CROYDON IN CRISIS: It did not take a couple of £800-a-day consultants to spot that Brick by Brick was dragging the council into financial ruin.
Reader NICHOLAS PANES’s first piece for this website, the presciently headlined “Building towards the council’s financial ruin, Brick by Brick”, was published three years ago. Here, he pores over the failed company’s latest financial accounts and asks: What else are they hiding now?
My first Freedom of Information request about Brick by Brick’s finances went in early in March 2018, and the answers were not very satisfactory. I analysed the slippage in the construction over three years; the low point was probably finding out with another FoI that Croydon did not even have the information to tell them how many homes Brick by Brick had built.
Even in July 2018, a council meeting was told, by the then cabinet member for finance, Simon Hall, that the “slippage” (such a gentle word for such an alarming event) amounted to £63million that should have been in the council’s coffers, but wasn’t, largely because of the failures of Brick by Brick to build houses on time and to budget. Tony Newman, the then leader of the council who was chairing the meeting, blocked any further questions.
Inside Croydon reported at that time, “The harsh reality is that Brick by Brick’s failure to deliver even a single new home in the three years since the company was established could mean that Croydon’s Labour-run council will be forced to make more, and deeper, cuts in other council services over the next two years.”
Fast-forward a couple of years, to covid-hit 2020, and the failure of Brick by Brick to re-pay to the council a penny of the £200million-plus loans they had received, or interest on those loans, or any profits on their business over the course of five years, had finally broken the back of the council’s finances, and officials were forced to issue a Section 114 notice last November.
Yet even just a couple of months before, in July 2020, the council deputy leader, Alison Butler, announced that the council would pay £30million to buy some of the properties Brick by Brick had for sale. Perhaps the money could go round in a circle, and allow BxB to repay part of their debt to the council?
This plan would have left the council with the debt permanently, tied up in housing, rather than the debt being reduced by sales to third parties. Fortunately, for Croydon’s long-suffering residents, when various officials were parachuted in later in the year, that £30million deal was blocked.
Now the task for the council is somehow to crawl out from the wreckage caused by Brick by Brick, managing to rescue some value from their unbuilt or unsold developments.
Predicting there would have to be an orderly wind-down was obvious really, but perhaps that’s the point. Having worked in publically quoted companies in the development arena, the shortcomings of Brick by Brick were manifest, from the original strategy to the woeful implementation.
While the current leader of Croydon Council appears to think it “was not a bad idea; it was just badly executed”, as Hamida Ali suggested in her evidence to a Commons select committee last month, I am of the view that public bodies should never expose themselves to any material degree to the vagaries and cyclical nature of the development market: £230million is certainly very material to the council’s financial failure.
Building houses to rent out, if the balance sheet can stand it, is one thing. Building them to sell at a profit is quite another, as Croydon and Brick by Brick has demonstrated.
Days after that parliamentary investigation session, Brick by Brick finally got around to publishing a long-delayed set of accounts for the financial year ended on March 31, 2020.
These accounts show a loss of £803,000 before tax, and after adjustments made to reduce the value of some developments.
A clean audit report is absent, as Ensors Accountants LLP, the auditors, do not express an opinion on the accounts due to material elements of uncertainty.
- Future financing. There is no binding legal agreement for the council as shareholder to provide further funding and, as failing to produce accounts on time is a default under the company’s loan agreements, the loans already made to Brick by Brick have become due “on demand”. In the accounts, the loans of nearly £208million are shown as due “after more than one year”.
- Housebuilding is inherently speculative. The outcomes, in terms of costs and sales values, are difficult to predict.
- Material errors in the timing and recognition of construction costs. This mean that the auditors were unable to form an opinion on the accuracy of work in progress valuation and the value of creditors. This reflects the poor financial controls already reported upon.
As on previous occasions, the accounts are far from informative, taking advantage of the reduced disclosure provisions for “small” companies. This may seem surprising, but despite having total assets which the directors value at nearly £230million, Brick by Brick’s debts are so high that this falls to a small negative figure, approaching £2million.
Another “advantage” of filing accounts as a “small” company is that Brick by Brick has been able to withhold the amounts paid in salaries to its highest earners, such as the company chief executive, Colm Lacey. These figures are usually provided in accounts; indeed, in the past Brick by Brick has declared payments made to directors. With these latest Brick by Brick accounts, we are only told that the number of employees in 2019-2020 was 38, up from 11 the previous year.
The accounts show that Croydon Council and associated companies are owed almost £212million.
Brick by Brick remains technically insolvent and wholly dependent on Croydon Council for future funding.
It seems extraordinary that Croydon Council, who are publishing these accounts without an audit opinion in circumstances where their own finances are under scrutiny, have tacitly condoned the directors who are taking advantage of accounting exemptions to keep the accounts of Brick by Brick as brief and uninformative as possible.
The Directors Report in the accounts refers to a number of matters affecting the results. These include the uncertainty over funding and changes to directors (Lacey and Martyn Evans were removed from the board in November last year).
Extraordinarily, the accounts also blame “delays in achieving planning consents”, the irony of which seems to be lost on the council-owned company. If only there had been greater scrutiny of planning consents, perhaps it would have been more difficult for the company to build up the high level of debts they incurred.
It was absolutely clear in 2018 that things were not going well at Brick by Brick. By the spring of 2019, the projects in their business plan were on average seven months behind schedule. As this website reported in early 2019, every single one of the company’s construction projects was overdue on completion – a 100 per cent record that ought to have been ringing alarm bells then.
In construction, time is money. From the beginning, Croydon Council never appeared to pay much attention to how Brick by Brick was being run, even though various directors came and went.
In January 2020, I asked Croydon Council in a FoI request how many houses Brick by Brick had sold up to the end of 2019. Straightforward enough.
I would have thought that Croydon would be quite keen to know that information, but when the reply arrived, late, in March 2020, the council – the sole shareholders of Brick by Brick – still did not have that information.
In fact, so incompetent were they that it appears that they had almost no checks and balances on the company at all, despite lending them vast sums of public money. They did not even know that the accounting controls the company itself had were inadequate – costs were not being controlled and nobody seemed to be asking the right questions.
Brick by Brick was a vanity project at Croydon Council Tax-payers’ expense. There was no clear plan how to achieve its objectives. Planning consents were nodded through in some highly inappropriate locations. So ignorant were the council and some of the key players in Brick by Brick that they had no clue about how to conduct successful development activities and did not even “know what they did not know”. Subsequently, many of their projects have caused dismay in the local area.
The publishing of these latest company results mark another step in the inevitable demise of Brick by Brick. They do not cover the current position as the reported year ended in March 2020. Brick by Brick is up for sale and the Council have given themselves until October to achieve this objective. Given the company’s track record and the possible lack of accuracy in the accounting records, the likelihood of a sale seems remote.
Selling sites as a distressed sale will cost a great deal, possibly 30 or even 40 per cent of their book value, worth tens of millions. Inside Croydon has reported that in consultants’ reports on the council’s divestment strategy, the estimate of the potential loss in selling off Brick by Brick – all kept strictly in the secret, Part B of official reports – could be as much as £100million.
Although the Brick by Brick accounts just published are poor, it is difficult not to reach the conclusion that much, much worse is yet to come.
Read more: Brick by Brick CEO says company has sold 6 houses. Or is it 5?
Read more: Brick by Brick faces ‘disaster’ as it misses sales targets by 83%
Read more: Why selling the unsaleable is not the answer on Brick by Brick
Read more: Building towards the council’s financial ruin, Brick by Brick
- Nicholas Panes is a former finance director of a PLC with experience of residential and commercial property development
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