Rural Growth Deal - Project Development Costs
Argyll and Bute Council · 5 December 2024
Back to Policy and Resources Committee — 5 December 2024 and its agenda
Text extracted from the council's PDF. Layout and reading order may differ from the original.
Page 1
ARGYLL AND BUTE COUNCIL POLICY AND RESOURCES COMMITTEE DEVELOPMENT AND ECONOMIC GROWTH 5th DECEMBER 2024 RURAL GROWTH DEAL – PROJECT DEVELOPMENT COSTS 1.0 EXECUTIVE SUMMARY 1.1 This report provides an update on the Rural Growth Deal (RGD) and specifically costs associated with Business Case and Project Development. The RGD will deliver £50m of investment from the Scottish and UK Governments for projects that are a driver for inclusive and transformational economic growth across the region. The Council and key delivery partners will also provide a minimum of £20m of match funding throughout the 10-year Deal programme. 1.2 The RGD Programme Management Office (PMO) continue to work with the UK and Scottish Governments to confirm the signing of the Full Deal Agreement, which represents the next key milestone for the Rural Growth Deal. This was postponed in June 2024 following the announcement of the General Election. 1.3 A number of RGD projects now have approved Outline Business Cases and further project development work is necessary to inform the Full Business Cases which will enable drawdown of funding from Central Government. This includes detailed design, procurement, site investigation works and statutory consents such as planning. 1.4 To date, costs associated with business case and project development works have largely been funded from the Council’s Inward Investment Fund. Match funding has also been secured from a number of key partners such as Highlands and Islands Enterprise and Scottish Enterprise. The Policy and Resources Committee have previously approved the release of 5 tranches of funding totalling £750k from the Inward Investment Fund (IIF). The RGD Internal Programme Board have delegated authority to authorise spend from the IIF to support RGD project development work. At the time of writing this report, total approved spend on RGD business case and project development work stands at £572,658. 1.5 Where possible, the RGD PMO will seek to recoup project costs from RGD capital funding allocations however, it will not be possible to submit any claims for funding until Full Business Cases for projects are endorsed by Central Government. As such, any costs incurred in advance are at risk to the Council and strategic partners. 1.6 It is currently estimated that there could be a cost pressure in the region of £3.183m over the lifetime of the Rural Growth Deal, which can be associated with project development costs. The majority of these costs will be reclaimed through RGD capital funding, once Full Business Cases are endorsed by Government. It is also anticipated that an estimated further £220k of funding will be required to be spent on Business Cases. This is not reclaimable from RGD capital funds and will be met by the Internal Investment Fund and through partner match funding. RECOMMENDATIONS: The Policy and Resources Committee are asked to:
Page 2
a) Note that the total estimated essential development costs to inform Treasury Five compliant Full Business Cases for all projects amount to £3.183m and these costs require to be incurred in advance of Central Government endorsement at risk to the Council and lead delivery partners. b) Agree that the Council sets aside a fund from the Priorities Investment Fund to the value of £0.700m that can pay for the development costs for Council projects on the basis that all will be paid back by the end of Year 10. c) Agree that any cash flow funding requests for projects led by external partners will be brought to P&R for approval as and when a request for funding is made and considered on a case by case basis. d) Delegate to the Internal Programme Board (Chief Executive and Executive Directors) to approve pre-development funding requests relating to Council led projects up to a threshold of £250k per project from the new Fund.
