CHAPTER 1

To:All Investment Division Staff

Cc:Chief Executive

Head of Appraisal

David Carson Department of Economic Development Business Liaison Unit

August 2001

PROCEDURES MANUAL FOR PRIVATE AND PUBLIC SECTOR DEVELOPMENT UNDER THE TOURISM DEVELOPMENT SCHEME

This manual has been designed with the aim of achieving a systematic and consistent approach to the processing of TDS applications, and to assist staff concerned to demonstrate best practice as required by Government in the performance of their duties. It is the responsibility of all staff to become totally familiar with its contents, and to apply its principles at all times.

This version of the manual supersedes earlier versions and for the first time is available on desk-top computers. Staff must not amend the manual on their own machines or mail it to other organisations or individuals.

The manual is written as if all cases were private sector projects. Where the guidance differs for public sector or community sector cases the relevant information is included in a shaded box adjacent to the original guidance.

MANUAL OF PROCEDURES

FOR

SELECTION, APPRAISAL, APPROVAL AND MONITORING

OF PRIVATE AND PUBLIC SECTOR PROJECTS

UNDER THE

TOURISM DEVELOPMENT SCHEME

CONTENTS

CHAPTERSUBJECT

PAGE

NO(S)

I

BACKGROUND TO THE MANUAL

1-2

II

OBJECTIVES OF THE SCHEME

1-2

III

PROJECT ELIGIBILITY

1-2

IV

KEY TDS CRITERIA

1-8

V

FORMS OF ASSISTANCE

1-10

VI

APPLICATIONS

1-4

VII

FINANCIAL APPRAISAL PROCESS

1-4

VIII

SUBMISSION TO INVESTMENT

COMMITTEE/PDU

1-2

IX

LETTER OF OFFER

1-3

X

ACCOUNTING PROCEDURES

1-3

XI

MONITORING PROCEDURES

1-3

ANNEX

1

STANDARDS OF FINANCIAL PLANNING,

CONTROL AND ACCOUNTABILITY IN THE

NORTHERN IRELAND PUBLIC SECTOR1-2

2

TOURIST INDUSTRY (FINANCIAL

ASSISTANCE) SCHEME 1992 AND

EXPLANATORY NOTE.

3

DEPARTMENT GUIDELINES ON OPERATION

OF TDS

4

FIRST SPECIAL REPORT FROM THE

COMMITTEE OF PUBLIC ACCOUNTS, DATED

23 NOVEMBER 1987.

5

ASSISTANCE FOR NON-VIABLE PROJECTS

6

PROJECT COSTS UNDER TDS.

7

GUIDANCE ON AREAS AND ITEMS NOT

REGARDED AS ELIGIBLE FOR FINANCIAL

ASSISTANCE.

8

MANAGEMENT RESOURCES REQUIRED

FROM APPLICANTS.

9

FINANCIAL INFORMATION AND CONTROLS

REQUIRED FROM APPLICANTS.

10

ECONOMIC APPRAISAL

11

GENERAL DUTIES AND RESPONSIBILITIES

OF A NON-EXECUTIVE DIRECTOR.

12

POTENTIAL ISSUES TO BE ADDRESSED

WHEN DETERMINING THE LEGAL RIGHTS

ATTACHING TO PREFERENCE SHARES.

13

BROAD DEFINITIONS FOR THE TOURISM

DEVELOPMENT SCHEME AND INITIAL

APPLICATION FORM.

14

STANDARD LETTER REQUESTING

BUSINESS PLAN.

15

ROLE OF THE PDU AND DELEGATED

LIMITS.

16

PROJECT ASSESSMENT COMMITTEE.

17

ILLUSTRATION OF BUSINESS PLAN

FORMAT FOR TDS SUBMISSION.

18

CHECKLIST OF INFORMATION REQUIRED

FOR MARKETING APPRAISAL.

19

CHECKLIST OF ISSUES FOR COMMENT BY

QUALITY ASSURANCE.

20

PROJECT REPORT FORMAT FOR INVESTMENT

COMMITTEE/DELEGATED PDU SUBMISSION.

21

STANDARD FORMAT FOR RECORDING FINAL

RATIFICATION BY INVESTMENT COMMITTEE

AND DELEGATED PDU

22

CASES REQUIRING SUBMISSION TO THE

DEPARTMENT.

23

MIS UPDATE FORM.

24

CLAIMING AND PAYMENT PROCEDURES.

25

NOTES FOR THE GUIDANCE OF CLAIMANTS.

26

LETTER OF OFFER MEETING PRO-FORMA.

27

INFORMATION REQUIRED FOR FINANCIAL

MONITORING.

28

PAYMENT AUTHORISATION FORM.

29

PROCESS FLOWCHART

30

MINOR AMENDMENTS TO LETTERS OF OFFER

PRO FORMA.

31

COVENANTS

32

USE OF CONSULTANTS

33

INITIAL SUBMISSIONS TO THE PROJECT

DEVELOPMENT UNIT PRO FORMA

34

LETTER OF OFFER SIGNING OFF SHEET

35

This manual sets out the procedures to be followed by the Northern Ireland tourist Board in the selection, appraisal, approval and monitoring of all private, public and voluntary sector projects seeking financial assistance under the Tourism Development Scheme legislated under the Tourism (Northern Ireland) Order 1992. It is the responsibility of the Board of the Northern Ireland Tourist Board to ensure that these guidelines are followed. Where any significant policy decisions are taken which would be contrary to the procedures set out in this manual, the approval of the Department of Economic Development must be obtained in advance of such a decision. It is important that the highest possible standards of financial planning, control and accountability be observed in the Northern Ireland public sector, and to emphasise the importance of this point, a copy of the Department of Finance and Personnel letter of 29 June 1995 to Accounting Officers is attached as Annex 1.

March 2000

CHAPTER IBACKGROUND TO THE MANUAL

1.Introduction

The introduction of the Tourism Development Scheme presents the tourist industry in Northern Ireland with the opportunity to develop accommodation and amenity projects with the direct incentive which selective financial assistance offers. The administration of the Tourism Development Scheme is the responsibility of the Northern Ireland Tourist Board in accordance with Guidelines prepared by the Department of Economic Development. By its nature, selective financial assistance presents two particular issues which are not relevant to standard capital grant programmes i.e.:

(i)with limited financial resources, the process of selection is likely to result in projects being declined for assistance and, therefore, development priorities need to be agreed and published;

(ii)the financial assistance may take the form of repayable monies such as preference share capital or secured loan stock and, therefore, the approach to determining financial packages must be subject to the custom and practice of corporate finance in the private sector.

This Manual documents how the Northern Ireland Tourist Board will administer the Tourism Development Scheme in terms of project selection, appraisal, approval and monitoring. As such, these issues will be fully addressed to avoid any charge of inadequate administration of a selective financial assistance scheme.

Initially drafted as a manual for handling private sector projects only, this update now addresses the handling of voluntary sector and public sector projects as well.

1.2Purpose

The purpose of the Manual is to ensure that:

(i)each project considered for assistance under the Tourism Development Scheme is subject to the same process of selection, appraisal, approval and monitoring appropriate to and within its category and,

(ii)best practice as directed from time to time by the Department of Economic Development is followed in performing financial and related appraisals on every project.

1.3Content

The Manual is designed to facilitate easy reference in the process of selection, appraisal, approval and monitoring. Consequently, the Chapters of the Manual follow that chronological order recognising that there is some degree of overlap (e.g. Chapters IV and V are relevant to the selection and the appraisal processes). Following Chapters I and II, the remaining Chapters can be categorised as follows:

Chapters III to VI

selection

Chapters VII

appraisal

Chapters VIII to IX

approval

Chapters X to XI

monitoring

All relevant personnel are expected to have read and understood the implications of the entire Manual even though their present duties may relate to only one area within the overall process.

1.4Glossary

The main abbreviations used within this Manual are:

(i)Department of Enterprise Trade and Investment “the Department”

(ii)Investment Committee:

“IC”

(iii)Northern Ireland Tourist Board:

“the Board”

(v)Project Development Unit:

“PDU”

(iv)Project Assessment Committee:

“PAC”

(vi)Tourism Development Scheme:

“TDS”

(vii)Quality Assurance:

“QA”

(ix)Administration Support Unit

“ASU”

1.5Circulation

This Manual is for the exclusive use of the Board’s personnel acting with the authority of the Department. The Manual may not be copied or reproduced in any form for any party without the prior consent of the Department.

