Official Report (Hansard)

DEPARTMENT OF FINANCE AND PERSONNEL (DFP)

STRATEGIC ANALYSIS OF THE VALUE FOR MONEY AND 
AFFORDABILITY IMPLICATIONS OF THE MAZE/LONG KESH OUTLINE 
BUSINESS CASE

Introduction

1. This paper provides a strategic analysis prepared by DFP officials of preliminary proposals received from the Office of the First Minister and deputy First Minister (OFMDFM) and from the Department of Culture Arts and Leisure (DCAL) relevant to the future development of the Maze / Long Kesh (MLK) site. The key materials and information used by the Department to prepare this analysis and assessment were:

   (a) An Outline Business Case (OBC) prepared by Deloitte Consultants on behalf of OFMDFM, accompanied by an OFMDFM/SIB review of the OBC and affordability, and a note by SIB on financial/affordability implications of the OBC. This material was sent to DFP under cover of a letter from the Accounting Officer for that Department dated 7 December 2007. A further note from the OFMDFM Accounting Officer on the cost and value for money implications of the proposals was sent on 21 April 2008.

   (b) A Business Case for a proposed multi-sports stadium for Northern Ireland and a Feasibility Study and Business Plan which examines the operational viability and delivery structure for the project. This material was prepared by PWC consultants on behalf of DCAL and sent to DFP under cover of letter from the Accounting Officer for DCAL dated 24 January 2008.

   (c) Further exchanges of correspondence between DFP and the two Departments seeking clarification of issues and matters arising from our analysis of the cases presented. There were also several meetings involving officials from the departments involved, and from the SIB, to discuss the materials submitted and the implications of the further information and clarification provided in response to DFP’s questions and analysis.

   (d) Further information relating to the assessment of the MLK site valuations and market tested bids sent to DFP by OFMDFM on 12 May 2008.

   (e) In addition the Chief Economist was asked to form a view as Head of Profession on the extensive range of technical papers submitted to DFP on the proposals for the development of the MLK site. In doing this, he convened the views and conclusions of all the economists in the various departments who had been involved in consideration of the proposals over a prolonged period. He provided the agreed views of the NICS economists involved in the proposals and these are summarised at Annex A.

Accounting Officers’ Views

2. Before considering such a proposal from a department, DFP would normally expect to receive a clear recommendation from the Accounting Officer(s) concerned that it represented value for money in terms of the benefits to be delivered compared to the scale of public money to be invested in the proposed project. This case is unusual in that both Accounting Officers have concluded that a clear value for money case has not been demonstrated in relation to the scale of the public expenditure proposed.
3. The OFMDFM Accounting Officer’s view is that the value for money of this case has not been fairly demonstrated and that the weighting of and emphasis given in the OBC to the qualitative, non-monetary benefits of the project and the overall affordability issues that it raises, necessitates that Ministers must first decide whether they wish to commit public funds to the ongoing development of the project. In his separate note of 24 January 2008, the DCAL Accounting Officer concluded that when the projected Net Present Cost (NPC) of the project is considered in the context of the wider benefits and the unquantified risks associated with the project, it was not possible for him as Accounting Officer alone (for the stadium and associated infrastructure element) to conclude, at that stage, that an economic case for the development of the proposed stadium at the MLK site had been fully demonstrated. Since then, the DCAL Accounting Officer has written on 14 May 2008 to formally advise DFP of his Accounting Officer assessment. He has confirmed that, when the NPC offered by this project is considered in the context of the wider benefits and the unquantified risks associated with the project, it is not possible for him as Accounting Officer (for the stadium and associated infrastructure element) to conclude that an economic case for the development of the proposed stadium at the MLK site has been fully demonstrated.
4. DFP officials have noted these conclusions from the two Departments on the value for money assessment of the proposed project. Clearly the normal DFP approval role in a case like this has to be qualified because neither department sponsoring the project has concluded that the current proposals for the future development of the Maze site represent value for money. In these circumstances there is, strictly speaking, nothing for us to approve at this stage since there is no unqualified recommendation from either department that the present proposals should proceed. However in order to inform Ministerial consideration of the issues involved, the remainder of this paper summarises our analysis of the key uncertainties and risks associated with these very complex set of proposals and provides our preliminary views on their viability.

