In December 2018 the Conservative administration announced their plans to refurbish and enhance the Assembly Rooms for £24m. This was in contrast to the previous Labour administration’s plans to build a new Performance venue for £44m. This was widely reported as a £20m “saving”. However, this was an inaccurate statement and was based on flawed principles – in fact there would be no saving!
Why is it flawed?
Like many large corporations, the Council is financed by interest bearing loans – for Derby City Council this is of the order of £500m.
The Cabinet paper for the Refurbished Assy Rooms states that £13m of capital receipts ( cash from the sale of assets) will be used to part fund the project. £4.5m from an external grant, and the remainder from reserves, business rates and council tax. It was publicised that there was no additional borrowing, therefore suggesting that the money was, somehow, “free”.
In any context, whether, personal, or a corporate institution, there is no such thing as “free money” when, fundamentally, liquidity is supported by loans. This is a basic principle.
An investment of this nature cannot be judged on the basis of the initial capital cost, only, especially when there are financial consequences in later years.
- The Refurbished option generates a recurring loss to the Council of ~ £300k per year. (NB – before the fire, the Assy Rooms required a subsidy of £750k per year)
- The New Performance Venue, is planned to generate a profit each year of ~ £1m
- A sound investment appraisal recognises these subsequent flows, and, importantly, when they take place.
At year 15 a further £5m ( at least) will need to be spent to repair the roof in the Refurbished option.
Confidential Business Case Comparison
The Cabinet paper presented in December 2018 laid out the financial position of the Refurbished option; it did not compare it with the New Performance Venue. That case was never formally published. Derby News has had sight of the confidential business case comparison prepared by Senior Officers and made available to Councillors.
- The 1st issue which is noticeable is that the cost of the Performance Venue has been increased from £44m to £50m
- £3m to include commercial units at the front of the Assy Rooms
- The declared return from this additional investment is negative thus making the Performance venue case look worse.
- £2m for inflation
- £1m for “contingency”
- £3m to include commercial units at the front of the Assy Rooms
- It reveals that the original grant of £8.6m from D2N2 for the Performance Venue has been reduced to £4.5m
- It confirms that the internal analysis process ignores the cost of money implications for the Refurbished option.
As a result of the above, great doubt is cast over the validity of this comparison.
Comparison of both options
A proper investment appraisal of the 2 options, over 20 years, ( using discounted cash flow, and arriving at a Net Present Value) is as follows:
- Starting with the capital costs, grants and details in the confidential Business Case Comparison – the Refurbished option is £3m cheaper than the New Performance Venue.
- As for 1. above, but including the full D2N2 grant for the New Performance Venue – the Refurbished option is £1m more expensive than the New Performance Venue
- As for 1. above, but excluding the loss-making Performance venue commercial units that was not part of the original plan – the Refurbished option is £1.5m cheaper than the New Performance Venue.
- as for 1. but assume that the subsidy for the Refurbished option is, as before, £750k per year – the Refurbished option is £2m more expensive than the New Performance Venue
- Compare the base case for the Refurbished option and the original assumptions for the New Performance Venue the Refurbished option is £6m more expensive than the New Performance Venue
There are many opinions as to whether the Refurbished option is better/worse for Derby than a New Performance Venue.
The Cabinet paper from October 2017, proposing the New Performance Venue stated ( my emphasis)
“The outcome from this work was that refurbishment of the Assembly Rooms could not compete with the new-build options. The options for refurbishment would not
offer the flexible/scalable spaces that could be provided through a new build due to the restrictions of the existing building structure, which could in turn impact on
the long term sustainability of the venue. The work also found that the options for refurbishment would require an ongoing subsidy once operational. In summary,
refurbishment of the Assembly Rooms was found to be financially unsustainable and unlikely to be attractive to entertainment operators as a concert venue.”
The same Senior officers are now supporting a Refurbished option.
John Forkin, the Managing Director of Marketing Derby is on record as saying in November 2018:
“A few weeks ago, at the Derby Renaissance Board, business patience finally snapped. Hearing that Derby City Council is about to spend £20m plus on reopening the loss-making Assembly Rooms, as opposed to building a new profit-making performance venue, at twice the size for twice the price, was simply too much.
It was a genuinely passionate debate with a rare consensus that the refurbishment was ‘underwhelming’, would create a ‘village hall’, fit for ‘a market town, not a city’ and fundamentally will not attract the performances required. A delegation from the DRB will soon be meeting the City Leader to express these concerns.”
Despite the opinions, it can be said, that:
- The most likely outcome on the business case comparison is that the Refurbished option will be more expensive then the New Performance Venue over the long term ( and this is a long term project) – by about 25%.
- The only virtue of the Refurbished option is that it will be opened 2-3 years earlier.
- The revenue from the new car park for the New Performance Venue is planned to be 10 times greater than the current car park – this is footfall into the City economy.
- The Refurbished option is fundamentally built using 1970s technology with layout limitations. No case has been presented which demonstrates an advantage in preserving the architecture.
The Conservative administration has delayed the new Moorways pool to ensure that it is a more ambitious, and more expensive, swimming “offer” than that proposed by the Labour administration. A Pool fit for a 21st Century Derby. It is probably a good decision.
I fail to see why the same principle is not applied to the Assembly Rooms – by implementing an option that is more progressive, that is profitable and is, in the long term, cheaper for the tax payer!
A political decision to deliver a “popular” manifesto commitment?
Categories: Derby City Council