Page 3
ARGYLL AND BUTE COUNCIL POLICY AND RESOURCES COMMITTEE DEVELOPMENT AND ECONOMIC GROWTH 5th December 2024 RURAL GROWTH DEAL – PROJECT DEVELOPMENT COSTS 2.0 INTRODUCTION 2.1 This report provides an update on the Rural Growth Deal (RGD) and specifically costs associated with Business Case and Project Development. The RGD will deliver £50m of investment from the Scottish and UK Governments for projects that are a driver for inclusive and transformational economic growth across the region. The Council and key delivery partners will also provide a minimum of £20m of match funding throughout the 10-year Deal programme. 2.2 The RGD Programme Management Office (PMO) continue to work with the UK and Scottish Government to agree a date for signing the Full Deal Agreement, which represents the next key milestone for the RGD. This was previously scheduled for the 7th June 2024 however, was postponed following the announcement of the UK General Election. 2.3 A number of RGD projects now have approved Outline Business Cases and further project development work is necessary to inform the Full Business Cases, which, following endorsement will enable drawdown of RGD funding from Central Government. The pre-development work necessary to inform Full Business Cases includes detailed design, procurement, site investigation works and statutory consents such as planning. 2.4 To date, costs associated with business case and project development works have largely been funded from the Council’s Inward Investment Fund (IIF). Match funding has also been secured from a number of key partners such as Highlands and Islands Enterprise and Scottish Enterprise. The Policy and Resources Committee have previously approved the release of 5 tranches of funding from the IIF totalling £750k, with authority delegated to the Internal Programme Board to authorise spend to support Rural Growth Deal project development work. At the time of writing this report, total allocated approved spend on RGD project development work stands at £572,658. 2.5 Where possible, the RGD PMO will seek to recoup capital costs from RGD funding allocations however, it will not be possible to submit any grant claims until Full Business Cases for projects are endorsed by Central Government. All costs incurred in advance of endorsement are at the risk to the Council and/or key delivery partners. 2.6 Given the fixed budgets on RGD projects, the most signficiant risk is construction tenders being unaffordable. This will require additional match funding to be sought, value engineering to be undertaken or in the worst case scenario abandonment of tenders. There are mechanisms within the RGD Programme to enable change however, it is uncertain if any abortive costs incurred can be claimed from capital budgets. As such, there is a risk that the Council and/or key delivery partners will require to repay such costs in the event of tenders being abandoned.
Page 4
2.7 Tables 2-4 below, set out further detail of estimated at risk project development costs across the RGD programme. 3.0 RECOMMENDATIONS The Policy and Resources Committee are asked to: a) Note that the total estimated essential development costs to inform Treasury Five compliant Full Business Cases for all projects amount to £3.183m and these costs require to be incurred in advance of Central Government endorsement at risk to the Council and lead delivery partners. b) Agree that the Council sets aside a fund from the Priorities Investment Fund to the value of £0.700m that can pay for the development costs for Council projects on the basis that all will be paid back by the end of Year 10. c) Agree that any cash flow funding requests for projects led by external partners will be brought to P&R for approval as and when a request for funding is made and considered on a case by case basis. d) Delegate to the Internal Programme Board (Chief Executive and Executive Directors) to approve pre-development funding requests relating to Council led projects up to a threshold of £250k per project from the new Fund. 4.0 DETAIL 4.1 Full Business Case Costs 4.1.1 In line with City Region and Growth Deal protocols, HM Treasury Green Book compliant Full Business Cases require to be endorsed by the UK and Scottish Government in order to enable drawdown of funding. This requires significant staff and financial resource to be allocated to projects and it should be noted that business cases will require several iterations in order to achieve endorsement from Central Government. 