CROYDON IN CRISIS: The Report in the Public Interest into the financial crisis at Croydon Council includes 21 recommendations. Four of them apply directly to Brick by Brick, the loss-making house-builder which has broken multiple agreements and owes the council at least £110m.
By STEVEN DOWNES
Some of the fiercest criticism of the reckless financial mismanagement at the council contained in the report from external auditors Grant Thornton is reserved for Brick by Brick, which must surely now have a very limited future.
“The continuing financial business case from the Council’s perspective for Brick by Brick should be urgently reviewed,” the auditors advise at the end of a lengthy section of the report devoted to the loss-making development company.
The auditors make a total of 21 recommendations towards the council getting itself out of the financial hole of its own making. Four of those apply directly to Brick by Brick, which after five years and more than £200million in loans from the council has not yet paid a penny in interest, according to the report’s authors.
Their scathing take-down of the uncontrolled spending on the misfiring house-builder could yet have further consequences for the likes of Jo Negrini, the council chief executive who introduced the scheme, and Colm Lacey, her appointee as managing director of the company, as well as Alison Butler, the Labour councillor and cabinet member for housing on whose watch the whole charade occurred.
There’s also serious concerns over the £30million additional borrowing incurred by the council this summer, with which Butler bought-up flats which had been built by Brick by Brick, but which through the company’s own poor management it could not sell.
Throughout the report, the auditors are strongly critical of the borough’s elected councillors for allowing all this to happen virtually unchecked, in particular questioning the usually feeble standard of questioning at the scrutiny committee, where Lacey was permitted to withhold vital financial details and allowed to lie to committee members without proper challenge from the scrutiny chair, Tony Newman loyalist Sean Fitzsimons.
The ultimate outcome from the report, though, will surely be the liquidation of Brick by Brick and the sell-off of its unfinished projects and building sites.
The report’s recommendations include:
- The cabinet and council should reconsider the financial business case for continuing to invest in Brick by Brick before agreeing any further borrowing.
- The cabinet and council should review and reconsider the ongoing financial rationale for the council in the equity investment arrangement with Brick by Brick.
- The Section 151 officer and monitoring officer should monitor compliance with loan covenants with Brick by Brick and report any breaches to members.
- The cabinet and council should review its arrangements to govern its interest in subsidiaries, how the subsidiaries are linked, the long-term impact of the subsidiaries on the council’s financial position and how the council’s and taxpayers interest is safeguarded.
The report’s authors explain, “In recent years the Local Government sector has seen a number of subsidiary companies being established. The council has established a number of subsidiary companies with the aim of generating additional income. The governance of the subsidiaries, whether wholly or partially owned by the council, is vital to both understand whether the arrangement is delivering the intended benefits and to safeguard the council’s interests held by the subsidiary…
“Brick by Brick Croydon Limited… was set up as a limited company with the council being the sole shareholder to deliver housing development aiming to address the shortage of housing and the initial business case was presented to cabinet in September 2014 with the governance arrangements being reported to cabinet in June 2016.
“… As the sole shareholder of Brick by Brick the cabinet receives the annual business plan from Brick by Brick which based on a review of the cabinet minutes is subject to a limited level of challenge.” Those are our italics, for emphasis.
“We would expect the council to have clear governance arrangements on how its interests (as sole shareholder) are safeguarded and the extent to which the original aims of the business plan are being achieved. We would also expect a formal reporting mechanism from the council-nominated directors back to the council.” As Inside Croydon was first to report, Brick by Brick currently has no council-nominated directors.
The report continues by listing a set of “Examples where the council has not shown sufficient scrutiny of its wholly-owned company”:
“The initial intention was for a proportion of the houses developed to be affordable housing through shared ownership. In January 2020, when potential purchasers were unable to obtain mortgages for the properties, the council became aware that Brick by Brick had not registered Brick by Brick as a Shared Ownership Provider. This failure indicates a lack of understanding of the requirements and how the regulatory context developed over time.”
Shared ownership homes were supposed to be the major component of BxB’s delivery of affordable homes. Bungling Brick by Brick’s failure to register as provider was first reported by Inside Croydon. Initially, the company promised disappointed prospective buyers that it would get the necessary paperwork done within a few months. To date, Brick by Brick remains unregistered as a recognised provider of shared ownership homes.
The auditors’ report continues: “The original business case [for Brick by Brick] approved by cabinet in March 2015 included the recommendation that the key legal and structural components of the company will not be more than 50% financed by the council. By the 2017-2018 business plan, the funding mechanism was 75% borrowing and 25% equity. The ongoing financial rationale for the council to provide 25% equity should be reviewed from the perspective of the council’s financial position.” That’s auditorspeak for “time to pull the plug”.
“The annual business plans continue to extend the time that Brick by Brick will be able to utilise receipts against future funding requirements or will repay the loans.
“The delay in the company being self-financing and repaying loans should be reviewed to determine whether the council can continue to afford its investment in Brick by Brick.” (Translation: “They’ve been having you for mugs.”)
“The council agrees individual loan agreements for each scheme with Brick by Brick which include loan covenants. Based on the loan agreements, we have reviewed a number of loans where covenants have not been met.” Our italics: Brick by Brick has broken agreements with the council, and the council has done nothing about it.