CHAPTER IIOBJECTIVES OF THE SCHEME

Background

2.1The origins of the TDS lie within the Statement of Government Tourism Policy issued as “A View to the Future” in 1989 following a major policy review. Financial assistance toward tourism development would be based on a highly selective approach similar to that applying to support for the manufacturing and tradable service sectors.

2.2TDS was introduced initially in 1990 under the then existing legislation which confined support to accommodation projects only. From April 1992 the legislative basis became Part III of the Tourism (Northern Ireland) Order 1992 which also conferred on the Board the power to provide financial assistance within the terms of a Scheme made by the Department with the approval of the Department of Finance and Personnel.

2.3The formal Scheme, designated the Tourist Industry (Financial Assistance) Scheme 1992 and Explanatory Note are reproduced as Annex 2. The Board has retained the title “Tourism Development Scheme” as the operational title.

Aim

2.4The aim of the TDS is to assist the development and improvement of tourist accommodation and amenities available to visitors to and within Northern Ireland, to improve the industry’s competitive position and to increase its economic contribution.

Objectives

2.5In pursuit of the delivery of that aim, the following principal objectives will apply:

(i)accommodation, attraction and amenity projects in both the public and private sectors will be considered for support;

(ii)the TDS scheme is selective and it is at the Board’s discretion as to whether any project should be offered financial assistance (and in terms of the type of assistance offered). Any such assistance should be limited to the minimum amount needed to enable the project to proceed;

(iii)there will be a strong focus on the quality of management, marketing and operation of the project, as well as on physical quality;

(iv)account will be taken of the likely job creation impact, together with other economic indicators such as displacement and targeting social need.

(v)the consideration of any project will include a risk evaluation, arrangements for monitoring and a post project evaluation.

2.6The operation of the TDS is delegated to the Board in accordance with the Guidelines and Directions from the Department – reproduced as Annex 3. Any application being dealt with by the Board has, therefore, to have regard to the terms of the TDS, the Explanatory Notes relating thereto, and the Guidelines.

2.7It is important that in considering financial assistance towards private sector projects, lessons be learned from past experience. In that context, the Treasury guidance to Government Departments on assisting private sector ventures is relevant, and a copy of the first special report from the Committee of Public Accounts dated 23 March 1987 is attached as Annex 4.

2.8In particular, it is imperative that there should be at least £1 of private sector investment for each £1 of assistance from public funds. In determining the level of grant, it is therefore necessary to ensure that, in aggregate, grants from all sources do not exceed 50% of project costs. For this purpose grants from the EU and IFI must be added to any assistance from Government Departments, public bodies and NITB. Grant assistance from Lottery Funds is to be treated as private finance in a project.

2.9There is a requirement under EU Regional Guidelines to reduce the maximum level of financial assistance offered to public sector proposals from 75% to 40%. This was considered by the Board in November 1999 when it was concluded that the proposed change should be phased in on the basis of a sliding scale over the period January 2000 – December 2003, as follows:

Jan ’00 : 50%

’01 : 45%

’02 : 40%

’03 : 40%

Given the need to ensure that available funds are utilised as fully as possible it was considered appropriate to retain the flexibility of a higher rate of assistance over the period provided that a clear message is conveyed that the intention is to promote less dependency on grant aid and that the appropriate argument is developed in support of any case deemed to merit a more favourable rate.

CHAPTER III PROJECT ELIGIBILITY

Introduction

3.1There is no automatic entitlement to financial assistance under the TDS. It is at the discretion of the Board (subject to the approval of the Department in certain cases) to provide financial assistance to any project which, in the opinion of the Board, will increase tourism activity to and within Northern Ireland and the revenue derived therefrom.

Eligible Activities

3.2A wide range of tourist facilities may be considered for financial assistance. These include various types of accommodation, activity holiday facilities, cultural and heritage attractions and the provision of tourist information and services.

Development Priorities

3.3The Board’s priorities for TDS are assessed and reviewed from time to time, and are set out in the following documents:-

(i)Corporate Plan

The Board’s Corporate Plan sets out the priorities for a three year period.

(ii)Strategic Plan

The Board’s Strategic Development Plan sets out the broad policy and strategic direction the Board has determined for the tourist industry.

All projects should be tested against the stated aims, objectives and priorities of these documents; (in addition to any annual statement of priority in connection with development projects).

Project Costs Under TDS

3.4Annex 6 details costs which under TDS should be included in determining a project’s overall funding requirement. There are a number of broad principles which can be applied to any project and may need to be communicated to promoters at an early stage. These are set out in the paragraphs below.

3.5TDS is intended to be a flexible approach to assisting developers. The actual costs of undertaking a project such as professional fees, statutory approvals, initial operating deficits, and pre-opening human resource and marketing costs, as well as site purchase, will all be taken into consideration when determining the appropriate level of support. This does not mean that they will all be regarded as eligible costs, as defined by TDS, for the purposes of assistance.

3.6Financial assistance is not directed towards particular capital expenditure but rather towards the funding of the total project cost. However, there are areas and items which are specifically not eligible – Examples of these are given in Annex 7.

3.7In addition, assistance will not be forthcoming other than in very exceptional circumstances where construction work has clearly commenced. Notwithstanding this exclusion, the Board may seek the Department’s consent to provide prior approval in cases where certain expenditure in advance of consideration and offer of TDS assistance is unavoidable. Such consent must be obtained in writing from the Department before any commitment to the applicant is made.

3.8It is a pre-requisite of any offer of assistance under TDS that the applicant is the owner of, and has clear title to the site on which development is planned. It follows therefore that assistance will not be offered in the circumstances where the applicant is one of a number of potential purchasers of a site to be developed.

3.9The employment of professional advisers is a matter for promoters. But where the project is significant in terms of expenditure, the Board will require the appointment of appropriate and suitably qualified professional advisers; e.g. architect, quantity surveyor, mechanical and electrical engineering consultants financial and marketing experts and environmental consultants. The range covered is not exhaustive and there may be circumstances where additional specialist consultants will be necessary. In the circumstances where a project is not approved for assistance the Board has no liability for any professional fees incurred in the preparation of an application. However, if a project is being supported under TDS, reasonable professional fees may be considered as eligible costs. The decision as to what may be regarded as a reasonable level of fees will be a matter for the Board, on the advice of its own professional advisers, but normally assistance will not exceed 15% of grant eligible costs, unless exceptional circumstances prevail. Professional fees related to the acquisition of site will always be regarded as ineligible for support.

3.10It is important that promoters receive a clear and reasoned assessment of the eligibility or otherwise of their project as soon as possible. In order to achieve this the Investment Division will utilise staff of appropriate skills and experience, including if necessary, using consultants and outside professional advisors. Annex 32 provides guidance on the use and appointment of consultants. The procedures for dealing with applications for assistance under the TDS are detailed in Chapter VI.

CHAPTER IVKEY TDS CRITERIA

Introduction

4.1All applications to Investment Division for selective financial assistance under the TDS should address the following key criteria:

Key Criteria

(i)Viability

(ii)Additionality

(iii)Efficiency

(iv)Marketability

(v)Quality

In addition the Board should have regard to

(vi)Sustainability

(vii)Targeting Social Need

(viii)Accessibility

4.2There will be cases where the project fails to meets one or more of these criteria but is to be supported for strategic reasons (e.g. is clearly a stated priority of the current Development Strategy). In such cases, the shortcomings of the project must be clearly identified and the reasons for supporting explained in detail, in writing.

Viability

4.3A viable project is one which, having received selective financial assistance on a once-and-for-all basis, can be self-sustaining. In practical terms this means that the project, and the business or organisation undertaking it, should be:

(i)adequately funded through an appropriate financial structure, and

(ii)capable of maintaining sufficient cash profits to meet

essential capital expenditure and to service all debts as they fall due.

Voluntary sector or Public sector projects should be adequately funded through an appropriate financial structure and capable of maintaining sufficient cash surplus to meet essential capital expenditure and to service all debts as they fall due, or

Be promoted with an organisation with assured access to sufficient contingent or deficit financing to ensure that any revenue deficits arising from the projections can be met on a continuing basis.

