Johnston Carmichael Chartered Accountants and Business Advisers Consultancy on Sustainable Business Model for Cairngorm Mountain Funicular Railway 7 September 2009 Final Report Strictly Private and Confidential Table of contents Section Page Appendices Transmittal Letter 1 Appendix 1 Terms of reference Glossary of Terms 2 Appendix 2 Sources of information Extracts from reference material relating to the 1 Introduction 3 Appendix 3 status of Cairngorm 2 Executive Summary and Key Findings 5 Appendix 4 Existing operational improvements and initiatives 3 Existing Business 9 Appendix 5 Financial analysis – existing business 4 Market and Customer Base 14 Appendix 6 Budget 2009/2010 – existing business 5 Repositioning the Business 17 Appendix 7 Existing business SWOT analysis 6 Operational, Market and Financial Assumptions 22 Appendix 8 International Best Practice review 7 Financial Evaluation 31 Appendix 9 Design brief 8 Structural Options and Tendering 36 Appendix 10 Keppie design (separate document) 9 Timetable and Implementation 40 Appendix 11 ROK outline capital costs phasing 10 Recommendations 42 Appendix 12 Detailed financial assumptions for the projections Appendix 13 “Do Nothing” projections Appendix 14 “Invest £1.5m” projections Appendix 15 “Invest £5-6m” projections Appendix 16 Subsidy and State Aid Appendix 17 Alternative corporate structures Appendix 18 EU Procurement Transmittal Letter Strictly Private & Confidential 7 September 2009 Highlands and Islands Enterprise Our review has covered the matters set out in our engagement letter. Cowan House Inverness Retail & Business Park Basis of our work INVERNESS IV2 7GF JC has not independently verified any of the information contained in this report and does not make any representation or warranty, express or implied, as to the accuracy, reasonableness or completeness of the information contained in this report. The For the attention of James Gibbs review includes certain statements and estimates with respect to the anticipated future performance of the Funicular Railway. Such statements and estimates reflect various Dear Sirs assumptions made concerning anticipated events which may not prove to be achievable. Accordingly, no representation is made by JC as to the accuracy of such Highlands and Islands Enterprise (“HIE”) – Cairngorm Funicular Railway statements and estimates. In accordance with our terms of engagement with HIE, we have undertaken a limited We have indicated within the report the sources of the information presented and have scope review of the affairs of the Cairngorm Funicular Railway (“the Funicular”) satisfied ourselves, so far as possible, that the information presented is consistent with under the terms of reference set out in Appendix I. other information obtained by us in the course of the work undertaken to prepare this report. Except where specifically stated, we have not sought to establish the Purpose of our report and restrictions on its use reliability of those sources by reference to other evidence. We have provided the management of CML with a copy of this report in order to obtain their confirmation This report was prepared on your specific instructions in connection with a proposed of its factual accuracy. transfer of the operational running of the Funicular Railway outwith the direct control of HIE and should not be used for any other purpose. No information in this Structure of report document should be published or passed to third parties, including professional advisers, without the express prior written permission of Johnston Carmichael (“JC”). Section 2 of this report reflects the key findings and recommendations from our JC assumes no responsibility in respect of the contents of this report to parties other review. The remaining sections of the report contain more detailed information on the than the addressee listed above. If others choose to rely in any way on the contents of Funicular Railway’s historic trading results and other matters. Notwithstanding that this report, they do so entirely at their own risk. our key findings are included in section 2, there may be points in the remainder of the report which are important to your consideration of the proposed transfer and Scope of our work therefore all sections should be read. The financial and corporate information used in this document is sourced from Yours faithfully information made available by the management of the Funicular Railway and certain members of HIE in the period from 28 November 2008 to 26 June 2009. The information primarily comprises accounting information together with meetings with Johnston Carmichael the management of the Funicular Railway and at HIE. We have not had unfettered access to the business and management records of the Funicular Railway. 