Robbing Peter to pay Paul?

 By Andrew Rowson

Question:

 When does Cambridgeshire County Council (CCC) transact with its wholly owned housing company on an arms-length basis, respecting the strict state aid regulations?

Answer: 

Only when it served the former Chief Finance Officer’s purposes by borrowing nine figure sums at preferential rates from the Public Works Loan Board, and lending on to its housing company at much higher “commercial rates” for it to purchase surplus land from the council.  For the last seven years the council has been pocketing the difference to fill large holes in its revenue budgets with illusory revenue instead of doing the hard work of finding proper, tangible cost savings.

In December 2017, after slower than expected land sales to This Land Ltd, CCC was already £750,000 behind schedule in receiving loan interest from its subsidiary, (originally named Cambridgeshire Housing and Investment Company Ltd – CHIC).  This Land had not yet needed the loans from CCC.  This was a problem not for CHIC/This Land, but for the council’s CFO, who had already banked on that loan interest income to balance his budgets.  The problem was fixed, reportedly at the behest of This Land Managing Director David Gellings, by both parties agreeing to a mega portfolio sale of council land to the subsidiary, requiring a loan or loans totalling £113.8 million within the year, that would bring in net interest revenue of over £6 million annually for the council, thus easing the CFO’s budget concerns.  The fact that the CFO was also This Land’s first director and possibly conflicted in his dual role was not officially recognised until four years after This Land’s incorporation.

Reports to members of the council’s Commercial and Investment Committee in December 2017 and February 2018 set out the provisions and safeguards to ensure that This Land was not getting an unfair advantage over other developers, and that public money was protected, to comply with s123 of the Local Government Act 1972:

“Except with the consent of the Secretary of State, a council shall not dispose of land under this section, otherwise than by way of a short tenancy, for a consideration less than the best that can reasonably be obtained.”

The provisions included:

•  Lending to This Land at “commercial interest rates” for secured loans
• Valuations of land to be provided by a single valuer - Savills.  Land without planning consent would be valued at up to a 70% discount with respect to Savills' opinion of its value with planning consent.  Members rejected the proposal to seek second valuations on the grounds that, even at the cost of just £1,500 per site, "it was questionable whether this was a good use of taxpayers' money".
• "In order to protect the Council's interests, as much of the enhanced value as possible will be recovered using overage clauses applied when planning consent has been obtained, subject to CHIC's reasonable costs being deducted."  The extent of the council's claw back on the onward sale of land with planning consent was later confirmed in an independent report by Avison Young in 2021 to be 100%.,
• "recovery of investment in event of sale of asset."  In other words, the outstanding balance on the loan would need to be returned to CCC if/when This Land sold any land to third parties - exactly the same way that home mortgages work.

These provisions meant that if This Land purchased council land at a discounted value, and later sold it at much higher price after obtained planning consent, it would obtain no financial benefit because practically the entire proceeds would have to be returned to the council.  This makes perfect sense because CHIC/This Land was not set up to trade in land, but to build and sell houses for a profit, as the CFO clarified at the very start in May 2016:

“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.”

According to the CFO, the legal advice on the above provisions came from solicitors Bevan Brittan LLP, and also from LGSS Law Ltd, the council’s part owned subsidiary legal firm whose managing director was also CCC’s Monitoring Officer (statutory legal officer) and the second This Land non-executive director, alongside the council’s Chief Finance Officer.  No elected Member is on record as having challenged that apparent conflict of interest.

Under this arrangement, council taxpayers’ money appeared safe because of the land security over the loans and the overage clauses.  This Land meanwhile was immediately lumbered with a nine-figure debt on which it immediately had to pay commercial interest, but with no house sales in sight to provide the funds to service that debt.

Two years later, This Land completed its fourth financial period (to 31 December 2019) still with no house sales, resulting in an in-year comprehensive loss of £11.8 million.  Around half of that loss was accounted for by the loan interest burden, £5.14m of which was still unpaid at the year-end date.  This Land’s second business plan was not working.

Cheating taxpayers three times over?

