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.

Unlawful State Aid ??????

To:        Cllr Neil Gough, Mr Frank Jordan

             Executive Director of Place and Sustainability

             Cambridgeshire County Council                                                                                                                                                                                               

18^th December 2023

Dear Cllr Gough and Mr Jordan,

Last week I wrote to you because you are both Non-Executive Directors (NEDs) of This Land Ltd.  I asked you several questions about the apparent unlawful state aid Cambridgeshire County Council (CCC) has given to its arm’s length, wholly owned subsidiary company.  My letter made it clear that I was writing to you rather than to the council’s FOI service.  Mostly it is because you are the proper people to answer the questions.  In addition, the Freedom of Information Act makes it clear that FOI requests are just for “what” type questions, not “how” or “why” type questions.  I am looking for reasons and explanations, not just documents.

So I was disappointed to receive an email on Friday from the authority’s FOI section, acknowledging my email, when I never addressed an email to FOI about state aid.  One of you has evidently passed my letter on to that department, against my express request.  I am not acknowledging that email because I did not submit an FOI request on this matter.

Accountability is one of the Nolan Principles that those elected or appointed to public office are expected to abide by.  Accountability is also the first of the core values set out in the Council’s Constitution.  “Accountable” is one of the aspirations that appears along the foot of the Corporate Leadership Team Structure document published on the Council’s website. 

In addition, the government has published guidance on the twelve Principles of Governance for all Public Body NEDs.  That guidance explains that you are bound by the Code of Conduct for Board Members of Public Bodies and the Nolan Principles (again), and that you are to meet the requirements set out in the Treasury’s Managing Public Money publication.  All these documents are easy to find online and download.

Please understand that I am expecting comprehensive answers to my questions from you, not from the FOI department.  With that in mind I am also publishing this letter on my blog site, and I look forward to publishing your response(s) on the same site.

Yours sincerely,

Andrew Rowson 

Cambridgeshire CC and This Land Ltd conceal £9m worth of administrative expenses

This is the second in a series of articles exposing how Cambridgeshire County Council (CCC) finance officers deny local electors their public inspection rights by Andrew Rowson.

A universally recognised accounting convention in published financial statements is that where an item of account has a note reference against it, that note provides additional information about the item elsewhere in the document.  

Where the headline item comprises two or more components or categories, they are all listed in the note to the accounts, with the list adding up to a total figure that reconciles with the original item in the headline accounts.  If several relatively small value categories together constitute a small percentage of the total, it is acceptable to group them together with the category name “Other”.  That way readers of the accounts can easily reconcile the figures and understand what the material components are.

This Land Ltd is Cambridgeshire County Council’s (CCC) wholly owned subsidiary housing company.  Its accounts are published on Companies House and can be found HERE. 

In its published, audited accounts, This Land Ltd complies with the above reporting convention for all headline items of account except one – Administrative expenses.

The extract below from This Land’s most recent audited accounts (financial year 2022/23) discloses Administrative expenses totalling £4.062m and £3.788m for the prior year. 

The corresponding note to the accounts (Note 6) should contain all the admin expenses categories that add up to those totals.

However, Note 6 only discloses a subset of five Admin expenses categories, and does not sum them.    

The arithmetic totals for the above five categories are £2,599,106 and £2,079,692 for 2022/23 and 2021/22 respectively.  

The corresponding undisclosed expenses therefore total £1,462,567 and £1,708,647.  Similar undisclosed expenses have been identified in all seven sets of This Land’s published accounts to date. 

Up to December 2019, the undisclosed categories each year accounted for well over 50% of the total by value.  The latest published accounts are the first where the missing expenses are not higher than the single highest value category – Staff costs.  

Across all seven accounting periods, the undisclosed administrative expenses now total £8.97m, and represent 46% by value of all administrative expenses over all seven accounting periods.  They account for 23.4% of all This Land’s comprehensive losses to date (£38.35m).  

By any measure, the missing amounts are material, and they are of intrinsic public interest, especially for Cambridgeshire taxpayers, especially because of the irregular reporting, and especially because This Land Ltd and its shareholder Cambridgeshire County Council are clearly determined to maintain the cover up of these expenses which should have been disclosed in full in the financial statements.

 Further denial of public inspection rights

A previous post on this blog (Democracy Denied) focused on the denial of public inspection rights during this summer’s accounts inspection period.  

That article dealt with the £10.9m discrepancy between claimed City Deal grant expenditure for 2022/23 and the corresponding payments disclosed in the published payment datasets.  CCC has shown no intention of removing all suspicion of improper use of City Deal funds by providing the requested accounting records.  