4.1.2 It is essential that the Council and key delivery partners plan for Full Business Case and associated project development costs throughout the lifecycle of the RGD programme to ensure these can be monitored and managed appropriately. As such, the RGD PMO have scoped requirements for FBCs, and estimated costs and timescales are detailed in Table 1 below. It should be noted that these are estimated costs at this stage and all works will be awarded in line with Local Government Procurement protocols following competitive tenders: Table 1: Full Business Case Requirements (as at October 2024): Project Lead Partner Expected approach to FBC Estimated FBC Cost Expected Year of Expenditure Kintyre Seasports Argyll & Bute Council in partnership with Kintyre Seasports Stantec & Blue Sea Consulting have been commissioned to complete FBC. £52,000 2024/25- 2025/26
Page 5
Low Carbon Economy – Islay TBC TBC £30,000 - £50,000 (OBC requires to be completed) 2031/32 Rural Skills Accelerator Programme – Dunoon STEM Hub Argyll & Bute Council Will be undertaken in- house by the Economic Growth Manager with support from Education. £5,000 (contingency) 2045/25- 2025/26 Rural Skills Accelerator Programme – SAMS STEM Hub Scottish Association for Marine Science TBC £25,000 2025/26 Rural Skills Accelerator Programme – Business Skills Highlands and Island Enterprise Highlands and Islands Enterprise to complete in- house. - 2024/25 Housing – Isle of Mull Argyll & Bute Council Stantec have been commissioned to complete FBC. £26,000 2024/25- 2025/26 Housing – Isle of Islay Argyll & Bute Council Expect that consultant support will be required to complete the FBC £26,000 2026/27 Clyde Engineering & Innovation Centre Argyll & Bute Council Expect that consultant support will be required to complete the FBC £30,000 2028/29 West Coast UAV Hub Argyll & Bute Council Expect that consultant support will be required to complete the FBC £30,000 2031/32 Marine Aquaculture Programme – UHI Argyll Expect that consultant support will be £30,000 2026/27
Page 6
Marine Industry Training Centre required to complete the FBC Marine Aquaculture Programme – SAMS International Seaweed & Shellfish Industry R&D Centre Scottish Association for Marine Science Expect that consultant support will be required to complete the FBC £30,000 2025/26 Marine Aquaculture Programme – Marine Environmental Research Laboratory University of Stirling University of Stirling will complete with in-house resource. - 2025/26 4.1.3 Members should note that the estimates provided are subject to change as the RGD Programme moves forward. The RGD PMO will work with key delivery partners to ensure that resources are efficiently utilised. In instances where total procurement spend is less than £2m, there may be an opportunity to complete Business Justification Cases instead of FBCs, which could reduce cost, however this will require to be agreed by Government on a case by case basis. The RGD PMO will continue to scope options for match funding to assist with project development costs. 4.1.4 Argyll and Bute Council Led Projects: Argyll and Bute Council are currently leading on 6 projects within the RGD programme. It is expected that the Inward Investment Fund will support project development costs for these projects. As of October 2024, there is circa £255k of funding remaining in the Inward Investment Fund which to date is unallocated. The following is a summary of some of the project development work anticipated for RGD projects being managed and delivered by the Council:- • Full Business Cases for Argyll and Bute Council led projects – 4 FBCs at an estimated total cost of £100k. • It should be noted that funding for the FBCs for Kintyre Seasports and the Housing – Isle of Mull projects has already been allocated within the approved spend from the IIF. The FBC for Rothesay Pavilion has also been completed however, further work will be necessary to secure full endorsement from Central Government. • Islay Low Carbon – this project has returned to options appraisal stage and there is a requirement to complete both an OBC and an FBC for the preferred option. Estimated total costs are £30k-£50k. • Further demand studies - It has been identified through the OBC feedback process that further demand studies will be required for the CEIC and West Coast UAV Hub propoals. An estimated total cost for this work could be in the region of £40k.
