- The Cleansing, Grounds Maintenance, Catering and Cleaning services should no

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Report Corporate Policy Committee 2 March 2010

3 REVIEW

OF TRADING ACCOUNTS

1. Reason for Report

1.1

accounts and asks Members to agree the removal of specified services from the trading account regime.

This report provides details of the recent review of the Council’s trading

1.2

changes to budget management arrangements are likely to be appropriate to support the work being progressed as part of the development of the Council’s Strategic Commissioning and Delivery Framework referred to in the preceding report on this agenda.

Beyond the changes recommended in this report, it is recognised that further

2. Report Summary

2.1

in some cases this has led to confusion regarding accountability for budget

management and control. A review of the Council’s existing trading accounts has been undertaken and the main findings of this review are:-

The Council currently maintains trading accounts for a range of Services and

-

The only Statutory Trading Account that the Council should continue to maintain is for the Roads Service; and

-

The Cleansing, Grounds Maintenance, Catering and Cleaning services should no longer be maintained under the Statutory Trading Accounts regime. The Cleansing and Grounds Maintenance Services will now be managed on a direct budget basis (ie. traditional budgeting) while Voluntary Trading Accounts will be maintained, at least in the immediate term, for the Building Cleaning and Catering Services. 2.2

findings of the trading accounts review and the suggested changes. The report also considers the future financial prospects of DGFirst and indicates that it is fully

anticipated that trading services (including those services being removed from the trading accounts regime) will return to overall profitability/surplus from the upcoming financial year (201 011 1).

The report, and the supporting appendices, provide an explanation of the

3. Recommendations

Members are asked to:

3.1 note the results of the trading accounts review as outlined at Section 10 of this report;

3.2 agree that the Cleansing, Grounds Maintenance, Catering and Building

Cleaning services will no longer be maintained under the Statutory Trading Accounts regime; and

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3.3 note that further revisions to service and budget management arrangements will be assessed as part of the remit of the working group being set up to implement the Strategic Commissioning and Delivery Framework referred to in the preceding report on this agenda.

4. Plan Links and Contribution

The review of trading accounts has been undertaken to support the development of the Strategic Commissioning and Delivery Framework which in turn supports a number of the key objectives reflected in the Council’s Corporate Plan.

5. ResourcesNalue for Money Assessment

5.1

One of the main concerns associated with the operation of the Council’s trading services has related to the material overall deficits returned by these services in recent years. Deficits in the Street CleansingNVaste Collection and the Property Maintenance services have been the main contributors to this position.

5.2

In the current financial year a more modest amount of

f251

k has been

contributed from Balances to address the Cleansing deficit (partially offset through a projected surplus against Grounds Maintenance). It is not anticipated that further material amounts will be required to address trading deficits in the current financial year.

5.3 As a result of a number of measures taken including the Waste Review, the full savings from which will be generated from

2010/11

following the removal of the blue box recycling service, and work done to rationalise the Property Maintenance Service, as reported to the Resources Committee, it is fully anticipated that trading services will return to overall profitability/surplus from the upcoming financial year

(2010/11).

5.4 It is important to recognise that DGFirst has responsibility for the financial performance of their services whether or not they are provided through a trading account. Where services are provided through a trading account it is the

responsibility of DGFirst to ensure that charges, to both internal and external

customers, are set at a level which ensures the avoidance of trading account deficits. It is anticipated that trading service charges will be subject to revision as a result of the introduction of Single Status.

6. Risk Assessment

6.1

services due mainly to variations in costs, market conditions and income associated with differing levels of trading. This has resulted in variations between projected and actual trading results although the projection of trading performance has improved in recent years and the extent of volatility in trading results has been reduced.

The financial performance of trading services is more volatile than budgeted

6.2

Perhaps the main risk currently facing the Council’s trading services relates to the impact of Single Status. Single Status changes will add to the costs of a number of services (including Roads and ArchitectdEngineering Services) and this

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7. Authorities and Legal Implications

The regulations requiring councils to maintain and publish information on statutory trading accounts for ‘significant trading operations’ are reflected in the Local Government in Scotland Act 2003. This Act repealed the previous legislation governing Compulsory Competitive Tendering.

8. Consultations

The Corporate Management Team and senior management within DGFirst have been consulted as part of the preparation of this report and are in agreement with its terms.

