This Land Ltd's latest Business Plan is confidential

By Andrew Rowson

This Land Ltd's 2023-24 audited accounts

On 7th January 2025, the latest consolidated accounts of This Land Ltd, Cambridgeshire County Council's (CCC) wholly owned housing development company, were published on Companies House.  The record-breaking comprehensive loss for the year to March 2024 was £11.89 million, taking the company's total losses to £50.23 million in its first eight years' of trading.

This Land's total losses are now more than double the company's entire historical revenue from selling houses (£25.04 million).

Selling houses or selling land?

Developing land and selling houses was what This Land was set up to do in 2016.  This is what the Chief Finance Officer wrote then in the 10-page prospectus for the company that became This Land Ltd:

"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."

However, because the company was unsuccessful at selling houses or turning a profit, following the government's 2020 ban on councils borrowing for yield, it began selling its own mortgaged land to property developers so that it could afford to pay its shareholder the interest on its existing loans.  The property developers presumably profited, whilst This Land's losses continued to grow.  In the first four accounting periods in which it made any sales, This Land's revenue from selling sites has been more than three times higher than the £25m revenue from selling houses.

 

In progressively selling the land it had purchased with borrowed money, but without repaying the loans to CCC, the company's land security against those borrowings fell from 85% in December 2018, to 22% in March 2024. 

In August 2024, CCC agreed to lend This Land a further £5.9m (plus £400k of equity).  Today This Land's land security represents barely 21% of  its liabilities towards its shareholder, CCC.

This Land is still unable to pay the loan interest

A previous post noted that as at last October (2024-25, period 7), CCC was forecasting a £5.77m shortfall in the loan interest receivable from This Land over the current financial year, on account of its cash flow problems.  A month later (period 8), the forecast shortfall rose to £6.27m), or 101% of the net income from This Land that the authority relies on to balance its revenue budget.  The net budget is the difference between the interest CCC pays to the Public Works Loan Board (PWLB) for borrowing the money it lent on to This Land, and the higher commercial rate loan interest income it should receive from This Land (a prime example of the outlawed practice of borrowing for yield).  Going over 100% means CCC is currently anticipating that this financial year, This Land will not even be able to pay it the £2.374m needed to cover the council's own loan interest payments to the PWLB (see here, p5). 

If the above trend continues until March 2025, and This Land cannot pay any of the loan interest CCC depends on to provide frontline services to the public, then the authority will need to find up to £8.57m worth of savings elsewhere, or be forced to make service cuts (pothole repairs?) in order to balance its budget for the financial year.

For how much longer can This Land survive?

Apart from repaying a few, smaller, short term loans to CCC, This Land's sporadic repayments to date have been for loan interest only.  The loan repayment schedule, set out on page 19 of This Land Finance Ltd's latest audited accounts, show when the loan principal amounts are due to be repaid. 

 The £5.9m loan agreed last July (behind closed doors) is due to be repaid in February 2026.

Taking all the above information into account, if This Land Ltd is not to default on repaying the loan principal total of £120m on time, it will need an immediate turnaround from making annual losses of nearly £12m, to making annual profits of £30m on average between now and January 2029, and to convert all of those profits into cash.  If one assumes This Land will break even in 2024-25 (however unlikely that may be), then the profits the company will need to make going forward to repay those loans just in time look like this:

How will This Land Ltd accomplish this task?

All the signs are that This Land is once again running out of cash.  CCC's loan to the company last year appears to have been unlawful - breaching the government's 2020 ban on councils borrowing primarily for yield, and also breaching the 2021 amendments to the CIPFA Prudential Code, which made it clear that:

 "borrowing for debt-for-yield investment is not permissible under the Prudential Code". 

True to form, CCC has concealed the report recommending that loan, asserting that it is confidential.  And so it appears that the purpose of the loan may have been to help This Land pay CCC the interest on its existing loans, thus initiating another vicious cycle.  Bridgewater hedge fund founder Ray Dalio put it this way in a recent article:

"When you get to the point that you have to borrow money to service the debt and interest rates are rising, so that debt service payments rise, so you need to borrow more money to pay them, you’re in what the markets call a death spiral."

However, the growing adverse forecast variances (see above) in This Land's loan interest payments to CCC suggest that the latest loan may already have been spent on other more urgent outgoings so that there was little or none left to pay CCC the loan interest. 

Where is the 2024 Business Plan?

This Land Ltd published annual business plans for 2022 and 2023.  They were both public documents.  Both contained wholly unreliable future cashflow forecasts, and so gave no reassurance that This Land would be able to service its existing debt and repay the nine-figure loans by their maturity dates.  The 2023 business plan for example promised:

"Our cashflow modelling confirms the repayment of all loans and interest by 2029" 

Just twelve months later, This Land requested, and received, a further loan of £5.9m from its shareholder. 