Background

5. The lands at the MLK site were transferred to the then Northern Ireland Executive in 2002 under the Reinvestment and Reform Initiative (RRI). During the subsequent period of Direct Rule a substantial amount of work was undertaken (led and co-ordinated by OFMDFM, DCAL and the SIB) to develop proposals for a mix of strategic development uses for the site. This included consultation with a range of stakeholders including local political parties, various community and sporting interests, local departments and other public bodies (including the Roads and Planning Services) and the private sector development market.
6. This work was coordinated by a Maze Consultation Panel which published a report in February 2005 identifying a range of potential uses for the land at the site including sports, heritage, industrial and agricultural zones. The panel report also recommended that the Government take forward a formal master planning process and engage with the private sector in doing so. The subsequent Masterplan for the site prepared for OFMDFM by external experts identified a range of strategic uses for the site similar to those previously identified in the Panel Report. These proposed land uses, including a stadium as a component of the proposed development, then formed the basis of the development plans that potential private sector development partners were invited to prepare. This private sector partner development route was chosen and approved by Direct Rule Ministers because of the potential offered to transfer cost, planning, development and delivery risks to the private sector.
7. The proposals for the MLK site that have now been brought forward by OFMDFM reflect in their essence the outworking of the above processes initiated and approved by Ministers during the period of Direct Rule. OFMDFM is responsible for site regeneration and the overall MLK proposal, while DCAL is responsible for sports policy and the stadium element of the proposal.
8. The Outline Business Case is a complex document consisting of an OBC in respect of the overall Maze/Long Kesh development prepared by Deloitte on behalf of OFMDFM, supported by separate subsidiary OBCs for the International Centre for Conflict Transformation (ICCT) and the associated infrastructure, and by a business plan for the ICCT. The OFMDFM view of the overall MLK OBC has also been informed by the separate Business Case prepared by PWC on behalf of DCAL in respect of the stadium, supported by a feasibility study and business plan examining the operational viability and delivery structure for the project.
9. The stadium proposal is inextricably linked to the development and potential success of the overall MLK development proposal since it is the key component and catalyst for potential future developments at the site that are intrinsic to the viability of the overall case presented by OFMDFM. It is fundamental to the overall proposal’s success or failure because the potential for ‘shared future’ benefits are predicated upon the proposed stadium being a success in terms of location, capacity, atmosphere, matchday experience, transport solution, robust staging agreements and the absence of competing stadium developments. For that reason, the interface between OFMDFM and DCAL as the lead Departments for the MLK and the stadium respectively has always been a crucial piece of this jigsaw.
10. Direct Rule Ministers agreed that the provision of a stadium should be regarded as a Government priority provided that:-

    (a) the three main sporting bodies (the Irish Football Association (IFA), the Irish Rugby Football Union (Ulster Branch) and the Gaelic Athletic Association (GAA)) agreed to host major games at the stadium; and

    (b) any proposed stadium development should, after construction, be capable of meeting its own operational costs without need for any further public sector subsidy.

Summary of the Proposals

11. In summary, the proposals put forward by OFMDFM officials, and incorporating the parallel business case on the stadium project prepared by DCAL, have the following key features:-

• Transfer to a private sector partner of approximately 300 of the 360 acres of the MLK site, with the remaining 60 acres being earmarked for the stadium, ICCT, roads development and the potential RUAS showground. (There is however conflicting information provided by OFMDFM, SIB and PWC on the precise size and land allocations proposed in the plan. For example, the SIB has provided an alternative land allocation proposal that identifies 346 acres being available on the site with the transfer to the private sector partner of approximately 245 acres). The lands to be transferred to the private partner have been earmarked for a variety of uses to include limited residential development, retail, leisure and commercial development, car and coach parking and future reserve lands. However there remains considerable uncertainty in the proposals available as to how much of these transferred lands would be used for these various purposes.
• A construction contract with the private sector partner for the stadium, ICCT and roads with a ‘pain/gain’ mechanism.
• An upfront payment by the private partner into a dedicated MLK works account plus overage (profit sharing) arrangements plus other benefits.
• The Net Present Cost (NPC) of the preferred option in the overall MLK OBC sent to us in December was estimated to be in the order of £156million - £193million. However OFMDFM has recently advised that following further work by their consultants, the estimated NPC of the proposed development has increased from £193million to £254million.

