Heritage Centre will ma2e the development easily accessi.le and accessi.le toilets are located at the upper prom entrance area and also .elow in the Heritage Centre and cafe area1 Toilets in the lower area have recently .een redesigned to ensure they comply with the council5s aspirations for pu.lic 7C5s and will .e open to mem.ers of the pu.lic who are not necessarily using the centre or visiting the attraction1 9ar2s Barfield have also committed to a system of concessions for local residents and specific promotions to .e offered to local schools and colleges1 They will .uild upon this in partnership with the 7est Pier Trust who already have pac2ages for schools that ta2e place at the 7est Pier site and the 0ishing 9useum )which also houses a collection of 7est Pier memora.ilia+1 Su/ta!nab!0!t< Im*0!cat!#n/ A1 * The sustaina.ility implications have .een thoroughly documented and reviewed as part of the planning process for the i!4( pro?ect1 The i!4( is a low energy use solution which is assisted in its drive mechanism .y energy supplied from the wind tur.ine ) (B estimated+1 The installation of heat pumps provides air heating and cooling in the pod and heritage centre and will provide an estimated !(B of the total thermal heating energy use1 -rey water and rainwater recycling is included within the design1 An< Ot"e S!gn!'!cant Im*0!cat!#n/ A1 % #ll significant implications are dealt with in the main .ody of the report1 !ob !ruce 28/02/14

'A

SUPPORTI2> &OCUME2TATIO2 Pa t 1 A**end!ce/: '1 1 !1 *1 %1 41 A1 /1 C1 <&3 Consulting Business Review Ch1' to Ch1% Timescales Target Hisitors=Capacity <ue <iligence & Council #dvisors Revised ,oan &tructure 7est Pier Trust Position &tatement IJ ,ocal #uthority P7,B funded pro?ects $mplications of not proceeding 7or2 Inderta2en to <ate .y 9ar2s Barfield #rchitects

Pa t II A**end!ce/: '(1 <&3 Consulting Business Review Ch1 4 ''1 Ris2 and 6pportunity Register

&#cument/ !n Membe /B R##m/ '1 Policy and Resources Committee report: 3uly ('

Bac3g #und &#cument/ None

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