That was not the only instance of the Council withholding information it has a statutory right to provide. 

During the inspection period I also requested a copy of This Land Ltd’s draft accounts for 2022/23, which CCC definitely held in August this year (the final published accounts for 2022/23 only appeared on Companies House at the end of October), and a full breakdown of all This Land’s administrative expenses by category, whether or not they were disclosed in the corresponding note to the draft accounts.

I was denied the draft accounts and the requested expenses information on a number of demonstrably ludicrous grounds, including:

·         ‘that subsidiary companies are not specified as a component of “relevant authorities” for the purposes of Local Audit & Accountability Act (LAAA) inspections (either in the legislation itself or by way of case law)’, and

·         ‘That the company’s administrative expenses do not form part of the Council’s accounting records’ and

·         ‘the administrative expenses of This Land with third party suppliers are not “related to” the accounting records of the Council (for the purposes of the LAAA) and that full disclosure is likely to prejudice This Land’s commercial interests.’

Before addressing each excuse, it is worth setting out what the legislation states.  The relevant section is s26 of the Local Audit & Accountability Act 2014 (LAAA 2014):

The courts have adopted a broad interpretation of what constitutes “other documents relating to those records”. 

The simple fact is that since 2017/18, CCC has produced accounts for the council alone, and within the same statement of accounts it also produces group accounts that consolidate CCC’s accounting records with those of This Land Ltd, as it explains in the narrative report section of the 2022/23 financial statements:

Therefore, the fact that This Land is a subsidiary company is irrelevant, and beside the point.  This Land’s accounting records, (including its administrative expenses), and all books, deeds, contracts etc. relating to those records, form part of CCC’s consolidated accounting records de facto and de jure.

Thus, This Land’s administrative expenses are self-evidently within scope of s26 of the Act.  Local electors and other interested parties clearly do have a statutory right to inspect them and to have copies of them during the annual public inspection period.  

The public interest argument for CCC to produce this important information that its failing housing company and the council are both determined to conceal, is also unassailable.  Conversely, the arguments CCC’s former Chief Finance Officer and its current Head of Finance have employed to deny me the information are bogus, and reflect the officers’ deep-seated aversion to transparency, which they have unfailingly demonstrated every year for the last seven years.  

Finance officers seem ready to clutch at any straw to justify breaching the law of the land in denying the public their inspection rights where they feel there is something to hide.  It is regrettable therefore that after I recently submitted a complaint about this conduct to the Chief Executive Officer, he defended his officers’ conduct, calling it “reasonable and proportionate”.

Cambridgeshire County Council’s routine denial of the public’s inspection rights highlights an apparent loophole in the legislation that this authority has exploited.  Under s28 of LAAA 2014, if an objector to the accounts is aggrieved by a local auditor’s final decision about an objection, or by the auditor’s decision not to consider an objection, a legal route is available that culminates in the objector being allowed to appeal to the court, which can overturn the auditor’s quasi-judicial decision.  

There does not seem to be a corresponding legal remedy for the public under LAAA 2014 when they are aggrieved by councils that contrive bogus arguments to evade their statutory obligations under s26 of the same Act to provide the public the information they are entitled to have.  The resulting damage to democracy is grave.  

Regrettably, external auditors cannot compel councils to provide the information interested parties have asked for.  Nor can the Information Commissioner’s Office (ICO) help.  The ICO’s remit does not cover the LAAA 2014. 

Public inspection rights of local authorities’ accounts have been on the statute books in one form or another since 1848.  They are designed to enable local taxpayers scrutinise how their authority spends their money – and to assess the value for money of the services it provides.  

The inspection rights under s26 LAAA 2014 are also an essential prerequisite for local electors to be able to assist external auditors in their statutory duties, by providing the auditor with information he/she might not otherwise be aware of, and by submitting objections to the accounts that the auditor may consider and investigate.  Thus, when council officers prevent the public from inspecting accounting records and related documents etc., an important part of the democratic process and the audit process is removed.  

With ever more councils submitting Section 114 notices and declaring themselves effectively bankrupt, and fraud levels at an all-time high, the last thing Cambridgeshire taxpayers need is the local auditor being denied information that might enable him to do his job better, just because the Council has abused its position by refusing to provide key information to local electors.

Given CCC’s stubborn refusal yet again to comply with s26 of LAAA 2014, I have now written to my Member of Parliament (Lucy Frazer KC, MP - Secretary of State for Culture, Media and Sport) asking her to intervene in this matter, to request that CCC comply (even three months late) with its statutory obligations, and to explain where, if at all,  the legal remedy lies for the public when confronted with obstructive council officers who deny them their inspection rights.  

