North Lanarkshire CouncilReport

Agenda item 14− (d) approval E noting Ref KH/KS Date 19/07/17

From Strategic Adviser − External Organisations, Partnership Unit, Infrastructure

Email hasseIIKnorthlan.gov.uk Telephone 01698 302235

Executive Summary

This report outlines Mears Scotland Limited Liability Partnership (LLP) performance against its'business objectives, Council priorities and financial expectations for the LLP's financial yearending December 2016. This report also advises members of the targets proposed for financialyear 2017−18, and provides commentary in respect of LLP governance and Council oversightarrangements to enable members to ascertain how effectively Council obligations are beingsatisfied.

Recommendations

The ALEOs and External Bodies' Monitoring Sub Committee is requested to:

1. Note Mears Scotland LLP performance against:

2

3

4

(a) the Council's 2016−2017 strategic priorities; and,(b) budgeted financial position for year ending 31 December 2016;

Note proposed 2017−2018 performance targets;

Note the LLP's approved budget to 31 December 2017; and

Identify areas of activity requiring further detailed consideration by the ALEOs and ExternalBodies Monitoring Sub−Committee

Supporting Documents

Council The Council's approved Agreements with Mears require the LLP to not onlyBusiness deliver satisfactory service performance, but also require them to deliver aPlan to 2020 number of additional benefits to support all of the priorities contained within the

Council's approved Business Plan.

Appendix I Delivery of Target Outcomes, 2016/17 and Proposed Outcomes 2017/18

Appendix 2 Pre−audit Financial Performance to 31st December 2016; 2017 Budget

Appendix 3 Mears LLP Financial Standing as at 31st December 2016

Background

1 .1 The Council created the housing and corporate property repairs LLP in 2010, following atender exercise for a strategic partner to deliver such services over a ten year period.The successful bidders were Morrison Facilities Services Ltd and the contractcommenced on 21 January 2011. Mears PLC subsequently bought Morrison FacilitiesServices Ltd from Anglian Water as a going concern, so now own the 67% shareholdingin the Mears Scotland LLP (Mears) strategic partnership and the inherent NorthLanarkshire service contract. North Lanarkshire Council owns the remaining 33% ofMears Scotland LLP.

1.2 In creating the LLP in 2010, the Council envisaged its property repairs and maintenanceservices being delivered by an independent private sector organisation capable ofexpanding its business into a wider commercial market. Based upon the Council'sprevious experience of its joint venture arrangements, it expected this new partnershipwould secure local employment, source local supplies and services, and ultimatelysecure continuous improvement in the repairs services delivered to North Lanarkshireresidents. By providing freedom to operate commercially, the Council envisaged annualbusiness growth of 5% per annum would deliver increased income streams to bothpartners.

1.3. A Management Committee consisting of representatives from both Mears PLC andNorth Lanarkshire Council is responsible for the LLP's governance, which includesoperational delivery and management, staffing, financial control and reporting, Health &Safety, performance monitoring and risk management. This Management Committeecurrently meets quarterly, with Council representation consisting of one officer and oneelected member and representation by Mears comprising up to 4 representatives.

1.4 In addition to Management Committee oversight, the LLP's Legal Agreements with theCouncil require the organisation to report its performance to an appropriate Councilcommittee. Presently, all client−related performance is considered by the Enterprise &Housing Committee, with the ALEOs and External Bodies Monitoring Sub−Committeefocussing instead on ensuring the LLP is delivering services which support the Council'sbusiness planning priorities and can be shown to represent the most effectivemechanism for service delivery.

2. Report

Performance against Council Priorities2.1 As outlined above, the Council expects its partnership with Mears to assist in developing

the local economy. With a view to measuring how Mears activities support delivery of theCouncil's priority outcomes, the ALEOs and External Bodies' Monitoring Committeeapproved a range of performance targets in November 2016, and the LLP'sachievement of these are outlined within Appendix 1 for member consideration.