CCC officers promised councillors that This Land's latest business plan (logically the 2024 plan), would  arrive in November 2024, then in December.  In January's agenda papers for the Strategy, Resources and Performance Committee, This Land's business plan (the year is no longer specified), was promised "in the Spring of 2025".  It is an important document because it should explain how the company intends to turn its fortunes around so dramatically.  Local taxpayers are entitled to know.

The agenda contents document for the inaugural meeting of CCC's Shareholder Sub-Committee, to be held on 29th January 2025, announces that members will discuss the long-anticipated This Land Ltd Business Plan.  According to a report written by the Monitoring Officer in July 2024,  the Sub-Committee's duties are to include approving the business plans of council-owned companies.  But if this is indeed This Land's 2024 Business Plan, there seems little point in approving, or even not approving it in January 2025.

Committed to open government?

Unlike its two predecessors, the latest Business Plan is deemed confidential.  No explanation is given other than that...

"it would not be in the public interest for this information to be disclosed." 

The agenda contents document states that the press and public are to be excluded from the meeting before This Land's business plan is discussed.  Members serving on the Sub-Committee cannot already have conducted a public interest test (as required by law) to determine whether to release the document, because their first meeting has not yet taken place.  As with the loan decision last July, council officers and elected members seem determined to breach the rules and conceal vital information from the public.  That is how CCC frequently conducts its business.  At the foot of the same agenda contents document, the committee clerk apparently thought it appropriate to add: 

"The County Council is committed to open government and members of the public are welcome to attend Committee meetings. It supports the principle of transparency and encourages filming, recording and taking photographs at meetings that are open to the public." 

CCC's evident intent to keep the latest business plan from the public cannot but heighten taxpayers' concerns that This Land Ltd still lacks a credible plan to extricate itself from its debt-induced death spiral.  If/when the company collapses, possibly bringing down the County Council with it, it will be long-suffering local taxpayers who will pay for CCC's incompetence and lack of effective governance since 2016 in the form of much higher council tax and service cuts.

For the record, the councillors on CCC's new Shareholder Sub-Committee who have the authority and the duty in the public interest to publish This Land's latest Business Plan on 29th January and support the principle of transparency by holding the agenda item 5 discussion in the open are:

Cllr David Ambrose Smith,

Cllr John Gowing,

Cllr Ros Hathorn,

Cllr Elisa Meschini,

Cllr Edna Murphy. 

 

Would you lend £6.3 million to this company?

By Andrew Rowson

How Cambridgeshire County Council concealed key investment information from the public and its own councillors

On 9th July 2024, Cambridgeshire County Council's (CCC) Strategy, Resources and Performance Committee (SRP) met.  The last item on the agenda was a discussion about a report entitled: "This Land - Monitoring and Financing".  The report is not available for the public to see, because the committee chair (Cllr Lucy Nethsingha) asserted that the item was confidential and that "it would not be in the public interest for this information to be disclosed."  The committee did not conduct a public interest test (as the law requires), before it resolved to exclude the press and public so it could discuss the report behind closed doors.

Three months later, at the October meeting of the same committee, it emerged that the July report had contained a recommendation that CCC make "prudential borrowing" of a further £6.3m - presumably from the Public Works Loan Board (PWLB) to lend on at a much higher commercial rate to its failing housing development company This Land Ltd, thus adding to the latter's outstanding £113.8m debt to its sole shareholder. 

When the company later renamed This Land Ltd (TLL) came into being in 2016, its raison d’être was primarily to allow CCC to exploit the PWLB's preferential low interest rates offered to councils and make up to £6.2 million potential net revenue annually by lending on to its subsidiary housing company.  The company would purchase land from the council, build houses on it, and eventually sell the houses at a profit and pay dividends to CCC.

In the May 2016 "Outline business case" for setting up the housing company, (aka "Housing Development Vehicle" - HDV): CCC's CFO explained to members of the Commercial & Investment Committee why he wanted the authority to set up a housing development company, when it had no in-house knowledge or commercial experience in that risky business sector:

"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."

He went on to reveal the cunning plan for "making money out of nothing" from the interest rate differential : 

"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 into 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.”

There are two major problems with the above model that its architect and the members who voted unanimously for it appear to have overlooked:

1) the net revenue helping CCC to provide its frontline services only materialises if the HDV can generate business profits from its operations from which to pay CCC the steep loan interest.  If it keeps making losses, it defaults on the loan repayments unless it can take out additional loans from CCC just to pay the interest - thus creating an ever larger debt that becomes increasingly unrepayable. 

2) Four years ago, to nobody's surprise, the last government banned the practice of councils borrowing for yield, and borrowing to fund commercial investments, because so many were abusing the rules.  A year later, revisions to the CIPFA Prudential Code underlined that councils borrowing primarily for yield was imprudent, and therefore unlawful.

"No borrowing to fund commercial investments"

The unambiguity of that unlawfulness was set out in a learned article published in Local Government Lawyer in December 2021 by Dr Paul Feild, and clearly aimed at council monitoring officers.  It was titled: "Why the revised Prudential Code matters to monitoring officers"

TLL has not made a profit in its first nine years since incorporation.  Losses up to March 2023 totalled £38.3 million.  The 2016 promise of making substantial losses for many years has thus been honoured.  In that time, TLL completed just 78 homes, effectively a £492,000 comprehensive loss for each home.