Readers of this blog will be informed in due course of the Cabinet Minister’s response.

How much state aid has This Land Ltd received?

Cambridgeshire County Council’s (CCC) plan in May 2016 to set up a housing development company revolved around an accounting trick in which the council would borrow substantial sums from the Public Works Loan Board at preferential interest rates and lend it on to its Housing Development Vehicle (HDV) at much higher, “commercial rates”.  

The difference between the two rates it called “revenue income”, which was to be spent on the council’s frontline services, and so relieve the authority of the discipline of finding in-year revenue savings.  This is how the Chief Finance Officer explained the arrangement to Members of CCC’s Assets and Investments Committee on 27^th May 2016:

“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 5 HERE.

The practice of councils borrowing for yield has now been outlawed by central government, precisely because of the risk of irresponsible councils abusing it and getting themselves and their commercial subsidiaries into massive debt.  

CCC’s revenue stream was illusory.  Since This Land has never made any profits, the cash it needed to service its (interest only) loans could only be sourced from additional borrowing by and from CCC, resulting in a vicious debt spiral that has propelled This Land into its current position where it owes CCC £113.8 million while making comprehensive losses totalling £38.35 million in its first seven years of trading.  

That equates to a loss of £724,000 on each of the 53 homes sold up to March 2023. In the most recent year of account, the average sale price per unit was just £247,000, down from £550,000 two years earlier.

Not falling foul of state aid regulations was CCC’s justification for its “making money out of nothing” scheme, as one elected member described the borrowing and lending arrangement.  Instead, the income stream merely created an unpayable debt for This Land, and consequently also for CCC, its sole shareholder.  This Land’s projection of repaying all its debt by March 2029 is pie in the sky.

How well has This Land done at avoiding state aid?  One could argue that each additional loan to allow the company to pay its interest was state aid that might have been denied any other company in a similar position with a hopeless business plan.

In its financial statements to March 2021, This Land at last acknowledged it had not always been able to pay its loan interest on time.  On occasions it had to wait until CCC approved the next tranche of borrowing and lending.  It is unlikely other companies in the real world would have been treated as sympathetically by their lenders without having to pay stiff penalties.

The question of state aid for This Land also arises in CCC’s published Transparency Code supplier payment data.  Two cost centres - “CHIC Start Up” and “This Land” recorded £691,000 worth of payments (incl. VAT) between December 2016 and August 2023. 

The £144,127 for consultancy payments all relates to a report by Avison Young about This Land commissioned by CCC in 2021.  It is therefore bona fide CCC expenditure.

But the £144,662 payments for Professional Fees and Hired Services, and Other Hired Contract Services (£65,473) were made to property management companies like BNP Paribas and CBRE Ltd, and to recruitment companies like Hays Specialist Recruitment.   Were they advising CCC, and were they recruiting for CCC, or did those payments relate to This Land’s own expenditure, for which Cambridgeshire taxpayers were picking up the bill?  These payments look more like the latter.

There can be little doubt however about whose expenditure was behind the single biggest expense type – the £214,915 spent on Advertising/Publicity.  The entire amount was paid to Small Back Room Design Consultants (SBR).  The company’s website shows what it has produced for This Land Ltd – a website, glossy brochures, a range of business cards, and even mugs, tee shirts and shopping bags, all sporting the stylised This Land logo.

This looks like a straight subsidy by CCC to its supposed arm’s length company.  Who authorised those invoices and payments from the county council’s bank account?  Perhaps it was CCC’s former Chief Finance Officer, and the main architect behind This Land – Chris Malyon, who was also a This Land non-executive director for four years, until he resigned in July 2020, because of the “appearance” of a conflict of interest.

The evidence from the payment data shows that a sizeable proportion at least of CCC’s payments coded to the above two cost centres was unlawful state aid to its lossmaking property company.  That is indicative of a lack of effective internal controls and conflicts of interest.  

What the public cannot see is the extent of any further state aid to This Land that has been coded to other cost centres, or removed at source from the published payment data to conceal it from the public – a habit CCC has engaged in for at least the last nine years.  

In the interest of transparency, This Land’s current non-executive directors attached to CCC – Frank Jordan (Executive Director of Place and Sustainability) and Cllr Neil Gough should make a statement explaining to the public the extent of CCC’s unlawful state aid to This Land, and how local taxpayers will be relieved of that burden.

Democracy Denied

By Andrew Rowson – 1^st December 2023

This is the first in a series of articles exposing the obstructionism by Cambridgeshire County Council (CCC) finance officers after local electors asked to inspect and have copies of documents and accounting records relating to the draft annual financial statements.  That public right is enshrined under Section 26 of the Local Audit and Accountability Act 2014 (LAAA 2014).