9. Background

9.1 The Local Government in Scotland Act 2003 requires councils to maintain and publish information on statutory trading accounts for ‘significant trading operations’. The criteria under which statutory trading accounts were/are assessed is outlined at

Appendix I to this report. Under these criteria the Council had, up until 2008/09, the following

4

Statutory Trading Accounts:-

0 Catering & Cleaning

0 Cleansing & Grounds Maintenance 0 Property Maintenance

0 Roads Maintenance

9.2 As a result of a reduction in size/turnover following the loss of the DGHP contract, the Property Maintenance Service was removed from the Statutory Trading Account regime in financial year 2008/09. This report proposes the removal of both the Catering & Cleaning and the Cleansing & Grounds Maintenance services from this regime and this is discussed at Section 10 of this report.

9.3 In addition to Statutory Trading Accounts, the Council has also maintained a range of Voluntary Trading Accounts. These Voluntary Trading Accounts have generally been maintained for Services which have a degree of external trading and/or recharge costs to a range of customers. These Voluntary Trading Accounts are listed and explained at Appendix 2 to this report.

9.4 There have been a number of recurring concerns associated with the

operation of trading accounts over recent years. It is recognised that in some cases the operation of trading accounts has led to a blurring of accountabilityhesponsibility and these concerns have increased in recent years as a result of recurring trading account deficits. These concerns, and changing requirements in relation to the maintenance of statutory trading accounts, make it appropriate to undertake an overall review of the maintenance of trading accounts within the Council.

10. Review of Trading Accounts

10.1 The maintenance of trading accounts is designed to support the demonstration of best value where services are:-

0 provided in a ‘competitive environment’ and

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10.2 However, it is essential that trading accounts are maintained only where it is appropriate and where it can be demonstrated that the above criteria are met. There have been concerns that in some cases the operation of trading accounts has led to a blurring of accountability/responsibility for service and financial performance. 10.3 A full review of the nature of the Council’s existing trading services, and the need to continue to maintain these services under the trading account regime, has been undertaken. The results of this review are reflected at Appendices 2 and 3 to this report.

10.4 The changes resulting from this review are outlined at Appendix 2 and the key issues are as follows:-

0 The only Statutory Trading Account that the Council should maintain will now be for the Roads Service

0 The Cleansing, Grounds Maintenance, Catering and Building Cleaning services should no longer be maintained under the Statutory Trading

Accounts regime. The Cleansing and Grounds Maintenance Services will now be managed on a direct budget basis (ie. traditional budgeting) while

Voluntary Trading Accounts will be maintained for the Building Cleaning and Catering Services.

10.5 Explanations for these suggested changes are provided at Appendix 2 to this report. It is important to recognise that further revisions to service and budget

management arrangements, including a potential further reduction in the number of voluntary trading accounts being maintained, will be assessed as part of the remit of the working group being set up to implement the Strategic Commissioning and Delivery Framework referred to in the preceding report on this agenda.

10.6 Under the Strategic Commissioning and Delivery Model it is considered unlikely that it will be appropriate for a single Service/Department to operate a trading account (and act as the deliverer) for a service for which they also hold the budget (and act as the commissioner). The transfer of the Cleansing and Grounds Maintenance activities to a direct budget approach addresses this concern for these services. The only significant area where this issue will continue to arise relates to the Roads Service and this will be subject to further review as part of the remit of the working group referred to at para 10.5 above.

11. Financial Implications and Projected Financial Performance

1

1.1 Given the financial difficulties encountered by trading services in recent years it is important that this review takes into account the projected financial performance of both the former and the continuing trading services.

Current Financial Year

11.2 In recognition of the initial findings of this review of trading services, the Finance Sub Committee at its meeting of 12 November 2009, noted the requirement for a one-off contribution from General Fund Balances to address the following:-

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Cleansing and Strategic Waste Fund Grounds Maintenance Supporting People Total 0911 0 Projected f 477

k

(E

201

k)

(f25k) f 251 k Deficit/( S u rpl us)

11.3 A report presented to the February meeting of the Resources Committee

indicated a projected deficit of f 148k against the remaining trading services due mainly to pressures on the Property Maintenance and School Catering Units which is only being partly offset through a surplus on the Roads account. This overall position has been gradually improving over the course of the financial year and the DGFirst Management Team are currently progressing further measures aimed at ensuring that this remaining deficit is addressed prior to the 200911 0 year-end.

