Hampshire County Council

Buildings, Land and Procurement Panel

26 June 2007

Business Services Group - Report and Accounts 2006/07

Report by the Director of Property, Business and Regulatory Services

1

Introduction

1.1

The main purpose of this report is to provide the Panel with a broad summary of the financial performance of the self-funding business units within the Property, Business & Regulatory Services Department during 2006/07. The businesses are:

· Hampshire County Council Catering Services (HC3S)

· Hampshire Transport Management

· Cleaning Services

· Hampshire Printing Services

· County Supplies

1.2

The report describes an annual trading surplus for the group as a whole of £337,000 and a modest increase in the overall accumulated surpluses retained by the businesses. With the exception of Hampshire Printing Services, all the businesses returned a better financial performance than planned and the report identifies the key factors in this good performance. Considering the economic climate within which the Businesses operate 2006/07 has been another successful year, with effort now going into increasing income streams for the future.

1.3

This proposal does not link to the Corporate Strategy but, nevertheless, requires a decision to enable the four businesses of the Business Services Group to operate within the County Council's financial regulations as self funding business units.

Recommendation

That the Buildings, Land and Procurement Panel advises the Executive Member for Policy and Resources that the 2006/07 report and final accounts for the Business Services Group be approved.

2

Financial Performance

2.1

The accounts for each business are shown in Appendix One together with a summary for the whole of the Business Services Group. Total income over the last four years was:

2003/04

2004/05

2005/06

2006/07

£33.34m

£34.98m

£35.39m

£36.81m

On this turnover, the businesses recorded a total trading surplus of £337,000 for 2006/07. This is in line with the average surplus achieved over previous years and compares very favourably with a planned deficit of £40,000 (as at December 2006). This represents another very good result for the group as a whole and the overall financial position of the PBRS business units continues to be sound.

2.2

As previously reported to the Panel, HC3S was expected to return a deficit of £241,000, but this was reduced by £92,000 at the end of the year. At £149,000, the deficit is equivalent to less than 1% of the income of HC3S while cash paybacks returned to secondary schools and corporate departments under existing trading agreements totalled £121,000 in 2006/07. Hampshire Transport Management, County Supplies and the Cleaning Services unit all returned results that were significantly better than forecast and the results of the individual businesses are summarised in the table below:

Table 1: Summary Financial Performance (£000s)

Business Unit

Actual

2002/03

Actual

2003/4

Actual

2004/5

Actual

2005/6

Plan

2006/07

Actual

2006/07

Catering

160

134

20

(123)

(241)

(149)

Transport

154

145

176

213

160

289

Cleaning

(69)

(37)

7

25

2

31

Printing

9

59

34

32

19

6

Supplies

156

197

146

116

100

160

TOTAL Surplus/(Deficit)

409

497

383

263

(40)

337

2.3

The impact of these results on the accumulated surpluses of the PBRS businesses is shown below:

Table 2: Accumulated Surpluses (£000's)

Surplus at 31/3/06 2,532

Adjustment from 2004/05 83

Sub Total 2,615

Trading surpluses 2006/07 337

Depreciation 148

Interest (Winnall premises) 48

Spending from surpluses NIL

Transfer to Corporate reserves 511

Closing balance at 31/3/07 2,637

2.4

The accumulated surpluses of the businesses provide a strategic reserve that will protect the County Council from financial risk in the event of unforeseen adverse trading conditions and make it possible for the businesses to invest in developing business and improving services. The report presented to the Panel in January 2007 indicated that re-investment from the surpluses was likely to be negligible in 2006/07, with a total of £857,000 being planned in 2007/08. No spending from the accumulated surplus was recorded in 2006/07, but a transfer to corporate reserves of £0.51 million was processed to support the Adult Services recovery plan. The combined effect of these changes means that the closing balance on the accumulated surplus was £2.637 million against a previous forecast of £2.344 million. A technical adjustment was made by the County Treasurer during 2006/07 which took the accumulated surplus to £2.615 million and the nett increase year on year is just £22,000.

2.5

HC3S manages delegated catering budgets on behalf of schools through a Service Level Agreement and surpluses on these budgets are re-invested in the form of improvement projects, and new equipment. The surplus in hand on these budgets at the end of March 2007 increased from £71,000 to £270,000.

2.6

The plans for expenditure in 2007/08 include radio data terminals and electronic trading at Supplies, investment in school kitchen and dining area improvements (in support of tender exercises and business development) and improvements for HTM. The most significant of these is, of course, the replacement vehicle workshop at the Bishops Waltham depot and competitive tenders for the build are expected to be invited shortly. Other potential calls on the surplus include the implementation of the corporate review of pay and benefits.

