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Agenda item

Ongoing Review of Brick by Brick Croydon Ltd and the future of the company

Cabinet Member: Leader of the Council, Councillor Hamida Ali

Officer: Interim Chief Executive, Katherine Kerswell and Interim Director of Finance, Investment & Risk and Section 151 Officer, Chris Buss

Key decision: yes

Decision:

The Leader of the Council delegated authority to the Cabinet to make the following decisions:

 

Cabinet RESOLVED (acting, where relevant, on behalf of the Council exercising its functions as sole shareholder of Brick by Brick Croydon Ltd) to:

 

1.           Reject the offer for the purchase of Brick by Brick (Croydon) Ltd.

 

2.           Agree that a modified build out scenario of 23 sites will be implemented and to note that in order to deliver that, Brick by Brick will require additional management and technical support, the costs of which are factored into the costs shown in this report and as further consequence of this decision that Brick by Brick will return 5 sites to the Council on the basis that they will be marketed for sale (and on the basis that site ownership will either remain with Brick by Brick or transfer to the Council, whichever is most efficient for maximizing value or the efficiency of the sale process). The remaining site of Belgrave and Grosvenor to be deferred pending the completion of the stock survey being undertaken in adjoining council buildings and to be brought to a future Cabinet meeting for final consideration.

 

3.           Agree that the decisions made under this Report shall take effect as amendments to the current Business Plan of Brick by Brick (and as a shareholder decision under the Articles of the company). In addition, and also as shareholder, the Council will require Brick by Brick to issue monthly reports to the Council to update on its financial position, progress with development of sites, sales, any key contractual issues and any other relevant matter (as needed). Such reports are to be presented to the Cabinet on a quarterly basis.

 

4.           Confirm that, in accordance with the February Cabinet report, sales receipts may continue to be recycled by Brick by Brick and agree that the S151 Officer, in consultation with the Chief Executive and Monitoring Officer be given authority to approve those ad-hoc sales receipt recycling requests from Brick by Brick, up to a total amount of £5m in any one transaction and following the terms of the consolidated loan agreement, reporting on a quarterly basis to Cabinet.

 

5.           Delegate authority to the Section 151 Officer, in consultation with the Chief Executive and Monitoring Officer, to make any necessary formal shareholder resolutions in order to give effect to the above recommendations and to authorise the entering into any of the necessary formal legal documentation that arise as a consequence (including (i) to confirm the appointment of consultants to provide the necessary additional management and technical support, and (ii) in respect of the sale of the 6 sites, as are referred to in recommendation 2).

 

6.           Delegate authority to the Section 151 Officer, in consultation with the Chief Executive and Monitoring Officer, to vary the loan agreement in respect of the sites returned to the Council sites (subject to SDLT and various other tax advice) and with any such modifications being reported in the quarterly report to Cabinet.

 

7.           Otherwise note the progress made with regard to Brick by Brick.

 

8.           To thank the Improvement and Assurance Panel for their advice and support in the production of the report.

 

Minutes:

The Leader of the Council (Councillor Hamida Ali) reflected that Cabinet had considered and deliberated the future of Brick by Brick at previous meetings in November 2020 and February 2021. It was stated that the meeting would determine the way forward for the company with the recommendation being that the council should reject the offer which had been received and should proceed with the build out of 23 sites and sell six sites.

 

It was noted by the Leader that the build out of the sites should complete that financial year with only two going beyond that date and one completing in February 2023.

 

The Leader felt that the decision before Cabinet was one of a balance between risk and return. It was noted that the analysis contained within the report argued that higher levels of risks could be mitigated and that the council should pursue the higher levels of return which were available. The fact that there was no risk free option was highlighted.

 

It was reflected that the guiding principles that have underpinned the council’s response to addressing its financial resilience had been to reduce the risk appetite and to maximise the return on the public’s investment, however with the decision in terms of the future of Brick by Brick the Leader felt that those two principles came into conflict and it was important that Cabinet came to a decision as to the best option of the two.