Page 7
• FBC Feedback Support – Experience to date has identified that FBCs will require multiple iterations prior to endorsement by Central Government. As such, it will be necessary to allow contingency in project budgets to account for the endorsement process and associated consultancy costs. An additional £5k per FBC at a total estimated cost of £30k has been factored in at this stage. 4.1.5 The estimated expenditure on the work above is circa £220k. The RGD is a 10 year programme therefore there will be an element of cost inflation and unexpected costs which may require to be met from the IIF. It is therefore considered that there is a risk that current funding allocated to the IIF may be insufficient to meet all future costs. The RGD PMO will work with Project Leads to identify match funding opportunties to support project development costs. Project leads will also seek to capitalise as much work as possible and re-claim costs from RGD capital funding following endorsement of Full Business Cases. 4.1.6 Partner Led Projects: There are currently 5 projects which are being led by partner organisations, these are within the Marine Aquaculture Programme and Rural Skills Accelerator Programme. These projects will require funding to support their Full Business Case and project development costs. 4.1.7 It is not considered viable for the Council to accept financial risk on projects that they will not own and/or operate following completion. As such, key delivery partners will require to accept a level of financial risk in order to deliver projects using RGD funding. There could however, be a requirement for the Council to assist with cash flow and procurement on behalf of some project stakeholders. 4.1.8 The RGD PMO will work with Project Leads to fully scope their funding requirements for Full Business Cases. 4.2 Project Development Costs 4.2.1 A significant amount of project development work is necessary in order to complete Treasury Five Case compliant FBCs. This includes detailed design, construction tenders and statutory consents. In order to develop FBCs the following milestones should be completed: • Design to RIBA Stage 4 (Technical Design); • All consents should be approved (including Planning, Building Warrant etc); • Procurement – costs in the FBC should be based on a tendering exercise; • Match funding – must be identified & approved by funders; • Any Legal agreements between the Council and Partners should be finalised; • Carbon Impact Assessments finalised; • Equalities Impact Assessments finalised; • Programme of works agreed. 4.2.2 Pre-construction activiites such as Detailed Design incur considerable expense for lead deliverty partners. The appointment of a Detailed Design team will include an Architect, Quantity Surveyor, Engineers and Project Management support. As a general estimate, up to 10% of project capital budgets requires to be allocated for pre-development costs.
Page 8
4.2.3 Detailed design is a requirement for project FBC’s and will require spend to be incurred in advance of Central Government endorsement at risk to the Council and lead delivery partners. The figure below details the approvals process for RGD projects in advance of funding drawdown:- 4.2.4 Table 4 and 5 below, sets out an estimated expenditure profile of when project development costs are anticpated to be incurred throughout the RGD Programme alongside when when it is anticipated the we will be able to claim for the project development costs. Further information at project level is contained within Table 2 and Table 3. Table 2: Projected Profile of RGD Project Development Costs Table 3: Projected Claim Profile of RGD Project Development Costs Table 4: Summary Profile of estimated RGD Development Costs and Drawdown (All Projects): Table 5 Summary Profile of estimated RGD Development Costs and Drawdown (ABC Projects Only): Outline Business Case approved by Government 1. Detailed Design/Consents/Impact Assessments Undertaken 2. Construction Tender Full Business Case submitted to Government for endorsement FBC endorsed by Government 1. Contracts for construction awarded 2. Claims made to Government for project costs quarterly Project Development Costs Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Kintyre Seasports £125,000 £125,000 £250,000 Dunoon STEM Hub £20,000 £20,000 SAMS STEM Hub £100,000 £100,000 Islay Low Carbon £50,000 £100,000 £150,000 £300,000 Housing - Mull £20,000 £20,000 Housing - Islay £100,000 £100,000 CEIC £300,000 £300,000 £600,000 West Coast UAV £200,000 £200,000 £400,000 Machrihanish Innovation Campus £250,000 £250,000 SAMS CSSID-e £250,000 £250,000 MITC £121,000 £121,000 £121,000 £530,000 £893,000 Total £145,000 £866,000 £221,000 £421,000 £830,000 £50,000 £300,000 £350,000 £0 £0 £3,183,000 Project Development Costs Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Kintyre