Future Prospects

-

From 201011 1

11.4 Within the remaining trading services it is projected that the Roads Unit will continue to return surpluses in the region of f300k per annum. However, as reflected at Appendix 3, it is considered appropriate, specifically for corporate budgeting

purposes, to make some allowance for potential delays in the achievement of

efficiencies in tackling difficulties in the Property Maintenance, Vehicle Maintenance and Catering Services. A small overall surplus is therefore projected against trading services and this will be carefully monitored on an ongoing basis.

11.5 In respect of the Services transferring out of the trading services regime, it is anticipated that there will continue to be a surplus of around f200k on the Grounds Maintenance Service. In recognition of the projected surplus against the Cleansing budget, as a result of the removal of the blue box scheme and the review of glass recyclate operations, Members agreed a saving of f202k as part of the 2010/11 budget setting process. As reflected at Appendix 3, an overall underspend of f200k against the services transferring to the General Fund is therefore projected for

financial year 201 0/11. This projection will be carefully monitored throughout the financial year with a view to returning this amount to General Fund Balances at the yea r-end

.

11.6 It is therefore fully anticipated that, with the delivery of the savings and

efficiencies already considered and agreed by Members, both continuing and former trading services will return to overall profitability from the new financial year. Trading results and performance against budget will require to be carefully managed and monitored to ensure that these improvements are secured. Opportunities to return amounts to balances and to support future savings requirements (perhaps through reinvestment of surpluses) will also be sought and will be reported to Members as appropriate.

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Paul Garrett

Operations Manager Accountancy Carruthers House

English Street DUMFRIES DG1 2HP

Date of Report: 8 February 2010

File Ref: tradingaccs-corppol02feb2010

Gordon Lawson

Director of Support Services Community & Support Services Carruthers House

English Street Dumfries DG1 2HP

Appendix I

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Guidance on Statutory Trading Accounts

Appendix 2

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Summary of Classification of Former Trading Services and Projected Financial Performance

Appendix 3

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Projected Financial Performance of Former and Continuing Trading Services

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Appendix 1

Guidance on Statutory Trading Accounts

The Local Government in Scotland Act 2003 repealed the legislation governing Compulsory Competitive Tendering and set out new regulations which required authorities to maintain and publish information on statutory trading accounts for “significant trading operations”. Significant trading operations must break even over a rolling three year cycle.

Identification of Trading Operations

The legislation stated that a service should be considered a trading operation when the following criteria were met:

0 it is provided in a “competitive environment” and

0 it is provided on a basis other than a straightforward recharge of cost. The Test of Significance

Where a service meets the criteria in the section above, the next step is to consider whether it is ‘significanf’enough to fall under the requirements of the statutory regime. The test of significance is important as it determines which trading operations require to be maintained as Statutory Trading Accounts. Although CIPFA/LASAAC Guidance indicated the criteria to be used for determining significance, the actual determination of the criteria was left to individual local authorities. Dumfries & Galloway Council decided on the following tests of significance:

0 turnover in excess of 2% of the Council’s revenue budget 0 budgeted surplus in excess of f50k and,

0 external contract income in excess o f f 100k.

Since 2003/04 the Council has annually reviewed all services provided within the Council to assess which services could be considered as Significant Trading Operations. Until financial year 2008/09, the Council maintained statutory trading accounts for the following services:

0 catering & cleaning

0 cleansing & grounds maintenance 0 property maintenance

0 roads maintenance.

As a result of a reduction in size/turnover following the loss of the DGHP

contract, the Property Maintenance Service was removed from the Statutory Trading Account regime in financial year 2008/09.

There has been a move in many local authorities to reduce the number of services maintained under the statutory trading accounts regime. In particular several authorities have recently ceased to maintain a Statutory Trading Account for Refuse Collection and Disposal activities.

The results of this Council’s review of trading accounts are outlined at

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Appendix 2

Summary of Classification of Former Trading Services

and Projected Financial Performance

The information reflected in this Appendix should be read alongside the financial summary provided at Appendix 3.

It is important to recognise that the following analysis of projected financial

performance does not address the impact of the introduction of Single Status which is currently being reviewed by DGFirst and will be the subject of a separate report.