• The overall MLK OBC also states that in affordability terms the cost of the preferred option to 2014-15 is £379million On Balance Sheet, or £307million Off Balance Sheet. The OFMDFM/SIB review of the OBC and affordability describes these costs as the cost to Government of implementing the Masterplan and goes on to state that the private partner procurement would result in a cost to Government of between £160-£180m phased over a four-year period (net of the upfront developer contribution). The OFMDFM/SIB paper goes on to note that projections would suggest a further payment to Government over the development period reducing the cost to Government to around £120m-£140m. This assumes an Off Balance Sheet outcome is achieved and excludes land assembly costs of £23m which OFMDFM acknowledge would have to be found separately. DFP have presumed that these additional costs would also fall to the NI DEL.

• In considering these figures for NPC and public expenditure impacts, it is important to differentiate between the Net Present Cost (NPC) of the proposal and the public expenditure (PE) impact. The NPC references refer to the sum of all discounted benefits and costs over the lifetime of the project. In this case a NPC means that the sum of all discounted costs exceeds the sum of all discounted benefits.  The discounting process allows for costs and benefits to be expressed in today's monetary value – i.e. adjusting for future inflation. It is important to stress that the NPC figures and ranges quoted are not PE figures. The NPC determination embraces all costs - public and private sector.

• The public expenditure figures, on the other hand, refer to the call on the Northern Ireland public expenditure allocation (or “the Block allocation”). There are both Capital and Resource DEL public expenditure requirements in this project and these are reflected in the alternative on and off balance sheet figures referred to above.

Key Economic and Value for Money Conclusion

15. Setting aside for the moment all other risks and issues (which are explored further below), the single most important conclusion emerging from the overall MLK OBC is that the Net Present Cost of the preferred option in a range of £156 to £193 million (and potentially as high as £254 million) clearly indicates that, based on quantifiable financial and economic criteria, the proposal does not represent value for money.
16. That being the case, it is clear to us that the core issue which will be central to final decisions on this proposal is whether the weight attached to the non-monetary benefits justifies its very significant Net Present Cost. In that context, the ‘shared future’ benefits are given a weighting of 60% in the overall non-monetary analysis contained in the OBC. These ‘shared future’ benefits will arise only in the event that the stadium is a success in terms of location, capacity, atmosphere, matchday experience, transport solution, robust staging agreements and the absence of competing stadium developments. These benefits should be quantifiable within a business case using baseline information, along with specific and measurable objectives and targets. This would allow for quantification of the non-monetary costs and benefits by way of appropriate non-monetary metrics, and specific and measurable evaluation criteria.
17. In the case of this OBC, however, this approach has not been adopted and, while we have taken the wider non-monetary benefits fully into account as required by the Green Book, we have concluded there is an insufficient level of quantification for a programme with this scale of public expenditure to allow for an informed decision to be made by an Accounting Officer as to whether the non-monetary benefits are worth the significant Net Present Cost. Our conclusion here is consistent with the opinions provided by the two departmental Accounting Officers as to their assessments of the overall value for money offered by these proposals.

Other Uncertainties, Risks and Issues

18. In addition to this central value for money conclusion, DFP’s analysis of the proposals has identified a number of other areas where the OBC clearly demonstrates significant risks and uncertainties. These revolve around the following areas that are explored in further detail below:-

• planning and land disposal;
• procurement issues;
• stadium capacity issues;
• operational viability;
• apportionment of infrastructure;
• employment issues;
• taxation issues; and
• option appraisal.

Planning and Land Disposal

19. A key factor in on our evaluation of the current proposals for the MLK site is the planning context and how this impacts upon the future development potential of the site, the level of risk to be transferred to the private sector under the proposals, and the future value of the site. The development of proposed uses for the site and the conduct of a competition among potential private sectors partners have been managed within a planning framework determined by the Planning Service. The key features of this planning framework are:

    (a) The MLK site is located in a green belt as designated in the statutory Lisburn Area Plan 2001 which implies that there is a general presumption against development. This remains the statutory Plan for the area until the draft Belfast Metropolitan Area Plan (BMAP) is adopted.

    (b) The draft BMAP, which was published in November 2004, designates the Maze lands as a “Strategic Land Reserve of Regional Importance”. The Planning Service has stated that they consider it essential that any emerging proposals for the MLK site be confined to those that can clearly be classified under the “Regional Significance” criteria. The Planning Service adds that development proposals, such as housing, could face difficulties in the context of the constraints currently imposed by the Regional Development Strategy and the BMAP. Any additional flexibility on this issue might only be considered in the longer term in the context of a Plan review.