Seasports £250,000 £250,000 Dunoon STEM Hub £20,000 £20,000 SAMS STEM Hub £100,000 £100,000 Islay Low Carbon £300,000 £300,000 Housing - Mull £20,000 £20,000 Housing - Islay £100,000 £100,000 CEIC £600,000 £600,000 West Coast UAV £400,000 £400,000 Machrihanish Innovation Campus £250,000 £250,000 SAMS CSSID-e £250,000 £250,000 MITC £363,000 £530,000 £893,000 Total £0 £270,000 £370,000 £613,000 £630,000 £600,000 £0 £0 £700,000 £0 £3,183,000 Year 1 £000 Year 2 £000 Year 3 £000 Year 4 £000 Year 5 £000 Year 6 £000 Year 7 £000 Year 8 £000 Year 9 £000 Year 10 £000 Total Expenditure 145 866 221 421 830 50 300 350 0 0 3183 Income 0 270 370 613 630 600 0 0 700 0 3183 Cash Flow -145 -596 149 192 -200 550 -300 -350 700 0 Cumulative Cash Flow -145 -741 -592 -400 -600 -50 -350 -700 0 0 Year 1 £000 Year 2 £000 Year 3 £000 Year 4 £000 Year 5 £000 Year 6 £000 Year 7 £000 Year 8 £000 Year 9 £000 Year 10 £000 Total Expenditure 145 145 100 300 300 50 300 350 0 0 1690 Income 0 270 20 0 100 600 0 0 700 0 1690 Cash Flow -145 125 -80 -300 -200 550 -300 -350 700 0 Cumulative Cash Flow -145 -20 -100 -400 -600 -50 -350 -700 0 0
Page 9
4.2.5 It can be seen from Table 2 above that the total estimated development costs for all projects amount to £3.183m and as previously outlined these costs require to be incurred in advance of Central Government endorsement at risk to the Council and lead delivery partners. There is a requirement for cash flow and the maximum amount of cash flow required at any one time is £0.741m and this occurs in Year 2. The PMO office will be looking for the lead delivery partners to assist with the cash flow and therefore bear the risk, however, this may not be possible for them to do. 4.2.6 If we only account for the projects that are Council led then the maximum amount of cash flow required at any one time is £0.700m and this occurs in Year 8. It is recommended that the Council sets aside a fund to the value of £0.700m that can pay for the development costs on the basis that all will be paid back by the end of Year 10. It is suggested that the Council allocate from the Priorities Investment Fund. The maximum cash flow exposure is based on the assumption that the Full Business Cases are approved and the development costs become claimable; there remains a risk that this isn’t the case and projects are abandoned due to unviable costs and/or unmet funding gaps . Therefore, the profile of expenditure and income will be kept under close review and updates provided to Members as part of regular Rural Growth Deal reporting. 4.2.7 It is proposed that any cash flow funding requests for projects led by external partners will be brought to P&R for approval as and when a request for funding is made. Input will be necessary from Legal Services to ensure that the appropriate funding agreements are put into place to reduce the risk to the Council. 4.2.8 Members should note the following points, regarding specific projects: • Kintyre Seasports – the tender for Detailed Design costs was returned in September 2024 and is now in the evaluation process. Members approved spend of up to £250k to support the next stage of project development including Detailed Design works in August 2024. • Dunoon STEM Hub – the majority of development costs will be met through match funding from the Clyde Mission Fund. • Isle of Mull Housing – the majority of development costs have been met through a successful application to the Scottish Government’s Islands Programme. Therefore a smaller sum will be required to be met through the RGD Capital funds. This is specific to the enabling infrastructure, FBC costs will require to come from Inward Investment Fund. • Marine Aquaculture Programme Projects – these projects are all led by external partners and to date OBC costs have been support by Highlands and Islands Enterprise. Lead partners have indicated they may struggle to cash flow project development costs such as detailed design. • Clyde Engineering & Innovation Cluster – To date project development costs for this project have been funded via Section 75 funds relating to the adjacent Waitrose development. This project also forms part of propsals drafted for funding from the previous UK Government’s Levelling Up programme. 4.2.9 Members are asked to agree delegated authority to the Internal Programme Board (Chief Executive and Executive Directors) to approve pre-development funding requests relating to Council led projects up to a threshold of £250k per project from the Fund
Page 10