By 2020, CCC was aware the rules on councils borrowing from the Public Works Loan Board for yield were about to change.  That was because so many councils, like CCC, had exploited the interest rate differential and made similar, reckless commercial investments.  In November 2020, the Treasury published its response to a consultation on changes to PWLB lending terms:

“In recent years a minority of local authorities have borrowed substantial sums from the PWLB to buy investment property with the primary aim of generating yield.  The National Audit Office estimates that local authorities bought £6.6bn of investment property between 2016-17and 2018-19.  The government is clear that this is not an appropriate use of PWLB loans.”

Seven months earlier, on 24^th April 2020, anticipating the felling of the magic money tree, CCC’s Commercial and Investment Committee approved a third This Land business plan in private session, with press and public excluded.  The first the public knew of it was fifteen months later, when some (not entirely accurate) details appeared in CCC’s draft 2020/21 accounts.  More details emerged only in January 2022, with the publication of Avison Young’s Shareholder Review of This Land.

In short, the revised business plan removed all the taxpayers’ safeguards from 2018, and turned This Land from a housebuilder into to a land promoter, apparently cheating local taxpayers in three respects:

1. Gone was the need to repay the mortgage balance when former council-owned land was sold on to a third party.  With those sales, CCC lost its loan security.
2. Gone too were all overage payments, pre-exemption rights and restrictions in the funding agreements, apart from a promise by This Land to pay a single overage payment of £2.125m before 2023.  It is not yet known whether that payment was made.
3. With the nine-figure, long term loans still unpaid, the loss of security from the onward sales turned secured loans into increasingly unsecured loans.  Unsecured loans in the real world cost more to service than loans secured on property.  However, This Land’s last three audited accounts show the weighted average interest rate on the loans remaining at 7.35%, so no interest rate hike to reflect the higher credit risk for the council.

CCC's 2020/21 accounts presented these changes as if throwing away millions of pounds of taxpayers’ money was normal and acceptable conduct:

“Amongst the revisions was a commercial decision by This Land to dispose of a number of assets: refocusing on those of an optimum size and position for the company. By 31st March 2021, five disposals had been made and further disposals were completed during 2021-22. The sales have progressed in a relatively buoyant housing market, thus allowing the company to maximise returns and select the best timing and circumstances for individual sales. The proceeds from these disposals have put the cash flow of the company into a position where less borrowing has been needed from the Council than previously anticipated during 2020-21.”

The effect of CCC agreeing to This Land’s wishes and jettisoning all the previous safeguards is not limited to the squandering of taxpayers’ money connected to the mortgaged land sold on by This Land.  The addition of “land promotion” to the list of This Land’s activities, plus raising the lending limit from £120m to £150m means that This Land has ample opportunity to exploit the absence of safeguards to generate super massive profits at the expense of public funds being lost.  To take an extreme example, by selling on land bought at a 70% discount, if This Land were to repeat that process twice more, it could in theory make a thirty-six-fold “profit” at taxpayers’ expense in a relatively short space of time, as in the following hypothetical scenario:

1. This Land borrows £1 million and purchases land from CCC worth £3.33 million with planning permission (i.e. at 70% discount).  It obtains planning permission and sells the land for £3.33 million to a third party.
2. It reinvests all the proceeds by purchasing more land from CCC worth £11.11 million with planning permission (70% discount).  It obtains planning permission and sells the land for £11.11 million.
3. It reinvests all the proceeds by purchasing more land from CCC worth £37.04 million with planning permission (70% discount). It obtains planning permission and sells the land for £37.04 million.

At the end of the process, This Land has cash assets of £37m which, after repaying the £1 million seed loan plus interest, and incurring the cost of securing planning consent, is pure profit.  Meanwhile £51.5m worth of council land has been sold for just £15.44 million, producing a loss of £36 million for the council.  Thus, by applying a rinse-and-repeat laundering process any number of times, The current arrangement between CCC and This Land means that the council can be stripped of a substantial share of its valuable land assets, whilst This Land pretends it is reversing historical losses and becoming a profitable business through its own legitimate commercial activity.  There is huge scope for fraud by means of This Land effectively selling council land at a discount to disreputable third parties whilst still making super massive profits for itself.  Following the 2020 business plan arrangements, This Land is being offered land at a substantial discount by its shareholder who is evidently keen to reverse the £38.35m losses made to date.  To avoid the embarrassment that would come from This Land going bankrupt, CCC seems prepared to go to any lengths to subsidise its failing housing company, whilst still asserting that it contracts with This Land on an arm’s length basis.  The waiving of all the previous safeguards is proof that the current relationship is anything but at arm’s length.

