- A case study in stupidity -
16th July 2023
After seven years of trading, Cambridgeshire County Council’s (CCC) wholly owned property development company, This Land Ltd, has accumulated losses of £36.3 million and has outstanding loans payable to the council of £113.8m.
According to the latest available audited accounts for 2021/22, CCC only has security against that debt to the tune of £44m of land purchased with those loans. In recent months however, it has made attempts to rationalise the charges over This Land to include the remainder of the company’s dwindling assets. The council is still left with substantial unsecured loans to its subsidiary.
In This Land’s latest annual business plan, published just a day before last week’s Strategy and Resources Committee meeting, the comprehensive loss for 2022/23 is projected to be £9.3m.
At that meeting, in addition to receiving sobering news about inflation, rising interest rates and a challenging housing market, members heard from CCC’s new Chief Finance Officer, Michael Hudson, who outlined what to expect in the foreseeable future:
“we are expecting to receive imminently… further changes to the capital regulations as a result of a number of commercial failures at other local authorities.”
“we will be carrying out a further economic review… that will pick up a number of these changes as well as the position for advising us as shareholders in terms of the economic viability of the company.”
In September 2022, despite hearing about the well-publicised failures of other council-owned property companies over recent years, external auditor Ernst & Young (EY) at last expressed concern about the Council not recovering the money it lent to This Land Ltd. In the audit plan for the 2021/22 audit, recovering the £114m debt owed by This Land was described as a new and significant risk. Mr Hodgson, EY’s audit partner went into more detail to members:
"…a significant risk around the debtor associated with This Land which links to working capital loans made to your wholly owned subsidiary. There has been some significant press coverage of both This Land and other housing-related subsidiaries in the country and their ability to repay the borrowing to which they have been afforded. And in light of that we will need to review the business model that This Land has via the component auditor, their going concern assumptions, and therefore their ability to repay the £113 million that is currently outstanding at the 31st of March [2022] - and discuss with management the need for any impairment over that balance because of any recoverability issues."
The statutory deadline for finalising the 2021/22 accounts was November 2022, over 7 months ago as of this date. This Land’s latest business plan does not mention any of its debt being written off, though arithmetically it is difficult to see how This Land can repay it all, especially given its commercial performance to date and the economic headwinds it is likely to face for years to come.
If the council does decide to write off some or all of the £114m debt, or pull the plug on the company altogether, the blame cannot be put on recent government regulations, or Covid-19, or the economic climate. The real damage was done at the outset, in the way the company was set up in 2016, and the absence of effective scrutiny or governance since then from elected members serving on key council committees. The details are all accessible in the public record on CCC’s website.
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This article looks at how This Land was set up in just three weeks in 2016, and what its purpose was.
No detailed business case, no consultation.
At the May 2016 Commercial and Investment Committee (C&I) chaired by the disgraced former CCC Deputy Council Leader, Cllr Roger Hickford, members were presented with a report by the CFO (Chris Malyon) and Monitoring Officer (Quentin Baker), recommending that members request the Monitoring Officer set up a wholly owned subsidiary company to develop residential and commercial property “with a view to generating capital and revenue income for Cambridgeshire County Council”.
The report claimed to contain an “outline business case” for the initiative, but it lacked any meaningful detail and could be described as wishful thinking at best. The proposed company was described as a Housing Development Vehicle (HDV). The official minutes for the meeting record councillors stating that “the HDV would need to be based on a very detailed business case being agreed”.
But that never happened.
Despite some members expressing misgivings (see below), the committee voted unanimously at that meeting to allow the CFO and Monitoring Officer to set the company up and appoint directors.
Three weeks later the Cambridgeshire Housing and Investment Company (CHIC) was incorporated on Companies House. The CFO and Monitoring Officer duly appointed themselves as the only two directors. There was no detailed business case, no long-term business plan, and the initiative was not put out for public consultation, contrary to Section 3 of the Local Government Act 1999 and the Secretary of State’s Statutory Guidance.
