Councillor Sue Dann (Cabinet Member for Customer Experience, Sport, Leisure and HR and OD) introduced the PAL Contract Extension report and discussed:

 

a)     This was Councillor Dann’s final report to Scrutiny as a Cabinet Member, and she was pleased to present it for pre?decision scrutiny;

 

b)    Plymouth Active Leisure Ltd (PAL) had been established in 2022 in extremely challenging circumstances during the COVID?19 pandemic, opening with reduced visitor numbers at the same time as rapidly rising utility costs and inflation, which made the first year of operation particularly difficult;

 

c)     Councillor Dann had worked closely with Rhys Jones (Chief Executive of PAL) since 2023, undertaking significant work to stabilise and improve performance across the service;

 

d)    Despite a challenging start, PAL’s current management arrangements had delivered a significant impact, with key performance highlights including:

 

                     i.         memberships increasing by approximately 48%;

 

                   ii.         growth in the swim school of around 31%;

 

                  iii.          an increase in income of approximately 29%;

 

e)     The social impact of PAL’s activities, measured using a recognised national social value tool, was estimated at around £11.7 million of added social impact for Plymouth’s communities;

 

f)      The Life Centre alone welcomed over one million visits a year, with more than 50,000 unique users. PAL also operated other key facilities including the city’s pools and outdoor leisure sites, demonstrating its reach beyond a single venue;

 

g)     In addition to sport and physical activity, PAL contributed to other Council priorities including tailored offers for looked after children and care leavers, and delivery of health?related programmes such as new “Active Referral” schemes for residents with long?term health conditions;

 

h)    PAL was due to receive national recognition from Swim England, with a memorandum of understanding due to be signed at the Life Centre, evidencing the quality and reputation of its swimming and aquatic offer;

 

i)      PAL formed part of the Council’s “family of companies”, which allowed a more commercial, flexible approach while retaining strategic control and alignment with corporate priorities;

 

j)      A new Chair had been appointed to the PAL Board in 2024 and, since that appointment, a full strategic review of PAL had been undertaken to address early issues, ensure financial sustainability, and position PAL to grow and move into its “next phase”;

 

k)     The Strategic Plan underpinned PAL’s contribution to “Thrive Active”, including the ambition to make Plymouth the most physically active coastal city, and to support residents to live happier, healthier and more active lives;

 

l)      The Strategic Plan was built around three core pillars:

 

                       i.    increasing participation and engagement;

 

                     ii.    improving health and wellbeing;

 

                    iii.    inspiring people in Plymouth, including supporting the development of talented swimmers and divers and running facilities to a consistently high standard;

 

m)   Sustainability was central to PAL’s ambitions, both in terms of financial resilience and environmental responsibility, including work to reduce carbon emissions from facilities;

 

n)    PAL had developed an ambitious 20?year financial plan which would involve total investment of approximately £200 million over the lifetime of the contract. The scale of commitment was a key reason for bringing the proposal to scrutiny;

 

o)    Under the proposed business plan, the Council’s annual management fee would reduce significantly over time, from around £700,000 per year to approximately £50,000 per year. By the end of the plan, the arrangement was forecast to generate a budget surplus;

 

p)    Due to the way PAL was structured, a proportion of the surpluses generated would be reinvested directly back into the Life Centre and other facilities to meet ongoing and historic maintenance needs, recognising that running large, complex leisure facilities, particularly pools, required substantial and sustained investment;

 

q)    PAL had taken out start?up loans at the point of its creation, and servicing and repaying these loans was built into the longer?term financial package and business plan presented to the Panel;

 

r)     To enable the scale of investment and to provide certainty, PAL was seeking a new 20?year contract with appropriate break clauses for both parties, allowing the development of a long?term investment plan while ensuring that both PAL and the Council could review progress and, if necessary, reconsider the arrangements at defined points;

 

s)     Council officers, led by the Director of Public Health and the Leisure Partnership Manager, had undertaken detailed due diligence on the proposals, supported by external consultants, and that the detail of this work was set out in the written report;

 

t)     As part of the proposed extension, there would be a detailed suite of annual Key Performance Indicators (KPIs), an annual business planning process, and strengthened governance arrangements, including a proposal for an annual report back to scrutiny;

 

u)    In Councillor Dann’s view, setting up PAL had been the right decision. Over the last three years the company had become more successful each year, with ambitious plans that aligned strongly with the city’s “Active Thrive” ambitions and the wider public health agenda;

 

v)     The proposals would place PAL on a long?term, sustainable footing, enabling it to be creative and innovative and to further develop links with the National Marine Park and the wider creative and leisure sectors in the city;

 

w)   From the Council’s perspective, the proposal represented a financially beneficial option which would reduce liabilities over time, create the potential for future profit, and deliver significant social and health outcomes for residents, supported by a committed Chief Executive and a strengthened Board.

