Report Title : Mouchel Partnership Extension (Part A)

MIDDLESBROUGH COUNCIL

EXECUTIVE REPORT

Report Title : Mouchel Partnership Extension (Part A)

Deputy Mayor and Executive Member for Regeneration : David Budd

Executive Member for Resources: Nicola Walker

Chief Executive : Ian Parker

Date : 14 January 2010

PURPOSE OF THE REPORT

To set out the results of negotiations about an extension to the Council’s partnership with Mouchel Business Services (Mouchel).

To show how affordability issues have been addressed.

To recommend that the Council agrees to a five year extension of the partnership with Mouchel, based on a reduced service scope, with the return of some specified services to the Council.

SUMMARY OF RECOMMENDATIONS

The Executive is recommended to:

(i)Agree in principle to a five year extension to the Council’s Strategic Service delivery partnership with Mouchel, subject to agreement of the final wording of changes to the Partnership Agreement (the Executive will be asked to make a final decision in March 2010);

(ii)Note the need to begin detailed planning in preparation for the return of certain services from June 2011. This process will be the subject of further reports to the Executive/Executive Members.

IF THIS IS A KEY DECISION WHICH KEY DECISION TEST APPLIES?

It is over the financial threshold (£75,000) / x
It has a significant impact on 2 or more wards
Non Key

DECISION IMPLEMENTATION DEADLINE

For the purposes of the scrutiny call in procedure this report is

Non-urgent / x
Urgent report

BACKGROUND AND EXTERNAL CONSULTATION

The initial term of the ten year Partnership Agreement with Mouchel is due to end in May 2011. The contract allows for an extension of up to five years. At the end of an extended term the Council would have to retender services (if it wanted to engage a private sector partner), return services to Council management or enter into some form of shared services arrangement with other local authorities (probably also through a procurement exercise).

Following consideration of the available options and agreement that the extension of the partnership was an option the Council should consider in detail, the formal process commenced in the summer of 2008. Commercial proposals for a five year extension, in accordance with the agreed process were submitted by Mouchel in December 2008. Over the last twelve months work has continued to:

Address affordability issues associated with Mouchel’s proposals and the return of some services to the Council.

Ensure that an extension agreement allowed greater flexibility to deliver increased savings targets in an extended term, if the requirement arose.

To reduce the contract price in the final full year of the partnership’s initial term (2010/11) by £1m.

To understand more fully the cost and issues associated with the option of returning of all services to the Council from June 2011.

Address key contractual issues, such as the contractual performance bond and the accommodation strategy.

Following extensive negotiations, proposals have been submitted by Mouchel which are supported by the Corporate Management Team. CMT considers that the proposals meet the key requirements set out for any extension agreement with Mouchel:

Allow the Council to demonstrate value for money;
Ensure that the service delivery model delivers high quality, cost effective and sustainable services; and
Allow for continuous improvement and innovation in service delivery.

This report sets out the key issues associated with the proposals. It goes on to recommend agreement by the Executive to an in principle decision to extend the partnership with Mouchel for a period of 5 years. This decision in principle is subject to agreeing the final wording of the changes to the Agreement. The Executive will be asked to make a final decision in March 2010.

Affordability

This has been one of the primary considerations throughout the extension process. The initial requirement on Mouchel was to guarantee a contract price that delivered 3% year on year efficiency savings, whilst maintaining service delivery and increasing levels of performance. This was also a requirement that the Council placed on itself in relation to services earmarked for return to the Council.

Work in the period to August 2009 identified an affordability gap for both the options. In the period since September the Council and Mouchel have jointly worked on proposals to reduce the affordability gap and also deliver a £1m reduction in the contract price for 2010/11.

The output from this work is a set of clearly documented efficiency and service reduction proposals, covering both contract price reductions from 2010/11 and Council and Mouchel run services from June 2011.

Details of the current assessment of overall affordability can be found in Appendix A.There are two important points to note about the current position:

Proposals for a reduction in the contract price in 2010/11 are dependent on the Council agreeing to an extension (if the extension were not to take place then proposals could be taken forward but they would be subject to additional charges/compensation by Mouchel in line with the current contractual arrangements). The full year effect of savings proposals for 2010/11 is £927k; and
The agreement with Mouchel will be based on a maximum five year contract price, which is aligned with Council affordability requirements.