    (c) Following on from this, the Planning Service conclusions about the development potential of the site, beyond the provision of facilities that meet the “Regional Significance” criteria, is that ancillary facilities such as hotels and offices associated with the regional facilities would be acceptable development proposals. However the Service records uncertainties about the prospects for other types of development on the site, including housing beyond some enabling development in the region of 200 houses. On the prospects for employment generating uses, the Planning Service similarly notes that employment generating uses (beyond a major new industrial project significant to the whole of NI) would need to be assessed in terms of current planning policy, while significant retail development is unlikely to receive planning approval because of the proximity of the Sprucefield retail park.

20. These significant uncertainties surrounding the medium term planning framework for the future of the MLK site present a significant obstacle to assessing the options and potential value for money from a potential development framework involving the transfer of a significant proportion of the lands to a private sector development partner. Such a partner could well be influenced by the considerable planning uncertainty over the future status of the site and thus make financial proposals that are less generous from the Government’s perspective reflecting the risk involved. However for the Government, there is a parallel risk that having accepted the best deal on offer at present from a private sector developer, future planning developments could result in greater opportunities for housing and industrial development on the transferred lands from which the private sector owner would stand to reap the benefits.
21. In the OBC presented to DFP by OFMDFM officials there is an attempt to address this issue via a proposal that a private sector developer would make an upfront contribution to the initial development of the site to be followed by further contributions over the subsequent decade. There would also be the potential for further contributions to the Government based on overage or profit sharing arrangements in the event that opportunities for additional significant residential development homes on the site materialised.
22. However DFP officials have concluded that these arrangements would expose the Government to a considerable risk of significant future losses to public funds when set against any future development potential on the site. DFP has therefore concluded that the significant uncertainties surrounding the present planning framework for the MLK site is not a satisfactory basis on which to take forward a procurement exercise involving a private sector partner and one which has such significant long term public expenditure implications.
23. Instead we believe that there should first be a concerted effort (involving the Planning Service) to establish a clear set of planning assumptions for the site so that decisions that will have such significant and long term public expenditure implications can be taken with full regard for the public interest involved. In terms of the present analysis of options for the immediate future of the site, the alternatives of conventional procurement or keeping a greater share of the site in public ownership and control pending clarification of long term planning issues have not been considered as part of the value for money assessment. This reflects the particular approach to this procurement exercise adopted by Direct Rule Ministers. However we do not believe that this approach represents an appropriate basis for the Executive to proceed with options for the future of the site.

Procurement Issues

24. DFP also has a particular concern about the procurement and contractual assumptions underpinning the Outline Business Case (OBC), and in particular the synchronicity between the business case process, the procurement process and the availability of the final staging agreements (i.e. the legally binding contracts) with the three sporting bodies. We have highlighted the point on a number of occasions that it was unusual to go out to the market prior to having an agreed OBC, primarily because of the reputational risk for the administration (in terms of public credibility and market credibility) and also because of the potentially significant costs which the private sector is obliged to incur in participating in the procurement competition.
25. The justification for this unusual approach, whereby a private partner competition has run ahead of the OBC process, was that it was intended to confirm the interest of the private sector and help determine the scale of the public sector contribution and the shape of the development proposals, without prejudice or commitment by the Government. Within that context, DFP Central Procurement Directorate (CPD) were involved in and confirmed that they were content with the proposed approach.
26. However, the current position is that, because of the delay which has occurred in terms of OFMDFM submitting the Outline Business Case to DFP and the two Accounting Officers reaching a definitive position on value for money, the Executive would be asked to approve an OBC for the entire site with a view to naming and, following a four to six week period of clarification, finalising the development agreement and appointing a preferred private sector bidder. Negotiations would then commence with that bidder with a view to reaching agreement on the final terms of arrangements for the long term development of the site. The outworking of this approach is that it would leave the Government committed from a public perspective and exposed to risk, particularly because of the absence of legally binding staging agreements with the three sporting bodies, which will not be available until the Final Business Case (FBC) process is concluded. The enforceability of these agreements and the conditionality attaching to them are fundamental to the proposal and remain uncertain. This is particularly important given the IFA’s conflicting contractual commitment to use Windsor Park for international matches.
27. In response to this point, OFMDFM have confirmed that approval to enter into the development agreement would be sought only when planning permission had been received, land assembly completed, commitment from the sports bodies in place, the FBC approved and the fixed target costs set. A Memorandum of Understanding (MOU) would include a clause that Government could withdraw at any stage up to the signing of the agreement. However, OFMDFM have confirmed that the developer is likely to seek inclusion in the MOU of a clause ensuring that developer costs incurred subsequent to the appointment of the preferred bidder could be recovered if the project did not proceed. These costs could be very significant. In addition, the reputational risk for the administration in those circumstances would be equally significant and arguably much greater than a decision now to abandon development proposals that carry significant financial risks for the Executive.