 

The Leader noted that there was greater risks pursuing the build out option, but that the greater certainty and lower risks of agreeing the bid came at a price and would potentially secure less of the money invested by the council. External analysis by PwC and Savilles had been undertaken which had evaluated what the price difference would be.

 

Members were informed that the recommendation contained within the report sought to secure the best return for the council’s investment and noted that almost 800 new homes will have been delivered, with over 50% of the homes being affordable. Whilst it was recognised that the recommendation involved greater risk, that risk would be offset by introducing additional support which had been budgeted for within the analysis. The Leader stressed that the council had striven to establish the best value from the investment in Brick by Brick for residents.

 

The Leader thanked all those involved in the work; including the Interim Director of Finance, Investment & Risk (Chris Buss), the Chief Executive (Katherine Kerswell), external consultants and the Improvement & Assurance Panel.

 

The Chair of Scrutiny & Overview Committee (SOC) (Councillor Sean Fitzsimons) informed Members that a meeting of Scrutiny had taken place on 6 July 2021 to review the Cabinet report and to receive a briefing from the Interim Director of Finance, Investment & Risk. Cabinet were informed that when Scrutiny review the report, the Committee had focussed on three key areas; officer confidence in the valuations provided, the evaluation of the risks to the council presented by the two options, and whether there were alternative options which needed further explanation. Questions were asked of the Leader and the Interim Director of Finance, Investment & Risk on all three areas to gain reassurance that all areas had been given proper consideration.

 

In relation to the valuations provided in the report, the Chair of SOC advised that the Committee were satisfied with the explanation provided as to the method used to calculate the valuation. Additionally, Members were reasonably satisfied that the build out option presented the greater risk to the council, but it was recognised that there was potentially greater financial return for the council if it pursued the build out option. It was report that the Committee received reassurance that the third party and council were managing the additional risk by appointing recognised companies to provide technical support to Brick by Brick to complete the build out of the final 23 sites.

 

Cabinet were advised that a potential issue had been raised by a ward councillor as to whether the council should proceed with the sale of the Brelgrave and Grosvenor site due to the potential need for wider redevelopment in the area. The Chair of SOC as stated that the Committee had requested to see the monthly monitoring to ensure it covered all of the risks identified within the report.

 

The Chair of SOC concluded by highlighting the quality of the report; whilst it was a technical report, Members of the Committee felt that it had been set out clearly and was informative. On balance, it was reported, the Committee was broadly supportive of the recommendation although it was recognised that it was a matter of balancing risk and reward.

 

The Cabinet Member for Croydon Renewal (Councillor Stuart King) reflected that he felt the bid document was a little weak and it was felt that insufficient progress had been made in terms of due diligence. Furthermore, concerns were raised that the cash return from the sale of Brick by Brick did not look particularly advantageous in terms of the timeframe involved. Whilst the sale was the lower risk option, the Cabinet Member stated that risks would still need to be managed.

 

It was noted by the Cabinet Member that expert external advice had been sought which counselled against the sale option and it was stated that the advice should be reflected upon when making a decision on the future of Brick by Brick.

 

In terms of the build out option, the Cabinet Member stated that whilst it was potentially the better financial option for the council, there were different and often greater risks associated with the option. In light of this, the Cabinet Member queried who would be managing the client role with Brick by Brick and would ensure the professional support was brought in to ensure the financial outcome was achieved. Furthermore, the Cabinet Member queried whether there were any potential operating costs within Brick by Brick which could be removed and whether officers were confidence that Brick by Brick could trade in a manner which was consistent with company obligations.

 

In response, the Interim Director of Finance, Investment & Risk advised that there were risks associated with Brick by Brick continuing to operate as the council would not want any directors to be run the risk of trading whilst insolvent. Legal advice had been sought on this matter and it was suggested that the council should offer certain guarantees that it would not stop funding the company. As such, a letter of comfort, of similar, could be issued to state the council would continue to honour the loans made to the company.

