Agenda item

The Committee is recommended to:

1.     Consider and review the Cabinet report and the Action Plan;

2.     Consider any proposed amendments or feedback that it wishes to make on the action plan; and

3.     Submit that feedback in a report to Cabinet at its meeting on 18 January 2020.

The Committee considered a report setting out the findings of the Strategic Review of the Council’s Companies conducted by PwC, along with an action plan providing the Council’s response to these findings. The Committee was asked to review the action plan, with any conclusions or recommendations due to be reported to the Cabinet for further consideration on 18 January 2021.

Prior to discussing the action plan, it was highlighted that a number of the actions had deliver dates in December and January, and at the time of the Committee meeting these remained on target. A report providing an update on the action plan was due to come to the February cycle of meetings, along with the findings from the second stage of the review. The second stage would include options for the future of the Council’s housing development vehicle, Brick by Brick. The Council had recently appointed two new Directors to the board of Brick by Brick, who were in the process of implementing actions regarding governance arrangements.

It was clarified that where recommendations had been marked as ongoing, this was due to either other actions being required to facilitate their delivery or the appropriate processes were being put in place. As a follow up, it was questioned how the various actions in both this review and others, would remain visible. It was confirmed that there was a master list of recommendations, with a process underway to rationalise these as many overlapped with each other.

For the first stage of the discussion the Committee was given the opportunity to ask clarifying questions. In response to a question about those responsible for defining the scope of the review, it was confirmed that it had been commissioned by the Cabinet in September 2020. The scope of the report had been set by the Chief Executive, in consultation with the Executive Director for Place and had been informed by the Report in the Public Interest (RIPI).

It was questioned why the future of Brick by Brick had not been included in the review, as it was dependent on funding from the Council. It was advised that the initial scope of the review had been to focus on what was wrong with Brick by Brick and the Council’s governance, to gain an understanding of the potential risks to the Council. The second phase of the review, which was due to report in February 2021, would be looking at the options for the future of company.

It was confirmed that Brick by Brick had cooperated with the review, including allowing the appointment of a third party quantity surveyor and had provided all the financial information it was able to provide. The options in the second phase of the review would include the potential cost for building out or not, what could be recovered from sales and how much it would cost the Council to deliver these options.

It was highlighted to the Committee that both the Strategic Review and the RIPI report had made recommendations on the Council’s role as the sole shareholder of Brick by Brick. As a result, there had been a report to Cabinet in November changing the articles of association for the company to ensure that the minutes of board meetings and financial accounting were made available to the Council. As previously noted, Cabinet had also agreed to appoint two new Directors to the Board, with these appointees in place and starting to work on addressing the issues that had been raised. 

In response to a question about whether there would be bench marking with other housing delivery vehicles, it was advised that caution was needed, due to local variations in the housing market it was difficult to find a like for like comparison. Work was underway to establish whether the estimated values for Brick by Brick developments could be supported by the value of other properties in the area.

It was questioned whether the potential risks from covid-19 and Brexit had been taken into account as part of the work to develop options for the future of Brick by Brick. It was advised that at present there were no plans to build additional contingency for either covid-19 or Brexit. The impact from covid-19 on housing delivery had been marginal, with the key risk from both the pandemic and Brexit being the potential impact on the wider economy and house sales.

For the remainder of this item, the discussion was focussed on the recommendations in the action plan, with these grouped together to provide a focus for the Committee.  These minutes follow the same format and summarise the discussion held at the meeting. The full set of recommendations arising from the meeting, which are to be reported to the meeting of the Cabinet on 18 January, can be found at the end of these minutes. 

Recommendations 1-4

It was confirmed that the process of recruiting a Director of Finance for Brick by Brick had commenced and the two recent appointees to the board of the company were both experienced CIPFA accountants, with a range of financial experience. The Council could also appoint additional board members, should it wish to, but any further appointments were unlikely to be made until after the outcome from the review on the future of the company was known.

It was questioned whether the rolling forecast mentioned in the report could be shared with the members of the Committee. In response it was advised that this information was normally used by the internal management of a company to understand its financial position at a given point in time and the company’s available cash flow. The Council was able to request this information, but it would not necessarily be expected to be provided as a matter of course.

The Committee recommended that other criteria beyond the purely financial, such as housing delivery, should be included in the consideration of future options for Brick by Brick.

In response to concern raised on behalf of residents about the potential transfer of new sites to Brick by Brick for development, it was advised that the Cabinet had agreed in November to suspend the transfer of sites to the company until after the review had been completed. The future options for sites not transferred to Brick by Brick would be a decision for the Council to resolve.

It was agreed that the ability of Brick by Brick to deliver housing on those sites already transferred, was a key consideration when deciding future options for the company. If the view was taken that Brick by Brick was not able to complete the identified housing developments, it would reduce the number of options to be considered.