Stadium Capacity Issues

28. Stadium capacity (i.e. demand forecast) is fundamental to the success of the stadium and therefore to the overall development proposal, since it has a direct bearing on critical determinants such as atmosphere, matchday experience and ultimately operational viability. It is acknowledged that the sporting bodies would pay a lower level of rent on all income over the minimum threshold and thus that there is an incentive on the sporting bodies to attract events beyond those envisaged in the base case. Nonetheless according to the base case only 1.5 Gaelic matches out of the proposed 16 contracted events require more than a 30,000 capacity. Indeed, the GAA’s commitment is to bring events capable of attracting 150,000 attendees per annum on average over any three year period, which the stadium OBC counts for illustrative purposes at 5.5 events per annum. Consequently, it would appear that there is no guarantee that the full 38,500 capacity would ever be required.
29. The issue of the proposed 38,500 capacity is therefore crucial, particularly since no smaller capacity option at the Maze has been taken forward to full appraisal. That is significant because stadium construction costs are generally very sensitive to capacity levels in that, as capacity increases, construction cost increases are proportionately higher. DCAL has provided illustrative benchmarking data for the cost of other stadia developments elsewhere in the UK adjusted to a common price basis. These show that the cost of a 38,000 capacity stadium at the Maze (£104 million) would be double that of a 30,000 capacity stadium in Milton Keynes (£52 million). Within this context, DFP is concerned about the absence of benchmarking information showing the MLK capital cost (inclusive of the 67% infrastructure cost apportionment) benchmarked against stadium developments elsewhere on the basis of total capital cost per spectator.
30. Finally, there are a number of other capacity-related risk factors that need to be taken into account. These include in particular the obvious consideration of whether the out of town location in conjunction with the 38,500 seat capacity could adversely affect the demand for smaller events. For example, there has been a concern recorded that soccer or rugby fans could be deterred from travelling to the stadium for a small event by the prospect of sitting in a partially empty stadium.

Operational Viability

31. The stadium would not be operationally viable on the basis of the contracted sporting events alone, but would be dependent on the estimated three concerts per annum assumed under the base case business plan. Section 4 of the stadium Outline Business Plan indicates that, if one fewer concert were to be hosted per annum, the stadium would make an annual loss of £84,000 post sinking fund contribution (against a profit of £166,000 under the base case). OFMDFM have commented that the stadium would be operationally viable in these circumstances if there was no sinking fund (i.e. for major refurbishment of the stadium). However, sinking funding methodology is accepted good practice for a project of this nature and it would be negligent to proceed without such a fund.
32. That being the case and given that none of the three envisaged concerts are guaranteed, these events constitute a significant risk to viability, which appears to rest with the public sector. In the event that the stadium operational company failed to achieve or maintain operational viability, there would undoubtedly be pressure on Government to meet its losses to ensure that the other benefits for which very substantial public expenditure had been incurred were not lost.
33. In addition, the Government also appears to be carrying the risk of the resource consequentials of the stadium and associated infrastructure. While the OBC highlights the cost of the preferred option to 2014-2015 as being within a range of between £307m Off Balance Sheet to £379m On Balance Sheet, the On Balance sheet costs increase to £718m over the thirty year life of the project, when one takes into account the depreciation and cost of capital charges. This constitutes a significant risk for Government and a major consideration, particularly in the context of the underlying rationale for the scheme that any proposed stadium development should be capable of meeting its own operational costs without need for any further public sector subsidy.

