Appendix 1 City Region Combined Authority Financial Monitoring Report

MERSEYTRAVEL STRATEGIC FINANCE AND PERFORMANCE MONITORING REPORT

QUARTER 2 2014/15

1. INTRODUCTION

1.1 This report summarises the key financial and performance monitoring information in respect of Merseytravel and the . It is a summary of the more detailed reporting that is received by the Merseytravel Committee.

1.2 The Combined Authority delegates detailed monitoring and scrutiny of financial and performance issues relating to Merseytravel to the Merseytravel Committee under its scheme of delegation.

2. MERSEYTRAVEL CORPORATE PLAN AND KEY OBJECTIVES

2.1 Corporate Plan Key Objectives

2.1.1 The Integrated Transport Authority established a set of key priorities for 2014/15 within its Corporate Plan. Following the dis-establishment of the ITA, these priorities have been adopted by the City Region Combined Authority and are delegated to Merseytravel for delivery.

2.1.2 Merseytravel’s key corporate priorities for 2014/15 are:

i. to effectively manage the Combined Authority Transition;

ii. to deliver our Local Transport Plan (LTP) 3 commitments and to develop a single LTP for the LCR;

iii. to embed transport in key city region developments;

iv. to improving connectivity within the City Region and our immediate boundaries;

v to improve Freight Strategy Development and implementation to support economic growth;

vi. to deliver an improved, affordable bus offer for the customer;

vii to review and develop a growth plan for integrated local rail services for 2014- 19;

viii to develop a long term integrated rail strategy for future infrastructure for the City Region;

ix to determine options for the modernisation of the fleet;

x. to improving performance on our directly delivered services;

xi to implement a SMART and integrated multi-modal ticketing offer;

xii to enhance customer information; Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

xiii to enhance customer service, standards and skills across the network; and

xiv to offer an affordable and contemporary range of travel concessions.

2.2 Overview of Performance Quarter 2

2.2.1 Significant progress has been made in the delivery of each of the key priorities in Quarter 2. This progress has been consolidated in the second quarter, and in some cases key targets have been fully realised.

2.2.2 In Quarter 2 the City Region Combined Authority received a successful outcome from its Growth Fund bid. In total, central government has awarded £242.5m to the City Region. The significance of this award for Merseytravel is three-fold:

 Merseytravel, through its role as accountable body for the Combined Authority will act as the accountable body for Growth Fund monies;  Transport schemes have been particularly favoured in this round, and account for 40% out of the total award; and  Merseytravel are promoting a number of the successful schemes, including the major schemes of Newton-le-Willows station improvements, North and the rail scheme.

2.2.3 Further progress on rail connectivity was achieved in Quarter 2 through Merseytravel’s work on Rail North and HS2. Regular progress reports on each of these vital schemes, has been reported through to the Combined Authority.

2.2.4 Each of Merseytravel’s promoted schemes will assist in the delivery of the Long-Term Rail Strategy which was adopted by the Combined Authority in the second quarter. This key strategic document will provide a blueprint for rail investment priorities for the next 30 years and should support and facilitate economic growth for the region for many years ahead.

2.2.5 Quarter 2 saw significant progress in understanding the operational, and particularly the financial implications of the potential replacement of the Merseyrail fleet. This is an extremely complex venture involving not only Merseytravel and Merseyrail but also and their electrical infrastructure supplier.

2.2.6 Merseytravel has piloted an innovative new bus ticket for young people from May 2014 that allows unlimited, multi-operator travel for those under 16 for £2 per day. The MyTicket product was introduced in partnership with the operators and is underpinned by an innovative funding mechanism that limits the risk of both Merseytravel and the operators.

2.2.7 To the end of Quarter 2, over 550,000 MyTicket products were sold and over 1 million journeys undertaken using the ticket. A report will be considered in due course in respect of the pilot however the indications are that the pilot is affordable and is achieving its stated objectives.

2.2.8 Further and significant progress has been made on our two, key business transformation projects for 2014/15. These projects are Smart Ticketing and Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

Transport Information. Both these projects will improve the passenger experience and will also have a significant impact on the cost of our back-office functions once fully implemented.

2.2.9 Smart-enabled Saveaway tickets will be available from November starting on the Wirral and rolling outwards over subsequent months.