In the outline business case, the CFO explained his reasons for CCC’s sudden interest in building houses:
"In view of CCC’s land holdings, and the currently extremely buoyant economic conditions for housing development, there is an opportunity for CCC to develop its own land rather than sell it. Simply selling sites for others to develop, and profit from, is no longer an option for CCC. The scale of the financial challenges facing CCC requires that it has to review every opportunity available to it in order to create an on-going revenue stream that can mitigate the reduction in the services that it otherwise would have to make.
The vision is to transform CCC from being a seller of sites to being a developer of sites. CCC is therefore developing, and delivering, a series of principally residential development projects from its property portfolio across Cambridgeshire, planned over an initial 10-year timescale.”
He went on to explain how the start-up company could generate immediate revenue, years before any houses were built and sold:
"The nature of housing developments is that there is a significant time lag from the point at which sites are identified until the point that a revenue stream is created. One way of ensuring that revenue is received by CCC much earlier in this cycle is for CCC to establish a market loan to the HDV. The HDV needs to borrow at market rates in order to avoid state aid regulations but CCC can borrow at far more competitive rates from the Public Works Loan Board [PWLB] and take the margin on the loan in to CCC’s revenue account. CCC will therefore gain approximately 3.0 to 3.5% on everything it lends to the HDV from the point at which the loan is made, not when sales or rents start to be received by the HDV. This will mean that the HDV will be making substantial losses for many years. This is not of concern as this will be within the financial model and long-term business plan of the HDV."
The confident prediction of substantial losses duly materialised over This Land’s first seven years, with a further £3.6m comprehensive loss predicted for the financial year to March 2024.
The Housing Development Vehicle was thus conceived by the council’s CFO with a structural and perverse incentive for the council to disregard the company’s performance in favour of maximising lending to an “arm’s length” subsidiary company of which he was the de facto Finance Director.
Under the proposed mechanism, the more public money the council lent to This Land, the greater the apparent revenue that would flow back into the council to fill any budget gaps in the provision of local services.
Until recently, open-ended borrowing at preferential interest rates was available to councils through the PWLB (which apparently asked no questions), perhaps encouraging some of them to give up looking for real, tangible savings elsewhere. The CFO’s conflict of interest was not discussed by members on that occasion. It is the subject of a separate post to be published shortly.
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Key questions follow from the proposal to lend large sums of public money to a wholly-owned start-up company operating in a sector where the council has no track record:
1) What is the company’s primary purpose? - developing homes or creating an illusory revenue stream for the council?
2) Is a high-risk, high stakes commercial gamble an appropriate use of taxpayers’ money?
3) How credible/detailed/sufficient is the outline business case as a decision making document?
4) In the anticipated loss-making years or decades, how would This Land generate the funds to keep up interest payments to the council?
5) Does the council have sufficient effective oversight?
6) Does the council understand what it committed itself to?
In answer to question 1, the focus on revenue generation over commercial performance was reiterated in the official minutes for that May 2016 meeting:
“Officers advised that they did not expect the HDV to make a profit for some time, maybe even for decades, although the income for the Council would be realised straight away.”
Its primary purpose as a revenue-generating vehicle is reflected in the lack of detail in the outline business case, and the council officers’ lack of concern, recorded in the business case itself above, about the prospect of making substantial losses for many years.
“Making money out of nothing”
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In discussing the proposal, one member had misgivings about the revenue-generating mechanism:
“A Member spoke in favour of the direction proposed, given his experience as a member of another property board for a LA with considerable assets. However, he felt that the risk already highlighted of government changing legislation, and ultimately the returns to the LA reducing, was a very real one, which needed to be evaluated. He also pointed out that the simple business model presented gave the impression of “making money out of nothing”, which may appear to be the case for the Council’s revenue account, but it did have significant cashflow implications. He asked if enough was known about the Council’s future cashflow predictions, and sought reassurance that the Council would not go illiquid. Officers commented that this was a valid point, and the level indebtedness would significantly increase, albeit to an acceptable level, as construction costs would require upfront funding, and this would be reflected on the Balance Sheet.”