Apportionment of Infrastructure

34. OFMDFM and DCAL have been unable to reach agreement on the apportionment methodology to be employed in the Outline Business Case. As a consequence, a different approach to the apportionment of infrastructure costs has been taken in the Consultants’ reports prepared on behalf of DCAL (PWC) and OFMDFM (Deloitte). Deloitte apportion 67.2% of the total MLK infrastructure costs to the stadium on the grounds that the main driver for infrastructure requirements on the site would be stadium generated (and particularly to cater for up to 38,500 peak demand and a relatively short ingress/ egress profile). However PWC apportion 40% of the MLK infrastructure costs to the stadium. Also Deloitte make a £2m provision for annual maintenance of the MLK infrastructure, while PWC make no such provision. For illustrative purposes, if the infrastructure apportionment to the stadium was set at the higher Deloitte figure of 67.2% of the full infrastructure cost, and the annual infrastructure maintenance was equally apportioned to the stadium and the wider MLK project, this would substantially increase the MLK stadium option NPC from c£37m to around £110m - making it much less favourable when compared to other options for a stadium.
35. While OFMDFM have provided clarification for the reason underlying the two different treatments and the Chief Economist’s view is that the two commissioned reports do not differ in terms of his overall conclusion on value for money, the DFP view is that the Deloitte approach in the overall MLK OBC of apportioning 67.2% of the total infrastructure costs to the stadium appears reasonable on the grounds that the main requirement for infrastructure would be stadium-related. However, applying this apportionment to the stadium OBC would increase its Net Present Cost very significantly. It would also translate to an equally significant capital cost per spectator, which would undermine the cost-effectiveness of the proposal. This point becomes particularly relevant when one considers the level of usage of the stadium in terms of the number of contracted sporting events and the fact that the average attendance falls so far short of stadium capacity. However, from a DFP perspective, this issue does not impact on the calculation of an NPC for the overall OBC for the MLK site since the infrastructure costs would be incurred anyhow regardless of how they were to apportioned between the various facilities that would be provided on the site.

Employment Issues

36. The OBC assumes that, taken together, the stadium and non-stadium jobs created as a result of the investment will total 5910 and this figure has been used in the accompanying analysis of economic benefits. In considering the displacement factor, the OBC states that the programme is likely to contribute a net employment gain to the region of 4121 jobs, of which 3250 will be on-site and the rest will be distributed elsewhere within the region. Given the importance attached to the employment dimension, DFP is concerned that the development agreement does not specify either a target or a minimum requirement for jobs on site. In response, OFMDFM have noted that it is not usual practice for a development agreement to contain such targets.
37. While the preferred bidder has indicated in their submission the potential for job creation, DFP is equally concerned about the absence of independent confirmation (for example, from DETI/Invest NI who are listed by OFMDFM as key stakeholders) as to the scale of employment (including an analysis of displacement); the quality of employment in terms of skills and earnings levels; and an assessment of how quickly the employment and the earnings and skills projections would be achieved. This information is clearly crucial to the proposal and it is surprising that it is missing. The Minister should note that the figure of 10,000 jobs frequently quoted in the media cannot be attributed to either Deloitte or PwC business cases. It has no material foundation that we are aware of. The difficulties in determining employment effects are reinforced by the uncertainty attaching to how future planning approval for commercial development on the site will affect the potential for future job creation – see paras 19-23 above.

Taxation Issues

38. Written confirmation as to the taxation treatment and any implications attaching to the upfront and clawback receipts is not yet available. OFMDFM have advised that this would be sought in advance of Final Business Case and Contract Award to ensure that any delivery vehicles are structured in the most tax efficient manner. Again, however, these constitute significant risks which impact directly on the affordability of the proposal.

Option Appraisal

39. It is clear that determination of the preferred option in the stadium OBC is unduly influenced by the more developed analysis of the MLK option. From an economic perspective, it is important that option ranking should not be unduly influenced by the stage of development of one option relative to other options. In the stadium OBC, the analysis of the MLK option is more developed than for some of the other options and the optimism bias adjustments reflect this. In addition, the affordability analysis for the MLK option reflects the ‘hope value’ attaching to future planning approvals. This undermines the balance of the assessment.