When the long anticipated borrowing for yield ban was introduced, because TLL was already making large seven figure annual losses, it had to find a new source of funding to pay its loan interest to CCC.  It came up with the idea of selling land it had purchased from CCC with borrowed money, so developers could once again take all the profits.  Since developers knew CCC was desperate to sell, it became a buyer's market, and This Land has made nothing but losses on selling land just as it has done selling houses.  Between January 2020 and March 2023, This Land sold £53.4 million worth of mortgaged land.

Selling the mortaged land, but keeping the cash proceeds

A singular feature of these sales of mortgaged land is that This Land did not repay CCC the outstanding mortgage principal, a luxury not extended to other commercial companies or domestic mortgage holders.  In the last three sets of accounts, This Land's long term liabilities have remained static at £113,824,500. 

For some reason not explained to local taxpayers, CCC allowed its subsidiary to do this, even though it meant the loans became increasing unsecured, and therefore risky, with each passing year.  By March 2023 - the balance sheet date of TLL's latest available published accounts, CCC's land security against its subsidiary being unable to repay its loans had fallen to £43,528,491.  In other words, nearly 62% of the outstanding £113,824,500 loans were unsecured against land assets.  Following the most recent loan that committee members agreed in July, that percentage has risen to nearly 64%.

So, for the last four years, TLL has been steadily cannibalising itself to pay the loan interest that is essential for CCC to fill the holes in its revenue budgets.  How long can TLL afford to do this before it runs out of available land it is having to sell to professional housing developers simply to stay afloat?  The signals are not encouraging.

Integrated finance monitoring reports

The same SRP committee that secretly agreed the £6.3m loan last July receives periodic finance monitoring reports from the Executive Director of Resources and Finance, Mr Michael Hudson.  Within those reports is a table - "Appendix 1a - Finances & Resources Detailed Financial Information".  That appendix shows forecast year-end variances during the year, and actual variances at the year-end itself for each service area within Finances and Resources, and for the individual services within each service area.

This Land is one of six services within the "Investment Activity" service area.  The table below from Appendix 1a shows Investment Activity as at March 2024, the end of the 2023/24 financial year.  The actual variance at year-end was a favourable (credit) figure, meaning the net revenue of £6.292m was £159k higher than the budgeted £6.133m revenue for that year.

The ten finance monitoring reports that preceded the July 2024 committee meeting, and the two reports since the July 2024 meeting all show the same granular, service-level budget and forecast information for each service area in the Appendix 1a report.

Now you see it, now you don't

But the Appendix 1a table presented to members at the July 9th 2024 meeting of the SRP committee was different. 

In that table, all the other service areas show the budget and forecast information for each individual service.  But Investment Activity alone shows no detail lines, just the single total for all six services, including This Land.

Furthermore, as early as period 2 (May 2024), the Executive Director of Resources and Finance was already forecasting a sizeable adverse (debit) variance of £1.169 million for its six investments over the new financial year.

Which of the six services shown in the first table above is responsible for the bulk of that adverse forecast variance?  The public and the committee members have not been told, unless members were given the missing detail in the closed session discussion on This Land Monitoring and Financing.   Since we now know that at that same meeting, the committee voted in secret to lend This Land a further £6.3 million, it would have been useful for them and for the public to know at the time whether any of the £1.169m worth of bad news was connected with This Land's ability to pay its loan interest on the existing £113.8m in the current financial year.  

The truth emerged only after the October and December meetings, in which the Appendix 1a table reverts to disclosing all the service-level information, including for Investment Activity.

Investment Activity up to period 5 (August 2024) looks like this:  

This Land's adverse £3.2 million forecast variance is larger than the total for Investment Activity, because of the offsetting favourable variance from Collective Investment Funds.

The same is true in the period 7 report below (October 2024), which includes variances as at period 6 in the left hand column.  This Land's adverse variance forecast for the year has grown to £5.77 million, again appreciably higher than the total, thanks to the two favourable variances in the last two lines. 

It therefore seems reasonable to assume that back in period 2, This Land's adverse forecast may also have been at least as high as the £1.169m total for Investment Activity.  If so, as a percentage of This Land's net revenue budget of £6.191m, it would equate to a 19% adverse variance.

Putting this information together produces this graph.  

The above graph begs the question: why did CCC Finance not predict the full scale of This Land's annual forecast variance back in period 2, when it must have been clear there was a large problem.  What communication does it have with This Land's finance team?  It looks as though each month CCC finance officers were surprised that the forecast annual shortfall had grown substantially.  This must say something about CCC's governance and scrutiny of its wholly owned subsidiary.