 

Oliver Woodhams (Head of Finance and Deputy Section 151 Officer) provided an overview of the financial modelling and risks and discussed:

 

x)    The existing £1.6 million working capital loan from the Council reflected the difficult post?COVID start?up period and remained owed by PAL;

 

y)     Although PAL was on a recovery trajectory, detailed financial modelling indicated that further working capital support of between approximately £0.7 million and £0.9 million would be required to maintain adequate working capital and provide an appropriate “cushion” to enable PAL to trade efficiently and effectively;

 

z)     The financial model underpinning the proposals was prudent and there was a strong track record of recent improvement alongside additional growth opportunities that had not yet been built into the model, representing potential “upside risk”;

 

aa)  External consultants had independently reviewed and challenged the Council’s assumptions and concluded that they were reasonable;

 

bb)There was inevitably financial risk associated with the decision and it would be wrong to present it as risk?free, but further due diligence, sensitivity analysis and modelling would be carried out in advance of the Cabinet decision in February;

 

cc)  Governance measures, including financial KPIs, annual business planning, and strengthened oversight, were being developed to monitor ongoing performance and risk.

 

Rhys Jones (Chief Executive, Plymouth Active Leisure) addressed the Panel and discussed:

 

dd)A detailed set of draft KPIs had been developed, in collaboration with the Director of Public Health, and would shortly be considered by the PAL Board;

 

ee)  The KPIs covered expected areas such as attendance, demographics, age profiles, financial performance and social outcomes, and were designed to be output and outcome?focused, reportable and of clear value to the Council;

 

ff)    The new Strategic Plan was explicitly Plymouth?focused, aligned with the Plymouth Plan and wider city priorities, and had been developed following engagement with Cabinet Members and officers across portfolios;

 

gg)  Governance arrangements within PAL had been significantly strengthened over the previous 12 months, including refreshed Board membership, the creation of relevant sub?groups and enhanced self?scrutiny, making the organisation “night and day” compared to its early years;

 

hh)Rhys Jones viewed the current position as “ground zero” in terms of having the right governance, leadership and plan in place, and that PAL now needed the opportunity to deliver what should have been achievable from day one;

 

ii)     The company had dealt with three extremely challenging years characterised by unprecedented increases in utility costs and above?inflation rises in the National Minimum Wage which could not have been predicted when PAL was created in 2021;

 

jj)     Despite these challenges, PAL had stabilised operations and developed a plan to repay historic debts and deliver additional benefits for residents;

 

kk)  There was substantial untapped potential in areas such as the swim school and diving programme, which were not yet back to their pre?COVID levels, giving confidence that additional growth was achievable;

 

ll)     A recent gym refurbishment at the Life Centre, funded through Council borrowing, had already out?performed its original business case, providing further evidence that PAL could deliver solid, realistic business plans;

 

mm)       Given the existing footfall (over one million visits a year to the Life Centre alone) and the breadth of new opportunities, Rhys was confident that PAL could deliver the growth and income required under the proposed plan.

 

Professor Steve Maddern (Director of Public Health) contributed on governance and contractual arrangements and discussed:

 

nn)The proposed break clauses were a central feature of the contract extension and were designed to give assurance both to the Council and to PAL;

 

oo)The first substantive break clause was proposed at around five years, allowing the Council to review whether the additional working capital support had delivered the expected improvements and to reconsider the contract if necessary;

 

pp)Further break clauses would be built in over the term of the contract, providing additional checkpoints and flexibility;

 

qq)The KPIs were scheduled to be finalised and agreed by the PAL Board within the month and were significantly more robust than those in place 12–14 months previously.

 

David Draffan (Service Director for Economic Development) added:

 

rr)   As Chair of the PAL Board, he had legal duties under the Companies Act and that his fiduciary responsibility was to PAL rather than directly to the Council, which required him to be satisfied as to the financial resilience of the business before supporting the proposals;

 

ss)   The business was fundamentally sound but required two key things: sufficient working capital to address start?up and post?COVID pressures, and investment to deliver a growth plan capable of servicing its debts over the life of the contract;

 

tt)   Approximately £1.9 million in start?up costs was entirely predictable for a new business of this nature and the proposals would put PAL on a stable footing to manage these costs and future investment;

 

uu)The plan would lever approximately £200 million over the term of the contract, reduce the management fee from around £700,000 to £50,000 within the first 10 years, and generate an estimated £4 million surplus by the end of the plan;

 

vv)  The plan would provide a £250,000 per annum facilities management budget and a further £4 million capital contribution to maintain and improve facilities, while fully dealing with all loans and generating approximately £4.7 million of new income;

 

ww)    Extensive Board development, including three away days and a detailed governance review, had taken place and that the Board collectively “owned” the vision and financial plan;

 

xx)       The culture within PAL was positive, with a high?quality Chief Executive, new appointments in finance and business roles, and strong staff commitment;

