Independent review finds that the loss-making, council-owned district heating network has less of a business case, and is more of a basket case, reports CARL SHILTON
Over-heated: LibDem councillors Jayne McCoy (left) and Ruth Dombey have little comfort from the CIPFA review
Richard Simpson, the senior council official who helped unleash the £200million disaster that is Brick by Brick on Croydon, is now faced with the prospect of clearing up the mess caused at Sutton Council by their ill-advised dodgy heating network, SDEN.
Sutton Council, where Simpson now works as its finance director, last night finally released the review of SDEN, the Sutton Decentralised Energy Network Ltd, drafted for them by the Chartered Institute of Public Finance and Accountancy.
And while the LibDem-controlled council’s leader, Ruth Dombey, was quick to use the council’s press office to proclaim that the review had found no evidence of fraud, the naturally cautious bean-counters from CIPFA made it abundantly clear in their report that their terms of reference – drawn up by Dombey and Sutton CEO Helen Bailey – deliberately ordered them to not look for evidence of fraud.
CIPFA’s conclusions, though, were no less damning of the “below standard” levels of governance in evidence surrounding the establishment of the heat network, which was set up to “greenwash” the building of the Viridor incinerator at Beddington Lane.
Indeed, some of CIPFA’s findings in Sutton were remarkably similar to Croydon’s auditors’ comments on the poor management of Brick by Brick and the questionable delegated authority used to push through purchase the Croydon Park Hotel, which all ultimately led to the issuing of a damning Report In The Public Interest.
CIPFA offered four options for Sutton to deal with the clearly unviable SDEN, including “do nothing” (when has that ever been a realistic option for anything?), to throw even more millions of Council Tax-payers’ cash at the loss-making business, or to sell the company – as if any reputable business would want to take on the basket case of a business. CIPFA are clear: without millions of pounds more spent on it, SDEN cannot survive as a business.
CIPFA’s damning report confirms that the LibDem council only managed to get approval for SDEN to go ahead because they used a dodgy financial plan that was boosted by more than £3million thanks to the inclusion of non-existent grant schemes, non-existent homes, poor governance and misuse of delegated powers. It was these actions which prompted one opposition Conservative councillor to describe SDEN’s business plan as “dishonest at best, fraudulent at worst”.
Not all there: New Mill Quarter has 725 homes. SDEN’s financial plans are based on 800
According to many among SDEN’s growing band of critics – including dozens of Hackbridge residents unfortunate enough to be their customers – those who lied about the company’s “optimistic” business plan have continued to mislead and provide false details to CIPFA.
The CIPFA investigation was commissioned by Sutton following a motion put to a council meeting in July which called for an in-depth look at the way SDEN was created, particularly in terms of a review of the business case by consultants KPMG in 2017.
Sutton Council commissioned KPMG in 2017 to review the SDEN financial model to reassure itself that the business case was sound enough to proceed with the multi-million pound investment. SDEN would borrow from the council, £4.2million that the council itself drew down from the Public Works Loan Board.
The business model was required to provide certain returns – an internal return on investment, or IRR, of 9.04 per cent and a cumulative cash return over 25 years of £1.54million. The 2017 model was claimed to exceed these figures, but the model itself (and KPMG’s report) were withheld from elected councillors, despite repeated requests to see them.
The council and SDEN claimed that KPMG found “no material issues” with the review of the business model and the financial assumptions it made. CIPFA’s report shows to be wholly untrue.
But CIPFA also reports that there is no documentary evidence available to show how the decisions were made to override and ignore the KPMG recommendations. There are three instances in the report where evidence trails go cold in respect of key decisions, thwarting CIPFA’s investigations, and providing a convenient result for the council.
The 2017 financial proposals depended on government grants made under the Renewable Heat Initiative scheme. That scheme had been shelved in 2016.
The SDEN plan also depended on receiving payment from customers in 800 homes at Barratt’s New Mill Quarter development, although planning permission was only ever granted for 725 units on that site.