The above comments show that at least one member was dimly aware that if This Land’s interest payments to the council have to be sourced from additional CCC borrowing from the PWLB and lending on to This Land, rather than generated from This Land’s own economic activity, then no net revenue is produced for the council. It is just an accounting trick that provides the illusion of revenue. The practice, not unlike a Ponzi scheme, has now been outlawed by the government.
The illusion though has remained in the minds of some councillors, as this contribution to the C&I Committee from Cllr Boden in October 2020 illustrates:
“The first thing is, I think many, if not all the Committee will have had the benefit of an email from Mr Rowson that was sent yesterday concerning various other councils and their attempts to raise money through commercial and investment processes. And I think that that is an extremely helpful thing for all members to read if you haven’t yet read it, because it shows just how things can go wrong if they are set up in the wrong way, and are not properly monitored and any problems addressed, or if attempts are made to overreach. And I think it’s really important because this is something which officers and members in this council have learned from. We’ve learned from the mistakes in some other local councils – and I’m not going to name any specific names, but there are some dreadful ones in addition to those which have already been highlighted by Mr Rowson in his email.
And we have learned those lessons and we will make sure that we in Cambridgeshire don’t make some of the same mistakes that have been made elsewhere.
So far as this agenda item is concerned, I think that from our point of view in this Committee it’s important to bear more in mind than just the published figures of This Land Ltd. We’ve set This Land Ltd up in order to be able to act in a commercial way – to be able to achieve certain objectives at arm’s length from the Council.
We obviously have an interest in the performance – the financial performance of This Land Ltd. But the interrelationship between this Council and This Land Ltd is of really vital importance. And that isn’t really reflected in the figures of This Land Ltd, but relates to the fact that first of all we are receiving significant amounts of interest from This Land Ltd which assists us significantly in revenue terms.
And secondly, we are effectively in some respects converting capital into revenue through what we do in This Land – which is also of benefit to the Council. So when we’re looking at the effectiveness from this Council’s point of view of This Land Ltd, we don’t just look as though we’re an investor at the figures that This Land produces. We also have to look at how else we benefit as a council. And I don’t think that that point always gets across very well, and it’s fairly clear from Mr Rowson’s question that it doesn’t get across to the public as well as it should do.”
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In February 2018, nearly two years after CHIC was incorporated, the company’s directors changed its name to This Land Ltd, to the apparent surprise of members of the C&I Committee. Selected passages from the minutes of that month’s C&I Committee meeting suggest a growing tension between This Land’s directors (including CCC’s former CFO and former Monitoring Officer) and the members charged with governance over This Land Ltd. A discussion began about the share of affordable homes planned by This Land:
- A Member remarked that the This Land brochure heavily featured upmarket images which suggested that affordability was not one of their main drivers. The Chairman [Cllr J Schumann] pointed out that the point of the proposals/housing vehicle was to generate as much income to support services for vulnerable residents as possible...
- A Member commented that the mitigation table in the report was lacking in the assessment of key risks, such as ‘Building Cost escalation’ and ‘Significant planning consents not obtained’: the Member felt these may get worse, and there should be greater risk assessment of the level of risk after the mitigation had taken place. Officers responded that they were comfortable with the risk assessment and mitigation information presented, which acknowledged that costs would increase, but accepted that these risks needed to be presented in a more developed way…
- A Member queried whether This Land had the authority to change its name, or whether that should have been a decision for the County Council as the shareholder. The Monitoring Officer confirmed that the company was entrusted with the day to day running of the company, and whilst there were various reserved rights for shareholders i.e. powers that cannot be exercised, change of name of the company was not one of them – the Board of Directors had the authority to change the name. As Directors, the Monitoring Officer and Deputy Chief Executive had agreed to the change of name. Moreover, Committee Members had all been invited to the rebranding event, and whilst there had been comments around the name, at no point had Members given any indication that they had strong objections to the change.
- A Member commented that the Committee was being asked to agree to the transfer of very substantial assets to a company when Members do not fully understand the reporting and governance arrangements: a workshop on these issues has been promised but had not happened. The Committee was unaware of the name change/ rebranding until the invitation to the relaunch event. The Member suggested that the decision be deferred pending the workshop being carried out. Another Member agreed, saying that this proposal was effectively being presented as a fait accompli, and she reiterated her concerns on the Risk Register and mitigation of the risks presented."