4.4When assessing viability the following issues are particularly important:

(1)Historical Performance and Current Financial Position

Where a project is undertaken by an existing business or organisation, the profitability of that business or performance of the organisation over the previous three years should be reviewed in addition to its current financial position. Areas of concern might include declining profitability, high gearing and negative cash flow from trading. Key financial indicators to be highlighted will, therefore, include achieved return on capital employed, gearing ratio and debt servicing capacity. The effect of such negative factors on the overall viability of the business, including the new project, must be carefully considered.

(2)Management

The assessment of the capabilities of the management team will be crucial to any view on the project’s viability. Because this will involve a qualitative judgement which will impact on the appraisal of quantitative factors (i.e. the achievability or otherwise of management’s financial projections) it is important that the views of all relevant Board staff contributing to that judgement are carefully explained and documented. Indicators of the credibility of management are likely to include:

a proven track record in management;

the requisite range of relevant skills;

a well researched business plan;

the use of credible professional advisers;

readily available financial information;

a personal commitment to the project.

Guidance on the skills which management should possess and on the financial information which should be available is contained in Annexes 8 and 9 respectively.

(3)Market Prospects

Marketability should be considered as a discrete appraisal criterion (see 4.17 which follows). The ability of the project to meet its projected sales mix and relative contribution to profitability will be critical to achieving viability. Therefore, the quality of the marketing function must always be assessed when evaluating the prospects of the project achieving its desired market position e.g. has the project sufficient marketing resources to achieve its stated sales projections to the scale and within the time frame necessary to confirm its viability.

(4)Financial Projections

Financial projections without grant assistance should be prepared for at least the first three years of the project, or longer if profitability (surpluses for the voluntary/public sector) is not projected within three years. (In all probability Appraisal will also require a further submission from the promoter including the negotiated grant in the projections). The assumptions underlying the projections should be vigorously challenged in the light of historical performance (where relevant) and against current industry data. Appropriate sensitivity analyses will then be performed. The viability of the project must be considered doubtful when, after applying reasonable sensitivities, the projections do not show:

(i)positive cash generation with the appropriate time frame for that type of project (e.g. five years for a hotel development); or

(ii)a reasonable return on the shareholders’ investment within the appropriate time frame. (A “reasonable return” should be commensurate with the risk involved in the project compared with the potential returns from other, risk-free investments. As a rule of thumb, 10% - 15% might be considered the minimum return on an equity investment in the hotel industry compared with a return on a “risk-free” investment of say 4 - 8%).

In voluntary/public sector projects revenue grants from other sources can be included when considering whether or not there is a positive cash generation.

Where sensitivity analyses indicate a potential funding gap, contingent funding must be available. It is extremely important that the promoters understand that, where their project is subject to cost over-runs or any other source of cash outflow, the Board is not in a position to provide additional funding over and above that agreed in the letter of offer. In all cases, the extent of the safety margin available within the project’s funding arrangements should be evaluated and an opinion reached as to whether it is probable that the proposed financial structure will provide funding which is adequate to meet the present and future needs of the project.

Additionality

4.5The aim of the additionality criterion is to ensure that the minimum amount of TDS assistance is deployed to bring about the benefits associated with a project to realisation. Assistance may be required for either:

(i)the project to proceed at all; or

(ii)the enhancement of the project.

4.6A project may be enhanced in any one or more of the following respects:

(i)nature, i.e. the introduction of new tourism or leisure facilities or the expansion of existing ones.

(ii)scale, i.e. increasing the size of the project.

(iii)timing, i.e. an earlier start to a project or quicker completion.

(iv)location, i.e. an internationally or nationally mobile project goes ahead in Northern Ireland rather than somewhere else.

4.7When appraising additionality the issue is not whether the project could or should proceed, but whether it will proceed if no, or less, assistance is provided.

4.8Additionality may be established in a number of different ways, but private sector cases tend to fall into two categories:

(i)where the applicant has access to limited private sector funds to undertake the project. Where shortage of funds is the reason for accepting that the additionality criterion has been met then viability should be even more rigorously tested (since contingency funding is unlikely to be available); and

(ii)where the applicant has sufficient private sector funds available but is unwilling to commit them to the project unless assistance is provided. The reasons for being unwilling to commit the funds can be many but are likely to be connected with the perceived risk associated with the project. Inadequacy of projected cash flow (particularly in the early years) or low projected returns relative to other investment opportunities may be relevant issues.

4.9The approach to determining the appropriate level of private sector funding for a project may be referred to as Optimum Funding Plan. In effect, an evaluation is made on the optimum level of debt and equity finance which the project could justify based upon private sector funding criteria (e.g. a realistic level of debt servicing coupled with a reasonable return on equity). The additionality criterion could be said to have been addressed in the event that the optimum levels of private sector debt and equity are being invested in a project leaving a funding shortfall (which represents the minimum level of public sector assistance) to be considered under the TDS (and/or other relevant schemes).

Voluntary/Community Organisations

Another pertinent issue may be the ranking of the project within a public or voluntary sector organisation’s internal priorities. A potential project might be judged by the Board to be of high tourism value but may not rank equally highly against the priorities of another organisation, such as a District Council, which will have to consider competing objectives and priorities for funding. In such cases assistance might be needed to raise the project within the promoter’s ranking and so to cause it to proceed.

Additionality can be satisfied in public/voluntary sector cases as the applicants generally have limited funds to undertake the projects and NITB can ensure that no other source of funding could be made available to the projects. It is unlikely that the private sector would undertake the type of tourism development envisaged by such applicants and subject to rigorous appraisal a high level of grant could be offered to such applicants.

Competition to private sector projects

Where this type of application involves public sector promoters competing directly with private sector promoters, mainly for accommodation development, these applications must be considered against the same criteria for comparable private sector projects and be subject to the same levels of grant assistance.

Public Bodies

This category includes District Council applications which form the majority of public/voluntary sector proposals considered by NITB. The promoter may have sufficient funds but be unwilling to commit them to projects unless assistance is provided by NITB. Assessing additionality in such cases can be difficult but can best be demonstrated by lowering the level of grant on individual projects, through negotiation with the applicant, and by reducing the level of grant rate until such time as projects simply cannot proceed.

It is particularly important to ensure that the relevant file and casework papers include an assessment of additionality. This would include details of negotiations with the promoters demonstrating that appropriate efforts were made to ensure the optimum level of funding from other sources.

Following discussion of the requirement under the new EU Regional Aid Guidelines to reduce the maximum level of financial assistance offered to public sector proposals from 75% to 40% the Board on 22-11-99 concluded that the proposed change should be phased in on the basis of a sliding scale over the period January 2000 – December 2003, as follows:

2000 : 50%

2001 : 45%

2002 : 40%

2003 : 40%

Given the need to ensure that available funds are utilised as fully as possible it was considered appropriate to retain the flexibility of a higher rate of assistance over the period provided that a clear message is conveyed that the intention is to promote less dependency on grant aid and that the appropriate argument is developed in support of any case deemed to merit a more favourable rate.

4.10It is particularly important to ensure that the relevant file and casework papers include judgement on additionality. This should include details of negotiations with the promoters and their bankers demonstrating that appropriate efforts were made to ensure the optimum level of private sector funding.

4.11No assistance should be provided towards expenditure incurred prior to the date on which the application for such assistance has been approved by the Board. However, in exceptional circumstances, paragraph 6(b) of the Scheme (Annex 2) provides a waiver to this rule, which the Board may exercise with the Department’s written agreement (i.e. an example of “ prior approval”).

Efficiency

4.12The efficiency criterion examines the net economic benefits of the project. It involves consideration of job creation and increased revenue in the local economy as well as any displacement effects on other businesses and employment in the tourist industry elsewhere in Northern Ireland. It is intended to ensure that assistance is concentrated on projects which seem likely to strengthen the regional economy and thereby provide more revenue and employment in Northern Ireland (with due regard being taken for the local emphasis applied under Targeting Social Need as outlined in paragraph 4.26 onwards). Applicants must therefore be able to demonstrate that their project has the ability to:-

(i)achieve increased tourist traffic resulting in more holiday visitors, leading to benefits in terms of net additional revenue and employment in Northern Ireland. and/or

(ii)increase the value of existing tourist traffic to the economy by increased visitor spending or financial benefit to local suppliers.

4.13It will be considered a negative aspect if a project serves mainly the domestic recreation or leisure market or will simply displace existing jobs or attract business away from other local providers.