The precise profiling of the contract price has yet to be agreed and all figures are currently presented as they fall. Mouchel have agreed to reprofiling to accommodate the Council’s requirements and whatever the profile it will not effect the overall maximum price. One of the key considerations associated with this are where exit costs associated with efficiency and savings proposals fall. The Council will work closely with Mouchel to minimise the impact of exit costs.

Business transformation and further savings and efficiencies

During the course of negotiations, Mouchel have identified a variety of large scale projects that would deliver efficiency savings to the Council. These are not tied into an extension agreement, however some of the efficiency savings generated may lead to reductions in the contract price (for example through a Corporate review of administrative support). Following agreement of an extension, work will begin to plan development and delivery of these projects.

There is also a list of efficiency and savings proposals that are earmarked to be worked on following agreement of an extension. As they require further development, currently there is no firm value associated with them at this point. However it is expected that a percentage of these will be taken forward and realise further efficiencies and savings.

Contractual issues

There are a variety of contractual issues that have been considered during the negotiation process and key issues are set out in Appendix B. There are still some legal drafting issues to address in the period to the end of January however the fundamental principles and issues have been agreed.

Mouchel business development

Mouchel have required clarification of the approach to a number of issues within the existing contractual arrangements, which are important to them in the delivery of their business model for an extension. No material changes to the contractual position are proposed following discussion and agreement on these however in some instance it does require a change to Council and Mouchel practice in the day to day running of the partnership. Examples include the approach to the cost models for partnership projects and support for new business development. Further details are set out in Appendix B.

Benefits of an extension

In addition to meeting requirements around affordability, releasing savings in 2010/11 and contractual terms (for example the break clause) there are a number of other benefits from an extension which are important considerations for the Council. The context of these are some of the main challenges that the Council faces over the next five years, in particular:

The increasingly tighter financial pressures across the public sector;
The need to respond to this through more efficient and smarter modes of operation; and
Accessing and developing the capacity to respond to these pressures.

These are all issues on which a continued relationship with Mouchel can benefit the Council significantly.

Transformational change and access to expertise and assistance

Mouchel have proposed a variety of large scale projects which, on the basis of their experience with other local authority partners, they consider can realise significant benefits to the Council, in terms of both improved service delivery and reduced cost of delivery. In addition there are other areas of Council operation where Mouchel experience of supporting service change is likely to be of benefit to the Council where otherwise the Council might have to source appropriate expertise. The development of Mouchel, its restructuring and its commitment to develop it presence in the local government market leave it well placed to support the Council in many of the challenges it faces.

Retaining and creating jobs in the town

The Mouchel operation in Middlesbrough includes more than 100 jobs working on non-council business. There is scope for this to grow further during an extended term.

Protecting the Council from risk

The services delivered through the partnership involve around 600 staff, providing a mixture of frontline and back office services. Delivery of the agreed efficiency and service reduction proposals present staffing and financial risks which Mouchel, as the service provider, will own.

Two stage service return

The return of all services to the Council in the summer of 2011 would present a significant logistical challenge. Set alongside the significant service delivery and budget challenges that the Council faces this would have had the potential to cause significant organisational disruption, no matter how well planned. A two stage approach also has the benefit of allowing the Council and Mouchel to learn from the return of staff in 2011.

Leaner services at the end the partnership

Plans that have been agreed for efficiencies and service reductions will lead to a leaner operation for the services provided by Mouchel, particularly in back office services. This should be beneficial to the Council in its consideration of service delivery options from the end of an extended term.

Risks associated with extending the partnership

There are a variety of risks associated with extending the partnership and these are set out in the following paragraphs.

Potential ringfencing of the revenue budget

The Council is currently committed to a fixed price contract with Mouchel which has effectively ring-fenced a proportion of the revenue budget since 2001. Negotiated reductions can be made but they would subject to compensation for loss of profit. To an extent ringfencing has reduced the Council’s flexibility in managing the revenue budget and has the potential to place an additional burden on other service areas. The proposed extension deal goes a substantial way to mitigate this risk being based on a maximum rather than a fixed price and with the capacity to reduce the price through mutually agreed reductions.