2.2 Some key points worthy of note from Appendix 1 include:

> To assist the Council in completing 95.98% of reactive repairs "right first time"(Scottish Average, 91.3%1), Mears were allocated 29,003 emergency repair jobsand 47,428 routine repairs jobs. Mears completed 98.35% (emergency repairs) and97.23% (routine repairs) within required timescales. The company performed abovethe 95% completion target which is specified within the Works Agreement with theCouncil;

> The LLP actively delivers tangible benefits to the wider North LanarkshireCommunity by purchasing locally sourced supplied and services from 28organisations, supporting 87 apprenticeships, maintaining a workforce which sees

12015/16 figures; 2016117 published late 2017

69% (424) of employees living within the North Lanarkshire area, and providing arange of work experience placements and career advice initiatives to local schools;

Mears continue to work in partnership with the Council and its subsidiary companiesby leasing office space from North Lanarkshire Properties LLP, obtaining buildingcleaning and fleet services from the Council's Infrastructure Services teams andsponsoring events such as the Tour Series (cycling event), held over the last fewyears in Motherwell during the month of May.

2.3 Based upon performance achieved in 2016−2017, Appendix 1 outlines the targets whichMears will be asked to achieve in 2017−2018 to support the Council in delivering itswider strategic priorities.

Overview of Governance Arrangements2.4 Council representation on the management committee referenced in paragraph 1.3

above enables the Council to maintain an overview of the [ [P 's overall performance andgovernance arrangements. Whilst the Council places reliance on the LLP governancearrangements, officers from Enterprise & Housing, Financial Solutions and the ALEOPartnership Unit also work together to ensure that all aspects of arms−length servicedelivery − for example KPI's, customer satisfaction/complaints, risk management andfinancial performance − are appropriately reflected within the Council's oversightarrangements.

2.5 Mears LLP continues to satisfy the Council's required oversight arrangements, androutinely submit the monitoring information expected by Council officers in line with thetimeframes specified within the LLP Agreement. Further work is required however inrespect of a detailed cash flow forecast and forward Business Plan, with Mearspersonnel currently liaising with Council officers to address these.

2.6 The LLP's risk management and reporting arrangements were considered by thecommittee in detail at its meeting of 16 November 2016, and confirmed unsurprisinglythat Health and Safety features as the organisation's top risk. The LLP routinely reviewsall inspection reports, incident summaries and KPI5, and implements relevant actions tominimise the impact this risk has on service delivery. A more detailed report outlining theCouncil's assessment of the LLP's risk management and reporting arrangements will bereported to committee for consideration in due course.

3. Implications3.1 Financial ImpactFinancial Position at Year Ending 31St December 20163.1.1 To satisfy the Council's duty to ensure the organisation delivering housing and corporate

property maintenance and repair services on its behalf is financially sound, the Council'sSection 95 Officer maintains appropriate and proportionate processes and proceduresfor scrutinising Mears LLP's financial performance.

3.1 .2 The Council's Legal Agreements with the [ [ P specify the financial information whichMears must submit to the Council − annual business plan, monthly managementaccounts, audited financial statements etc. − to enable Financial Solutions to assess andreport any financial risk likely to arise as a result of the Council using the [ [ P to deliverthese services.

3.1.3 The Council expends both revenue and capital resources annually with Mears, to deliverservices which assist the Council in achieving its priority outcomes. For the Council'sfinancial year 2016−17, £30m was budgeted in respect of revenue works, with capitalawards estimated around LiOm. In acknowledging the Council expects the LLP toexpand its business into a wider commercial market, Mears anticipated turnover of

£52.2m for financial year 1 January 2016 to 31 December 2016 and a net trading profitof 1.7m (3.2%)

3.1 .4 For the financial year recently completed members will wish to note the LLP'spre−auditedaccounts illustrate Mears performed marginally better than reforecast, achieving

sales of £53m and net profit of £1 .9m (3.5%). This performance also comparesfavourably with the previous year's final position and is largely due to the Companydelivering additional capital works. Appendix 2 provides further details regarding theLLP's financial position.

3.1.5 The Works Agreement with the LLP also provides for the Council to receive financialbenefits in the form of Volume Discount, Best Value Efficiency Savings (BVES) andDividends. Beginning with the volume discount arrangement, members will wish to notethe Council is entitled to receive a 6.28% return on the value of relevant works awardedthrough the partnership. In recognising the increased level of works processed throughthe contract during 2016−17, the Council achieved income of £2.5m against the budgetof P−1 .650m.

3.1 .6 The partnership agreement provides for a Best Value Efficiency Saving (BVES) to beapplied to the schedule of rates paid by the Council on 1st July each year. The BVESreceivable is dependent on turnover achieved by MEARS, with a rate of 2.75%applicable on works to the value of £30m, a further 4.69% applicable on works between£30m and £35m, and any turnover in excess of £35m attracting additional BVES of7.69%. Recognising the Council's 2016−17 revenue budget of £30m for housing repairs,the partnership expected to deliver a minimum benefit of £0.825m, with £1 .294m actuallyrealised as a result of relevant turnover of £38m being delivered by the LLP.