4.14For projects receiving grants from £100,000 to £999,999 the Treasury Guidelines require that a Net Present Cost calculation is undertaken on the project costs. From £1 million and upwards, or if the grant exceeds 30% of eligible costs (public and/or private?) the Treasury Green Book Guidelines are followed and a full economic appraisal must be undertaken.(See Annex 10) Efficiency should be quantified in terms of value added and employment effect using the financial model developed by NIERC. The rationale and main assumptions of this model are outlined in Annex 10. Notwithstanding these analyses, the final overall judgement of efficiency will be qualitative based on an evaluation of the project’s contribution towards the development of the tourism industry in Northern Ireland and the overall strengthening of Northern Ireland’s competitive position as a tourist destination.

4.15The Board may also take into account, for example,:

(i)the extent to which the project can be used by the Board, either itself or in conjunction with the British Tourist Authority and/or Bord Failte, to promote Northern Ireland as an international tourist destination;

(ii)the extent to which the project may, in combination with other amenities in the area, increase significantly the area’s tourism potential;

(iii)the scope for the project to act as a “demonstrator” for improved standards of product and management, for overcoming aversion by providers of capital to investing in or lending to the tourism industry in general, for the particular type of project, or for the market viability of new products; and

(iv)the extent to which the project contributes to extending the tourist season.

4.16For projects under the de minimis level (presently £100,000), the assessment of efficiency may be limited to a qualitative judgement, provided the arguments and conclusions are recorded.

Marketability

4.17Applicants must be able to demonstrate they have identified and are addressing a specific market niche(s). They should have developed a marketing strategy and a detailed marketing plan and have sufficient resources to implement their strategy both within Northern Ireland and beyond.

4.18The marketing strategy must be consistent with the quality aspects of the project and the extent of marketing spend should be appropriate to the overall project cost. Due recognition should be given to the critical success factors relating to the marketing strategy, e.g.:

(i)the strategy should be developed after research into the project’s chosen markets;

(ii)there should be adequate resources to deliver the marketing objectives of the strategy; and

(iii)target markets should be differentiated by tourism products with marketing focused on those products.

4.19The assessment of the adequacy of marketing resources will include an evaluation of management (their experience, qualifications, contacts etc.) and the proposed level and content of marketing spend on the individual components of the marketing mix. The assessment of all the relevant aspects of marketing should be undertaken by the Board’s Marketing Division or by an external appraiser. In either case, the person or persons concerned should have the appropriate professional skills and experience necessary to perform the task.

4.20The strategy need not be unique to one business. For example it may involve participation in group marketing/package arrangements, particularly in the case of smaller projects. Moreover, the involvement by any project with a national or international marketing organisations will be evidence of a clear intention to increase the marketing of Northern Ireland to potential visitors.

Quality

4.21The project should improve the overall quality of the Northern Ireland tourism product. In particular the project must:

(i)attain the quality standards for the accommodation or amenity as stipulated by the Board and administered by QA;

(ii)be staffed in terms of numbers and skills in accordance with the best practice relevant to the standard of the facility; and

(iii) be managed with a commitment and professionalism commensurate with the scale of the project.

(iv)give consideration to relevant opening times

4.22Where appropriate, staff training programmes should be in place. Consideration should be given to using the Training and Employment Agency’s Company Development Programme where the project is a hotel. A range of other courses is available from LEDU and various training agencies. Programmes should lead to recognised qualifications.

4.23The quality criterion also covers the physical development of the project. It involves, therefore, an evaluation of the financial and commercial credibility of the developers, as to their ability to undertake a project of the intended quality and scale. An independent quantity surveyor should be engaged by the Board to review the bill of quantities and/or other relevant documentation to ensure that quality and cost are appropriately balanced.

4.24Prior to payment of grant, all relevant statutory approvals (e.g. planning permission, building control, etc.) must have been secured, and copies provided to the Board for consideration and acceptance. Account should also be taken during the progress of the development, of the periodic inspections undertaken by Building Control inspectors to ensure that best construction practice is being met and building control regulations adhered to.

Sustainability

4.25Applicants should address all aspects of the project which could have an impact on the sustainability of the environment. In particular the applicant must:

(i)ensure that the physical aspects of the project reflect a sympathetic design and location; and

(ii)adopt and implement an appropriate environmental strategy with regard to the operation of the business. This should be in line with the DED publication “ An Environmental Checklist”, and the Board’s publication, “Tourism in Northern Ireland – A Sustainable Approach”.

Social Need

4.26Targeting Social Need has been a public expenditure priority in Northern Ireland since 1991. It recognises that differences exist in the social and economic conditions experienced in certain geographical areas and by certain groups in Northern Ireland and seeks to secure the direction of resources to less advantaged areas and groups.

4.27Accordingly the Board, in common with other agencies sponsored by the Department, proposes to target an increasing proportion of its activities on areas identified as socially and economically disadvantaged, and will produce an action plan that sets out the steps it will take to achieve this.

Accessibility

4.28The Board, in concert with the national tourist boards for England, Scotland and Wales, has produced a National Accessible Scheme to identify and promote accommodation suitable for wheelchair users and others with mobility problems. Visitor accommodation has been grouped into three main categories which relate to the degree of accessibility, as follows:-

· accessible to a wheelchair user travelling independently (Category 1)

· accessible to a wheelchair user travelling with assistance (Category 2)

· accessible to some wheelchair users and people with limited mobility able to walk a few paces and up to a maximum of three steps (Category 3)

In assessing applications for financial assistance towards accommodation and amenity development, the Board will take account of accessibility provision for all visitors, including those with a wide range of difficulties, such as mobility, visual, hearing etc. The Board’s aim will be, where possible, to ensure the achievement of Category 1, as above.

4.29Regulations on accessibility are contained in Part R of the Building Regulations and are a statutory requirement. This reinforces the importance of ensuring Building Control approval and certification is achieved.

CHAPTER VFORMS OF ASSISTANCE

Introduction

5.1There are three main types of assistance which may be offered under the TDS. The selection of the most appropriate form(s) should be determined by reference to two principal objectives:

(i)complementing the financial circumstances of the project; and

(ii)minimising the net cost to the TDS.

These objectives can be expressed in the following terms.

5.2The financial circumstances of a project can be expressed in terms of:

(i)its proposed financial structure including planned investments of debt and equity finance;

(ii)its potential for additional debt and equity finance as measured by projected debt servicing capacity and by projected return on capital employed respectively;

(iii)its overall risk profile leading to an assessment of the justification for other forms of funding such as capital and/or revenue grants; and

(iv)the calibre of the project’s promoters including their ability to raise additional finance, if required, and to operate a business with the involvement of outside investors.

For public/voluntary projects the financial circumstances of a project can be expressed in terms of:

(i)its proposed financial structure including the contribution potentially available from all sources of funding;

(ii)its viability as defined in Chapter IV;

(iii)the calibre of the project’s promoters including their ability to operate the project in a way which will minimise costs and maximise income.

5.3The net cost of contribution to a project under the TDS can be minimised by applying a form of assistance which provides a financial payback to the Exchequer, e.g. loan finance, preference shares or repayable capital grant. However, the relative contribution of repayable assistance should always be considered as its gross cost when appraising a project’s funding plan.

5.4The three main types of assistance can be categorised as:

(i)grant assistance;

(ii)loan finance;

(iii)share capital.

These types can take a number of forms all of which should be considered when determining the most appropriate package of assistance for an approved project.

5.5For projects under the de minimis level £100,000 (this has been raised with DED for a ruling, the TDS review said £50k.should be a de minimis level There is also a reference in An 3 to £50k grant in the circumstances of this para which would now equate to £200k costs because of the falling grant rate) the administrative burden of monitoring share capital and loan investments is likely to make such forms of assistance inefficient and, therefore, capital or revenue grants will be the preferred forms of support in those cases.

5.6Establishing the appropriate form of assistance for a project will ultimately be the responsibility of the Appraisal Unit. The Development Executive should liase with the Appraisal Executive to discuss the proposed forms of assistance as soon as the project cost and the anticipated level of assistance have been determined.

Grant Assistance

5.7When determining the appropriate form of financial assistance, the first step is to establish the extent of any funding shortfall arising from the failure by the private sector to provide the optimum levels of debt and equity finance that the project should be able to support. Where there is a funding gap, grant assistance should be considered in the event that a form of repayable assistance such as loan finance or share capital is deemed to be inappropriate.