A second, and perhaps more serious question, is why did Mr Hudson produce finance monitoring reports for period 2, and present them to the SRP Committee for its 9th July meeting, with all the detailed This Land information removed?  It cannot be accidental.  That was the same meeting in which the report on This Land Monitoring and Financing - presumably written by Mr Hudson - recommended the additional £6.3m loan.  It looks very much as if by July last year,  the Finance team including Mr Hudson already knew that This Land was experiencing severe cash flow difficulties and would struggle to pay the existing loan interest.  So they hid the evidence.  What rational lender in those circumstances puts his head in the sand and lends a failing company millions more?

In the December meeting of the SRP Committee, when the published annual forecast variance was 93% and £5.774m, that figure represented 77% of CCC's entire forecast variance for the year.  Yet the Head of Finance's presentation of the period 7 Finance Monitoring Reports, and the members comments in the ensuing discussion never once mentioned This Land.  There is no mention of This Land either in the official minutes of that meeting.

 Where is the 2024 annual business plan?  Where are the published accounts?

For the past few years, This Land has been asked to produce an annual business plan.  The 2023 plan was presented to members in July 2023.  The finance monitoring reports for period 5 at the 31st October meeting of SRP Committee promised that:

"The council is due to receive the annual business plan from This Land in November"

That evidently did not happen.  On a different page, in a different table, the same report states:

"This Land Business Plan continues to be reviewed and will be brought back to SR&P committee in December."

That did not happen either.  The December report (Annex A) on period 7 promises the business plan, but only mentions "by year-end".  Is it referring to the financial year-end, which would be 31st March 2025?:

"Pressures in the Finance & Resources directorate relate primarily to lower than expected income from the council’s investments, particular in its wholly owned housing company This Land. It is prudent to forecast a pressure in this area, as by year-end the current position of the company will be clearer following the submission of its full business plan and its subsequent review by the council. This may necessitate support to the company or a further earmarked reserve provision by the council, otherwise this forecast overspend will be unwound."

The SRP Committee's next meeting is scheduled for 28th January 2025.  The newly formed Shareholder Sub-Committee, which has the responsibility of approving the business plans of CCC's subsidiary companies, meets for the first time on 29th January 2025.  If This Land's 2024 Business Plan does arrive by the end of this month, it is unclear what value any approval, or even non-approval by either committee would have, given that the 2024/25 financial year end will only be two months away by then.

In every This Land business plan to date, the cashflow forecasts have been completely wrong.  The 2023 business plan for example boasted that the company would not need any more cash injection until 2029.  Twelve months later, This Land was lent another £6.3 million - presumably an unsecured loan.  It would appear that the allegedly unlawful purpose, yet again, is to enable This Land to pay the £8.5m loan interest for 2024/25 to CCC before the end of the financial year.  If so, it would be exactly the scenario the last government and the CIPFA Code tried to avoid with the borrowing for yield ban.  Audit firm Grant Thornton produced a recent Report in the Public Interest for its client - Woking Borough Council, which fell into the same trap as CCC.  Grant Thornton explained it this way:

"Large sums which the Council made to the companies were advanced in the knowledge that they would be used to enable the companies to pay the Council the interest they owed on their existing loans, to maintain day-to-day operations. In some instances, these were revolving loans, and their application resulted in increased borrowing by the Council. These were essentially revenue payments, yet it is clear from statutory guidance, including The Chartered Institute of Public Finance and Accountancy (CIPFA’s) Prudential Code for capital finance in local authorities, that over the medium term debt will only be used for a capital purpose. Although interest costs may be capitalised during the construction phase of projects, loans were made to companies which were not engaged in construction."

Grant Thornton's report shows that while in some respects, Woking's reckless excess was on a different scale to CCC, there are still many similarities, not least the conduct of the senior management team at the time, which in Woking's case have all been replaced:

"The senior management team of the Council was made up of the former Chief Executive, the former Deputy Chief Executive, the former Monitoring Officer and the former s151 Officer. The complementary knowledge, experience, powers and duties of each of the former senior officers should, between them, have been sufficient to have in place arrangements to safeguard the interests of the Council and ensure that its finances were managed prudently, and that all its actions were lawful. Each member of this team should have been able to challenge the others if actions were proposed which would contravene the laws and regulations under which each operates or damage the interests of the Council."

At CCC, why did the Monitoring Officer approve the £6.3m loan last July?  Why did the Executive Director of Resources and Finance conceal important information about This Land's financial and cashflow positions last year from elected members?  Why is the response to This Land's worsening financial position always to throw more taxpayer money at it, rather than consider winding it up before the losses become even greater?  Is it not currently trading whilst effectively insolvent?  And why has CCC's Chief Executive Officer, Dr Stephen Moir (who attended the 9th July 2024 meeting) not challenged the behaviour of the two other statutory officers whom he appointed?  Does he too think that in spite of all the evidence to date, This Land will soon begin making super massive profits and will repay all the interest and £120m of loan principal between now and January 2029?

At the time of writing there is no sign of This Land's 2024 business plan, and its accounts for 2023/24 are now overdue on Companies House.  With elected members also asleep at the wheel, what is it going to take to make someone in authority do the right thing?