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The Monitoring Officer and Deputy Chief Executive reassured Members that they took their roles very seriously, especially in ensuring the governance of the organisation was carried out in an appropriate way. Operational issues were the responsibility of the This Land Board: the Committee was not running the company. The Committee had appointed the Managing Director and shareholder representatives.
Whilst the workshop on governance and reporting processes had not yet taken place, the Committee had had a workshop on the processes involved in the portfolio transfer, and there was no lack of transparency or openness on how that process was taking place.
In response to a Member question, it was confirmed that the Committee did not normally have the right to the commercially confidential minutes of the Board of Directors, but the Directors and Managing Director would be happy to talk to Members as shareholders…
- A Member highlighted that the Committee was in unchartered territory, and whilst This Land clearly had a clear business plan, there was nothing to compel them to realise their objectives, and the company had no mission statement, vision or values. The Deputy Chief Executive commented that those issues had been set out in their Business Plan, specifically about how the company sought to differentiate itself. He stressed that the Council’s role as shareholder meant that they could not compel the company to deliver a certain percentage of affordable housing – if the Council did that, the dynamic would change, and the relationship would become contractual, which would have implications for the company’s ability to operate in a commercial environment…
- A number of Members commented that they were uncomfortable about agreeing the portfolio sale before the workshop on governance and reporting arrangements had been carried out, and it was agreed that the workshop would be arranged as a matter of urgency. Action required. The Chairman commented that the arrangements with This Land had not changed since the company was set up.
Conclusions
Seven years ago Cambridgeshire County Councillors were conned, or bullied against their better judgement by two of the council’s three statutory officers to commit to an open-ended commercial venture on the strength of a false prospectus – the promise of £6m or so of additional revenue for the council each year that came from the difference between the PWLB’s preferential lending rate, and the commercial interest rate CCC could charge its subsidiary “to avoid state aid regulations”.
CHIC was set up with complete disregard for the legislation and statutory guidance, and without undertaking any of the common sense procedures set out in the recently updated Local Authority Company Review Guidance.
In February 2018 the CFO and Monitoring Officer tightened their grip on the company they renamed This Land Ltd, leaving councillors ill at ease and largely in the dark. The company continued to feast on taxpayers’ money from additional loans from CCC, but without producing any revenue of its own.
The government eventually felled the magic money tree by curtailing councils’ ability to borrow for yield from the PWLB. This Land then turned to selling large parts of its property portfolio (purchased with borrowed money) to third party developers, but without repaying the mortgage.
Selling land to developers is precisely what the former CFO said in 2016 was no longer an option. In recent years the company has effectively been cannibalising itself to stay afloat.
CHIC/This Land was incorporated under benign economic conditions. Today, having squandered time and large sums of public money its options are much more limited and its headroom for error or contingencies non-existent. If it is to recuperate those losses, it will need to make substantial profits in the coming years in a probably sustained and hostile economic and commercial environment. This Land’s track record to date does not inspire confidence.
Other council-owned property companies that have made similar mistakes, such as Croydon’s Brick by Brick, are still suffering financially years after the decision to wind the company down.
This Land claims it is still on track to repay the £113.8m it owes CCC and recoup the £40m cumulative losses before the end of the decade. If it achieves that it will be a minor miracle. After looking at the facts and at the promised new independent review, it is to be hoped that CCC’s new CFO, (who had nothing to do with This Land’s history), will make a sober assessment of where we are and prioritise taxpayers’ money over politicians’ obsession with reputation management.
But if This Land is to be put out of its misery, the councillors ultimately responsible for allowing this to happen should be named and shamed and held accountable, along with the two officers who left the council several years ago. Finally, the two firms of external auditors (BDO and EY) who did and said nothing about This Land until last year must answer for their absence of professional scepticism and judgement after they were repeatedly presented with the relevant facts.
Future posts will reveal how some of the millions lent to This Land have been spent, and how at least £7.5 million worth of “administrative expenses” has been concealed from members and the public.
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