5.8There will be cases, however, where the provision of grant assistance will be necessary to encourage a high calibre promoter to participate in a key tourism project or to develop a larger scale project which without grant assistance may appear not to be commercially viable.

For public/voluntary projects the first step is to establish the extent of any funding shortfall arising from the failure by the promoter to secure funding sufficient to cover eligible project costs. Where there is a funding gap, grant assistance should be considered in the event that loan finance is deemed to be inappropriate.

There will be cases where the provision of grant assistance will be necessary to encourage a promoter to participate in a key tourism project or to develop a larger scale project which without grant assistance may not rank sufficiently highly in the promoter'’ internal priorities.

Forms of Grant

5.9Two distinct forms of grant may be offered:

(i)Capital grant; such grants should be related to capital expenditure and released against evidence of actual expenditure based upon an agreed percentage of eligible costs;

(ii)Interest relief grant; such grants may be offered over a period of 1-3 years, with the objective of helping a project through the early years, allowing it to advance to the point at which it attains trading viability.

(Note: In exceptional cases, and only with Departmental approval, grants may be offered towards marketing and management costs which relate to the project, for example to reposition the business. These costs must be incremental to the normal trading costs).

Capital Grants

5.10Capital grants are normally intended to cover any funding gap after the optimum debt and equity finance have been sourced; or in the case of public/voluntary sector projects after the maximum contribution from other sources has been secured. Typically, capital grants are required during a project’s physical development, and, therefore, it is crucial that the appropriate pre-conditions are strictly observed to allow capital grant to become payable during the development phase. In any event, capital grants should be related to capital expenditure and released as a set percentage contribution against vouched eligible expenditure.

5.11Repayment criteria may be attached to capital grants so that:

(i)the promoters are incentivised to meet targets agreed with the Board; and

(ii)TDS funds can be recovered where actual performance indicates that a higher level of debt and /or equity could have been sustainable.(this must mean superprofits it cannot mean trying to go back and revisit the appraisal)

For public/voluntary projects TDS funds can be recovered where actual performance indicates that trading surpluses are more than sufficient to cover revenue expenses, including maintenance and reasonable refurbishment.

The intention behind making capital grants repayable is not to penalise successful projects. Rather, it is to ensure that:

· Excessive grant is not paid, in contravention of the additional criterion, because of overly conservative projections; and

· Commitment to investment in tourism-related activities is translated into actual expenditure.

5.12The terms of repayment of capital grant as contained in the relevant letter of offer (specimen at Chapter IX) must be carefully considered, explained and monitored.

5.13In addition to the general terms of repayment the following specific conditions liable to result in repayment would include:-

(1)failure to meet certain targets such as:-

(i)recruitment of key personnel;

(ii)management and training spend;

(iii)marketing spend;

(2)achievement of an agreed level of operating profit (the amount of repayment will normally be a proportion of the incremental super profit).

For public/voluntary sector projects (2) above reads – the achievement of an agreed level of operating surplus (the amount of repayment will normally be a proportion of the excess over the agreed level).

Interest Relief Grant

5.14Interest relief grant offers a flexible mechanism for supporting a project where the necessary funding is available from private sector sources and, after an initial period of assistance, projected operating profits are able to service the ongoing cost of commercial borrowings. Interest relief may be offered for a period of 1 to 3 years, and should be on a decreasing basis to match rising income as the project reaches its targeted profitability. A maximum amount should be stated for each year, based on the projected funding requirement, and unused interest relief should not automatically be carried forward to the following year.

5.15Once an interest relief grant is specified in a letter of offer, it remains in force regardless of subsequent changes in the ruling interest rate notified by DED. However, should the rate of interest paid by the business fall below the rate of interest relief grant offered then it is this lower interest rate which will be eligible for grant. This may result in an applicant not being able to claim the full interest relief grant offered. In these circumstances, the Board may consider extending the earning period if the case warrants this treatment.

5.16The ease with which interest relief grant can be paid will in large measure be related to the applicant’s borrowing arrangements. Difficulties may arise in identifying the eligible borrowings, the date of commencement of grant etc. It is, therefore, desirable to encourage applicants to borrow in the following forms:

(i)a term or loan account;

(ii)a new overdraft facility.

In each case the Appraisal Executive will determine, in conjunction with the applicant, the increased borrowing requirements on which interest relief grant is to be paid, and the starting date for the grant (or if the latter is not possible, a date, within one year, by which the starting date must be specified). This information will be contained in the letter of offer.

5.17Interest relief grant is not payable on any borrowings obtained under the Small Firms Loan Guarantee Scheme or any loan obtained under TDS.

Grant Towards Feasibility Studies

5.18Assistance may be available towards the costs of a recognised consultant exploring and developing the feasibility and market potential of a tourism project. This form of assistance should not be used extensively but in appropriate circumstances it would enable the Board to:

(i)operate pro-actively in key projects by encouraging, for example, an international hotel group to consider a location in Northern Ireland; or

(ii)identify the feasibility of a proposal which, while novel, would complement the Development Strategy.

5.19The consultant’s report would assist the applicant and the Board to analyse the opportunity for a particular tourism project and should cover such areas as quality standards, pricing structure, competition, marketing needs, staffing levels etc. On the basis of the study’s findings, an application might then be developed which would be appraised by the Board in the normal way.

Loan Finance (NOT available to Local Authorities)

5.20Where a project has the capacity to service additional debt over and above that available from commercial lending sources, the Board may offer a loan as part of a package of assistance. In such circumstances, the reasons why the project cannot attract the optimum level of bank or other private sector borrowings should be identified, discussed and documented.

5.21The potential financial benefit of this form of assistance to public finance is twofold:

(i)a regular source of income to the Exchequer in the form of interest payments; and

(ii)a commitment to repaying the assistance over a period of time.

5.22In summary, the terms attaching to a loan will be determined by the Board in light of the circumstances of the individual project, but normally:

(i)it must be a term loan and not an overdraft;

(ii)it will be repayable over a period of not longer than 10 years;

(iii)the interest charges will be fixed for the period over which the loan is repayable at the appropriate Government lending rate (i.e. normally the “broadly commercial rate” or, if circumstances require, the “concessionary rate” as part of a negotiated package) applying at the date of offer as notified to the Board by the Department:

(iv)the loan should be fully secured by a legal charge or other means, the form of security being the best available in the circumstances of the case. However, personal guarantees must not be accepted and security must not be taken on domestic property. Security should not be taken where it does not appear to have a realisable value. The Board should monitor the value of its security at least every three years to ensure that it has adequate cover (see 5.31 below); and

(v)where justified by the potential tourism benefits of the project, the Board may, as part of the negotiated package of assistance, agree to defer loan repayments and/or not to charge interest for a period of up to a maximum of two years.

5.23The Board may offer a loan on terms outside these norms in exceptional cases where, in its view, such a course is justified by the tourism benefits of the project but such terms will be subject to the prior agreement of the Department.

The Amount of Loan

5.24The amount of loan on offer will depend on a number of factors, including:-

(i)the project’s funding requirement;

(ii)the availability of private or institutional funding;

(iii)the track record of the promoters;

(iv)their ability to repay all borrowings; and

(v)the security available.

In any case, the aggregate amount of all borrowings proposed for a project should not exceed the amount indicated by the various measurements of optimum debt capacity i.e.:

· interest cover (the number of times the interest payable is covered by operating profit);

· debt repayment capacity (the number of times scheduled repayments are covered by operating cash flow);

· financial gearing ratio (ratio between debt and equity).

Interest Rate Payable

5.25Loans should normally bear interest at the prevailing rate determined under the Industry Act, which is defined as broadly commercial. However, concessionary features may be part of the negotiated package including:

(i)a preferential interest rate; and/or

(ii)an interest-free period of up to a maximum of two years.

Both “commercial” and “preferential” rates of interest are set in accordance with the Industry Act and vary from time to time. The Board is kept informed by the Business Liaison Unit of the Department of the current rates. It is advisable to check on the current rates during negotiations.

Repayment Term

5.26The period of a loan must reflect the project’s ability to repay and banking practice for that particular type of finance. As a rule, repayment should be within 5-10 years, i.e. medium term. Shorter terms could be considered for new projects in existing businesses or where profits are generated quickly. The Department’s approval must be sought for loans outside the norms at Annex A of the Guidelines, included as Annex 3 of this Manual.