Local taxpayers have no assurance that Savills’ valuations are fair, or that the discounts of up to 70% or more (see below) reasonably reflect the risk of not obtaining planning consent.  There is no transparency.  Savills has been a regular supplier of services to the authority for at least the last fourteen years.  CCC’s published payment data show that it has paid Savills over £1.4 million since July 2010.  Elected members’ decision in 2018 not to seek any second valuations despite the modest costs involved (£1,500 per site) is highly questionable. 

 

Questions for This Land Ltd and Cambridgeshire County Council

Given the facts, This Land’s current precarious position, which at long last CCC is beginning to wake up to, and the welcome commitment to greater disclosure in the published Shareholder Agreement, CCC needs to address the public’s valid concerns about This Land’s relationship with its shareholder and state aid.  In recent years, such questions have been put to county councillors serving on the relevant committees, buy they have never been answered.

The table below is compiled from information in This Land’s audited accounts on Companies House.

After its incorporation in 2016, the fifteen-month accounting period from January 2020 to March 2021 was the first in which This land reported any revenue (other than token rental income).  In its fifth set of accounts, it reported £1.1m of house sales (two homes), and £18.2m of land sales.

In each set of accounts, even the latest 2022/23 accounts, the notes refer to the long-term borrowings as “secured borrowings”.  However, as This Land has sold more and more mortgaged land without repaying the mortgages to the council, (the £113.8m loan liability remains unchanged), the accounts also show the council’s security levels falling from £80.5m to £43.5m in three years, now representing just 38.2% of its lending exposure. The reality is that until the company’s charges were revised in May 2023 to cover all This Land’s assets, and not just land, nearly 62% of This Land’s borrowing was unsecured.  Yet, as noted above, the weighted average interest rate charged on the loan has remained at 7.35% for the last three years.  That suggests that interest rates have not risen to reflect the increased risk to the authority of being exposed to £70 million of unsecured lending becoming irrecoverable, something the auditor stated in September 2022 was a significant risk.

In the interests of transparency and the public interest, here are some questions CCC and/or This Land need to answer:

1. How can CCC maintain it is complying with s123 of the Local Government Act 1972 when, by removing all overage clauses and the obligation on This Land to repay CCC its investment in the event of subsequent land sales to third parties, CCC is demonstrably not disposing of land for the best consideration that can reasonably be obtained?
2. Does CCC still obtain land valuations from a single source?  If so, does the authority believe that is in the public interest, and does it believe it is transparently so?
3. When CCC conceded to This Land’s wishes and agreed to waive all the financial safeguards in the April 2020 revised business plan, did it seek further legal advice, or was it purely a political and commercial decision with no legal input?
4. Does CCC dispose of its land to any other third parties in this fashion?  If so, have the safeguards also been waived, opening CCC up to further risk of squandering public money and assets?
5. Do CCC and This Land recognise the risks and concerns set out in the repeated buying and selling of discounted land scenario shown above?  What is their response to those concerns?
6. Will CCC and/or This Land now produce a schedule showing the following information for each piece of land CCC has sold to This Land Ltd since 2016:    

a.       Name/identity of land,

b.       Name of valuer – e.g. Savills or other,

c.       Whether or not the land had planning consent at the time of the original sale to This Land, or whether planning consent was agreed subject to a S106 agreement,

d.       The valuer’s estimate of the land with planning consent,

e.       Price paid by This Land for the land, and date of sale, with the discount percentage stated,

f.        Whether This Land has obtained planning consent since it purchased the land,

g.       Whether This Land has subsequently sold the land to a third party, and if so, what was the date of the sale and the sale price agreed.

The above list does not include the names of the purchasers, though that could be identified from a Land Registry search.  It is hard to see how any of the above information could be commercially confidential given the circumstance of the land being offered to This Land Ltd before any other interested parties.