2.7

Implementation of the new pay and benefits framework is expected to increase payroll costs within HC3S by more than £100,000 in the first year with an even larger financial impact likely to result from the loss of income from lunches from lunchtime supervisory assistants (currently paid for by schools). This remains the largest single business risk for the group as a whole.

2.8

The trends in these accounts provide grounds for optimism that the business plan targets for 2007/08 that were approved at the January meeting of the Panel will be achieved or exceeded. The current discussions relating to the timetable for the implementation of the Pay and Benefits review introduce some uncertainty about the forecasts for the new financial year, but it is too early to comment on whether or not any of the anticipated costs will be incurred in 2007/08.

3

Business Performance and Issues

3.1

The new Business Plans were reviewed by the Panel earlier this year and only the most significant items are described below.

Catering Services

3.2

Around 5.7 million meals were served in the County Council's primary schools in 2006/07 and 22% of these were to pupils eligible for free meals. Total income rose to £16.1 million as a result of the 15 pence price increase in April 2006, an increase in the amount of government grant allocated to HC3S, and payments from Adult Services in respect of the pilot project at six care homes. Towards the end of the year, it became possible for Children's Services to increase the grant allocation to HC3S by some £81,000 to £592,000 and this was the biggest single contribution to the improved financial performance of the business unit.

3.3

In terms of meal numbers, the picture for 2006/07 is mixed. The decline in numbers that was identified in 2005/06 continued into 2006/07 and in fact accelerated between April and July in 2006. The start of the new academic year brought some improvement and from October 2006, the results for every month have been better than in the equivalent period the year before. Between January and March 2007, the improvement on the previous year was around 4% and in the half-term after Easter the increase has been 9%. The recovery over the last eight months has been extremely good for morale within the business, but it must be remembered that over this period meal numbers are still almost 15% below the level achieved several years ago and that an appropriate strategy for income, costs and funding is still very much required.

3.4

Initial discussions with representative head teachers and Children's Services about the options to return the business to a surplus position have been started, but the scale of the task and the options that need to be pursued are critically affected by the timetable for the implementation of the Council's Pay and Benefits project and the ongoing availability of the `school meals' grant. In simple terms, a delay of 12 months in the implementation of Pay and Benefits would mean that HC3S could be expected to break-even in 2007/08 instead of returning the planned deficit of £341,000. On the subject of the grant monies, it is now understood that the government is likely to announce a commitment to funding for a further three years and that the distribution mechanism will reduce the amount that is allocated directly to schools. The detail of the new arrangements is not likely to be known before July. Notwithstanding these issues, the best guarantee of a stable future for the business is to achieve an increase in the level of pupil uptake and this remains the primary focus of the team's efforts.

3.5

The refurbishment of the Council's headquarters buildings has required the temporary closure of the Castle Restaurant, which has resulted in a reduced contribution to the overheads of the business. However, the mobile `trolley' services have been very well received and if recent trends continue, the contribution in 2007/08 will be in excess of £20,000.

Hampshire Transport Management (HTM)

3.6

2006/07 was a good year for HTM with income on target at £8.1 million,

which is an increase of 6.7% on 2005/06. Most of the increase came from

fuel sales and contract hire, but the courier service has continued to grow its

workload and its income and the hire of pool and occasional vehicles has

also increased. The surplus of £287,000 is some £129,000 better than

planned. The largest single factor in this result is that lease payments on

the vehicle fleet were lower than forecast. This has implications for the

projection for 2007/08 and work is currently being undertaken to establish

whether there is an opportunity to reduce the contract hire rates in 2007/08.

3.7

Implementation of the new fleet management system is well underway and this is providing a good opportunity to review the productivity and costs within HTM's five workshops. Efforts to extend the customer base have begun to bear fruit and Eastleigh Borough Council has recently agreed to purchase its commercial vehicles through HTM. Thirteen vehicles have been ordered to date.

3.8

The healthy trading position of HTM has afforded funds for infrastructure improvements that are intended to secure the future success of the business. Expenditure was modest in 2006/07 but the programme of upgrading facilities will continue in 2007/08 with the main focus of the work being at Bishops Waltham. Plans to upgrade the fuel facilities at Petersfield and for minor work on the buildings at Micheldever are being considered and will be undertaken subject to the overall trading performance in the current financial year.

Cleaning Services

3.9

The cleaning service returned a larger than forecast surplus of £31,000. This reflects the effects of the refurbishment of Ashburton Court with overtime costs in particular being lower than the projection. Charges for 2007/08 are being set with the objective of achieving a near break-even position.