2.3 Priorities for Quarter 3

2.3.1 The challenge for the rest of 2014/15 is to maintain this progress. In particular, the focus of our activity in Quarter 3 will be:

i. to work with City Region partners to establish appropriate governance arrangements to manage any project and programme risks arising from the City Region Growth Fund bid;

ii. to complete the business case evaluation of the Rolling Stock renewal options for the Merseyrail Fleet and make recommendations to Members accordingly;

iii. continue working with partners across the Northern City Regions on the development of Rail North;

iv continue to support the interests of the Liverpool City Region in promoting the benefits of HS2 and in working with the One North partnership in the promotion of better East-West connectivity;

v. to launch the Smart-enabled Saveaway ticket which represents a significant milestone in our long-term Smart-ticketing strategy;

vi. to work with City Region partners on a combined LTP4 across the Liverpool City Region Combined Authority;

vii. to analyse the financial and commercial impact of the My Ticket product for young people and determine the success, or otherwise, of the pilot; and

viii to renegotiate commercial deals with bus and rail operators in respect of concessionary travel from April 1st 2015.

2.4 Performance Risk

2.4.1 Merseytravel has a Corporate Risk Register which identifies all its key corporate risks. Based on the performance of the organisation in Quarter 2 and our knowledge of our operating environment, no revisions to this risk register have been made in Quarter 2.

2.4.2 At the end of Quarter 2, the organisation was not aware of any material risks that would impact on our ability to deliver our key corporate priorities.

Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

3. FINANCIAL PERFORMANCE

3.1 Summary

3.1.1 Performance against budget in the second quarter was good, with a forecast overall net underspend on Merseytravel activities of £3.6m. Significant savings have arisen from holding vacant posts and a number of significant efficiencies have been identified that will have longer-term financial benefit to the organisation.

3.1.2 Tunnel toll revenue continues to perform strongly through significantly increased tunnel usage. Merseytravel collects tunnel toll revenue on behalf of the City Region Combined Authority.

3.1.3 The risk of any material over spending on Merseytravel Services or the Mersey Tunnels is low.

3.1.4 A summary of revenue expenditure against budget for is presented in Table 1.

3.1.5 A summary of financial and performance information of key service areas is summarised overleaf. Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

Table 1 Financial Monitoring Statement for Merseytravel Quarter 2 2014/15

Internal Gross @Q2 @Q2 Variance Budget Recharges Budget Budget profile Actual @Q2 2014/15 2014/15 2014/15 2014/15 2014/15 2014/15 £ooo £ooo £ooo £ooo £ooo £ooo Service Area Bus services 18,074 22 18096 8,780 7,981 -799 Rail services -3,184 1664 -1520 -127 -380 -253 Travel concessions 55,669 1237 56906 30,055 29,697 -358 Hubs 6,255 2733 8988 2,587 2,364 -223 Mersey Ferries -736 2665 1929 -1,269 -1,286 -17 Mersey Tunnels (see note -17,171 7415 -9756 -12024 -12490 -466 3.2) Democratic 1,246 1667 2913 544 553 +9 ICT 3,931 -3931 0 2,549 2,452 -97 Policy & LTP Development 1,341 1800 3141 622 544 -78 Funds Management 41,345 -196 41149 17,807 17,877 +70 Asset Management 11,369 -11369 0 6,650 5,733 -917 Rolling Stock 3,004 0 3004 905 667 -238 People, Customer & Devel’nt 4,162 -1285 2877 2,187 1,966 -221 Resources 2,422 -2422 0 1,259 1,226 -33 Contribution from Reserves -363 0 -363 0 0 0

127,364 0 127364 60,525 56,904 -3,621

NOTE: Quarter 2 budgets and actuals are shown net of any recharges. Once recharges are applied this will reduce the level of tunnels surplus income over expenditure – please refer to Table 2 below Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

3.2 Mersey Tunnels

3.2.1 The Mersey Tunnels are operated by Merseytravel on behalf of the Liverpool City Region Combined Authority. All tunnel toll revenue is attributable to the Liverpool City Region Combined Authority.