Sleepwalking to disaster. How This Land Ltd is failing

 By Andrew Rowson – January 2024 

‘In Local Government there is no substitute for doing boring really well. Only when you have a solid foundation can you innovate.’

Max Caller, CBE

 

 ‘If you look at Northamptonshire through to Woking, with others in between, what was happening there was a situation crystallising around a financial risk based largely upon commercial ventures.  That’s reflected a position whereby those organisations were not identifying and not addressing those risks.’

Michael Hudson, Cambridgeshire County Council S151 Officer

 

Certainly, if one looks back, it is absolutely the case that each of the local authorities that have had to issue section 114 notices has had failures of leadership, management and governance, and some have taken risks that were unmerited….So far….there has been a direct linkage between poor leadership and the subsequent issuance of a section 114 notice.

Rt Hon Michael Gove MP, Secretary of State, DLUHC

 

1 - Introduction

This report mostly comprises extracts from official minutes or transcripts from council committee meetings, or from reports by Cambridgeshire County Council (CCC) or its outgoing external auditor – EY.  It demonstrates firstly the recklessness of council officers and elected Members of CCC’s former Commercial and Investment Committee for launching a high-cost, high-risk commercial venture in 2016 with no detailed business plan, no public consultation, and on the basis of a fundamentally flawed prospectus.  The Council and its Members appeared to be oblivious to the reality that under the original flimsy “outline business case” even under the “extremely buoyant economic conditions for housing development” that existed seven years ago, the housing company was not expected to turn a profit “for years, if not decades”.  That being the case, the only two ways This Land Ltd could service its substantial interest-only loans to CCC were:

a)       By CCC borrowing yet more from the Public Works Loan Board (PWLB) and lending it on to This Land at commercial rates, thus creating a spiralling liability that could never be repaid, or, once central government put an end to that option...  

b)      By selling land purchased from CCC (with borrowed money) on to developers, and using that income to service the debt to CCC.  In so doing, This Land has cannibalised itself, whilst at the same time steadily eroding its potential for making future profits from selling its own houses – the very opposite of what the company was set up to do.

The longer This Land remains a loss-making enterprise, the heavier the debt burden becomes, the more land the company has to sell, and the less likely any prospect of ever making a profit or of repaying the debt.  In the accounting period to March 2023, 78% of This Land’s total revenue has come from Land sales rather than residential property sales.  It would appear, given the scale of the outstanding debt (£113.8m), the sale of £53.4m worth of land to date, and the surprisingly low sale prices of the units sold in 2022/23 (£247,000/unit on average), that This Land may already be past the point of no return.

The second revelation in this report is EY’s dishonesty in its statements about the prospects of CCC recovering the long-term debt owed by its wholly owned subsidiary.  In September 2022 EY acknowledged for the first time the “new and significant risk” of CCC not recovering some or all of its long term debt (113.8m) from This Land Ltd.  That risk was not new.  It was brought to EY’s attention in September 2021 by a local elector in an objection to the previous year’s accounts (2020/21), when CCC’s long-term debt from This Land had risen by £26 million to £113.8m.  EY ignored that objection (as it had ignored the two prior to that and the one after it), until presented with a Letter Before Action in October 2022.  Within days of that letter, EY accepted all four objections relating to four successive years’ accounts. 

In the September 2022 Audit & Accounts meeting, EY’s audit partner, Mr Mark Hodgson, told Committee Members that EY was discussing with management the possible need for “impairments” to the debt owed by This Land because of recoverability issues.  Yet six months later, (3^rd March 2023) in his decision notice to all four objections, the same audit partner declined to issue a public interest report about the significant risk of default because he had “not to date identified a level of indebtedness by This Land that would affect our value for money conclusion”.  Nine months after that, on 1^st December 2023, and after several missed self-imposed deadlines for completing its audit work on this matter, the auditor told CCC Members that the audit team has still not completed its audit work to establish how likely CCC is to recover all that substantial debt.  Those Members, like the public, may now have to wait until February to find out how safe local taxpayers’ money is.  That would be twenty-nine months after the matter was first brought to the external auditor’s attention, seventeen months after the auditor first flagged it up as a significant risk in his September 2022 audit plan, and seven months after EY and CCC had access to This Land’s 2023 Business Plan.  Last November's resignation of This Land’s Chief Executive (£235,038 annual remuneration including pension contributions) does not augur well for a positive outcome.

2 - Outline Business Case for CCC to establish a company as a Housing Development Vehicle (HDV) – 27^th 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.

 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.’

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 [Housing Development Vehicle]. 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.  See Agenda Item

3 - Minutes – Commercial & Investment Committee – 27^th May 2016

 ‘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 of 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.

 A Member asked, on the basis of forecasts already undertaken on borrowing, repayments and income streams, how long it would be until there was net income. Officers advised that they did not expect the HDV [Housing Development Vehicle] to make a profit for some time, maybe even for decades, although the income for the Council would be realised straight away. Much depended on the shape and length of the development pipeline.