The above information is essential to reassure the public that the business of disposing of council land is being conducted properly, and not in breach of s123 of the Local Government Act 1972.  Given the magnitude of the sums involved, the overwhelming public interest in disclosure should override any commercial confidentiality argument for keeping the information secret.

One statistic that highlights the public’s concerns is the final row of figures in the table above.  It would appear that This Land Ltd’s land sales in 2022/23, totalling £11.99m were for land previously purchased from CCC for just £990,000, since that is the corresponding drop in the disclosed land security from the previous year.  If that twelve-fold higher revenue reflects the land’s fair value with planning consent, that suggests This Land secured that land from CCC at a discount of around 92%, not 70%, with a corresponding loss to the council (and therefore local taxpayers) of more than £11 million, to add to the apparent loss of £6.6m in the previous financial year (£23.2m -£16.6m).  In other words, the figures suggest that This Land is effectively stealing from the council to report a paper profit on land sales, in order to reduce the company’s overall losses in the last two years.  If that £11m apparent profit on land sales in 2022/23 is taken out of the equation, the company’s overall loss would be £22.2m rather than the already substantial £11.2m loss shown in the 2022/23 accounts.  It is hard to understand how the company could produce such massive losses in a single year.  CCC needs to explain those figures.

If, by transitioning from a failed house building company into a “land promotion” company, all This Land Ltd is doing is being given preferential treatment and offered surplus council land at significant discounts, securing planning permission, selling it on and retaining all the proceeds for itself, then there is no need for a company structure at all.  That is what CCC can do on its own, and no doubt has been doing for decades, if not centuries.  Why introduce an opaque organisation with upwards of £4m/year overheads (£8.9m of which have been concealed from the public), and a needless £8.5m/year interest burden that the company cannot afford without further borrowing from the council or stripping the council of its land assets?

The answer appears to be a costly face-saving exercise in which the council continues to assert that This Land is a going concern because its past financial mismanagement has made it dependent on the contrived net “revenue” of around £6m/year in loan interest from This Land to support its frontline services.

No elected member serving on the Audit and Accounts Committee or the Strategy, Resources and Planning Committee seems to understand, (or is prepared to admit in public), that This Land has not been adding any economic value through its own commercial endeavours or skills, but is simply a parasite feeding off the council and steadily stripping it of its valuable land portfolio.

The public needs clear and unambiguous answers to the questions listed above, a full explanation from CCC and/or This Land for what appear to be material and highly suspicious under-valuations of former council-owned land, and an explanation for how This Land’s current business model can be anything other than unlawful state aid that this council and its taxpayers cannot afford.

County Councillor Mark Goldsack Quotes

 

Assets and Procurement Committee – 28 November 2023

Agenda Item 6 – This Land – Publication of Shareholders Agreement

Click here for Source – Timestamp 47.25

Cllr Mark Goldsack

“Thank you Chair.  I really welcome the Shareholder’s Agreement, openness and being able to see this in a public meeting.  And I think it’s a real step in the right direction.  As part of the debate of this section I would encourage everyone involved with This Land to go further, and further disclosure.  There’s a lot of disinformation and misinformation in the public domain about the operation of This Land.  And that affects people’s judgement and people’s perception of the reality of the situation.  I have spoken to the Chair of This Land direct, and asked for better communication out to councils – parish councils, town councils and the like.  But I see this very much as a step in the right direction, and I would encourage all those involved – Tom and Michael etc. to really push for more information out there – factual information that does counter some of the disinformation that circulates out there.  Unfortunately, we live in an era (and I’ve used this phrase many times), but we live in an era of social media.  And on social media, noise wins over fact.  So we have to make sure that fact stands absolutely true out there.  So, thank you for bringing this.  I look forward to more.”

Perhaps Cllr Goldsack could start the ball rolling by providing just two examples of where in the public domain, or social media, anyone at all has circulated disinformation and misinformation about This Land, and in what way that information was incorrect.  Cllr Goldsack has a tenuous relationship with factual information, as evidenced by this item from Private Eye’s Rotten Boroughs column published on 3^rd March 2021, about an earlier meeting of Soham Town Council, which the Councillor attended.