Loss of flexibility

In addition to issues relating to financial management and flexibility addressed in the previous paragraph, remaining in a partnership for a further five years could limit the Council flexibility to respond to changing national or local priorities. Although the partnership is based on a contractual agreement this does not mean that changes cannot be initiated to remove or add services or to deliver services in a different way. Sometimes such changes will have additional costs associated with them which need to form part of the planning and budgeting process. During the initial term the partnership arrangement did not prejudice developments such as Housing Stock Transfer.

Mouchel capability to deliver and service performance record

A partnership of the scale that the Council has with Mouchel will always face challenges from time to time associated with service delivery and performance. The very early years of the partnership did present a number of significant challenges however more recently the position has been much more stable. There are a variety of mechanisms that are in place to ensure that service standards are met, most notably the Price Performance Mechanism. In preparing for discussions about an extension and in negotiations with Mouchel the Council has looked to experience from the past and sought to further strengthen its ability to help ensure safe service delivery. In addition the extension proposal include the return of two key strategic services, Accountancy and Property to the Council from June 2011.

Future ownership of Mouchel

Partnering with a private sector company will nearly always include the risk that ownership of the business may change. During the life of the partnership this has occurred twice, most recently with Mouchel’s purchase of HBS in the summer of 2007. The Partnership Agreement includes a clause that allows the Council to terminate the partnership agreement in the event of a change of ownership and this would continue to be the case in an extended term.

Planning for returning services

Following agreement of the recommendations in this report, work on more detailed planning for the return of services will commence. There are in the region of 130 staff due to return to the Council. The key tasks include communication and consultation with staff, negotiation with trades unions, formalising accommodation plans and planning for the transfer of assets.

OPTION APPRAISAL/RISK ASSESSMENT

There are two options for the Executive to consider:

Option 1– Do not extend. Agree not to extend the Mouchel partnership to 2016 and to return all services to the Council from June 2011. In order to attempt to minimise disruption and costs associated with this option work would need to commence very quickly to manage the return of services. This option will increase budget pressures on the Council as a majority of the savings for 2010 would not be realised and the risk for delivery of all efficiencies and savings from June 2011 would shift to the Council. The Council would also need to engage a variety of external support to manage the transfer back of services and support the Council in service transformation.

Option 2 – Agree to extend in principle for a reduced service scope. Agree in principle to a five year extension with Mouchel, subject to final agreement of amendments to the Partnership Agreement. This will allow the Council to undertake final legal negotiations with Mouchel and for the Executive to take a final decision on the extension proposals in March 2010, following completion of the budget process. Mouchel have put forward proposals which meet the Council’s affordability requirements, delivers cost effective and sustainable services, and allows for continuious improvement. In addition to securing a favourable position on the financial and service delivery aspects of an extension, other benefits include access to support for service transformation and development.

Option 2 is the preferred option.

EQUALITY IMPACT ASSESSMENT

This will be included in the Executive Report on the Extension due to be submitted for consideration in March 2010.

FINANCIAL, LEGAL AND WARD ISSUES

Financial issues

Details of the overall financial position at the conclusion of negotiations with Mouchel are set out in Appendix A of the report. The proposals are affordable to the Council within the original parameters set for negotiation of an extension i.e. a three percent year on year reduction in the contract price. The negotiations have also resulted in provisions which protect the Council in the event that efficiency and savings targets are increased during the term of an extension and the opportunity to terminate the Partnership should financial pressures on the Council require such an option.

Legal issues

Under the Partnership Agreement the Council is able to extend the partnership with Mouchel for up to five years. The proposed amendments to the Partnership Agreement are all in accordance with the original OJEU notice and European procurement rules. The fundamentals of these changes have been agreed with Mouchel and are currently subject to formal legal drafting.

Ward issues

There are no ward issues.

RECOMMENDATIONS

The Executive is recommended to:

Agree in principle to a five year extension to the Council’s Strategic Service delivery partnership with Mouchel, subject to agreement of the final wording of changes to the Partnership Agreement (the Executive will be asked to make a final decision in March 2010);

Note the need to begin detailed planning in preparation for the return of certain services from June 2011. This process will be the subject of further reports to the Executive/Executive Members.

REASONS

The proposals from Mouchel meet the affordability and other requirements set out by the Council.

BACKGROUND PAPERS

No background papers were used in the preparation of this report.

AUTHOR: John Polson, Partnership Manager.

Ron Brown, Strategic Commissioning and Procurement Manager

TEL NO: 01642 729017 (JP), 01642 729181 (RB)

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