By Andrew Rowson
Then
27th May. 2016. CCC’s Commercial &
Investment Committee voted unanimously to set up a new Housing Development Vehicle (HDV):
“Cambridgeshire Housing and Investment Company Ltd ” (CHIC – later renamed
“This Land Ltd”).
The extract below is from the May 2016 prospectus presented to members of CCC's Commercial & Investment Committee by the CFO and the Monitoring Officer. From this and other extracts, it would appear that setting up and running a profitable housebuilding company was secondary in importance to securing net revenue for the council in the first instance by exploiting interest rate differences, even though the loan interest income could ultimately only be generated by the company making profits from building and selling houses:
“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 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.”
20th October 2020. After four years’ of trading, This Land Ltd’s comprehensive losses totalled £16.5 million, and its outstanding long-term borrowing from CCC was £113.8 million.
CCC - Commercial and Investment Committee – timestamp 1.03.53.
Cllr Chris Boden
“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 is an extremely helpful thing for all Members to read
if you haven’t already 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 mistakes in some
other local councils. There have been
some… I’m not going to name any specific names, but there are some dreadful
ones in addition to those that have been highlighted by Mr Rowson in his email. And we have learned from 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
inter-relationship 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 are looking at the effectiveness
from this Council’s point of view of This Land Ltd we don’t just look as though
we are an investor at the figures that This Land produces, we also have to
think of how else we benefit as a council.
And I don’t think 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.”
25th November 2020. Government bans councils borrowing from the Public Works Loan Board (PWLB) for commercial yield (i.e. converting capital into revenue). CCC stops lending to This Land for the next four years.
10th December 2021. Extract from an article by Dr Paul Field, published in Local Government Lawyer, “Why the revised Prudential Code matters to monitoring officers.
“In this feature I have shown that the CIPFA Prudential
Code is effectively applied by law and that the somewhat fluid question
regarding legality of borrowing solely to invest in income producing assets is
no longer equivocal, it is now outlawed and will be contrary to the Prudential
Code and thus imprudent.
Investments funded by borrowing unconnected with a local
authority’s functions can have no place in authorities' Investment Plans or
Capital Management Strategies. These policies must be approved on an annual
basis by full Council.
Borrowing and investment strategies and practice are
liable to be picked up by the local auditor because they will all be out
looking for them. As compliance with the Prudential Code is a legal
requirement, non-compliance will be the business of the Monitoring Officer as
well as the Chief Finance Officer.”
20th December 2021. CIPFA publishes the revised Prudential Code for Capital Finance in Local Authorities
2021 - 2024. This Land Ltd sells £78m worth of mortgaged land
CCC made a loan to This Land shortly before the government's ban was announced in November 2020. For the next four years, it made no further formal loans to its subsidiary. However, This Land's last four audited financial statements show that in those four years to March 2024, This Land sold £78.3 million worth of mortgaged land, apparently without repaying the corresponding mortgage balances to CCC (see this recent post for details). Over that period, This Land's outstanding borrowing from CCC has remained static at £113.8m, which indicates that the company has retained the mortgage principal totalling £55.1m rather than repaying it to its lender. In other words, over those four years, This Land appears to have kept the entire sale proceeds (including the mortgage principal), to support its own operations, whilst depleting CCC's land security by the same amount. Over the four years to 31st March 2024, CCC's land security against the risk of This Land defaulting on its loan repayments consequently fell from £80.5m to just £25.4m. One speculation is that CCC's £6.3m loan agreed in July 2024 (see below) after the four-year gap may have been the result of This Land all but running out of available mortgaged land to sell to keep the company afloat with sufficient cash to pay ongoing expenses and overheads (including its annual £8.6m loan interest burden to CCC).
9th July 2024. In closed session, CCC’s Strategy, Resources & Performance Committee approves a loan of £6.3 million to This Land Ltd sourced by “prudential borrowing”, to provide “short term cashflow support” to its struggling housing development subsidiary. The loan was not approved by the full Council, and the public has been denied sight of the report recommending the loan, or a copy of the advice that CCC allegedly received that claimed the loan was lawful and compliant with the 2021 Prudential Code amendments. It is assumed the loan was unsecured. The £6.3m was split into a £5.9m loan, and a £400,000 equity injection into This Land Ltd.