3.2.2 A summary of Tunnel financial performance is included at Table 2 below.

Table 2: Mersey Tunnels Financial Performance Quarter 2

EXPENDITURE Budget Q 2 Q2 Variance Budget Actual £000 £000 £000 £000 Employee Costs 4,352 2,169 2,174 5 Energy Costs 1,258 505 498 -7 Other Premises Costs 582 311 279 -32 Supplies and Services & Transport 1,401 729 763 +34 Capital Financing 16,953 6,861 6,861 0 Expenditure before recharges 24,546 10,575 10,575 0 Asset Management 5,023 0 0 0 Other recharges 2,392 0 0 0 Total Expenditure 31,961 10,575 10,575 0 Income Income from Tunnel Tolls -41,390 -22,403 -22868 -465 Other Income -327 -196 -197 -1 Total Income -41,717 -22,599 -23065 -466 Net Surplus -9,756 -12024 -12490 -466

3.2.3 The surplus shown to the end of Quarter 2 is before actual recharges have been applied. This has a tendency to exaggerate the reported surplus in-year, although current projections are that the £9.7m surplus will grow to £11.5m by year end through a combination of increased revenue from usage and savings in operating costs. A comparison of forecast surplus is provided in Table 3 below:

Table 3 Tunnels Surplus 2014/15

Original Estimate: £9.756 million

Revised Estimate: £11.5 million

3.2.4 The first-call on the reported tunnels surplus is to be applied to the financing of current and future capital investment in tunnels infrastructure. Once these costs have been considered, Tunnels Act Surplus is held in reserve by the Liverpool City Region Combined Authority for investment in future Local Transport Plan priorities Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

within the five Merseyside District Authorities in accordance with the Tunnels Act 2004.

3.2.5 Tunnels usage in the first half of 2014/15 was 12.776 million vehicle journeys, which represents a 1.0% increase from 2013/14. The second quarter has also seen continuation of the trend towards automatic payments using the discounted Fast Tag system as an alternative to cash with Fast Tag journeys representing 38.2% of journeys in the first quarter (an increase of 2.0% from 2013/14).

3.2.6 The tunnels capital programme for 2014/15 is £8.8m. This includes a number of major schemes. The largest schemes in the current programme are the Combined CCTV Control room (£1.4m), and investment in digital monitoring systems (SCADA) £1m. Both schemes commenced in the first quarter.

3.2.7 The Merseytravel Committee has considered a report in respect of the planned rewiring of the and has recommended that Merseytravel undertakes this scheme on behalf of the Combined Authority across two years.

3.2.8 This scheme was included as a priority in the long term capital programme for the Tunnels and addresses significant business continuity risks and provides opportunities to significantly reduce future energy costs. The total cost of the rewiring is £8m across two financial years.

3.2.9 It is recommended that this scheme is given formal approval by the Combined Authority and added to the 2015/16 capital programme to be financed from future tolls revenue and the Tunnels capital reserve.

3.3 Rail Services

3.3.1 Financial projections for rail services include savings against the original budget of £0.4m which arose from the successful re-negotiation of the DfT’s contract extension with Northern. Whereas previously Merseytravel funded a number of Northern services that were extensions to the previous contract between DfT and Northern, under the new direct award, many of these are now included in the baseline contract specification.

3.3.2 A significant challenge for Quarter 2 will be negotiating the level of future SRG with the DfT for the next 5 year period. Merseytravel needs to ensure that it continues to receive sufficient SRG to undertake its functions in respect of rail, and in particular, the Merseyrail Network.

3.3.3 The Merseyrail Network continues to perform well against its benchmark group of other Train Operating Companies (TOCs).

3.3.4 Major rail schemes at Newton-le-Willows, Maghull North and Halton Curve were included in the recent Growth Fund bid. Design and business case preparatory work is underway on each scheme.

3.3.5 Work has continued on the special project that is considering options for the renewal of the Merseyrail fleet of rolling stock. The focus in Quarter 2 has been to determine Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

a revised business case for rolling stock that is affordable and that complements the Long Term Rail Strategy.

3.3.6 Progress towards the procurement stage will be conditional on meeting these requirements and, in order to ensure consistency with the Long Term Rail Strategy.

3.3.7 Following a major review of our structures in respect of bus and rail, we are in the process of appointing two new posts of Head of Bus and Rail Concession Manager which will significantly increase our capacity in respect of strategic and operational rail issues. The new Head of Rail post has been appointed.

3.4 Bus Services

3.4.1 Merseytravel expenditure on bus services is predominantly linked to the Supported Bus Network on Merseyside. These are directly tendered or subsidised bus services that address gaps in the commercial network.

3.4.2 The budget for supported bus services was significantly reduced in 2014/15 in recognition of a number of services that were identified as no longer delivering value for money. The indications for 2014/15 are that financial projections within the budget are being met and savings targets are being delivered.

