Title:
Candidate Number:
Exam Name:
Exam Date:
REPORT TO: CSB
RE: PROPOSED PPP
Review of PPP Option Vs. CSB Option to Construct
PPP Option:
Pro/Con:
+ Option to cancel the contract is available if PPP does not meet the requirements of the contract and its obligation. This gives CSB the option to cancel the contract if PPP does not fulfill their requirements.
+ Fox will be responsible for the large initial cost of construction which is estimated at $7M. Given that the CSB may not have this kind of cash available to finance a construction without going into significant debt it is very beneficial to have PPP take on the ultimate risk.
+ Fox is responsible for compensating CSB for any costs incurred as a result of construction finishing late. This is good for CSB because it can plan ahead with students, teachers and any other things they need to do without being concerned about financial consequences of opening the school late.
+ Fox will be responsible for all the collection of revenue, payment for construction, cafeteria operations and other general maintenance and business aspects of the school. Given that CSB is responsible for education we will be able to focus on our core competency (education) instead of incidental responsibilities like revenue collection for rentals. This will likely result in higher and faster collection of revenue.
- Given our projection of high growth in the future for student population, there is a risk that we may be required to pay a higher fee to Fox if this growth is considered "extreme".
Mitigation: Our agreement should spell out exactly the % increase that is considered extreme so there is no debate in the future. We should review our projections for student increase to determine if we are at risk of having "extreme" growth.
- If we are unsatisfied with Fox's work it may be difficult to leave the contracted agreement because we would have to show "continued and unacceptable failure to meet obligations" on Fox's behalf.
Mitigation: We should spell out more specifically measures that Fox has to meet in order to meet their obligations so that they can be measured objectively in the future. Some suggestions are included further on.
- CSB will be required to makeup any shortfall on the school/land sale at the end of 25 years. Depending on the market at that point it is difficult to determine what the amount of cash at risk is.
Mitigation: CSB should allocate a fund whereby they save a portion of the possible liability every year so that at the end of 25 years we will not have a situation where CSB will not have the cash and will be in breach.
- Fox chooses the materials for the school. If Fox chooses materials that will not last long after 25 years then CSB will be stuck with a school that is worthless at the end of 25 years.
Mitigation: CSB should have some input on materials that can be used for the school assuming it intends to operate the school after 25 years. CSB should review the materials to be used and have an engineer assess how long they can last. CSB should consider paying a premium for better materials to Fox on the difference between good material and the original intended material.
- Risk that Fox will go out of business.
Mitigation: We need to have a plan outlined and signed before formal agreement is signed to indicate what happens (contingency plan) if Fox were to go out of business.
CSB Option:
Pro/Con:
+ If CSB operates the school on its own it will have complete control over the school design, materials and construction process which will give CSB more control and flexibility to change things.
+ CSB will have full rental and cafeteria control of its operations and it can choose who to offer both services to. CSB will also have more control over the cafeteria operation and can change vendors if the food quality is not met.
- CSB will have a very large upfront cost of construction which will impact cash available for other operations and may put CSB in a short (and possibly long)-term debt situation.
Mitigation: CSB could look to finance the construction using favourable loan terms that can be paid back in a number of years from now.
- CSB will have higher costs of maintenance and will be required to collect its own rental revenue which is not its core competency and they may not do it quickly or effectively compared to Fox.
Overall Conclusion:
- The quantitative analysis in Appendix 1 indicates that the option for CSB to construct the school on a NPV basis is higher than the PPP option. The quantitative analysis therefore indicates that we should use the PPP option.
- I am concerned about the experience that Fox has with maintaining properties. His experience is with rental property construction therefore I am confident in his ability to manage the build of the new high school. However:
- Fox has no experience with school maintenance. his only experience with maintenance is in elderly care homes which is different than schools where there is a lot more activity, the size is larger and the demands may be greater).
- Citizens are already concerned about the maintenance of schools and that profit motive will impact how well the schools are maintained therefore the above is an area of concern.
- Fox has no experience maintaining cafeteria service and may not be able to oversee (making sure regulations and standards are met) the service. This is an area of concern since the school is required to follow food standard regulations for schools.
- I recommend that we review the agreement outlined above to incorporate the concerns I have raised. We need to set objective performance targets that Fox has to meet.
- I also recommend that we see if we can work out a deal with Fox whereby they construct the school but we will be responsible for maintenance. Fox could rent out the rooms per agreement but CSB would be responsible for the cafeteria service and school maintenance. This would cost more long-term but the cash would be spent over time (not initial outlay of cash for construction) and we would have more control over the above which would aleviate the citizens concerns.
Comment on Terms
I am concerned about some of the contract terms. They need to be defined more clearly:
- Fox has stated they will work very hard to maximize revenue from rentals. This should not come at any cost. Given that this is a school we should outline some restrictions as to who can rent. The school may not be the appropriate place for a casino or other activities considered questionable/vices/etc.
- Fox stated he will get us the best prices for food in the cafeteria. CSB's concerns should also include the qualityu of the food and whether it meets the guidelines set out by the School Food regulations. The cheapest food may not meet the nutrition requirements.
- Second concern is the maintenance of the service standards. The food needs to be prepared properly and it is unclear whether Fox can oversee this aspect of the business properly given no experience.
- We should consider whether to allow Cola in the schools. Although the extra revenue stream is a good thing, the CSB's concern should be with the health of the students. Giving up complete control to a nationally known supplier is not a good idea. CSB should insist that Fox create a clause in the agreement which allows CSB to determine which drinks are allowed in the machines. This will ensure that CSB has control over all the drinks available in the school.
- As mentioned above, bankruptcy of Fox is a concern. A clear contingency plan should be outlined to deal with the unlikely event. The CSB/Students/School should not suffer as a result of the bankruptcy.
Procedures to be Performed on a Regular Basis on Fox's Promises
Rental Revenue:
- Utilization rates for rental space should be tracked. A calendar or other manner of record keeping should be instituted which keeps track of which rooms/spaces were used, by whom, for how much $ and for what length of time.
- We are interested in knowing the utilization rate % of time room in school is occupied out of % of time room in school is available.
- These numbers can be used as a basis of determining how well Fox is performing in renting out our space and can be compared month to month or year to year. Benchmarks could be set for Fox in the contract to ensure that a minimum amount is met or require Fox to reimburse us.
Price/Quality Food Guidelines
- The quality of food should be measured in surprise inspections by the CSB. The food should be taken on a surprise basis (a sample of food commonly served) to a lab that checks nutrition levels. The amounts should be compared against regulation requirements to verify that the food meets minimum standards.
Maintenance
- The time to complete maintenance requests should be tracked. CSB staff should track how long it takes between when the call is made for maintenance and to when the maintenance people arrive to when the job is complete. This will give objective evidence of how long it takes to arrive to finish. Fox should be held to certain minimum benchmarks (perhaps no longer than 3 hours to arrive for a maintenance request).
- If minimum benchmarks are not met the school is not maintained properly and this should be brought to Fox's attention to be rectified.
- This will help with citizen concerns over maintenance.
Vending Machines
- Vending machine revenue can be verified by contacting the supplier to determine how much pop was sold. compare this to
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