Security

5.27The offer of a loan which is to be secured should be considered only where a valuation can be applied to the assets comprising the security. The following issues need to be considered, therefore, for all secured loans.:

(i)the security must be a legally-enforceable charge which may be offered over a fixed asset or “floating assets” (e.g. stocks and debtors);

(ii)the charge may not have first priority over the secured assets on all occasions, but may be subordinated as a second charge behind a first charge-holder such as a lending bank (or alternatively, under a pari passu arrangement whereby security would be shared with another chargeholder);

(iii)a floating charge in isolation is often of little value particularly in hotel properties and, therefore, should be accepted only in exceptional circumstances;

(iv)properties offered as security must be valued in advance by VLA and legal advice should be sought at an early stage about appropriate documentation.

Valuation Procedures

5.28The Board’s Finance and Personnel Division should make necessary arrangements to monitor the value of its security through the VLA to ensure that it continues to have adequate cover. In the first instance VLA Special Projects Branch should be contacted to discuss any proposed valuation. VLA will then decide whether the Belfast Branch or a local office should carry out the necessary valuation work. A copy of plans/drawings (including the name of the architect responsible) and project costing should be sent to the Valuation Officer. VLA will recommend monitoring arrangements, which may vary from case to case, when they complete the initial valuation.

Arrears

5.29Where any instalment of principal and/or interest is more than 31 days in arrears, the Board should apply additional interest to bring the rate charged to the full commercial rate for such loans by the main banks payable as from the date on which the instalment fell due. Where the circumstances of the case appear to the Board to warrant it, the Board may, with the consent of the Department, waive the payment of part or all of such additional interest. Further penalties which may be levied on projects failing to meet their financial obligations to the Board are included in the specimen letter of offer at Chapter IX.

Loan Guarantees

5.30A loan guarantee should only be considered where the desired purpose could not be achieved by any form of assistance. In that event, the Board would offer a formal letter of guarantee for a specific amount and for a specified period of time to enable loan finance to be raised from a recognised bank. A major practical problem with a loan guarantee is that, if it is called upon, it would have to be met in full from the current financial resources of the Board. Accordingly, it would have to be considered as a contingent liability in each financial year that the guarantee was outstanding.

Where circumstances of a case dictate that a guarantee is the only available way of providing support, the Board should seek the Department’s agreement to the proposed course of action as early as possible and prior to any commitment by the Board to any applicant. All loan guarantees must be subject to a fixed maximum commitment and must be time limited, not open ended.

Share Capital

5.31Where a project is capable of paying dividends and/or producing a capital gain on a level of share capital in excess of that available from private investors (i.e. below optimum equity), the board may consider subscribing for share capital in the project company. The Board must not in any circumstances become the major shareholder in the property or body corporate. However, before subscribing for share capital, the Board must:

(i)be satisfied that the project can become a major asset to the tourism industry in Northern Ireland;

(ii)be satisfied that the other investors in the project are of sufficient understanding and integrity to be suitable fellow shareholders; and

(iii)obtain the approval of the Department.

5.32Investments in share capital will normally take the form of preference shares, rather than ordinary shares and should be negotiated on commercial terms. This will, therefore, involve agreeing appropriate redemption and coupon terms. It is essential that the terms are structured so as to encourage the redemption of the preference shares as early as possible.

5.33The financial benefit to public finance is potentially twofold:

(i)a regular source of income to the Exchequer in the form of dividends; and

(ii)a repayable capital gain if the project performs well and the shares are redeemed.

This approach can satisfy an important consideration in protecting H.M. Government from facilitating the generation of “super profits in a project by providing financial assistance which, in due course, proves to have been unnecessary.

Coupon Rate

5.34The dividend on the preference shares as calculated by reference to the offered coupon rate should recognise:

(i)current market deposit interest rates; and

(ii)a risk premium appropriate to the nature of the project.

However, in order to encourage the earliest possible redemption of the shares, consideration should be given to increasing the coupon over time e.g. a rate of say 5% for Years 1 to 3, followed by say 7.5% for Years 4 to 5 followed by 10% thereafter. In some circumstances, a zero coupon may be accepted in the early years of a project to avoid increasing cash losses.

5.35In all circumstances, the coupon rate should be fixed at subscription and dividends should normally be cumulative, i.e. when a dividend is not paid, it becomes due for payment in each succeeding financial year until it is actually paid.

Redemption Rights

5.36The right to a redemption premium attaching to preference shares (i.e. repayment of an amount in excess of the original amount invested) should be considered in conjunction with the coupon rate (rate of dividend payable) and will depend ultimately on the project’s ability to redeem the shares out of future cash generation. Where a high coupon rate would put a strain on cash flow in the early years of a project, it may be more appropriate to rely on a high redemption premium to achieve a commercial return on the investment, e.g. an equivalent compound return of say 10% to 15% per annum including coupon and premium.

5.37An escalating redemption premium may be used as an incentive to early redemption which is a TDS objective for all repayable assistance e.g. a premium rate of 10% if redeemed during Years 1 to 5, followed by 15% in Years 6 to 10 and 20% thereafter.

Custodian Rights

5.38The Board should always obtain the right to appoint non-executive director to the board of a company in which it proposes to invest share capital. The approval of the Department is required before a nominee may be put forward for such a position.

5.39The principal role of a non-executive director in these circumstances will be to safeguard the interests of the Board and to monitor and report on the Board’s investment. All directors have certain statutory responsibilities which are outlined in Annex 11 together with a guide to best practice in performing the task. Any nominee should be informed in advance of the obligations of such an appointment and should consider whether personal indemnity cover is appropriate.

Other Rights

5.40A variety of other rights may be attached to preference shares such as;

(i)voting rights;

(ii)rights on receivership / liquidation; and

(iii)rights to receive financial information.

A standard list of the terms and conditions of preference shares is attached at Annex 12. The terms and conditions for all proposed investments in this form should be submitted to the Department for approval.

CHAPTER VIAPPLICATIONS

Introduction

6.1In handling applications for support under the TDS it is essential that a standard approach is applied to each individual case under consideration. The main benefit of a standard or systematic approach is the ability to demonstrate that applications are handled in a time efficient manner, and the Board can be assured that there is a consistency of approach in the handling of applications.

6.2The overriding purpose of the process is to analyse the detail of each proposal, identify strengths and weakness, and test against TDS criteria.

6.3Investment staff should always record fully how decisions were made in each case. While every effort must be made to deal with proposals expeditiously and efficiently, adequate time must be taken to evaluate and appraise projects fully and properly.

Initial Process

6.4Initial enquiries may take a variety of forms including a telephone call to Investment Division, a letter outlining the proposal, or exceptionally a business plan. It is essential that all initial enquiries be dealt with properly, and a written record should be maintained of each enquiry, and the response given. This record should be reviewed regularly by the appropriate Development Executive to ensure that the advice being given is consistent with policy.

6.5On receipt of an initial enquiry, the first decision to be taken is whether the proposal has sufficient worth to merit further consideration. While proposals should not be rejected at Administrative Assistant Officer level, it is in order for such officers, to comment that their experience leads them to believe that a particular proposal would be unlikely to succeed. If the potential applicant presses the point, a more senior member of staff, either in Administration Support Unit or a Development Executive, should be consulted and asked to confirm the initial view expressed, or to suggest an alternative approach.

6.6If it is concluded that an initial enquiry merits further consideration, a letter together with a set of guidelines on financial assistance priorities should be issued. If as a result of this action, the potential applicant wishes to pursue the matter, he/she should be asked to complete an initial application form giving details of the proposal. A copy of the initial application form is included as Annex 13.

6.7Written proposals should be reviewed for completeness by ASU (and if necessary, advice sought from a Case Team) and passed to the Manager responsible for project development, who will allocate them to the appropriate Development Executive. The latter is responsible for deciding if the information provided is adequate, for requesting any additional information necessary and for determining if the proposal as outlined meets TDS criteria. As soon as possible, and with the minimum of delay, a brief submission outlining the proposal should be made to the PDU. (The PAC previously handled smaller cases but this function is currently in abeyance.)

6.8The main role of the PDU is to act as a filter of development proposals, to ensure that all proposals are dealt with in a consistent manner, and in accordance with the Board’s development and financial priorities, and to reach a corporate conclusion as to how projects should be taken forward. In so doing, the Investment Division will be enabled to communicate with all areas of the Board involved in TDS project selection and appraisal.