For the last seven years, two local electors, (one a former County Councillor) have been repeatedly denied our inspection rights at CCC for no good reason, often being lied to, or else we have received information that has been doctored or manipulated in some way.  

Following the same unacceptable treatment during this year’s public inspection period, I wrote to the Chief Executive last month, complaining about the denial of information again this year.  Two weeks ago I received an email from CCC’s Finance department.  Instead of providing the missing information, which had all been requested within the statutory inspection period ending on September 1st, the officer attempted to justify the council’s conduct of withholding the information, using bogus arguments and incorrect facts.  

Since the CEO personally took ownership of my complaint, I conclude that he condones and has approved of his officers’ conduct.  Consequently, I shall shortly be writing to the Council Leader, Cllr Lucy Nethsingha, asking her to instruct the officer body to comply with the legislation and to provide the missing information.

City Deal again.

In a recent article on this website I challenged CCC to issue legal proceedings following its shameful bullying tactics against a local journalist who published an opinion piece about the materially false accounting of government City Deal grants.  The article that offended the authority was republished on this website three months ago.

Since then, I have heard nothing from CCC.  It has clearly decided against putting its money where its mouth is after its earlier theatrical threats against the journalist.  The inescapable conclusion is that the authority’s silence is a tacit, but nonetheless eloquent admission that it deliberately and fraudulently falsified its financial statements for several years, overstating its assets and usable reserves by £218m in the aggregate between 2016/17 and 2019/20, including a £97.8m prior year “correction” to the 2015/16 accounts which had previously correctly accounted for that year’s £20m City Deal grant.  

That being the case, this website will from now on drop the word “alleged” when referring to the uncorrected false statements in CCC’s financial accounts.

The breakdown of the overstatements is shown in the table below.  It was explained in some detail to every elected member in January this year, and has been explained many times to members serving on the council’s Audit & Accounts Committee.  Nobody has challenged the facts, which come from the authority’s audited financial statements.

CCC’s current and previous auditors (EY and BDO), who I have publicly accused of being complicit in the false accounting, have also failed to come forward with any legal challenge.

The last article quoted EY’s contorted explanation from its decision notice in March this year for not correcting the accounting errors in the five financial years before 2020/21, after it had belatedly corrected the same accounting error for the final 2020/21 accounts (see bottom line in the table above).

The false accounting of City Deal grants is related to two of the requests for information in this year’s public documents inspection which the authority refused to provide.

Back in September 2017, when CCC Finance and the then auditor BDO first decided to falsify the accounts, they did so on the false assertion that the government attached no conditions to how the City Deal grants were to be spent.  In fact, conditions have always been attached to the grants, as the authority and its current auditor now concede.

Had there been no conditions, the monies ringfenced for the Greater Cambridge Partnership (GCP)’s specific capital infrastructure projects under City Deal could have been spent on items beyond the ring fence, including relieving pressures on CCC’s own revenue budgets rather than finding in-year savings. 

Therefore, in my inspection request dated 17^th August this year, I asked for the sums spent on City Deal projects during the financial year, the full list of cost centres in CCC’s financial system designated for City Deal projects and, if that list did not fully reconcile with the stated expenditure, the explanation, or reconciliation of where that expenditure had gone.

The point of requesting the full list of City Deal cost centres was to be able to check the total City Deal spending for the financial year against those cost centres from the published Transparency Code spend data.

Twelve days after the request, Finance provided the summary figures below, followed by a list of 64 titles under the heading “Cost centres”.  When they were cross-referenced to the true cost centres in the Transparency Code database, 45 of the 64 (70%) were not cost centres at all – rendering any reconciliation exercise impossible.  The following day (August 30^th), I informed Finance of its error, reiterating that I was looking to reconcile the declared City Deal expenditure total for 2022/23 (£27,846,194) against the payments in the Transparency Code payment data in the corresponding City Deal cost centres.  I also asked for confirmation that the true list of City Deal cost centres only captured bona fide City Deal spend and nothing else.  I never received an answer to that question.

At 1.41pm on Friday 1^st September, the final day of the inspection period, I received an email from Finance containing 32 attachments.  The 32^nd attachment was a revised list of 45 City Deal cost centres, 41 of which matched with cost centres in the Transparency Code data that had recorded payments against them.  The finance officer explained that the earlier list had included “capital project titles rather than capital cost centres”.  It is hard to understand how Finance could have made that mistake accidentally, given the clarity and the context of my repeated requests for cost centre titles.