Statutow Trading Accounts

Roads

This Service generates significant external income through genuine trading based on external contracts at market rates. Size of turnover ( f 18 Million +) and extent of external trading ( f 2 Million +) clearly meet the criteria for the maintenance of a Statutory Trading Account.

This Service has consistently generated material surpluses over a number of years and, in the current financial year, a surplus of f388k is projected.

Although performance will require to be carefully managed and monitored on an ongoing basis, it is considered reasonable to assume that trading surpluses will continue and a forecast surplus of f300k for 201 0/11 is considered a prudent estimate.

Vol u n taw Tradinzr Accounts

Property Maintenance

It is considered appropriate to maintain a trading account for this service as the level of activity is subject to material variation and it is therefore unrealistic to require this service to operate to a set budget. As neither the overall turnover nor the level of external income now exceed the tests of significance, there is no need for a statutory trading account to be maintained and the trading account approach is therefore being continued for management purposes.

Property Maintenance has encountered significant trading difficulties in recent years returning deficits of f667k in 2007/08 and f477k in 2008/09. As reported to the Resources Committee, significant progress has been made in addressing these difficulties and a materially reduced deficit of f259k is now projected for the current financial year.

It is confidently projected that further improvements in trading performance will be achieved and a forecast of a break-even position in 2010/11 is considered realistic. As reflected at Appendix 3, it is considered prudent to build in a small allowance for delays in the achievement of these further savings and efficiencies. This approach is taken specifically for corporate budgeting purposes and does not remove the expectation/requirement on this trading account to break-even.

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Architects and Engineering Services

It is considered appropriate to maintain a trading account for these services where, as with Property Maintenance above, the level of activity is subject to material variation and it is therefore unrealistic to expect these services to operate to a set budget. These trading accounts should however be voluntary, rather than statutory, as neither the overall turnover nor the level of external income exceed the tests of significance.

In recent years these services have been able to generate modest, but healthy, surpluses and a surplus of f28k is projected for the current financial year. It is anticipated that these surpluses will be achievable for future financial years although, for corporate budgeting purposes, assuming a break-even position is considered the most appropriate approach at this stage.

Vehicle Maintenance

In addition to the level of variation in activity levels, there is also a need to retain a voluntary trading account approach for the Vehicle Maintenance Units as a

mechanism is required to recharge costs across a range of, mainly internal, customers.

A deficit of f83k was returned by this Service in 2008/09 and the projection for the

current financial year is for a deficit at a similar level of f82k.

This service has recently undergone a detailed review of costs and charge out rates. Charge out rates will be appropriately updated to ensure full cost recovery and the avoidance of a deficit in the new financial year.

Building Cleaning

Similarly to Vehicle Maintenance, the maintenance of a trading account for Building Cleaning is voluntary and is being retained to recognise varying activity levels and to ensure that there is a mechanism to recharge costs to a range of, mainly

internal, customers.

This Service returned a deficit of f 97k in financial year 2008/09 but it is anticipated that a surplus of f35k will be achieved in the current financial year.

A report outlining further effciencies and savings within the Building Cleaning

Service was recently considered by the Resources Committee. It is projected that these further measures will result in a surplus of at least f50k in the upcoming financial year.

Catering

Separated from Building Cleaning, the turnover of the Catering Unit is below the threshold requiring the preparation of statutory trading accounts. However, at this stage it is considered appropriate to maintain a voluntary trading account as

around 49% of this Unit’s income is external. The classification of this Unit, and the associated budgeting arrangements, will be further reviewed as part of the

implementation of the Commissioning and Delivery framework and may be subject to further change.

This Service is facing considerable difficulties in terms of trading performance and a deficit of f258k is projected for the current financial year due mainly to a

significant reduction in school meal take up in secondary schools associated with the impact of the Nutritional Standards Act. This Service is currently subject to review and the results of this review will be reported to the March meeting of the Education Committee. Although a projected break-even position has been

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shown at Appendix

3

against this Service for 201 011 1, it is considered

appropriate, for corporate budgeting purposes, to retain a provision in respect of potential delays in addressing existing trading difficulties.

Radio Maintenance Service

This service is relatively small in terms of the test of significance and there is therefore no need to maintain a statutory trading account. However, this service does generate the significant majority of its income from external sources (f420k out of f540k) and a voluntary trading account approach is therefore considered appropriate.