proposed in para 3.0. This will be necessary to avoid delays to RGD business cases and is consistent with the existing approval process for Inward Investment Fund funding. 4.3 Project Development Risks 4.3.1 Funding of project development costs is a risk that is common across all City and Region Growth Deals in the UK. To date, Government have been resolute that they will not fund project development costs in advance of the endorsement of project Full Business Cases. 4.3.2 As set out above, Treasury 5 FBCs incur significant cost to the Council and lead delivery partners and all spend is at risk in advance of FBC’s being endorsed by Central Government. The key risk the to the Council and project partners is projects requiring to be abandoned due to unviable costs and/or unmet funding gaps. This is unlikely to be confirmed until construction tenders have been undertaken. 4.3.3 In a worst case scenario, where value engineering and applications for match funding are unsuccessful the Council or partners will be left with abortive project development costs which can not be funded from RGD capital budgets in the absence of a viable Full Business Case. 4.3.4 Protocols are in place to manage change across the RGD programme and any decision to re-alloate project funding which deviates from the Heads of Terms Agreement will require approval from Central Government. 5.0 CONCLUSION 5.1 The Policy and Resources Committee have previously approved the release of 5 tranches of funding totalling £750k from the Inward Investment Fund with authority delegated to the Internal Programme Board to authorise spend to support Rural Growth Deal business case and project development work. At the time of writing this report, total approved spend on RGD development work stands at £572,658. 5.2 Following signing of the Full Deal Agreement, it will be necessary to draft FBCs for all projects within the RGD Programme. Drawdown of RGD funding is subject to endorsement of FBCs by Central Government. This will require further project development work such as detailed design, planning and consultancy support which is necessary in order to develop Treasury compliant FBCs. 5.3 Members are asked to note that all spend in advance of FBC endorsement is at risk to the Council and key project partners however, this is necessary in order to achieve endorsement of RGD projects by Central Government. Where possible, all capital costs incurred will be reclaimed from RGD capital budgets following endorsement of FBC’s by Central Government. 5.4 There is still a significant amount of work required to get to endorsement of FBCs, which brings a level of risk to the Council and partners. The Council will require to incur spend at risk in order to undertake the project development work necessary to inform FBC’s. Key RGD delivery partners will also require to spend at risk on their projects the RGD PMO will work proactively with all stakeholders to ensure that risk is managed and
Page 11
mitigated. This may include requests to the P&R Committee to support external partners cash flow business case development work. 5.5 The RGD PMO will work with colleagues from Financial Services to manage financial risk throughout the lifetime of the RGD Programme. The RGD programme will also be subject to robust financial monitoring and evaluation as set out in the RGD Financial Plan which will be endorsed by Central Government as part of the suite of documents required for Full Deal Signing. 6.0 IMPLICATIONS 6.1 Policy – The RGD is consistent with the Council’s Economic Strategy. 6.2 Financial – RGD Projects require a level of upfront spend at risk to allow project development to progress. It is recommended that the Council sets aside a fund to the value of £0.700m that can pay for the development costs on the basis that all will be paid back by the end of Year 10. It is suggested that the Council allocate from the Priorities Investment Fund. 6.3 Legal – The RGD may require input from Legal Services as part of the Full Deal Signing. 6.4 HR – None at present. 6.5 Fairer Scotland Duty: Required as part of OBC process. 6.5.1 Equalities - protected characteristics - Equality Impact Assessments are required for all RGD projects. 6.5.2 Socio-economic Duty - The Rural Growth Deal will follow Scottish Government guidance on Inclusive growth including measures to address socio-economic disadvantage 6.5.3 Islands – Islands impact assessments required as part of OBC process where necessary. 6.6 Climate Change – Carbon Management Plans are required for all RGD business cases. 6.7 Risk – Spend incurred in advance of approval of FBCs will be at risk to lead partner. 6.8 Customer Service – None at present. 6.9 The Rights of the Child (UNCRC) – None at present. Kirsty Flanagan Executive Director with responsibility for Development and Economic Growth Council Leader: Councillor Jim Lynch 20 November 2024 For further information contact: Fergus Murray, Head of Development and Economic Growth Fergus.Murray@argyll-bute.gov.uk
Page 12
Jonathan Welch, Transformational Projects & Regeneration Manager Jonathan.Welch@argyll-bute.gov.uk Aileen Semple, Rural Growth Deal Project Officer Aileen.Semple@argyll-bute.gov.uk