It was confirmed that the Fairfield Halls and College Green site had not been transferred to Brick by Brick. It was also confirmed that Grant Thornton had been commissioned to undertaken an audit investigation into the decision making surrounding the Fairfield Halls refurbishment.

In response to a question about whether Brick by Brick had been providing the Council with monthly management accounts, as required by its facility agreement, it was confirmed that these had never been provided.

It was suggested that consideration should be given to asking Brick by Brick to publish high level performance indicators, which would provide assurance to the public that the Council’s investment was being put to good use. In response it was advised that the possibility of publishing information could be investigated, but it would need to be done in such a way to ensure that what was published did not compromise the commercial confidentiality of the company.

Recommendation 5

It was confirmed that site specific risk assessments would be included as part of the process going forward, with it essential for the Council to take a more focussed view on potential options for development sites. An individual assessment would need to be undertaken on each site to ensure that the best option was chosen.  It was suggested that the recommendation could be refined to emphasise that site specific assessments would be required.

It was advised that the Council had not yet formulised a policy on what to do with those sites not already transferred to Brick by Brick. This policy would need to take into account a wide range of criteria, but financial risk would be a key driver. 

Recommendation 6

It was highlighted that three small patches of land in Selsdon, had been assigned what was perceived to be an overly high value. As such there was a concern that the Council may be paying too much for the properties it was purchasing from Brick by Brick. Reassurance was given that although a decision to purchase additional properties under construction from Brick by Brick had been taken in July 2020, it was subsequently agreed to review these purchases upon completion. The Council retained the option to decline the purchase if it decided that was the best course of action.

Recommendation 7.

It was highlighted that at present there was a capacity issue within the Planning service, with it questioned whether the Council could afford to increase staff numbers within the team. It was confirmed that the Council could afford to recruit additional planners, as fees tended to cover the cost of staffing. There had historically been a shortage of planners across the country, but Croydon had fared better than most due to the number of big projects being developed within the borough. A recruitment strategy was being developed, with the aim of recruiting an additional 8 – 10 planners.

In response to a suggestion that there was a perception that Brick by Brick applications were being prioritised, it was confirmed that this had been looked into by PwC as part of the review. No evidence had been found that would indicate that this was the case.

Recommendation 8

The loan arrangements between the Council and Brick by Brick were highlighted, in particular the 75% loan to 25% equity arrangement. As the equity part of the loan arrangement had not been applied, the legal position on this was questioned. In response it was advised that the Council had only advanced 75% of the costs with the intention of taking the equity, but that had not followed. As Brick by Brick had made £14m in sales over the past year, this had been kept in the company to offset against the Council not transferring equity. The 75% to 25% arrangement was used to ensure compliance with state aid requirements.

Recommendations 9 – 12

In response to a question about whether the decision making of Brick by Brick would be investigated, it was confirmed that a specific piece of work to investigate how Brick by Brick was originally set up had not been commissioned at this stage. The LGA had been commissioned to review how the Council got into its present situation, which would take account of Brick by Brick. This review would also indicate whether there was any disciplinary issues to be considered.

Following on from confirmation of the LGA review, it was suggested that a priority should be to take steps to ensure the preservation of any records that may be relevant to the review. It was agreed that this would be taken into consideration. Separately it was questioned whether the board of Brick by Brick had the ability to take disciplinary action should it be found that one of their employees had acted incorrectly. It was confirmed that any such behaviour would be a matter for the directors to resolve.

Regarding recommendation 9 it was confirmed that it was focused on financial governance and the Council’s relationship with its external companies. It would not be a wider governance review, as one had only recently been completed by the Council. The Financial Consultant, Ian O’Donnell had been commissioned to review the Council’s financial governance, which would address many of the issues raised. 

Recommendation 13 – 15

It was highlighted that recommendation 13 had a completion date of December 2020, but as there was not a process in place to provide detailed analysis to inform the calculation of land values, it was questioned whether there could be any confidence on the delivery of this recommendation?  It was confirmed that the Council was working toward having a process in place. However, any test of the process would not happen immediately, due to the decision to stop the transfer of sites to Brick by Brick. Reassurance was given that once the Council was in a position to consider the possible transfer of sites a robust process would be put in place.

Recommendation 16 – 18

It was acknowledged that the economy had significantly changed since the Growth Zone project for the town centre in Croydon had originally been created in 2016, which had led to ambitions for the project being reassessed. As such it was agreed that the recommendations proposed were appropriate for the new aims of the Growth Zone project.

It was recommended by the Committee, that given the importance of the Growth Zone to the future of the town centre, a risk assessment should be undertaken specifically for the project. This risk assessment would need to be regularly reviewed to ensure that the appropriate mitigation was in place to continue with the delivery of the project.

Recommendations 19 – 21

In response to a question about the Council’s use of both the Revolving Investment Fund and the Asset Investment Fund, it was confirmed that although it might appear to be complicated, it could be untangled if needed. It was also confirmed that PwC had not been able to find all of the documentation for the Council’s loans to Brick by Brick as part of the review. Reassurance was given that a robust process had now been put in place to ensure any future loans from the Council to its companies were appropriately documented and tracked.