SDEN was never eligible for RHI, so it should have been taken out of the financial model, says CIPFA. The inclusion of RHI was used to claim an extra £1.33million to the bottom line after 25 years.
The inclusion of the non-existent homes contributed £570,000.
In its report, CIPFA has attributed these overestimates to “optimism bias” rather than any conflict of interest, incompetence, or worse.
CIPFA appear to have been a touch too generous in their assessment, as Inside Sutton has been shown evidence that as recently as July this year, 2021, the managing director of SDEN was still claiming that the business would somehow receive grants from RHI, a scheme that had closed five years earlier.
Tim Crowley, the former Tory opposition leader on the council, says that the inclusion of RHI money in SDEN’s business plan was not a mere “oversight”.
“I have an email from the MD of SDEN, Mandy Cherrington, from July 12, 2021, less than three weeks before she resigned, that says SDEN is not receiving RHI payments as the scheme was ‘due to close soon’. It closed in 2016, for goodness sake.
“She further told me that an amount was estimated under the RHI heading as it was assumed some kind of replacement scheme would be in place. This is not ‘optimism bias’. It’s completely divorced from reality.”
‘Divorced from reality’: SDEN’s ex-MD, Amanda Cherrington
CIPFA’s report notes that the post-KPMG model included customer heating usage estimates that were significantly above those reported to KPMG. If the suggested usage figure had been included, a further £1.4million would have been wiped off the projected 25-year return.
CIPFA reports that a serious risk to the project was also removed from the council’s risk register, an important monitoring method supposed to ensure that public money and assets are not put at risk.
The report states: “In February 2015 the risk of construction delays was ‘red’. By March 2017, the risk is reduced to ‘amber’ on the basis that there could be a penalty clause in the contract with Barratt Homes. By July 2017, the risk is no longer listed in the risk register, but we have found no evidence that the contract with Barratts included any such clause.”
CIPFA calculates that the cost of these build-out hold-ups to SDEN were £88,000 for every three months of delay.
To assist SDEN, Simpson is now recommending that Sutton reduces the interest rate payable by SDEN from 6 per cent to 2 per cent. It means that the council is waving goodbye to about £83,000 in payments every year, or more than £2million over 25 years.
Another proposal suggested by CIPFA to help SDEN balance its books is to increase the variable cost of heat and hot water for customers at New Mill Quarter by 11 per cent next year and a further 11 per cent in 2023. Th CIPFA accountants make a pitch for this week’s No Shit Sherlock award when they report that such a decision “may require a change in pricing policy and would increase customer dissatisfaction”.
CIPFA strongly criticises the business case process, saying that it did not follow the Treasury’s “good practice” of the “Five Case Business Model”.
“It was decided not to pursue this approach,” says CIPFA.
Catherine Gray: doubts that McCoy did not know about the ‘missing’ 75 housing units
“There is no documentary evidence of why this decision was taken. Adoption of this approach would have necessitated the production of a Full Business Case prior to financial close as the final decision point as to whether to go ahead with SDEN.”
The report also revealed some concerning revelations around the inclusion of the 75 non-existent dwellings.
CIPFA notes: “The development director for Barratt Homes sent an email in December 2016 that confirmed an outline intention to build 80 homes on the business forest. The updated financial model thus included these extra 80 dwellings (rounded down in the model to 75 dwellings), even though by June 2017, no planning application had been made for this change. We understand that the issue was discussed amongst officers, but we found no evidence that it was brought to the attention of [Sutton Shareholdings Board] in June 2017.”
This raises the question of who received the email from Barratts, and whether the planning department or Councillor Jayne McCoy were consulted. McCoy was party to the delegated powers, so should have known about the changes. As nominal head of the quasi-judicial planning department, this also raises serious questions regarding issues of predetermination – something which is strictly against planning law.
“It’s surely inconceivable that the lead member with delegated authority to maintain the integrity of the financial plan was not consulted about this,” says Catherine Gray, the Conservative opposition’s lead on McCoy’s housing, economy and business committee.
