Part 2 — workplace parking & the tram — the numbers don't add up
“35% of the overall project cost will now be met from local sources. The majority of the funding requirement of the Authority will be met through a WPL (Workplace Parking Levy).” Nottingham Express Transit Phase two, Full Business Case — Redacted Version May 2012
I initially proposed writing a single piece on the state of Nottingham City Council’s finances. My research however, proved that one post would not only be laborious to write, but also to read.
What I have decided to do, is select a topic and argue that instead of accepting the mantra spouted from the Labour Group that Central Government is to blame for higher Council Tax and thinner services in Nottingham, it is in fact the Labour Group’s anti-business, job stifling policies, combined with financial mismanagement that are holding our city back and putting at risk our security.
It is bad business decisions, driven by ego rather than economic competence which expose Nottingham City residents, not Nottingham City Council (“NCC”) to high levels of financial risk whilst also putting front-line services on the chopping block.
The response by NCC when things go bad will be as follows.
- Blame Central Government (get your excuses in early);
- Cut front-line services; and then
- Raise Council Tax (nice to have someone else pay for your mistakes).
NET Phase Two — the tram
Part 1 of my finance blogs focussed on the Workplace Parking Levy (“WPL”) introduced by NCC in April 2012.
A key rationale from the Labour Group for introducing the WPL was that the revenue from the tax would contribute towards NCC’s costs of constructing Phase Two of the tram works (extending the tram to the south and south west of the city of Nottingham).
The total cost for NET Phase Two was forecast to be £570 million with Central Government (the taxpayer) 65% of the costs and NCC (Nottingham city residents) providing 35%.
The Nottingham Express Transit Phase Two Business Case (“NBC”) sets out NCC’s rationale and funding basis behind NET Phase Two.
Section 6.16 of the NBC expressly says, “it is planned to introduce a WPL in Nottingham during 2012 to provide a significant proportion of the local funding required for NET Phase Two”.
This statement is corroborated by NCC in the official Central Government release articled dated 15 December 2011. It states, “The government is providing funding up to a maximum present value of £371 million towards the total maximum scheme cost of £570 million. Nottingham City Council will be providing the remaining funding largely from funds obtained from a Workplace Parking Levy”.
Therefore, annual funding for NET Phase Two (the tram) between 2011 and 2034 is directly dependent on the success of the WPL scheme and the robustness of NCC’s financial modelling, taking into account the micro and macroeconomic landscape and risks. This makes me very worried…
The plan
Originally, we were told by NCC that the WPL would bring in c.£14 million a year, which has not materialised. In fact, NCC’s Executive Board Paper (19 July 2011) titled, “Nottingham Express Transit (NET) Phase Two Procurement” (“EBP”) shows that the NCC only expect income from the WPL to reach £14 million in 2028/29 a whole 17 years after introduction! It really is back of a fag packet stuff…
Secondly the WPL is intended to fund not only NET Phase Two, but also used towards funding for the Nottingham Train Station (£1.1 million a year) and the Link Bus Network (£650,000 per year).
The EBP clearly states at Section 4.13, “Appendix 3d comprises a schedule detailing the projected Availability payments to Tramlink, associated internal costs and financing sources, which shows the sum which is required from WPL. Based upon current projections, and allowing for £1.1m pa required to repay the prudential borrowing approved for funding the Nottingham Station (Hub) Improvements, around £0.65m pa (increasing by inflation) will be available to fund the Link bus network”.
This means that the funding for three separate projects, yes three, is dependent not only on the success of the WPL, but on the robustness of NCC’s WPL income forecasts between 2012 and 2034.
The story so far
The EPB shows that the WPL needs to raise £264.9 million between 2012/13 and 2033/34 for NET Phase Two to be financially viable.
Note, £264.9 million is more than the £199 million of required funding (the 35%), because this latter figure is a NET figure, i.e. expenditure on principal costs, interest costs, payments to Tramlink, Hub and Link Bus Network funding greatly exceeds the income from Central Government.
Furthermore, gaping holes have already appeared in NCC’s financial modelling. Section 4.17 of the EBP states, “The estimated gross income from WPL in 2012/13 is £8.967m. This is set to rise to £10.384m in 2013/14. This income forecast is built into the financial models of the NET project and is a key aspect for the NET business case”.
Gross Income, as set out in NCC’s Statement of Accounts shows revenue from the WPL in 2012/13 of £7.752m and in 2013/14 of £8.453m. A gap in the financial modelling of £3.146m within two years.