 A Member asked if the HDV would be open to legal challenges by other developers i.e. as a result of the Council selling land to its own company.  Officers advised that experience around the country to date showed that land had successfully been transferred in this way, and there had been no legal challenges to date. Members noted the potential issues where there could be challenge, around selling at less than best consideration. However, the model proposed would protect the Council from such challenges, as it was proposing to transfer land at market value to the HDV.

 A Member commented that future discussions and reports need to be clear whether they were referring to the County Council or the HDV. He also queried if making a return on money borrowed from the government in the way proposed was completely legal. Officers advised that it was, although it was noted that the government may introduce a cap on prudential borrowing in the future, at which stage the Council would need to look at other potential mechanisms.”  See Committee Meeting Minutes here.

Notwithstanding the above misgivings, Members voted unanimously for officers to incorporate the housing company, with no detailed business case, and without going to public consultation. Cambridge Housing and Investment Company Ltd (CHIC) was incorporated three weeks later.

4 - Minutes – Commercial & Investment Committee – 23rd February 2018

 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.

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 noted that whilst one of the recommendations was to declare the properties listed in the confidential Appendix 1 to the report as surplus, but there was no information provided on why those properties were surplus. In terms of process and audit trail, this information was required. Officers pointed out that the schedules and reports on these properties had been presented to the Committee over the course of the last 18 months. 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.  See Committee Meeting Minutes here.

5 – Blog - Rt Hon Lucy Frazer KC, MP - 4^th April 2018

 

Lucy Frazer MP and senior representatives from Cambridgeshire County Council; Leader of the Council Cllr Steve Count, Chief Executive Gillian Beasley, and Deputy Chief Executive and CFO Chris Malyon, met with, Housing, Communities and Local Government Minister, Rishi Sunak MP to discuss the financial challenges that Cambridgeshire County Council face given their current funding…

Lucy said, “I am very grateful to Rishi for offering this meeting to Steve, Gillian, Chris and myself. Our meeting was extremely positive.  Rishi listened attentively to the concerns expressed and acknowledged the entrepreneurial spirit of Cambridgeshire County Council, praising their highly efficient operations….

The Minister acknowledged the Council’s highly efficient operations, praising the shared service agreements between Cambridgeshire and Peterborough, and identifying Cambridgeshire County Council as an example of good practice.  See Lucy Frazer's website here.

6 - Commercial & Investment Committee, 16^th October 2020

 Cllr Boden

‘..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 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 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 already been highlighted by Mr Rowson in his email.  And we’ve 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 financial performance of This Land Ltd.  But the interrelationship between the 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 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.

So I think that is something we all need to bear in mind.  And in connection with that, and looking at the recommendations that we’ve got in front of us today, I would ask – I’m not asking for the recommendations to be amended – but I would ask that what’s been delegated to the officers and the Chairman in terms of the detailed terms of the loan – that we ensure that the terms which are granted to This Land Ltd are no better that they would be able to get from the commercial market.  Because we’re not here to do benefit to This Land Ltd.  We’re here for the benefit of the Council.  And in order to achieve the best balance between what goes on within This Land Ltd and what we need in this Council, it’s important that we do follow the requirements of central government financing, to avoid state financing, but also to benefit this Council by ensuring that those terms are not at uncommercial and unrealistic rates.’  See YouTube video here. (Timestamp 1.03.56)

7 - Mark Hodgson, EY partner – CCC Audit & Accounts Committee meeting, 29^th September 2022

 For your attention primarily there are two new audit risks 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 they have been afforded.  And in light of that we 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 [£113.8m] that is currently outstanding at 31^st March [2022], and discuss with management the need for any impairment over that balance because of any recoverability issues. See YouTube video here. (Timestamp: 54.26)

 

8 - Mark Hodgson, EY Partner – Decision Notice on a local elector’s 2021 objection to the accounts – 3^rd March 2023

 Auditor’s decision and reasons: Local authorities have a general power to trade in function-related activities through a company (section 95 of the Local Government Act 2003 (LGA 2003)).  They also have a power to invest under section 12 of the LGA 2003.  The statutory guidance issued under 15(1) of the LGA 2003 gives further details around what investments are – financial investments include loans (paragraph 40).  Paragraph 33 states that local authorities can make loans to (inter alia) wholly owned companies.  Section 111 of the Local Government Act 1972 also provides a subsidiary power to local authorities to “do anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions”.  It is clear CCC has the power to pass money to This Land Ltd.  We are also not aware of any ground on which to base a conclusion of public law unlawfulness in respect of the exercise of such powers.  Therefore, there is no unlawful item of account.  We have not to date identified a level of indebtedness by This Land Ltd that would affect our value for money conclusion.  We have carefully reviewed these conclusions again, and we do not see an unlawful item of account or grounds to make a public interest report under the 2014 Act.  We are of the opinion that – from the governance and oversight arrangements in respect of This Land Ltd set out by CCC in its response (as well as the publicly available documents: particularly the Avison Young report and subsequent action and consideration of that report well into 2022) – there is appropriate governance, transparency and oversight of This Land Ltd.