Rotten Boroughs, 3 March 2021

Private Eye’s facts were correct in every particular.  This Land’s inability to make its loan interest payments to CCC on time, and the fact it was forced to sell land purchased with those loans just to stay afloat was acknowledged on page 22 of CCC’s own financial statements for the 2020/21 financial year:

“During 2019-20, This Land undertook a significant review and reset of its business plan necessitated by revised assumptions showing a deteriorating financial position. The company had experienced delays achieving planning permission and was concerned its original plan was unduly optimistic and by the future overage obligations it had to the Council. A revised plan was submitted to the Council’s Commercial and Investment Committee in April 2020, with the Committee agreeing, for the Council’s part, to a number of updates and variations arising from the updated approach. Amongst the revisions was a commercial decision by This Land to dispose of a number of assets: refocusing on those of an optimum size and position for the company. By 31st March 2021, five disposals had been made and further disposals were completed during 2021-22. The sales have progressed in a relatively buoyant housing market, thus allowing the company to maximise returns and select the best timing and circumstances for individual sales. The proceeds from these disposals have put the cash flow of the company into a position where less borrowing has been needed from the Council than previously anticipated during 2020-21.

Other significant revisions within the 2020 business plan included a reduction in the Council’s future entitlement to planning overage uplifts from This Land, an increase in the permitted levels of lending to the company in principle (although detailed approval of draw down requests are required to access this and actual lending is currently below the level authorised in 2017) and adding land promotion as a further area of business activity for the company. Adoption of the revised business plan enabled the Council to advance loan amounts that had previously been on hold and in turn This Land could ensure it was up-to-date with previously delayed interest payments back to the Council.”

How transparent is This Land?

If Councillor Goldsack is keen to show transparency, perhaps he could comment on the following.

This Land’s Shareholder Agreement, which is now published, contains a section on Freedom of Information

In fact, requests for information about This Land do not have to go via the County Council.  Since it is a publicly owned company under Section 6 of the Freedom of Information Act 2000, anyone can address FOI requests directly to This Land Ltd, rendering section 11 of the Shareholder Agreement redundant.

In all seven of This Land’s audited accounts published to date on Companies House, a material proportion of its administrative expenses was omitted from the corresponding note to the accounts.  In total, that lack of transparency comes to £8.98m, 46% of its total administrative expenses over seven years - and the equivalent of 23.4% of This Land’s comprehensive losses so far.  

By any measure, those omissions are material.  The unsystematic way in which a large proportion of This Land’s administrative expenses (but no other item of account) has been omitted from the notes to its own audited and published accounts breaches the disclosure requirements set out in Financial Reporting Standard 102 on financial statements (FRS 102), in particular, sections 2.4-2.7, section 8 and sections 2.10 and 2.11.

The missing categories and their amounts have been repeatedly requested by a local elector under s26 of the Local Audit & Accountability Act during the statutory inspection period of Cambridgeshire County Council’s own draft financial statements.  Each year the request has been denied.  

Since 2017/18, This Land’s accounts have been consolidated with the County Council’s own accounts, to form group accounts.  The group accounts form part of the local auditor’s audit.  Since 2018/19 the authority’s local auditor has been EY.  It follows that the audit extends to This Land Ltd’s own accounting records, and therefore that all This Land’s “books, deeds, contracts, bills, vouchers, receipts and other documents relating to those records”, as well as the accounting records themselves also come within the scope of statutory inspections of the County Council’s draft accounts. 

Perhaps Cllr Goldsack could lead by example in the interests of transparency and the public interest, and insist that Cambridgeshire CC stop denying the public their statutory inspection rights, and instead provide the missing details requested last August, including copies of the supplier invoices or other documents that make up the £1.46m worth of omitted administrative expenses in the notes to This Land’s 2022/23 accounts.  

Unless and until that information is provided, the public has no idea whether the undisclosed expenses were consultancy fees, backhanders, or any other inappropriate payments.  This Land and its auditors’ (RSM UK Audit LLP) refusal to comply with FRC 102, EY’s failure to demonstrate professional scepticism and to investigate or even comment, and the authority’s stubborn refusal to comply with its statutory obligations to the public together create what lawyers call “a plausible suspicion of wrongdoing" in respect of those undisclosed administrative expenses.