After matching the revised cost centre list with published payments to those cost centres during 2022/23, the total payments fell short of the £27.8m by £10.9m (39%).  The difference is orders of magnitude higher than can be explained by timing differences between expenditure and payment dates, or by any payments below £500, which are not included in the published payment data.

The significant discrepancy might be explained by the following four factors, or by a combination of them:

• Bona fide City Deal expenditure was incorrectly coded to cost centres other than those provided by Finance as the full list of City Deal cost centres,
  
  
• Bona fide City Deal expenditure was correctly coded to the corresponding cost centres, but a significant proportion of payments were simply removed from the Transparency Code datasets prior to publication.  CCC has a long and disreputable track record for doing this,
  
  
• Substantial expenditure contributing to the £27.85m total above was spent on non-City Deal-related items, and coded to other cost centres - in breach of the government’s grant conditions that CCC has belatedly recognised,
  
  
• Substantial expenditure contributing to the £27.85m was not related to City Deal and was never recorded in CCC’s payments system, but instead was syphoned off from the City Deal pot by means of general ledger journals to support the County Council’s revenue budgets – again in breach of the clear City Deal grant conditions set out in the grant determination documents and other grant agreement documents.
  
  
• By waiting twelve days before providing an initial response, then providing incorrect and useless information, and finally by providing an incomplete response to my request on the very last afternoon of the inspection period,
   
• Finance again employed similar tactics to previous years to deny a local elector his statutory inspection rights.  

Because of the scale of the City Deal discrepancy in 2022/23, and the authority’s previous lie (maintained for four years) that there were no conditions associated with the capital grants, there are reasonable grounds to suspect that a large part of the missing payments may be explained by the fourth factor above.  That suspicion is given added substance by clear references in public committee documents to “internal borrowing” from unspent City Deal grants to spend on items unconnected to City Deal projects. 

As reported in the previous article, further concern comes from the fact that if one takes the opening City Deal balance above (£87.3m), and compares that with the known grant receipts dating back to 2015/16, and the disclosed payments to cost centre descriptions prefixed with “City Deal” or “GCP”, the City Deal expenditure not showing in the Transparency Code payment data rises to around £47m up to March 2023.  

Instead of explaining these anomalies, which might yet have an innocent explanation, CCC has set itself on a course of explaining nothing, covering everything up, and attempting to discredit the people who ask legitimate questions about how these government grants have been, and are being spent.

Questions about the governance and transparency of City Deal grants are not frivolous, and local electors are entitled to seek assurances that their money is being properly managed in a transparent fashion.  The fact remains that there is a yawning £47m hole in the transparency of how City Deal grants have been spent (£10.9m in 2022/23 alone).  

This authority’s endless ducking and diving to avoid providing the information properly requested under s26 of LAAA 2014 is a reprehensible denial of the public’s inspection rights, and does nothing to quell the many concerns about how City Deal grants have been managed and spent.  The Chief Executive Officer’s role in defending the indefensible conduct of his officers is an outrage.

A second request during the inspection period was for the signed City Deal grant funding agreement, complete with terms and conditions, as set out in the Treasury’s “Managing Public Money” document, and also in the Cabinet Office’s Guidance for General Grants.  

I was repeatedly denied that document as well.  Instead, Finance officers pointed to a government press release which contained a short document for public consumption which was not signed and did not contain any of the detail or terms and conditions specified by the Treasury and the Cabinet Office. That document was certainly not the grant funding agreement for the potential payment of £500 million worth of government grants over fifteen years.

Echoes of the GCGP LEP

Cambridgeshire County Council has been in a similar position before.  In 2017, North East Cambridgeshire MP Stephen Barclay raised concerns about the transparency and governance of the former Greater Cambridge/ Greater Peterborough Local Enterprise Partnership (LEP), and the LEP Chairman’s conflicts of interest.  As with City Deal, CCC was also the accountable body for the LEP.  Investigations and critical reports by the National Audit Office and the Public Accounts Committee followed.

In January 2018, CCC’s then CEO – Gillian Beasley, and the LEP Chairman, Mark Reeve were questioned by MPs, who were dissatisfied by and severely critical of their responses about accountability and transparency.  The upshot was that £38m of planned government funding was withheld, and the LEP was scrapped.

In respect of the City Deal reconciliation and the other inspection requests denied by CCC again this year, the authority seems determined to conceal important information from local electors and in so doing, disregard the law.  

Consequently, in addition to writing to the council leader, I am also escalating the matter to my Member of Parliament, Lucy Frazer KC MP, the Culture Secretary.