 

9 - CCC - Audit & Accounts Committee meeting – 28^th September 2023

 Cllr Gay

Yes.  Just on This Land.  Can you give any sense on what sort of areas the projections (EY testing This Land’s cash flow projections in its 2022 Business Plan) cover, because I think the first capital repayment is in 2026, and obviously a default on those payments by This Land would be very serious indeed for the authority, and we need look no further than Thurrock to know that ill-conceived and failed capital projects have contributed to the failures in Slough and in Thurrock and a number of others.  So have we got any preliminary indications, and is there any sense in which we can plan to mitigate any impacts that failure to repay on time would have?

Tom Kelly, Service Director: Finance & Procurement

Yes.  So in terms of the audit of 21/22, I think EY have highlighted that as the recoverability of the long term debtor, or credit loss – so exactly the point Cllr Gay makes.  I think perhaps in simplified terms, the approach that’s been taken is to look at the assurance the Council has effectively received through the submitted This Land Business Plan, which for the relevant year shows a surplus of £16 million over the planning period in their central scenario.  And then looks at the assurances we’ve received and kind of test some of the underlying assumptions related to that.  So EY are for instance looking at checking [that] some of the actual values received back up the Business Plan.  They’re looking in detail at one of the construction sites that’s been completed, and again checking the income and expenditure figures match through there.  It relies on checking through how in particular inflation indices have been applied to the programme, and the future assumptions that have been made around strategic land sites that This Land still needs to acquire. 

So that gives you a sense of the detail and the type of responses that the Council’s needing to provide as part of that testing.  Of course, rolling forward to where we are now, there’s been a subsequent business plan received from This Land Ltd, and there’s been those national developments that Cllr Gay refers to.  And we have a number of assurance mechanisms continuing with the company and also in our kind of consideration of reserves provision and MRP.  There are kind of mitigations in place for some of the downside risk on those scenarios.  So it’s actively under consideration.

Cllr Wilson (Chair)

I’m not sure if you’ve got the bottom line.  Are we comfortable that we’re going to get the money back?  I heard a lot of “things are being studied in detail”.  But the bottom line is – are we confident we’re going to get the money back?

Service Director: Finance & Procurement

Yes.  So I think that the shareholder committee for This Land is the Strategy and Resources and er, was Strategy and Resources – now moves across to Assets and Procurement.  Relatively recently they got the most recent Business Plan report that does show the central scenario continuing to project full repayment of the loans on time.  The Council has officially received that, and we are comfortable with that position.  But it does show that there is risk with this venture, and there are sensitivities where that declines.  So that’s hence why we need to keep that kind of ever watchful vigilance in respect to it.

Chair

Thank you.  Any other comments?  Chris?

Cllr Boden

Not on This Land.

YouTube video here  - Timestamp: 50.26

 

10 - EY – Audit Results Report (ISA 260) - 21^st November 2023

Type of risk	Description	Findings and conclusion
Significant Risk	Recoverability of Long-Term Debtor with This Land Group	We have not yet fully completed our work in this area and will provide a verbal update on 1 December 2023. See Minutes here - Agenda Item 7.

 In the promised verbal update at the 1^st December 2023 meeting of CCC’s Audit & Accounts Committee, EY reported that its audit team was still working on this item, which remains the only outstanding material risk issue before the auditor can issue his 2021/22 audit opinion (Timestamp 1.20.50). The statutory deadline for 2021/22 audit completions was 30^th November 2022.

According to EY, the audit team is now looking at This Land’s future cashflow projections from its 2023 business plan.  EY and CCC have had access to the business plan since July.

That cashflow projection, (based on the assumption of zero inflation – see below) shows cash balances fluctuating between £10m and £20m for the next three years, before shooting up in the second half of 2026 and 2027, just in time to repay the loan principal in three tranches:

·         January 2028 - £64.7m

·         September 2028 – circa £39.2m

·         January 2029 – circa £9.9m.

This Land’s eventual success in repaying the loans therefore depends entirely on an unlikely surge of substantial profits in the last two years before March 2029, in the teeth of economic headwinds of falling house prices, falling land prices, and with an onerous debt burden.  Given This Land’s track record for getting its projections wrong, the above cashflow forecast does not inspire confidence.  CCC, This Land Ltd and their respective external auditors both assess This Land’s going concern status by looking only at the next twelve month horizon.l

11 - This Land’s 2023 Business Plan – Alice in Wonderland

The “outline business case” that CCC Members approved unanimously in May 2016 made no mention of the number of houses the HDV planned to build.  A year later, CCC’s 2017/18 financial statements contained the following:

Five years later, This Land’s 2023 business plan (see below) sets out the more modest ambition of building and selling only 490 houses itself by January or March 2029, with a further 453 to be built by other developers, making up 863 in total.  Given the 53 units This Land has sold in the seven years to March 2023, that presumably means that in order to meet its target of repaying the £113.8m loan principal by 2029, This Land itself anticipates selling a further 437 homes (490-53) in the six years to 2029.  That equates to an average of 73 annual house sales until then.  Most of those will need to be built without This Land being able to borrow further from CCC.  These figures and assumptions are all based on the limited information available to the public.