“Are we expected to believe that officers constantly kept all this information from the lead member for SDEN?”
Busted flush: the CIPFA report shows that, without money from the Renewable Heat Initiative, a government scheme closed in 2016, SDEN could go another 20 years making losses
CIPFA also takes serious issue with the status of the current SDEN business plan.
“The plan is out of date and does not adequately address the financial or operational issues currently facing the company,” they say.
“We found it difficult to identify a clear and consistent strategic direction for SDEN from those we interviewed… the company directors do not appear to have the time required to develop a clear business plan.”
The long-suffering residents of New Mill Quarter will be disappointed that CIPFA think the price they pay are “reasonable”.
The CIPFA report will discussed by the council’s strategy and resources committee next Monday, when fireworks night is expected to come early.
Jayne McCoy:said she had ‘complete faith ‘in SDEN’s business model, which CIPFA has criticised
If the CIPFA report is accurate, McCoy has provided wholly inaccurate answers to questions given at full council. For example, she insisted that SDEN never actually had to make a profit at all. “We thought that the original KPMG modelling rate of return of 9 per cent was sufficient, but as I said it was almost as a contingency, the key thing was it covered its costs.” McCoy has also stated she had “complete faith in the integrity of the modelling”.
Catherine Gray told Inside Sutton: “The financial model made assumptions that were out by £3million over the life of the project. This is a catastrophic forecasting error. This cannot be attributed to officers simply being overly-optimistic about the scheme. All the warning signs were there, and both Conservative and independent councillors have constantly questioned the business case.
“This financial model went way beyond optimism and into the realms of fantasy. This was a basket case, not a business case.
“This report shows shockingly poor governance, questionable practices, and a concerning abuse of delegated powers.”
Nick Mattey, an independent councillor for Beddington North, is angry that CIPFA have largely overlooked the plight of New Mill Quarter residents, who have been overcharged and ill-served by SDEN.
“This report confirms what I have said all along, that SDEN is a business built on lie after lie. Sutton Council prostituted itself to Viridor to justify the incinerator with what it describes as a ‘green’ heat network. The crushingly high fixed tariff of £30 a month charged to SDEN customers is a disgrace.
“Meanwhile Viridor is raking in up to £5million a year from electricity generated from the landfill gas engines. The landfill gas comes from millions of tons of organic waste that should never have been buried in Beddington in the first place. Sutton Liberal Democrats have turned Beddington Farmlands into a festering landfill and then said that building an incinerator will make things better. I have never met people more clueless about the environment in my life.”
With a £2million bail-out package for SDEN effectively being proposed by finance director Simpson next week, Tom Drummond, the opposition leader on the council, says that the CIPFA report’s findings suggest that now is the time for a proper fraud investigation.
“This report opens the door to further investigation. It beggars belief that so many coincidences of exaggerated income could all come together so conveniently, coincidences that cannot be simply dismissed as ‘optimism bias’.
Tom Drummond: financial chicanery
“I think we should always remember the true victims, the residents of New Mill Quarter, and the Council Tax-payers of Sutton. This financial chicanery is carried out in the name of the ‘ambitious for Sutton’ slogan, by a poorly performing energy supplier that treats its customers with contempt. That is despicable and unforgivable.”
Sheldon Vestery, the chair of the New Mill Quarter Residents’ Association, said, “The council misinformation machine is in full force. The report does provide evidence of fraud, although it does not call it that, highlighting fake buildings, overestimated heat demand, and more.”
Tim Crowley suggests that other offences may have also been committed around the operation of SDEN, including the company effectively trading while insolvent. “We’re not finished with this yet,” he said. “Pandora’s box has been opened.”
Read more: Sutton chiefs block opposition from seeing fraud report
Read more: Heat network’s plan depends on 75 homes that don’t exist
Read more: Sutton heat network director quits as fraud inquiry begins
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Crikey, they’re all at it.