Hampshire Printing Services

3.10

Total income was broadly similar to 2005/06 at around £2.3 million with a slightly higher value of business (£1.89m) going through the main print works, while charges to the County Treasurer for Variable Data Printing were reduced. During the year, the most significant change for HPS was the delivery of the new KOMORI printing press. Installation of the new equipment and the training of the machine operators took several weeks near the end of the financial year and during this period an increased amount of work was bought in from the private sector to minimise any service disruption for customers. As a result, outwork reached a total of some £618,000 in 2006/07 and this was the principal cause of a squeeze on HPS' overall trading account. However, a small surplus of £6,000 was achieved.

3.11

HPS is already seeing the benefit of the higher productivity that can be achieved with the new press and expects to make significant in-roads into the volume of outwork. For the first time, a formal framework contract has been established that will sweep up the majority of the remaining outwork and HPS is moving towards the role of corporate `gatekeeper' via its print management service.

County Supplies and the Corporate Procurement Unit

3.12

Total income was unchanged at £9.7 million, but this was some £64,000 higher than the revised forecast. The overall surplus for Supplies was £60,000 higher than anticipated at £160,000 driven by the extra income and lower than expected overhead costs (£54,000 below the forecast). The value of the contracts undertaken by County Supplies has continued to grow and is now estimated to be more than £100 million for the first time. The participation of external customers is a strong factor in this growth. Income from retrospective rebates of £1.32 million was received on contracts with some 25% of this total coming from the expenditure of external customers. A breakdown of the contract portfolio is shown in Appendix Two.

3.13

County Supplies is an active member of the Central Buying Consortium (CBC) and commits over £25 million annually to joint purchasing arrangements with other member authorities. This involvement with the CBC continues to deliver value for the County Council and there has been an increasing trend towards joint procurement with the other public sector consortia particularly the Eastern Shires Purchasing Organisation. This collaboration is supported by the Regional Centres of Excellence and the Centre for Procurement Performance (managed by the Department for Education and Skills) and this will continue in 2007/08. However, it must be acknowledged that developments in the area of commodity goods and services are not proceeding as quickly as these national bodies would like to see.

3.14

Regular progress reports have been made to the Panel regarding the Corporate Procurement role developed by County Supplies. A further progress report appears elsewhere on the Panel's agenda. During 2006/07, costs of £100,000 were recovered from departments in respect of the two Contracts Managers employed to deliver the corporate review programme with other costs being funded through the trading account of County Supplies. A further £100,000 will be recovered in 2007/08 after which it will be necessary to review the performance and structure of the team together with the funding mechanism.

3.15

The previous annual report commented on the very substantial price rises for electricity and oil that were necessary during 2005 and this trend continued in the 2006 price round for energy. Prices moderated over the last winter and, against a background of uncertainty, it is currently expected that reductions of 10-15% will be achieved in 2007.

3.16

Total issues from the warehouse operation to internal customers were more than £5.2 million and £2.4 million to external customers. Inflationary pressure on purchase costs began to appear during 2006/07 for the first time in several years and this was particularly evident for paper. As a result, prices in the new 2007/08 catalogue have increased by around 5% overall. Over the last eleven years, general inflation (RPI-X) has increased prices by 27.1% in the economy as a whole, but warehouse prices are still on average 17% lower than they were in 1996! Conditions in this market are illustrated in the table below:

Table 3: Inflation Index (Based on the catalogue prices of 285 stock lines multiplied by the volume of issues made in 2002/03)

Date Index Sales value

1996

100.0

£4,110,283

1998

85.4

£3,509,944

2000

78.8

£3,237,944

2002

82.7

£3,399,053

2004

80.6

£3,312,940

2005

80.0

£3,287,662

2006

79.2

£3,254,660

2007

83.0

£3,411,577

3.17

County Supplies' issue prices for stock are regularly compared with a range of public and private sector organisations and this information continues to show that the warehouse offers customers good overall value-for-money. Comparisons based on the new catalogue and five similar organisations (3 public, 2 private) indicate that County Supplies continues to offer the lowest prices for a sample `basket' of goods worth £2.1 million or 27% of total sales. Competitor activity continues to be strong, but expenditure with eighteen organisations monitored by County Supplies fell by 3% in 2006/07 compared with 2005/06.

Sickness Absence

3.18

Absence levels within the businesses are on average higher than across the department as a whole. However, it is pleasing to be able to report that the percentage of hours lost fell from 4.6% in 2005/06 to 3.7% in 2006/07. With an average number of full time equivalent staff of 864, this reduction is equivalent to almost 2,000 working days.