With NET WPL income forecast to grow to £17.7m per annum in 2034, it is worrying that NCC’s financial forecast have fallen short in their first two years. If WPL revenue fails to grow at the level forecast or stagnates, there will be a large gap to plug in NET Phase Two’s finances by other means.
Interest rates — a ticking time bomb
Since the financial crash of 2008, interest rates have remained stubbornly low. The Bank of England base interest rate for example, has remained at 0.5% since 5 March 2009.
Just like a mortgage or ISA, the NET Phase Two project is subject to fluctuating interest rates. When the Bank of England base rate is as low as 0.5%, it is more than likely that when interest rates do change, they will increase over the project life-cycle rather than remain the same or fall further.
Appendix 3b of the EPB states, “the cost of the scheme is heavily dependent upon long-term interest rates; both charged by the banks to Tramlink and the cost of prudential borrowing for the City Council. Rates are slightly lower than modelled, however the addition of 1% on the cost of borrowing for local government from Central Government has eliminated nearly all contingency in this area”.
Why this is particularly worrying for Nottingham City residents is that Central Government will not provide any more funding for the project beyond what it has already given. In a letter from the Department for Transport (“DT”) to NCC dated 24 March 2011, the DT expressly states, “I should make it clear that this offer is the maximum financial support we can provide and so we will not be able to give you any extra support should financing terms prove more expensive than anticipated”.
Any increase in liabilities for NET Phase Two will have to be met by NCC (the rate-payers of Nottingham) again through cut-backs in services or increased taxes to plug the funding gap.
What does this all mean for Nottingham city residents?
Based on NCC’s dismal record on financial competence, I believe they have over-reached with their ambition once again with this grandiose project and will be dipping their hands further into our pockets to pay for their mistakes sooner rather than later.
The implications of a shortfall in WPL revenue run much deeper than a few numbers on a set of financial statements that only policy wonks read.
The gap between expected income and actual income simply means the money has to found some place else.
NCC is in agreement with this. Section 4.18 of the EBP states, “In the unlikely event of a very significant change in employee parking provision or change in travel behaviour by employees, resulting in a reduction in levy income in excess of this margin, then the City Council would have to meet the contracted NET payments from the revenue budget of other sources”.
Either Council services have to be cut or taxes have to be raised on Nottingham city residents. I'm afraid NCC’s response will be a combination of the two as it hasn't raised the required amount of WPL in the last three years.
Council tax has risen 1.95% between 2014/15 and 2015/16 (a separate post will follow specifically on Council Tax) and there has been a significant reduction in services to residents; I'm sure NCC are more than happy to let people hear about that.
Therefore, when NCC’s Labour Group say they must increase taxes due to Central Government cuts, it isn't the truth. They need to find money (and quickly) to plug the financial gaps in their failed ostentatious schemes.
In addition, because the WPL revenue is integral to NET Phase Two, if any incoming party wanted to scrap the WPL, they would need to replace the funding stream from other sources (on the basis of honouring the contract).
I have always believed that government, especially local government, should focus on delivering its core services. Multi-million pound projects (NET Phase Two runs to over half a billion) which are directly funded by the ratepayer are simply not a priority.
Yet again, Nottingham city residents face potentially years of paying for the bad financial decisions of our local elected officials.
Here comes the topspin
In what has now become an almost natural reaction, the Labour Group will attempt to pass the blame onto someone else for their financial mess. In this case, as with others, the blame is squarely levelled at Central Government.
The Nottingham City Council Plan 2015–2019 (“NCCP”) leads with the spin, “We will do this despite the significant financial challenges the Council continues to face. It is no secret that we face further cuts to our budget, but we have been successful at managing our finances in the past and we will continue to do so”.
The NCCP goes on to say, “In 2015/16, we will face a £30m cut in the grant we get from Government to run our services with more significant cuts in funding expected over the next four years”.
There will and have been cuts in NCC’s grant, but the reason services are cut and taxes go up has more to do with how poorly residents’ money is managed, spent and speculated. Whether Enviroenergy or NET Phase Two, NCC is not so innocent and exempt from complicity.
What happened to the new, straight-talking, honest politics? Or is that just when it suits Labour to make a point or have no policy?
It is clear from the figures of the NET Phase two project alone, that the Labour Group are simply out of their depth when it comes to responsibility with our money.