3.4.3 Reducing expenditure on the supported bus network by working with commercial operators is a key strand within our Medium Term Financial Strategy. It is important that the network delivers value for money and we are committed to changing the network to one that is less reliant on our direct financial intervention.

3.4.4 Further significant savings have been identified and will be taken forward in Quarter 3.

3.4.5 There are some major capital schemes for bus within our overall capital programme. The majority of bus schemes are funded from a successful Better Bus Area Grant award of £3.4m. These schemes are very much partnership schemes, involving Local Authority partners and commercial operators.

3.4.6 Merseytravel launched a pilot scheme to promote affordable travel for young people in May 2014. This involved the launch of a product called MyTicket, which gives unlimited multi-operator travel to under 16’s for £2 per day.

3.4.7 MyTicket has proved to be extremely popular with around 800,000 tickets sold to date and over 1.5m journeys undertaken. A significant proportion of these tickets were journeys that would previously have been undertaken using other ticket types, however the product is also generating real growth.

3.4.8 This growth is significant, as under the innovative funding mechanism for MyTicket, the bus operators benefit from this growth and receive correspondingly less subsidy from Merseytravel. Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

3.4.9 The results of the pilot scheme will be formally evaluated in the fourth quarter of 2014/15 and recommendations will be made with respect to its future sustainability and affordability.

3.5 Hubs and Travel Centres

3.5.1 Merseytravel Hubs and Travel Centres underspent at the end of Quarter 2 largely as a result of efficiency measures relating to changes in working patterns and also changes to premises budgets.

3.5.2 There is a £0.4m capital programme for Hubs in 2014/15, including an element for Queen Square road works refurbishment in (£0.8m across 2 years)

3.5.3 Queen Square works will cause city centre disruption, and have been programmed for late 2014 to avoid the City’s summer programme of events.

3.6 Concessionary Travel Scheme

3.6.1 Payments to commercial operators under the Concessionary Travel Scheme are subject to fixed deals in 2014/15 and as such, annual expenditure will be in line with the approved budget. Some savings will be forthcoming as actual inflationary impacts are less than forecast in the budget process.

3.6.2 2014/15 represents the last year of all fixed deals for concessionary travel and a significant challenge for 2015/16 will be to renegotiate commercial terms against a background of diminishing resources. Accurate Smart Ticketing information will be crucial in informing these negotiations.

3.6.3 A review of the Concessionary Travel Scheme is a key priority for Merseytravel in 2014/15.

3.7 Mersey Ferries

3.7.1 The second quarter of each year is critical for the overall financial performance of the Mersey Ferries. 2013/14 was an exceptional year, largely due to prolonged periods of fine weather. Performance in Quarter 2 of this year was also very high, helped by significant events such as the Open Golf, the International Festival of Business, the Tour of Britain cycle race, and especially, the Giants.

3.7.2 The financial projection for the Mersey Ferries at the end of Quarter 2 is broadly in line with original budget estimates. A significant exception to this is in employee costs, where additional annual savings of £75,000 are anticipated as a result of changes in working patterns introduced in 2013/14.

3.7.3 The Mersey Ferries operate three distinct services:

 Commuter Service  River Explorer Services  Manchester Ship Canal and other Charter Services Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

Table 4: Mersey Ferries Patronage by Service

Annual Quarter 2 Quarter 2 Variance Function Target 2013/14 2014/15 Previous Year

River Explorer Patronage 463,000 301,427 320,023 +6.2% Commuter Patronage 157,500 107,737 73,546 -31.7% Total Mersey Ferries Patronage 620,500 409,164 393,569 -3.8% Manchester Ship Canal Cruises 19,686 12,706 15,550 +22.4%

3.7.4 Reducing patronage on the commuter services is a long-term trend, but was also affected by timetable changes. However, this is more than offset by the increase in the River Explorer service. This has significant financial benefits as, for example, the average fare for a River Explorer cruise is £2.94 compared to the £1.06 average fare for the commuter service.

3.7.5 Revenue per passenger on the leisure element of Ferries operations is therefore much greater than on the commuter service and the River Explorer service, together with the Manchester Ship Canal cruises, are our most important service financially.

