A Bigger Splash – Getting the most out of Leisure Outsourcing

Local authorities are constantly under pressure to increase savings and decrease cost, risk and resource. As a result, over time there has been a steady increase in the outsourcing of leisure services. This is approached differently north and south of the border.

In Scotland, the most common way of achieving this is by the establishment of a leisure trust – generally a charitable arms-length body set up by a local authority as a company limited by guarantee, to which relevant staff are transferred, with a long-term lease of assets. The authority usually retains a degree of influence and indirect control over the leisure trust, striking a balance between the OSCR independence requirements and the procurement regulations.

• The main benefit of a leisure trust is that it delivers financial benefits through tax savings and can attract funding not otherwise available to the local authority.
• Other benefits include the trust’s ability to focus solely on sport and leisure while continuing to draw on knowledge and expertise from within the local authority.
• Disadvantages include that a trust can be expensive to set up, it is reliant on the skills and experience of the board members, and continued involvement by the authority can both help and hinder its operation.

The model adopted in England is to outsource leisure management to a private sector leisure management company following a competitive procurement process. Contracts tend to be for approximately ten years, often with an option to extend, and staff TUPE transfer to the leisure operator, with the leisure facilities being leased from the local authority.

Most of these contracts, depending on the condition and location of the facilities and the commercial terms of the contract, will be based on a surplus share scheme – whereby the leisure operator pays a management fee to the local authority and in return keeps any profits up to a cap (above which any profits are shared). Whilst setting up such arrangements can be costly and removes a degree of control from the local authority, the advantages include the transfer of operating risk to the leisure operator, the opportunity to generate income and the opportunity to encourage investment by the leisure operator in the facilities.

Irrespective of a route chosen, a services/outsourcing contract will be required. This will set out, among other things, the services which are to be provided and the required standard. So what are the key considerations that local authorities should bear in mind when tendering for and/or contracting with a leisure operator?

1. Be clear about the intended risk transfer and where relevant establish market interest through soft market testing. Sport England have produced a template Leisure Operating Contract (LOC) with accompanying toolkit which sets out what is considered to be the ‘standard’ market position.Any significant changes to risk, such as defects, “no better no worse” protection provisions, NNDR and benchmarking are likely to be met with resistance from the private sector and could reduce the number of bidders (and as such competition), or worst case result in none. Even if you are not running a public procurement, the Sport England LOC contains a lot of very useful drafting and guidance.
2. Be clear about the scope of services – what do you want the leisure operator to provide?This could be just general leisure management and lifecycle, but consider any additional requirements such as government-supported health testing or car park maintenance and management. It is best to include all of your requirements from the start.
3. Assess the current condition of your assets and consider the best way to deliver any improvements – a leisure operator is unlikely to want to take on a facility which poses significant health and safety risks, or is unappealing to potential users. If they are willing to take it on, the condition will be reflected in their price or they will want significant caveats in the risk transfer.The local authority may also want to consider whether it is ultimately better value for money to make any repairs/improvements itself (benefiting from cheaper borrowing than a private leisure operator) rather than including these in the leisure operating contract. If you are setting up a leisure trust, the board members will expect funding for the necessary works and will be conservative in their cost estimates. This cost may need to be offset against the anticipated savings in the early years.
4. Monitor, monitor, monitor!Just because you have outsourced, it is still important to monitor your agreement and make sure that it is being implemented correctly.Particularly in surplus share models, the local authority has a vested interest to ensure that the facilities are being utilised and promoted to their full potential.It’s also much easier to maintain facilities over the life of the contract rather than seeking significant rectification towards the end. This is particularly important where you are re-procuring because at that stage the outgoing operator will have little incentive to cooperate.
5. Another key issue is the transfer of details and equipment to new operators at the expiry of the existing agreement where an outgoing operator has been unsuccessful in a retendering exercise and has little incentive to assist their replacement.Local authorities should make sure that any leisure operating agreement contains clear handback provisions with a timely process for inspections, necessary or outstanding repairs and transfer of data such as membership information and direct debit details.The incoming operator will expect to have facilities and information which allows them to operate from day one, and any deficiency in this will likely be backed-off on the authority with a right to adjust the management fee.

If you have any questions about leisure contracts, or any other form of public sector outsourcing, please contact Eleanor Lane or Iona Hunter.