This service tends to outturn at around the break even level which is the current forecast for both 2009/10 and the upcoming financial year.

Traininn Unit

Same explanation/issues as for Radio Maintenance Service above.

To be Removed From Trading Account Regime

Cleansing

This Service has previously been grouped alongside the Grounds Maintenance Service for the purposes of Statutory Trading Accounts reporting. However, treated as a separate service, Cleansing does not meet the test of significance in terms of size of turnover and maintenance of a statutory trading accounts is no longer appropriate/necessary.

The significant majority of income is generated from Council services (mainly DGFirst itself) and external income is relatively small (less than 15% of overall income) with charges to external customers based on a schedule of rates agreed annually by the Resources Committee. It is therefore considered that this external income should be treated as fees & charges within the overall budget rather than this service operating through a trading account.

The Cleansing Service has returned material deficits of f668k in 2007108 reducing to f490k in 2008/09. A projected deficit of f477k for the current financial year has been reported to the Finance Sub Committee and addressed, on non-recurring basis, through the application of General Fund Balances.

It is fully anticipated that the measures agreed as part of the Waste Strategy

Review (and in particular the removal of the blue box scheme which is projected to save f 587k and the review of glass recyclate operations) will result in this Service generating a surplus which has allowed Members to reflect savings of f202k in the Council’s 201 0/11 agreed budget.

Grounds Maintenance

Same explanation as above for Cleansing in terms of removal from Statutory Trading Account regime and transfer to General Fund.

The Grounds Maintenance Service has generated healthy surpluses of f225k in 2007/08 and f272k in 2008/09. A projected surplus of f201 k in the current year has been reported to the Finance Sub Committee and used to help offset the impact on Balances of the Cleansing deficit.

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Supporting People

This Service does not trade and was previously maintained as a trading account due to its link to the Homecare service. Supporting People will now be maintained as part of the Homecare Service which, since financial year

2008/09,

has been removed from trading accounts.

Business Support, Admin & Depots

These Units are maintained within DGFirst to provide support to the various trading and non-trading business units. These Units are operated on a full cost recharge basis and should not be maintained as trading accounts.

These units will continue to break even through fully recovering their costs through recharging and the overall level of expenditure is budgeted and monitored within DGFirst. As with the Council’s other support services, the budgets against which the expenditure of these activities will be monitored will be agreed by Members on an annual basis.

An overall summary of the financial projections for former and continuing trading services is provided at Section 11 of the main report.

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Projected Financial Performance of Former

and Continuing Trading Services

Statutory Trading Accounts Roads

Voluntary Tradinn Accounts Architects Engineering Services Property Maintenance Vehicle Maintenance Building Cleaning Catering Training Unit

Radio Maintenance Unit

Provision for Delays in Savings/Efficiencies* Total

Trading Accounts Total (Deficit)/Surplus

Services Transferred to General Fund Cleansing (&SWF)

Agreed Savings Grounds Maintenance Supporting People

Business SupporVAdmin & Depots/Fleet Management

General Fund Total

Projected Projected Surplus/(Deficit) Surplus/(Deficit) 2009/10 201 011 1 fOOOs f 000s 388 300 27 1 -259 -82 35 -258 0 0 -536 -1 48 -477 201 25 0 -251 0 0 O * O * 50 O * 0 0 -250 -200 100 202 -202 200 0 0 200 Appendix 3

Explanations of projected trading results for 2009/10 were reported to the Resources Committee at its meeting of 16 February 2010.

Comments on projected 2010/11 financial performance are provided at Appendix 2 to this report. Section 1 1 of the main report provides an overview of the financial projections of former and continuing trading services for both the current and upcoming financial years.

The projected combined 2009/10 deficit against Property Maintenance, Vehicle Maintenance and Catering is f599k. Measures to address these deficits are already being progressed, particularly for Property Maintenance and Vehicle Maintenance, and projected break-even positions are shown for each of these Services for 201 011 1. However, it is recognised that there may be delays in addressing existing deficits, mainly in respect of the Catering service, and a provision of f250k for delay in the achievement of savings/efficiencies is reflected in the table above. This is included specifically for corporate budgeting purposes and does not remove the expectationlrequirement on individual trading services to at least break-even.