It was questioned whether the Council had sufficient expertise in-house to provide advice and guidance to the Cabinet on treasury management matters. In response, it was advised that most local authorities would employ external companies to provide advice on treasury management. It was highlighted that advisors are employed to give advice, but it was down to the Council whether it followed this advice or not. It was unlikely that any advisors would have recommended the model for treasury management that had been followed by the Council.

Although it was confirmed it would usually be the case that the General Purposes and Audit Committee was responsible for reviewing treasury management arrangements, it was agreed that a recommendation would be made asking for further clarity on the role of scrutiny and audit.

It was noted that given the changes in personnel at the Council, it was understandable that there was a lack of corporate memory and it was agreed that it was essential for the necessary governance to be put in place to ensure the retention of corporate memory as a matter of urgency.

Recommendations 22 - 24

It was noted that the arrangements for Croydon Affordable Homes were very complicated to understand for those without an in depth knowledge of the Council. To help understand the arrangements for the company a request was made for a diagram setting out the inter-related entities. It was also questioned whether the cash flow for the company could be traced. In response, it was advised that although it was difficult to understand, work had been undertaken which had confirmed that although the company was not costing the Council any money, it was also not making as much income as anticipated.

In response to a question about the offer made to the Council’s pension fund to transfer property into the fund and whether this was considered normal practice, it was confirmed that it was not unusual for such a transaction to take place.  A final decision on the possible transfer of property had yet to be taken, with work underway with the pension regulator and the Department for Communities and Local Government on whether it should go ahead. Should it be permitted to proceed, it would be a decision for the Pension Committee and Pension Board to resolve.

It was agreed that that Recommendation 24 concerning the amount of money set aside for life cycle costs of Croydon Affordable Housing stock should be prioritised to ensure that sufficient funds had been set aside for maintenance costs.

Recommendation 24 – 26

Following a request for further information, it was agreed that more detail would be provided to the members of the Committee on the Housing Allocations Policy used for properties owned by Croydon Affordable Homes.

Recommendation 27

In response to a question about whether the Asset Investment Fund should have its own risks on the corporate risk register, it was confirmed that there was such a risk, but it had only recently been added.

It was also questioned whether the Council would have been in a better financial position if the Asset Investment Board had not been set up. It was advised that funding for the Board had been borrowed at an interest rate of 2.6% and at present the income generated by the investment fund covered the cost of repayment, so overall the Council was better off.

It was noted that there had been missed payments within the fund that had resulted in media headlines suggesting this was the cause of what tipped the Council into bankruptcy, which was not the case. It was questioned whether there would be any further issues with payment and how this could be avoided. It was confirmed that the Council had now budgeted for ongoing payments, so it would not be an issue in the forthcoming year.  The Council would need to look at its options for the Croydon Park Hotel to minimise any cost to council taxpayers.

It was asked whether the fund was meeting expectations. It was confirmed that in terms of the Council’s revenue account the return from the rent on the acquisitions was slightly more than the cost incurred. However, the Asset Investment Fund had contributed to the overspend due to an assumption made on the rental income it would achieve, which had not been realised.

In response to a question about selling assets to cover the Council’s debt, it was advised that each site would need to be reviewed on a case by case basis. The disposal of assets had been discussed with the MHCLG and there was no indication that the Council would be expected to hold a fire sale. When considering asset disposal, one of the key considerations would be ensuring the best outcome for public money. 

At the conclusion of this item the Chair thanked both the Councillors and officers in attendance for their participation in the meeting and their open engagement with the questions of the Committee.

Recommendations

At the conclusion of the discussion on this item, the Scrutiny and Overview Committee agreed to make the following recommendations to the Cabinet on the action plan arising from the Strategic Review of the Council’s Companies.

1.    The Committee would request the opportunity to scrutinise the report arising from the second phase of the PwC review of the Council’s Companies.

2.    The Committee would request the opportunity to scrutinise the progress made against delivering the action plan, at the appropriate time.

3.    The Committee identified that a lack of governance and appropriate management systems were a reoccurring theme in both this report and the Report in the Public Interest, and as such it was important to ensure that a robust level of challenge from scrutiny was facilitated to prevent any repetition of past mistakes.

4.    The Committee noted that investigation had found no evidence that Brick by Brick had ever produced monthly management accounts and recommends that this is addressed as soon as possible.

5.    Should the second phase report identify continuing with Brick by Brick, it was requested that the annual business case for the company continue to receive scrutiny from the Streets, Environment & Homes Sub-Committee.

6.    The Committee recognised the need to be mindful of the capacity within the Council to respond to requests from scrutiny, particularly in light of the ongoing pressures from covid-19, and would both encourage and welcome an open dialogue with the Corporate and Political Leadership to manage expectations.

7.    The Committee recommends that achieving value for money should form a key priority within any future relationship with its companies.