6.9The PDU, which meets weekly (normally on a Tuesday morning) will consider the submissions put to it and its conclusion and recommendations as to future action will be recorded in minutes which will be circulated to all those concerned. The conclusions of the PDU may entail the seeking of further information, a site visit to clarify areas of doubt, the requirement for completion by the applicant of a detailed application form and a Business Plan, or the recommended rejection of the proposal.

The Investment Committee has delegated authority to PDU to make certain decisions. This is set out in Annex 15. However, in broad terms PDU may reject initial applications where they fall outside the Board’s published priorities for assistance. PDU may request Business Plans on the clear understanding that the costs involved in preparation are the responsibility of the applicant, and that a request for a Business Plan does not constitute a commitment to grant. If a Business Plan is being requested, the extent of information which it should include will be in keeping with the form and amount of financial assistance sought, and the type and size of business concerned. A standard letter seeking a Business Plan is included as Annex14, but the Appraisal Executive should be consulted before issue of such a request to ensure that any special requirements are included. A note of requests for Business Plans should be provided for the Investment Committee’s information. PDU may also approve formal offers of grant within delegated limits (Annex 15). A schedule of cases accepted or rejected should be provided to the Investment Committee in the format in Annex 15.

The Business Plan

6.10The preparation of a Business Plan will be a new concept for many applicants and they may seek help and guidance. The Development and Appraisal Executives should assist as much as possible in identifying the areas which need to be addressed but the onus must be on the applicant to prepare his own plan. Sources of advice and guidance are attached at Annex 17. Indeed the ability and willingness to prepare such a plan is an initial indication of the quality of management.

6.11In de minimis cases, (not exceeding £100,000 of costs) (this to be resolved by DED) the Board may decide that a Business Plan is not required. The Development Executive will then have to liase with the Appraisal Executive to ensure that adequate information is available to enable a meaningful appraisal to be performed.

6.12A detailed Business Plan covering marketing, financial and technical aspects of a project may take 1-2 months to prepare. During this period the Development Executive should keep in contact with the applicant to encourage and assist where possible. Experience suggests that the applicant should get the drawings and costings agreed as early as possible in this process and ideally before the financial elements of the Plan are produced.

6.13While the applicant should already have discussed the financing of the project with his bank, he may now wish to have more detailed discussions and a representative of the Investment Division may be requested to attend such meetings to indicate Board support for the project. While such a meeting could secure (further) private sector funding, care must be taken to avoid any commitment at this stage. The Appraisal Executive should attend all such meetings.

Indicative Offer

6.14In the normal courses of events, indicative offers will not be issued. If however, circumstances dictate that such a letter should be issued, it is important that the applicant understands that the suggested offer of assistance is subject to certain appraisal, consultation and approval procedures and that the Board is not committed until a formal letter of offer is issued and accepted by the applicant. An indicative offer should only be issued with the agreement of the Investment Director, and if necessary after legal advice.

Prior Approval to Proceed before the Board has considered the case

6.15Having had his proposal accepted for further consideration the applicant may wish to commence work on the project. This should be discouraged. If the applicant still wishes to go ahead, the approval of the Board and the Department will be required to allow consideration of the application to continue. If approval is given a letter should then be issued to the applicant confirming that the Board is not committed to providing assistance and that the applicant proceeds at his own risk. Such prior approvals should be the exception, not the rule.

Role of Marketing/Sales and Quality Assurance and Monitoring

6.16The Development Executive with input on particular issues by an Appraisal Executive where appropriate, must ensure that the Marketing/Sales Division, Quality Assurance and Monitoring have commented on the project in writing and included clear conclusions and recommendations (de minimis cases may be excepted). Any outstanding issues highlighted must be followed up by the Development Executive. Annexes 18 and 19 set out the requirements. The Development Executive should ensure that the Investment part of the case paper addresses the issue of whether or not the project is satisfactory in terms of the Board’s marketing strategy, the actual challenge to the assumptions and figures will take place as part of the appraisal.

Submission to Appraisal

6.17Once there is sufficient information for the Investment Division to recommend a project for full appraisal, it should be formally submitted to the Appraisal Unit. However, it is envisaged that the appropriate Appraisal Executive will have been regularly consulted prior to this stage so that any problems likely to arise can be anticipated and addressed if possible. The respective responsibilities of the Investment Division and the Appraisal Unit in preparing the project submission are set out in Chapter VII.

CHAPTER VIITHE FINANCIAL APPRAISAL PROCESS

Introduction

7.1The financial appraisal process will be performed by the Appraisal Unit for all projects. (The marketing appraisal is also the responsibility of the Appraisal Unit with advice as necessary from Marketing Division.) The aim of appraisal is to provide an objective assessment of the project in the context of TDS criteria. Accordingly, the Appraisal Unit (in conjunction with Marketing and Quality Assurance where appropriate) provides an independent challenge function in contrast with Investment Division’s role of project facilitator.

Submission to Appraisal

7.2When the Development Executive is satisfied that support can be recommended for the project in terms of TDS strategic priorities and available budget, the project should be submitted for formal appraisal. The main criteria for which the Investment Division has responsibility are marketability, quality, sustainability (in liaison with Marketing and Quality Assurance), accessibility and TSN. These sections of the Project Report along with the background section should be submitted by the Development Executive to the Appraisal Executive. Casework files should also be submitted and should include, inter alia:

(1)financial information as follows:

(i)last three years’ financial statements (where appropriate);

(ii)most recent management accounts (where appropriate);

(iii)three years’ financial projections (including development cash flow forecast);

(2)evidence of available funding from the private sector in the form of debt and equity finance.

There should be also be a clear comment on management and the project’s contribution towards the development of the tourism industry.

Financial Appraisal

7.3The Appraisal Executive will be responsible for forming a view on the project as a whole including whether it meets the eligibility criteria set out in Chapter III. Therefore the Appraisal Executive will have to evaluate the information and recommendations of the Investment Division in respect of tourism benefits, marketing and quality as well as reaching a view on the more specifically financial criteria, i.e.:

(i)viability:

(ii)efficiency:

(iii)additionality.

7.4The appraisal of management will often be the most important and subjective element of the assessment of viability. Decisions as to whether management have the required skills should be referred to the Investment Committee in all major or sensitive projects. For other projects the assessment of management’s capabilities will rest with the appropriate Development Executive who should duly record the reasons for his decision. Where management have a track record in the industry, the written advice of Quality Assurance should always be sought.

7.5The Appraisal Executive will be expected to challenge vigorously the assumptions underlying the financial projections prepared by the applicants and to be satisfied that the projections represent a reasonable basis on which to determine viability, efficiency and additionality. Appropriate sensitivity analyses should be performed and recommendations tailored accordingly.

7.6The financial viability of a project should be tested in terms of both funding adequacy and maintainable profitability. There are distinct elements to those two indicators of viability which will be evaluated individually by the Appraisal Unit.

1.Funding Adequacy

(i)The evaluation of funding adequacy in a project commences with estimate of pre-startup costs. In a property development such as a hotel, start-up costs in the form of the expenditure on the physical construction, fitting-out and related professional fees represent the largest element of the project’s funding requirement. To these costs must be added the expenses relating to commencement of trading e.g. pre-opening marketing, management placement and staff training. All these costs and expenses are only estimates when subjected to appraisal. Accordingly, realistic contingencies should be incorporated into the overall funding requirement to ensure cost over-runs do not jeopardise the adequacy of the funding plan.

(ii)At this point, the evaluation of funding adequacy becomes inter-related with that of profitability. With hotel and other accommodation projects, however, there is a transitional period of up to three years before “stable trading” is achieved. Consequently, it is vital that financial projections of trading profits (or losses) for that period are tested for reasonableness and sensitivity analyses are applied, as appropriate.

(iii)This approach is intended to provide the most accurate evaluation of funding requirement for a project. It should always be recognised that it is not possible for any promoter to apply precision to an estimate of funding requirement. With a reasonable degree of contingent funding in the overall requirement, the possibility of running out of available funding should be minimised.

Once the overall funding requirement is established, the available sources of funding can be assessed to determine their adequacy to cover the requirement. At this point, the additionality test (which is applied to ensure that the minimum amount of selective financial assistance is made available to a project) is taken into account. For private sector projects, funding in the form of private sector equity and debt finance should be an integral part of any funding plan alongside the proposed public sector finance.