The auditors highlight how Brick by Brick has yet to publish its audited accounts for 2019-2020 – something Inside Croydon was first to report. The auditors have seen the agreements with Brick by Brick that show the accounts must be published within 90 days of the end of its accounting period. “At the end of August 2020 (153 days after the year-end) the audited accounts for Brick by Brick were not available,” the auditors state bluntly. Their concern, quite rightly, is that no one at the council had noticed, or bothered to do anything about it.
There have been other broken agreements, too, most importantly the one requiring the company to pay interest on its multi-million pound loans.
When asked at a scrutiny meeting earler this year, Lacey showed utter contempt for elected councillors when he refused to answer questions about how much interest had been paid to the council. The reason for Lacey’s lack of frankness is now apparent: his company has paid back nothing.
According to the auditors, “At 31 March 2020, the council is yet to receive loan interest payments from Brick by Brick of £14.4million, of which £5million was outstanding at 31 March 2019.
“The loan agreement sets out the loan repayment date. At 31 March 2019 of the £221million loan agreements between the Council and Brick by Brick, £99million had been drawn down with a further £94million drawn down in 2019-2020.
“Based on our review of the loan agreements, £110million of those loans were due for repayment by the date of this report and had not yet been received by the council.” Our italics.
The report continues, “Repayment dates can be varied by written consent, however we have been unable to obtain confirmation from the council that written consent was formally requested or provided to vary the loan agreement repayment date. Brick by Brick’s annual business plan updates the expected date when all loans will be repaid and the cabinet approval of the annual business plan has been considered by Brick by Brick to imply consent.”
Lacey, usually accompanied by Butler, has gone through an annual petulant charade of turning up to council scrutiny meetings with a draft business plan, but one with many of the essential financial details withheld or “not yet ready”. It means that it is not until the business plan is released, just a few days before the cabinet meeting, that anyone outside Brick by Brick or Butler’s inner circle would ever get to see those vital figures.
And that was just the way that Lacey, Butler and Negrini wanted it, knowing full well that tightly-controlled cabinet meetings have rarely been a place for full and frank discussion. The auditors make it clear in their report that this has resulted in a practice that has been legally highly dubious.
“As the loan agreements are legal documents it would be reasonable to expect any variation to be formalised,” they say.
“The council has confirmed that its opinion is that any variation of the loan repayment date would require formal documentation. The council should take action to clarify the existing loan repayment position with Brick by Brick and agree formal processes for any future variation in loan repayment date.”
Inside Croydon has been reporting on the costly short-comings of Brick by Brick for the past three years. It was becoming evident in July 2018, when Simon Hall presented a financial report that shrugged off a £63million “slippage” in returns from the builders as something of no great concern.
The auditors’ report strongly suggests that the rookie developers’ failures to see through its council-funded developments in a timely and business-like manner is one of the major causes of the council’s financial crisis.
“The initial business case approved by the council expected Brick by Brick would build and sell properties and pay dividends to the council from the profit generated,” they state.
“The slippage in progress in building and selling properties has delayed Brick by Brick making a profit and no dividends were received by the council, adding further pressure to the council’s financial position.”
Lacey’s autonomous status at Brick by Brick, outside the council, saw him allowed to take liberties over the activities of the business, the auditors suggest.
“Brick by Brick set up its own internal trading arm, Common Ground Architecture. The first reference to this is in Brick by Brick’s business plan for 2018-2019 presented to cabinet in February 2018. By February 2019, the 2019-2020 Business Plan refers to the trading arm taking on external clients. We have found no evidence that the council, sole shareholder of Brick by Brick, considered the impact on the council’s interests or the risks inherent in establishing a trading arm that takes on external clients or whether the trading arm is in line with the council’s strategic intention for Brick by Brick.”
With Brick by Brick clearly struggling, failing to complete builds and running out of money to pay for new projects, even as recently as this July, Butler and Negrini managed to cook-up a scheme which provided a £30million bail-out for their pet project – with the cash-strapped council, in the middle of the covid cashflow crisis, borrowing tens of millions more to do so.
The ludicrous nature of Croydon Council buying flats from Brick by Brick, built on land that had been public property and using money loaned to the house-builder by the council, has not escaped the attention of the auditors.
“At the cabinet in July 2020, the council made a decision to incur an additional £30million of borrowing to purchase properties from Brick by Brick to increase the affordable housing supply available. This is not in line with the original business case for Brick by Brick approved by members in March 2015.
“The most recent business plan presented to cabinet states Brick by Brick ‘will offer first refusal on all of our homes to the local authority in order to help address local housing need’. The underlying financial case from the council’s perspective for the purchase of these properties did not address the circular nature of the council taking out borrowing to lend to Brick by Brick to build the properties and then the council taking out additional borrowing to purchase properties from Brick by Brick.” Our italics.
“This should be urgently reviewed,” the auditors state. Some Town Hall insiders suggest that the Met Police’s Fraud Squad might be the ones to conduct that review.
As far as the auditors are concerned, Brick by Brick should be getting no more tax-payers’ money.
“The continuing financial business case from the council’s perspective for Brick by Brick should be urgently reviewed before agreeing any further borrowing.”
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