Affordability

40. Aside from value for money, the other key issue for consideration is affordability. In this context, the OBC focuses on the Net Present Cost of the preferred option. With regard to the direct DEL (public expenditure) implications of the proposal, the OBC highlights the affordability cost of the preferred option to 2014-2015 as being within a range of between £307m Off Balance sheet to £379m On Balance Sheet. However, over the thirty year life of the project, the resource costs of the preferred option are estimated to be within a range of £305m Off Balance Sheet to £718m On Balance Sheet.
41. This large variation between Off Balance Sheet and On Balance Sheet costs is due to non-cash charges, i.e. depreciation and cost of capital charges of up to £18 million per annum in the early years, reducing to £12 million in later years. Over the life of the project, these charges could amount to an additional £413 million, bringing the potential On Balance Sheet costs up to £718m.
42. The decision on whether the stadium should be Off or On Balance Sheet would normally be informed by advice from DFP, but ultimately it is for the Department’s Accounting Officer to take a view on this issue in the presentation of the Departmental Resource Accounts. The Resource Accounts would in turn be subject to audit by the Northern Ireland Audit Office, which would make an assessment of the Accounting Officer’s proposed treatment. Their view and interpretation is therefore of crucial importance. In addition, the introduction of International Financial Reporting Standards (IFRS) in April 2009 will impact on this area as they are proposing a change in treatment for assessing the appropriateness of scoring items On or Off Balance Sheet. Current financial reporting standards would assess this issue in terms of risk, but IFRS place more significance on physical control of the asset. These implications need further research but early indications are that this proposal could potentially be On Balance Sheet under the new standards.
43. Affordability will therefore be a key consideration in coming to a decision on the MLK proposal and the On or Off Balance Sheet treatment will have an important impact in that context. In simple terms, however, the opportunity cost attaching to the proposal can be regarded as comprising the 360 acre site plus between £305m and £718m of public expenditure over the thirty year life of the stadium. This does not take into account other potential costs attaching to the various risks (such as taxation treatment and legal challenge) identified in this paper.
44. Against this background, it is clear that the affordability of the MLK proposal is a very significant consideration in terms of opportunity cost for the NI Block.

Conclusion

45. When the Net Present Cost attaching to the Maze/Long Kesh proposal is considered against the very significant risks and weaknesses which are inherent in the Outline Business Case, taking into account the largely unquantified wider non-monetary benefits, we do not believe that the proposal represents value for money. With regard to affordability, the potential funding implications and the associated opportunity cost attaching to the proposal are very significant in the context of the NI Block.

Department of Finance and Personnel 
May 2008

ANNEX A

NICS ECONOMISTS’ TECHNICAL ASSESSMENT OF THE MAZE/LONG 
KESH OUTLINE BUSINESS CASE

Background

1. The Chief Economist of the NICS was asked to form a view as Head of Profession on the extensive range of technical papers submitted to DFP on the proposed development at Maze/Long Kesh (MLK). The papers most relevant to those considerations were the PriceWaterhouse (PWC) and the Deloitte Outline Business Cases (OBC) plus the DCAL Accounting Officer letter of 24 January 2008, the OFMDFM Accounting Officer letter of 7 December 2007 and the OFMDFM clarification Notes of 21 March 2008 and 21 April 2008.
2. A number of Government economists in the key stakeholder departments (OFMDFM, DCAL and DFP) have been closely involved in the consideration of this proposal over many months. While these economists have engaged with each other on an ongoing basis on the many complex issues associated with the business cases, it was agreed that the Chief Economist should convene a meeting of all economists involved to ensure that all their views were formally taken into account. Accordingly, this assessment reflects the views of all the NICS economists involved in the MLK OBC.
3. In a standard assessment of a business case, the key determining issues would relate to value for money and project affordability. This case, however, is without doubt the most complex to come forward for consideration in recent years. The reasons for the complexity are many – the inter-related strands of the Stadium, the ICCT, the wider MLK site development, the interaction with the private sector developers, and the assumptions adopted on future public policy on issues such as planning. Some of these issues therefore go beyond direct impacts of value for money and affordability.

