Tomorrow, and tomorrow, and tomorrow

 By Andrew Rowson

In September 2022, Cambridgeshire County Council's (CCC) external auditor, EY, published its audit plan for the authority's 2021/22 draft accounts.  Signalled in red on page six was a new and significant risk - the recoverability of all £113.8m of debt from its failing housing company, This Land Ltd.  In its first seven years of trading, the company has lost £38.35m.

This is what EY audit partner Mark Hodgson told members of the Audit & Accounts Committee at that committee meeting, eighteen months ago:

“For your attention primarily there are two new audit risks this year.  A significant risk around the debtor associated with This Land, which links to working capital loans made to your wholly-owned subsidiary.  There has been some significant press coverage of both This Land and other housing-related subsidiaries in the country, and their ability to repay the borrowing to which they have been afforded [sic].  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 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.” 

Click here to see the recorded meeting on Youtube: timestamp 54.24

It is rather different to the message the same auditor gave a local elector six months later, in a decision notice to four formal objections to the accounts that concluded after a delay of three and a half years:

“We have not to date identified a level of indebtedness by This Land that would affect our value for money conclusion.  We have carefully reviewed these conclusions again, and we do not see un 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.”

So, is the auditor comfortable or uncomfortable with This Land’s indebtedness and the likelihood of its ever repaying the £113.8 million?  Apparently, it is still too soon to tell.  Twelve months have passed since EY wrote the comments above.  It is fourteen weeks since EY’s last upbeat assessment to elected members about This Land’s fantastical future cashflow projections, despite the company’s many previous business plans all turning out to be completely wrong.

The end of March 2024 will mark sixteen months beyond the government’s statutory deadline for CCC to publish its final, audited accounts for 2021/22.   It is also four years and seven months since a local elector first drew EY’s attention to This Land’s ballooning debt and cash flow problems.  Since last summer, several of EY's self-imposed deadlines for completing the 2021/22 audit have come and gone.  For some months the recoverability or otherwise of the loans to This Land has been the sole remaining issue holding up the audit completion.  Why is EY taking so long to finish the job?  It couldn’t have anything to do with the May local elections could it?

CCC's Audit & Accounts Committee next meets on 28th March. The agenda and meeting documents should be published on 21st March, and will be found here.

Robbing Peter to pay Paul?

 By Andrew Rowson

Question:

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

Answer: 

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

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

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

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

The provisions included:

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

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

“In view of CCC’s land holdings, and the currently extremely buoyant economic conditions for housing development, there is an opportunity for CCC to develop its own land rather than sell it. Simply selling sites for others to develop, and profit from, is no longer an option for CCC. The scale of the financial challenges facing CCC requires that it has to review every opportunity available to it in order to create an on-going revenue stream that can mitigate the reduction in the services that it otherwise would have to make.”

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

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

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

Cheating taxpayers three times over?

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

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

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

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

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

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

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

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

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

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

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

 

Questions for This Land Ltd and Cambridgeshire County Council

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

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

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

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

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

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

a.       Name/identity of land,

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

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

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

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

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

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

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

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

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

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

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

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

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

County Councillor Mark Goldsack Quotes

 

Assets and Procurement Committee – 28 November 2023

Agenda Item 6 – This Land – Publication of Shareholders Agreement

Click here for Source – Timestamp 47.25

Cllr Mark Goldsack

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

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

Rotten Boroughs, 3 March 2021

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

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

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

How transparent is This Land?

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

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

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

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

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

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

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

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

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

Private Eye Rotten Boroughs, 1615 – 17th Jan 2023

 

Cambridge Blues

Another council with perilous finances is Lib-Dem-controlled Cambridgeshire, which is at risk of going bust in the next couple of years because of the debt albatross that is its wholly owned building company This Land (Eyes passim).  Inherited from a previous Tory regime, This Land owes the county council at least £113.8m and, pie-in-the-sky business plans aside, has little prospect of repaying it.

Eighteen months after the council published its draft 2021/22 accounts (Eye 1579), the final audit opinion is still a work in progress, with a verdict on the viability of This Land still awaited.  Since then, This Land has published two sets of its own accounts and posted £18.4m more losses.  In the seven years to March 2023, the company had sold 53 homes and lost £38.3m – equivalent to £723,000 per sale.  During the last financial year, the average sale price was just £247,000 per home.  Three weeks after the latest accounts were published in October, This Land’s chief executive David Lewis was “terminated”, less than 18 months after being confirmed in the job after a period as interim CEO.

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.