In the case of public and voluntary sector projects, the Board should

always seek to maximise the contribution by the promoter.

2.Maintainable Profitability

(i)The measurement of profitability in hotel projects should be made easier by reference to industry standards in respect of sales mix, departmental contribution and gross profit. Nevertheless, each project requires individual assessment by the Appraisal Unit.

(ii)The appraisal of future profitability in any project is based upon a robust challenge of the main assumptions underlying the relevant profit projections. For example, the most significant areas of uncertainty in a new hotel project are likely to be in respect of sales mix, room yield and staff costs. Areas of uncertainty will be subjected to sensitivity analysis to ascertain the possible effects on profitability (and, indeed, funding through cash flow from trading.)

(iii)It is important to recognise that the overall appraisal of profitability draws upon specific assessments of the project’s operations e.g. management capability, marketing prospects, financial strength, etc. Of these, the two most viable relate to the management and marketing functions. The Appraisal Unit draws upon knowledge of any prospective management team from all parts of the Board. The appraisal of the marketing function is more systematic with direct reference to the marketing appraisal to which every project is subjected.

(iv)For a project to have a realistic prospect for maintainable profitability, the Appraisal Unit shall review up to ten years’ projections. A trend of stable profits extending over a number of years will be sought sometimes following 2/3 years initial losses.

Capacity to Cover Revenue Costs in Public/Voluntary Sector projects

(i)The capacity to cover revenue costs may derive entirely from projected trading surplus, from an assurance of deficit funding as might be required or from a combination of surplus and deficit funding. Each project will therefore require individual assessment by the Appraisal Unit.

(ii)Where surpluses are projected, the appraisal of this is based upon a robust challenge of the main assumptions underlying the relevant projections. Areas of uncertainty will be subjected to sensitivity analysis to ascertain the possible effects on profitability (and, indeed, funding through cash flow from trading).

(iii)It is important to realise that the overall appraisal of the capacity to generate surpluses draws upon specific assessments of the project’s operations e.g. management capability, marketing prospects, financial strength etc. The Appraisal Unit draws upon knowledge of any prospective management team from all parts of the Board. The appraisal of the marketing function is more systematic with direct reference to the marketing appraisal to which every project is subjected.

(iv)For a project to have a realistic prospect for maintainable surpluses, the Appraisal shall review up to ten years’ projections. A trend of stable surpluses extending over a number of years will be sought, sometimes following 2/3 years initial losses.

(v)To the extent that the capacity of a project to over revenue costs derives from an assured source of deficit funding, the promoter must provide satisfactory evidence of this. A letter from a local authority, other public body or a grant making charitable trust should normally suffice, provided it is couched in specific terms. Any doubt in this matter must be removed before viability can be satisfied.

7.7When assessing efficiency, the Appraisal Executive will require the input of the Development Executive on the qualitative considerations outlined in paragraph 4.14 above.

7.8The amount of assistance required to satisfy viability and additionality criteria will be established by the Appraisal Executive, and appropriate terms and conditions should then be determined in consultation with the Development Executive.

7.9The Appraisal Executive will be expected to lead the negotiating process at this stage. The aim will be to achieve the best possible funding plan for all parties while ensuring that the project goes ahead to a specification acceptable to the Board.

7.10Specific conditions and monitoring arrangements should be discussed and agreed by all parties, including the applicant and his bankers, at this stage. Some standard and specific conditions relating to offers of assistance under this scheme are included in the specimen Letter of Offer at Chapter IX.

7.11Once the Appraisal Report has been completed, an Executive Summary can be drafted for submission of the final Project Report to the Investment Committee.

External Consultants

7.12External Consultants may be engaged to provide specialist opinion or to avoid a backlog of projects awaiting appraisal. Where the engagement relates to the financial, marketing or economic appraisal, the appointment of external consultants shall be the responsibility of the Appraisal Director. All such engagements must be subject to an agreed letter of engagement and will normally be subject to established public sector tendering procedures. (See Annex 32).

CHAPTER VIII SUBMISSION TO THE INVESTMENT COMMITTEE AND PDU ACTING WITH DELEGATED AUTHORITY

Content of Submission

8.1The objective of a submission is to present as clear and comprehensive a picture as possible of the project. The strengths and weakness of the project should be discussed and a recommendation made on the form and amount of assistance.

8.2The project submission (in the form of a Project Report) should be prepared according to the standard format set out in the summary attached as Annex 20. Where the opinions of specialists are referred to, it should be clear as to who the specialists are, for whom they are acting and when they reported their opinion; written evidence of all such specialist reports, whether by personnel within the Board or External Consultants, should be retained on the casework file.

8.3The main headings to each report should be:

Part OneProject Overview/Summary

Part TwoProject Recommendation

Part ThreeProject Appraisal

Process

8.4The Investment Committee will usually meet once a month. Project Reports for consideration should be with members one week before the date of the meeting. Case papers must be available to the Investment Director 5 working days in advance of the date they are dispatched to Board Members. This is essential to allow them to be reviewed by the Investment Director and Chief Executive and copied and collated by ASU for dispatch.

8.5Both the Development Executive and the Appraisal Executive should attend the Investment Committee meeting with the former undertaking the main role presenting the case.

8.6The discussions on each case must be fully minuted and copied on to each case file as well as a centrally held Investment Committee minutes file. The minute should include a note of any queries and/or reservations by the Committee and how these were addressed and resolved. The Committee’s decision and the agreed action points will be recorded in a standard format as set out in Annex 21.

Submissions to the Department

8.7Cases requiring submission to the Department are identified in Annex 22. In all such cases those aspects requiring approval should be highlighted within the “conclusions and recommendations” section of the report. Notification to the Department should be as early as possible. The process of notification followed by a formal request for approval is also detailed in Annex 22.

Delegated Authority Cases to the Project Development Unit

8.8Annex 15 sets out the role of the PDU in delegated authority cases and the Delegated Limits. While one of the purposes of this delegation is to avoid the considerable administration included in taking a case to the Investment Committee and to avoid overwhelming the Committee with small, standard cases; it nevertheless remains that all cases processed under the rules of the TDS Scheme must be handled within the rules of the Scheme and with the same care and diligence as cases going before the Investment Committee.

CHAPTER IXLETTER OF OFFER

Letter of Offer

9.1It is important to take time to ensure that Letters of Offer are accurate, concise and checked. A Letter of Offer is a formal legal document which creates binding obligations enforceable against the Board. If the Board or any party to a Letter of Offer acts to the detriment of the other party then a liability exists. Annex 29 Part IV sets out the process for drawing up a letter of offer. Annex 34 contains the signing off pro forma. A copy of this pro forma and the amended version of the draft Letter of Offer should be retained on file.

9.2Letters of Offer must be adapted to particular circumstances but should have three qualities.

LOGIC

look for what does not apply and what needs added

PRECISIONevery Letter of Offer should be as precise as possible

COMMON SENSEthis forms a major element of the content of a Letter of Offer. Are conditions applicable or are they REASONABLE. – this is important in ascertaining if they have been complied with.

Issuing Letters of Offer

9.3Letters of Offer should be addressed to the person controlling the asset. It is crucially important to get the legal entity right. Likewise, Board Officers should check to ensure that whoever signs and accepts the Letter of Offer on behalf of the recipient is empowered to do so.

9.4If there are three names in the offer, all three individuals bound by the offer must sign. If the offer is to a limited company it must be signed by two Directors or Secretary in authority. In a partnership, normally one person has authority on behalf of the others.

(i)Partnerships are governed by law and it is not normally necessary to seek a copy of the partnership agreement. If the promoters own the premises to be developed jointly then they are already bound in.

(ii)If only one partner owns the premises there could be difficulties. In this instance NITB should request a letter from them stating that they have agreed to carry on the business together as and that the premises will be regarded as a partnership asset. This is all that is needed

9.5If a Letter of Offer is issued in DRAFT, make sure DRAFT is written on it.

Amending Letters of Offer

9.6It is possible to revoke an original Letter of Offer and issue a new one. This is the preferred method if there are a substantial number of alterations. If the alterations are MINOR, the amendments can be made by letter referring to the amended Letter of Offer.

9.7It must be recorded formally that an amendment has taken place and the applicant has accepted it. The applicant must be warned to keep the amendment with the original Letter of Offer and the Board should also mark the original Letter of Offer in pencil showing the part that has been altered.

9.8The ap