Value for Money

4. There has been considerable analysis of the value for money forecasts associated with the Stadium proposal. This proved rather complex as it required a detailed understanding of the wider MLK development strands and the apportionment of costs, particularly those relating to the provision of new infrastructure. This partially explains why the two commissioned reports from PWC and Deloittes indicated great variance in the estimated costs and benefits attributed to the Stadium itself. However, there were other material differences in methodologies that once reconciled (eg, adjusting for inflation assumptions, residual value of site, etc) have led the Chief Economist to conclude that the two commissioned reports do not differ in terms of his overall conclusion on value-for money.
5. The economic assessment of the MLK proposal suggests that there would be a Net Present Cost in the order of £156 - £193 million. The Stadium accounts for the majority of this cost. Accepting this position therefore asks the Accounting Officer to assume that the wider non-quantifiable benefits of constructing a 38,500 capacity Stadium and ICCT at the MLK site are considerable enough to bridge this £156 - £193 million deficit. In addition, there are an unusual range of risks, many of which could further undermine the financial viability of the proposals.
6. The material submitted indicates that these wider benefits are to be found primarily in creating a more socially cohesive and inclusive society as envisaged in delivering the Shared Future. This is undoubtedly a difficult measure to quantify in any business case. No evidence has yet been presented to demonstrate where Northern Ireland now is in terms of community cohesion and where it might endeavour to be. In the absence of this, ascribing a value of £156 - £193 million to the contribution that this project might make is questionable, particularly given the current level of interaction between the sporting codes.
7. The decision on value for money is also significantly influenced by the capacity issue. It is clear from the latest OFMDFM material that the venue will accommodate, at best, one sporting event per annum in excess of 35,000. There will also be only 2.5 sporting events per annum that will require seating in the range of 25,000 – 35,000. This raises concerns over revenue forecast and construction costs. The need for a 38,500 seat capacity has not been explained on economic grounds. Indeed, the latest OFMDFM correspondence indicates that the GAA commitment to this one 38,500 event is not concrete. It also appears that the level of seating provision has been determined by negotiation rather than economic analysis.
8. It is also a matter of concern that the balance sheet position of the Stadium has still not been resolved. Bringing the Stadium onto DCAL’s balance sheet will impose additional costs upon the department’s budget for many years.
9. A ‘pain/gain’ mechanism for the Stadium construction has been developed within the draft contract that acknowledges the need to attempt some form of cost escalation cap. While the Stadium forms a significant component of the MLK development, raising the analysis to the strategic MLK level generates a number of wider concerns.

Wider Concerns/Contractual Clarity

10. The first of these concerns relates to the intention to provide affordable housing on the site. However, it is far from transparent about what is actually to be provided. The business case does not indicate how many houses might be provided and on what financial terms or whether that housing would be gifted to DSD/NIHE.
11. The provision of affordable housing on the site raises another important factor in the consideration of the business case for the Stadium and that is the wider development of the site. The business case indicates that it is only possible to plan for housing provision capped at 200 residential units in the Phase 1 works. This reflects guidance from the Planning Service. OFMDFM’s letter of 7 December 2007 referred to an aspiration for very significant residential development, but the subsequent OFMDFM correspondence has not yet clarified this reference and the weighting that should be associated with it.
12. The need to clarify housing intentions is important because it reflects the need to gauge the private sector developer’s intentions on the land to be disposed off. Whilst OFMDFM has provided some information on a proposed clawback arrangement on land disposal, it falls far short of a value for money analysis of the proposed procurement terms. In the absence of this, it is difficult to see how an Accounting Officer could form a firm view on the value for money of the current set of proposals for the MLK site.
13. OFMDFM’s 7 December 2007 letter states “All bidders were asked to provide an unconditional upfront private sector capital contribution (ie not dependent on any planning assumptions) to the cost of the Phase 1 works, in return for the transfer of approximately 300 acres of the MLK site”. However, the OFMDFM 21 March 2008 response to DFP states ‘… the bidder’s effective valuation is for considerably less than 300 acres’. Since then, further inconsistencies in relation to the size of the site and the quantum to be transferred to the private sector parties have emerged in a report of 17 April 2008 prepared by the MLK Programme Director.

Summary

14. The MLK development proposals are undoubtedly complex in having to address a number of policy objectives. This complexity has been increased by the disconnect between the business case process and the procurement process. The Stadium proposal is the flagship upon which the other strands (eg ICCT) need to be defined in terms of value for money. This is why it is critically important to identify all benefits and costs expected over the lifetime of this project.
15. This particular case potentially generates a Net Present cost in the order of £200 million. The Chief Economist and the other NICS economists involved in assessing the MLK proposal, taking into account the largely unquantified wider non-monetary benefits, are agreed that a value for money economic case for proceeding with the proposal does not appear to have been demonstrated. In addition, there are other significant risks which also need to be taken into account in forming a view on the proposal.

Department of Finance and Personnel 
May 2008