Now
26th February 2025. After eight years’ of trading, This Land Ltd’s comprehensive losses total £50.23 million, and its outstanding debt to its sole shareholder, CCC is around £120 million. According to loan repayment schedules shown on page 19 of This Land Finance Ltd's 2023/24 audited financial statements, the last of those loans has to be repaid by January 2029. That schedule does not include the short-term £6.3m loan to This Land agreed in July 2024, which is due to be repaid at the beginning of 2026.
CCC Audit & Accounts Committee meeting.
CCC’s revised draft financial statements
for 2023/24,
p44:
During 2024-25, the Council
has reported that expected income from This Land has been delayed and in July
2024 the Council’s Strategy, Resources & Performance committee received a
report highlighting concerns around This Land’s financial performance against
its business plan and a request for cashflow support. This reflects
a worsening economic outlook for housing developments as well as delays
progressing revenue from individual properties to planned timescales. Following
advice and analysis, the Council agreed to provide the company short term
cashflow support and the Council is currently considering a revised multi-year
business plan from This Land. As a result of the
latest information and the worsening financial outlook emerging during 2024-25,
the Council has revised downwards its future expectations for This Land income
in its own business plan and will need to consider the form of financial restructuring, support or
expected credit loss as a result of the agreed business plan ahead of its next
published accounts for 2024-25.
KPMG: Year-end
report for the year ended 31st March 2024
P18 – Recoverability of long-term debtor with This Land
Group
“Management have not provided us with a paper or workings
for an assessment of Expected Credit Loss (ECL) provision for the This Land
Debtor, nor has any provision currently been recognised. The ECL provision should be equal to the
contracted cashflows less the amount of cash (or similar consideration)
expected to be received by the Council.
We note that this balance, and the resulting accounting treatment, is
highly dependent on This Land’s ability to deliver its future business
plan. While we have not received an ECL
paper from management, our review of the latest audited accounts of This Land,
performance reports and latest business plans would indicate that the
subsidiary is significantly behind plan and there has therefore been an
increase in credit risk and a high probability that the subsidiary will default
over the lifetime of the loan. This may
result in a material adjustment to the accounts.
Management has sought advice regarding the accounting and
broader implications (such as any impact on the Minimum Revenue
Provision). Given that the future
business Plan for This Land has yet to be agreed by the Council and is unlikely
to be finalised much before the backstop date [28 Feb 2025], we do not
expect to be able to conclude on this area.
We have provided some initial comments on the first draft accounting
advice.
We understand that disclosure will be made in the final
version of accounts to note the deteriorating financial position of the
Council’s subsidiary, This Land.”
P49 - Significant Value for Money Risk - Private sector skill and experience.
“The Council does not have the suitable skills and
experience to effectively manage the risks associated with a commercial private
sector subsidiary facing significant financial and cashflow challenges.”
“Our review of minutes of the Strategy, Resources and
Performance Committee shows limited discussions in regard to This Land
performance throughout the year, and a review of the Corporate Risk register
notes that there is no mention of This Land throughout.
Given current economic uncertainties affecting the
construction sector, the continued under-performance of This Land and the
various complex options being considered to maximise the Council’s return, we
consider it would be appropriate for the Council to have representation on the
This Land Board and Strategy, Resources and Performance Committee with
appropriate skills and experience.”
“Based on our findings, we
have determined that there is a significant weakness in relation to
arrangements for economy, efficiency and effectiveness due to the lack of
expertise required to oversee and challenge commercial subsidiaries, particularly
This Land.”
4th March 2025
At the time of writing, the agenda for the 11th March meeting of Strategy, Resources and Performance Committee has just been published. The forecast adverse variance for CCC's loan interest income from This Land in 2024/25 has risen again to £7.414m as at January 2025, (-120% of budgeted net income for the year).
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