This Land’s original outline business case and subsequent business plans all proved unrealistic.  Delays in securing planning permission and other setbacks meant that the company did not sell its first house until its fifth year of operation.  Without considering where the cash would come from to pay its growing loan interest obligations, and with central government putting a stop to councils borrowing from the Public Works Loan Board for commercial gain, in the last three accounting periods This Land was obliged to sell some of the land it had purchased from CCC just to keep the company afloat.  As at March 2023, only 22% of This Land’s total revenue had come from selling houses.  The remaining 78% came from land sales.  The £53.2m figure for land sales in the graph below excludes a further £27 million CCC claims This Land will receive from land sales between 2023 and 2026 in a “binding contract” (p 36). Additional plot sales are expected during 2023/24.  That would mean This Land receiving at least £80m of revenue from selling land it had originally bought to build houses on.  It is precisely what council officers assured Members in May 2016 it would not do:

“Simply selling sites for others to develop, and profit from, is no longer an option for CCC.”

The public has no information about any profit share arrangements between This Land and the developers who have purchased the £80m worth of land.

As noted in a previous article, the headlong dash for cash has also meant that the average sale price of homes sold by This Land in the last three accounting periods (as per This Land’s audited accounts) has fallen from £550,000 per unit in 2020/21, to £329,000 in 2021/22, and to £247,000 in 2022/23.

This Land’s 2023 business plan projects future net profits totalling £42.5 million from 2023/24 onwards:

When placed alongside the company’s audited historical losses up to and including 2022/23, the figures look like this:

On 17^th November 2023, 23 days after the company’s latest audited were published on Companies House, This Land Ltd’s Chief Executive resigned.  Those accounts recorded a comprehensive loss of £11.2m for the year to March 2023 - £2m higher than the £9.2m shown in the 2023 business plan published in July (see table above).

If the past history of 53 house sales producing net losses of £38.35m is compared with the future promise of £42.5m net profits and 437 additional houses sold by the beginning of 2029 (see above), the two sets of data produce starkly different net profit/loss per unit statistics:

  

None of the information available to the public can explain the alchemy the company now promises will turn its fortunes around only in three years’ time, or why that secret of success has eluded This Land Ltd for so many years.

The derived net profit figure of £97k per house sale above is after charging around £4m/year of administration expenses, and after the loan interest expense (currently over £8m/year).  When those two are added in, the figures suggest This Land’s gross profit on each house sold in the remaining years to March 2029 will need to be at least £260,000 on average, which is higher than This Land’s average house sale price in 2022/23.  In other words, in the absence of additional critical information not provided to the public, the figures presented in This Land’s latest business plan do not begin to add up, and it should not have taken EY over six months to draw clear conclusions from its audit work – especially when it was first informed of the debt recoverability issue well over two years ago, when the debt first rose to £113.8m. 

For years, CCC has denied the public more granular information about This Land on the grounds of “commercial confidentiality”.  In July 2023, a confidential appendix to This Land’s latest business plan was provided only to Members of the Strategy and Resources Committee behind closed doors.  One concern is that to avoid embarrassment, CCC might be allowing This Land to limp on until it finally crashes, generating further substantial losses along the way that local taxpayers will ultimately have to pay for, rather than putting the public interest first and making a sober assessment of its subsidiary’s future prospects.

As a result of This Land’s substantial losses to date, the succession of failed business plans, the auditor’s recent concerns about the recoverability of loans made to the company, vague talk of using reserves to deal with the “downside risk” of the loans not being repaid, and the suspicious shape of the latest cash flow projection – with cash reserves only beginning to accumulate at least three years hence, the public can have little confidence in the latest plan without seeing more concrete and credible information.  CCC should therefore stop hiding behind the “corporate veil” and the convenient excuse of “commercial confidentiality”, especially since This Land has evidently not been treated on a commercial, arm’s length basis in several respects.  To assure local taxpayers (the ultimate stakeholders) that This Land’s latest business plan is not another illusion or a delay tactic to prolong the company’s end artificially, the County Council should provide additional substantial information to support the latest cash flow forecast.  That information should be in the form of numbers of projected house sales per year up to 2029, with some credible indication of profitability per unit sold.  It should also explain why This Land has used the “base case forecast” for its projections, predicated on a zero percent inflation rate, when inflation rates, especially in construction, are historically extremely high, and predicted to remain high for several years to come.  Credible granular information from the authority is essential since on many occasions in the past EY has shown itself not to be an independent party, as its contradictory statements on This Land also bear witness (see sections 7 and 8 above).  In the absence of any supporting evidence, a simple vote of confidence by EY on the recoverability of the £113.8m debt is unlikely to quell the public’s unease about This Land’s future.