1 Glossary of Terms JC Johnston Carmichael ROK ROK Plc SVP The Stevens View Partnership Board The Board of Directors of CML CML or “the Company” Cairngorm Mountain Limited a subsidiary of OJEU the Official Journal of the European Union HIE Cairngorm Cairngorm Mountain CMTL Cairngorm Mountain Trust Limited The Cairngorms The range of mountain which includes Destination Badenoch and Strathspey and the rest of Cairngorm Inverness and Eastern Highlands Enterprise Area plus Moray. The Funicular Railway The Funicular Railway system for transportation up and down at Cairngorm FY05 12 months ended 30 April 2005 THC The Highland Council FY06 12 months ended 30 April 2006 VAT Value Added Tax – All revenues and costs in FY07 12 months ended 29 April 2007 the report are assumed to be net of VAT FY08 12 months ended 27 April 2008 FY09 11 months ended 31 March 2009 HIE PMB The HIE Project Management Board HIE PMT The HIE Project Management Team TTM Trailing twelve months DMO Destination Management Organisation CNPA Cairngorm National Park Authority SNH Scottish National Heritage FCS Forestry Commission Service NFPC Not-for-profit company 2 Introduction Section 1 Introduction, Terms of Reference and Background To establish the market and design led improvements to the operation which would lead to increased visitor flow, increased visitor retention and Introduction and Terms of Reference increased visitor spend (Section 5); JC has been engaged by HIE to undertake a review of the Funicular Railway To establish the cost and revenue impacts of implementing the market led at the Cairngorm Mountain with the following objectives: changes identified (Section 6); To develop a new business model for the operation of HIE’s Funicular To undertake a financial and outline economic appraisal of the options Railway in the Cairngorms, which is both financially sustainable for both being considered (Section 7); HIE and the operator, and which is also compliant with EU rules on State Aid. To review the options for operating the Funicular Railway which do not result in HIE retaining ownership of the operating company but which To review, recommend and manage the process of transition of the provide both HIE with a workable operational model and the operator with operation of the railway from it’s current operator, Cairngorm Mountain a business model which reflects a reasonable and commercial risk and Limited (a wholly owned subsidiary of HIE) to a new operator who will reward (Section 8); manage the operation on the basis of the new business model, having first been selected through a process of competitive tender, which is also To recommend an implementation plan and timetable for HIE to succeed compliant with EU regulation and if necessary pre-approved. in managing the process of transition of the operation of the Funicular Railway from its current operator (CML) to a new operator (Section 9); This report addresses these objectives following an in-depth review of the and existing business operation and consideration of the options for setting up a new business model which is sustainable for both HIE and the operator. To make recommendations based our analysis and findings (Section 10). Review Methodology To reach our conclusions we determine the criteria for a definition of “Financially Sustainable” in relation to the business. These criteria included The methodology adopted in the review was as follows: that the business: To review the existing business operation through operational, market and 1. Has to be commercially attractive and provide a value for money financial analysis; (Section 3) experience for the customer to attract new and increase repeat customers To analyse the existing and potential market and customer base of the business (Section 4); 2. Has to have a clear medium term business strategy and management skills to deliver that strategy To compare the operations with comparable operators (Section 5) 3 Introduction Section 1 3. Has to have a mechanism which incentivises the management and staff the Treasury guidelines on project appraisal known as “The Green Book”. to deliver the business strategy However, since this report does not address a new project as envisaged in the Green Book, we have not sought to do a complete analysis and options 4. Has to make profits to enable on-going and cyclical maintenance and appraisal using the terms set out therein. replacement of equipment and upgrade of facilities, possibly through “sinking funds” 5. Has to make profits sufficient to pay a return on the assets to both HIE and an operator (including, ideally, the leased assets of the mountain and the Funicular Railway) 6. Has to be adequately capitalised and not over-geared These criteria were discussed with HIE who accepted the principles of our definition although it was recognised that it may not be necessary to meet all of the criteria to satisfy HIE’s interpretation of the business being “financially sustainable”. Sources of Information In the process of carrying out this review we have had access to a significant number of previous reports carried out on the Funicular Railway and CML, information from the management of the company, information from HIE and information that is publicly available in relation to the operations. Details of the sources of information we have used or have access to are set out in Appendix 2.