4

Summary

4.1

The businesses achieved an overall surplus of £337,000 and at the end of March 2007, the accumulated surplus was £2.637 million. Both figures are better than the forecasts reported to the Panel in January this year and the resulting position gives confidence that the businesses will be well placed to self-fund further investment and deal with any currently foreseeable trading issues. The principal uncertainties relate to the implementation of the Pay and Benefits project and the scale of any on-going call on the accumulated surplus of the group required to facilitate this (particularly given that trading units will be required to self-fund any increase in payroll costs).

LINK(S) TO CORPORATE STRATEGY

Yes

No

Hampshire safer and more secure for all

X

Maximising well-being

X

Enhancing our quality of place

X

This proposal does not link to the Corporate Strategy but, nevertheless, requires a decision to enable the four businesses of the Business Services Group to operate within the County Council's financial regulations as self funding business units.

PBRS Business Services Group

Final Accounts 2006/07

Target

Actual

Difference

£'000

£'000

£'000

Income

36,641

36,805

163

Direct Costs

30,814

30,838

24

Contribution

5,827

5,967

140

Overheads

5,787

5,630

-157

Surplus/(Deficit)

40

337

297

Hampshire County Council Catering Services (HC3S)

2006/07 Final Accounts

Target

Actual

Difference

£'000

£'000

£'000

Income

Sale of meals

15,486

15,518

32

Government grant

511

592

81

Total Income

15,997

16,110

113

Direct Costs

14,819

14,864

45

Contribution to overheads

1,178

1,246

68

Overheads

1,419

1,395

-24

Surplus/(Deficit)

-241

-149

92

Hampshire Transport Management (HTM)

2006/07 Final Accounts

Target

Actual

Difference

£'000

£'000

£'000

Income

Contract Hire

4,024

4,056

32

Other

4,065

4,062

-3

Total Income

8,089

8,118

29

Direct Costs

6,765

6,631

-134

Contribution to overheads

1,324

1,487

163

Overheads

1,164

1,198

34

Surplus/(Deficit)

160

289

129

PBRS Cleaning Services

2006/07 Final Accounts

Target

Actual

Difference

£'000

£'000

£'000

Income

All sites

579

581

2

Total Income

579

581

2

Direct Costs

408

391

-17

Contribution to overheads

171

190

19

Overheads

169

159

-10

Surplus/(Deficit)

2

31

29

Hampshire Printing Services (HPS)

2006/07 Final Accounts

Target

Actual

Difference

£'000

£'000

£'000

Income

Main Printworks

1,927

1,890

-37

Other

411

404

-7

Total Income

2,338

2,294

-44

Direct Costs

1,111

1,183

72

Contribution to overheads

1,227

1,111

-116

Overheads

1,208

1,105

-103

Surplus/(Deficit)

19

6

-13

Hampshire County Supplies

2006/07 Final Accounts

Target

Actual

Difference

£'000

£'000

£'000

Income

Stores turnover

7,592

7,685

93

Retrospective rebates

1,388

1,319

-69

Other

658

697

39

Total Income

9,638

9,702

64

Direct Costs

7,711

7,769

58

Contribution to overheads

1,927

1,933

6

Overheads

1,827

1,773

-54

Surplus/(Deficit)

100

160

60

COUNTY SUPPLIES APPROX. PURCHASING TURNOVER 2006/2007

Commodity Group

STOCK

CALL-OFF

Supplied from

County Supplies Warehouse

Ordered from suppliers against Purchasing Arrangements made by County Supplies

(£000)

(£000)

1

Stationery Buying Team

3,435

848

- stationery, paper, art & craft

- maths, science & technology

2

Hardware Buying Team

2,018

3,032

- hardware, electrical, cleaning materials

- laundry & catering equipment

- first aid, paper disposables

3

Furniture Buying Team

50

4,964

- furniture, furnishings

- early years equipment

4

Technology Buying Team

214

18,070

- office equipment, audio visual, music

- computers, telecoms and photographic

- Sport

5

Photocopying

4,804

6

Books

1,268

7

Food

8,100

8

Oil Fuels

5,250

9

Gas

10,100

10a

Electricity

9,000

10b

Street Lighting

3,000

11

Maintenance & Repair Contracts etc

1,300

12

Catering Contracts

5,900

13

Cleaning Contracts

4,700

14

Ground Maintenance Contracts

2,000

15

Recruitment, Public Notice Advertising

1,500

16

Coroners' Disposals, Research, Cash Collection, Transport, Waste Collection, Banking, Vehicle Purchases, Photography, Sale of Advert. Space, Physician, Pension Fund, Venues etc.

2,586

17

Staff Agency/Temporary Workers

12,000

18

Security

345

TOTALS

5,717

98,767

GRAND TOTAL

104,484