3.1.7 Although the contract provides scope for the Council to receive dividends from thispartnership arrangement, the cumulative negative trading position evidenced in thebalance sheet means the LLP has not yet had an opportunity to declare any dividends.

3.1.8 In return for satisfactory service delivery and effective financial performance through theLLP, Mears PLC is entitled to receive a management fee which comprises both fixedand variable elements, and is partially linked to level of works delivered through thecontract. The minimum management fee due to Mears PLC from the LLP is £0.9m perannum, with £1 .092m paid to the Group in respect of the last financial year.

3.1.9 To give members an understanding of the overall financial standing of the LLP,Appendix 3 provides key balance sheet data as at 31 December 2016, along with the2015 end of year comparator figures. Key points worthy of specific attention include:a) Prior year losses result in the LLP continuing to hold cumulative net losses

(7.3m), although this has reduced significantly from the previous year due tothe LLP's positive 2016 trading position. The organisation must continue todeliver positive results and profits over the remaining contract period if it is toreduce these losses and achieve breakeven.

b) A comparison of the LLP's current assets (stock, debtors and cash) to itscurrent liabilities or obligations (creditors, tax, vat etc.), equates to a netcurrent liability of £2.6m and a low current ratio of 0.79. A ratio of less than 1 isgenerally an indication of an organisation having insufficient resources to meetits obligations and in this instance, indicates the LLP continues to rely uponthe approved parent company loan outlined below. Members should notehowever that the high cash balance of £7.350m which is contributing to thiscurrent ratio is the result of MEARS targeting delivery of a strong group cashposition.

C) Appendix 3 illustrates the LLP had creditor balances in excess of £8m at itsyear−end. The LLP operates to agreed payment terms with all suppliers, andmembers will wish to note that 65% of sums illustrated had not fallen due forpayment at the LLP's 31 December 2016 year−end.

d) Appendix 3 also illustrates the LLP draw−down on its £8m approved loanfacility with Mears PLC totalled £4.9m as at 31 December 2016. The LLP usesthis loan facility to assist in managing its current obligations, and members willnote the balance has positively improved upon the previous year level

Approved Budget 20173.1.10 The Management Committee considered the LLP's 2017 budget on 2 nd March 2017, and

per Appendix 2, the LLP anticipates total turnover of £48.3m and net profit of £1 .2m willbe realised during 2017. This budget includes £31m of revenue and Li Om of capitalworks.

3.1 .11 Members will note the 2017 budget assumes a lower level of capital works will bereceived from the Council in comparison to levels actually awarded for financial year2016. However as with previous years, the LLP budget includes £1.75m of 'blue sky'capital works which Mears envisage can be secured competitively. Further updates tothe LLP's 2017 budget, and its performance against that, will be included within the nextreport to this committee, and are expected to reflect the outcome of the Council'srecently tendered kitchen and bathroom installation contracts.

3.2 HR/Policy/Legislative Impact3.2.1 This report does not require consideration of any HR/Policy or Legislative impacts.

3.3 Environmental Impact3.3.1 As illustrated within Appendix 1, the LLP positively addresses environmental

considerations through delivery of activities which increase environmental efficiency andcomply with National Home Energy Rating Standard assessment procedures.

3.4 Risk Impact3.4.1 As outlined in paragraph 2.5 above, the LLP's risk management and reporting

arrangements are routinely considered by the Management Committee to ensure anyimpact on service delivery, and therefore Council reputation, is minimised. Whilst there isno requirement for members to undertake detailed consideration of the LLP's key riskson this occasion, future reports to committee will provide further commentary regardingthe LLP's top risks and their arrangements for managing and reporting them.

4. Measures of success

4.1 The Performance Monitoring Framework approved by the ALEOs and External BodiesMonitoring Committee in May 2016 requires Committee to consider Mears LLPperformance twice per year. These reports detail the LLP activities which are expectedto support delivery of the Council's priority outcomes, as well as the organisation'sperformance against these and should therefore ensure elected members have sufficientinformation to assess how Mears service delivery supports the Council in deliveringagainst the approved Business Plan to 2020.

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