 

In response to questions, the Panel discussed:

 

yy)  Concerns about financial fragility, higher?than?anticipated costs and lower?than?expected savings, and whether the proposals were sufficiently robust rather than simply reflecting an aspiration for PAL to succeed;

zz)  The scale of the additional working capital request (up to approximately £0.9 million) on top of the existing £1.6 million loan, and the evidence that PAL would be able to repay both existing and new loans over the life of the contract;

 

aaa)     The importance of clearly defined, measurable KPIs and whether these had been fully drafted and agreed, noting that Members wished to see KPIs covering participation, demographics, health outcomes, financial performance and social value aligned to key city strategies such as the Plymouth Plan;

 

bbb)    The national context in which many leisure facilities and operators were under severe financial pressure and, in some cases, closing, and whether PAL’s assumptions about growth and surplus generation were realistic in that environment;

 

ccc)     PAL already benefitted from an exceptional asset base and very strong footfall at the Life Centre and other venues, which placed it in a different position to some national comparators, but ongoing monitoring of risk remained essential;

 

ddd)    The full range of strategic options that had been considered, including:

 

                     i.         ceasing the service, which was deemed wholly unacceptable given over one million annual visits and the significant social and health impacts of the leisure offer;

 

                   ii.         bringing the service fully in?house, which had been modelled but was assessed as significantly more expensive due to business rates, staff terms and pension liabilities, and would place a specialist commercial operation wholly within the Council’s structures;

 

                  iii.          outsourcing to a national leisure operator, which had been tried previously and failed to align with Plymouth’s strategic objectives, focusing on “facility management” rather than the broader health and community outcomes now sought;

 

eee)    Retaining PAL as a Teckal company within the Council’s family of companies allowed the Council to retain strategic control and influence over the business plan and health objectives, whilst benefitting from the tax, regulatory and commercial freedoms of a company model;

 

fff)        Whether protections existed for local community pools and facilities in the event that PAL did not meet income targets, and the reassurance that decisions on closing facilities were reserved matters for the Council as shareholder rather than decisions for the PAL Board alone;

 

ggg)     Examples such as Plympton Pool, which now operated profitably and Mount Wise Pools, which remaining free to local residents. This evidenced PAL’s commitment to maintaining a broad community offer, with no current intention to close facilities;

 

hhh)    Decisions on specific capital investment schemes would be subject to separate approval through the Council’s capital programme governance;

 

iii)         Financial modelling indicated that over the medium to long term, business growth would be sufficient to repay existing and new loans, reduce the management fee, and still generate surpluses that could be reinvested in facilities or released as savings to the Council;

 

jjj)         Recognition by officers that there was financial risk associated with the preferred option, balanced against the risks of alternative options such as “doing nothing”, not extending the contract, or withdrawing support, which could leave PAL vulnerable, threaten key assets and increase the likelihood of PAL defaulting on existing loans;

 

kkk)    The governance framework for PAL, including:

 

                        i.         the presence of a public health consultant on the Board;

 

                      ii.         the appointment of two experienced non?executive directors with substantial local authority leisure and commercial fitness sector backgrounds;

 

                     iii.         the voluntary nature of Board roles;

 

                     iv.         the exploration of additional mechanisms such as a finance sub?committee and enhanced performance reporting;

 

lll)   The perceived complexity of the Council’s relationship with PAL, and the implications of PAL being a Teckal company;

 

mmm)   Nervousness regarding the length of the proposed extension and the scale of the financial commitment, alongside strong support for the ambition to provide high?quality, accessible leisure services and to maintain the Life Centre and other facilities as major assets for the city;

 

nnn)       The value of ongoing scrutiny in providing assurance, with members expressing a desire for regular, structured oversight of KPIs, financial performance, delivery against break?clause expectations and progress on loan repayment.

 

The Panel agreed:

 

1.     To review, comment and endorse option 4.5 (as set out in the report) to retain the services of PAL and in doing so: 

 

                 i.         To provide further working capital support to PAL, and to agree revised repayment terms for existing loans;

 

                ii.         To endorse an extension to the existing 10-year contract with PAL (current end of term March 2032), with a break-clause at the point where all working capital loans are estimated to be repaid, noting that the revised contract will contain a number of performance indicators and other provisions to mitigate the Council’s financial risk and ensure the delivery of outcomes;

 

              iii.         Note that to underpin the growth in income required to repay working capital loans, PAL will bring forward a number of capital investment projects which will be subject to approval through the Council’s Capital Programme procedures and governance;

 

2.     To recommend that a Plymouth Active Leisure performance update be presented to the Housing and Community Services Scrutiny Panel prior to significant contractual milestones for the duration of the extended contract, in order to ensure robust monitoring of KPIs, financial and contract performance (including progress against loan repayments, management fee reductions and any break?clause triggers).