3.7.6 The Mersey Ferries are structured as a separate company from Merseytravel, limited by guarantee. They are a wholly owned subsidiary company. However, as a company limited by guarantee, they cannot sustain operational losses. Consequently, Merseytravel provides the Ferries with an operational grant each year that allows the company to break-even.

3.7.7 This payment effectively subsidises the losses incurred by Mersey Ferries in operating its year-round commuter service. The commuter service is a key strategic public transport activity rather than a visitor attraction. The Approved budgeted level of subsidy forecast to be paid to Mersey Ferries in 2014/15 is £2.5m. However, any increase in income, or reductions in expenditure allows this subsidy to be reduced.

3.7.8 The safe operation of the Mersey Ferries requires significant and sustained capital investment in both the vessels themselves and each of the three landing stages. This is provided for within a £0.9m capital programme. Strengthening the landing stage following the extreme high tide experienced in December 2013 accounts for £0.6m of this programme and is programmed for delivery over the autumn period. Further strengthening works are also planned for 2015/16.

3.7.9 Future capital requirements will be informed by a planned ‘dry-dock’ inspection of the Woodside pontoon scheduled for later this year.

Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

3.8 Visitor Attractions

3.8.1 Financial projections for our visitor attractions at the end of Quarter 1 were broadly in line with the budget. However, it should be stressed that summer months are key to financial performance.

3.8.2 Visitors to the U boat attraction at Woodside in the second quarter were slightly down on the same period in 2013/14. Spaceport visitors were more significantly reduced compared to 2013/14. While this reduction is significant, it was anticipated in our financial forecast and reflects changes in the exhibition on offer at Spaceport this year.

3.8.3 The Beatles Story performed less strongly in Quarter 2, principally as a consequence of less than forecast income from retail spending. At the time of writing, this fall in income is being assessed as to the impact upon the budget, and to the identification of introducing compensating events to reduce the overall impact

3.9 Capital Programme 2014/15

3.9.1 The Merseytravel General Purposes Sub Committee considered the half-yearly review of the Capital Programme at its meeting of the 16 October. Overall, the programme is on course, and no significant overall slippage is currently predicted, although there is some slippage on individual schemes.

3.9.2 The most significant scheme to slip from the 2014/15 capital programme is Bus Station, where Merseytravel is dependent upon a third party, as the Merseytravel element is part of a much bigger supermarket development.

3.9.3 Savings in some areas of the capital programme have presented the opportunity to re-prioritise other schemes within the overall programme. As a result, a revised programme is presented at Appendix 2 and it is recommended that the Combined Authority approve these changes.

3.10 Other Costs

3.10.1 A number of underspends were identified at the end of Quarter 2 across Asset Management and other support services. These were predominantly associated with slippage on vacant posts following restructures in a number of areas in 2013/14.

3.10.2 A review of Support Services will be undertaken in the second and third quarter of 2014/15 as part of the organisation’s Medium Term Financial Strategy, and will be incorporated into the 2015/16 budget setting process.

3.11 Treasury Management Activity

3.11.1 Merseytravel’s Treasury Management activity in the first quarter was in line with its overall treasury management policy and strategy. Second quarter performance was marginally behind target. However, steps have been taken to address this for quarter 3 and beyond. Appendix 1 Liverpool City Region Combined Authority Financial Monitoring Report

3.12 Property Management Strategy

3.12.1 Following the success of the International Festival of Business, Merseytravel has received notifications of interest from a number of commercial bodies seeking office space within the Mann Island HQ. Negotiations in respect of Mann Island are undertaken on our behalf by our commercial letting partner, CBRE. The use of CBRE ensures that any sub-leases are entered into at prevailing commercial rates.

3.12.2 Negotiations with one commercial body are at an advanced stage and permission is being sought from the Combined Authority (as the primary lease holder) to enter into a formal arrangement in respect of the vacant 5th floor for a period of at least ten years. All due diligence has been undertaken in respect of the potential tenant by our partners CBRE.

3.12.3 This tenancy would be in addition to the three third party sub-leases already in place and represents further and significant progress towards reducing the cost of Mann Island.

4. CONCLUSION

4.1 Financial and Performance monitoring at the end of September indicates that significant progress has been made across all our corporate priorities and that this has been achieved within the financial targets established in the 2014/15 budget.

4.2 Income from the second quarter, especially on toll income, has been higher than expected.

4.3 At the end of Quarter 2, we assess both the risk of material financial overspending and of not delivering our corporate priorities to be low.

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