 

In terms of the operating costs, the Interim Director advised that allowances had been made within the estimates. Brick by Brick directors would be ensuring that overall management costs in the company were minimised whilst providing the most effective service possible.

 

It was highlighted by the Interim Director that the PwC report in November 2020 had identified that the council had not effectively managed its relationship with Brick by Brick. Members were advised that under the new staff structure of the council the Section 151 Officer would have overall responsibility for a number of areas including managing the council’s relationship with its companies, including Brick by Brick. The Interim Director advised that under the Section 151 Officer there should be a specific post that manages the day to day relationship as the company was run down.

 

The Cabinet Member for Sustainable Croydon (Councillor Muhammad Ali) noted that paragraph 3.15 of the report listed the associated risks with the recommended approach and sough assurance that appropriate measures would be put in place to manage those risk, including a mitigation plan. Additionally, the Cabinet Member queried whether the appointment of the professional support for the build out would be a decision of Brick by Brick or the council. In response, the Interim Director advised that any operational decision rested with the directors of the company and the council’s role as funder and shareholder was to provide advice and support when they were making that decision.

 

The Deputy Cabinet Member for Families, Health & Social Care (Councillor Stephen Mann) stated that it was a vitally important report for the council to get for residents and for the communities which were being created through the developments. He suggested that it was important that strategies were developed for the sites which were being transferred back to the council as time was running out for the planning consents and residents were querying what would happen to the sites. In light of this, the Deputy Cabinet Member queried whether there was effective community engagement to ensure communities were kept abreast of the information. Furthermore, the original principle of setting up Brick by Brick was highlighted and the Deputy Cabinet Member queried whether the six sites being returned to the council should be considered for alternative development options, such as community land trusts.

 

The Leader noted that the Cabinet had made a decision in February 2021 to not pursue a number of sites and those 40 sites were part of a review by the council which would be reported to Cabinet in autumn 2021, as the final decision on what to do with those sites was a Cabinet decision.

 

In terms of alternative development options for the remaining sites, the Leader noted that the return of the sites was predicated on the sale of sites. The Interim Director further advised that for every site not sold increased the amount of money which the council would not receive as the investment made by the council would be used to secure planning permission.

 

The Interim Director noted that the Belgrave and Grosvenor site was, however, slightly different as a stock survey was being undertaken on the neighbouring blocks. That survey, Members were advised, may suggest that the neighbouring blocks were too expensive to maintain and thus a redevelopment of the whole site, including the site which Brick by Brick had previously been due to develop, should be considered by the council. As such, the Interim Director advised that deferring the decision for that site was appropriate to understand the wider context.

 

The Cabinet Member for Children, Young People & Learning (Councillor Alisa Flemming) raised concerns in relation to the timescales for the six sites as at some of those sites boarding had been erected which had reduced the amount of space available to residents. It was felt that narrow footpaths or restricted access of cycle storages could be accepted whilst a development was ongoing, but due to the uncertainty of the sites communication was required with the local residents so they understood the timescales.

 

The Interim Director advised that it was in the council’s interests to receive the capital receipts as soon as possible and subject to the Cabinet decision, officers would work with Brick by Brick to market the sites as quickly as possible. It was noted that there were some issues in terms of curtilage and should there be issues of access these would be looked at.

 

The Cabinet Member for Resources & Financial Governance (Councillor Callton Young) noted that the council was seeking to achieve best value and to listen to the professional advice which had been sought. It was felt that the report from Savilles was optimistic, and the Cabinet Member queried whether he would be best placed to be more cautious or to follow the professional advice. Whilst the Cabinet Member was in favour of the build out option, he stressed that he wanted to ensure best value for residents.

 

Members were advised by the Interim Director that the advice received in February had been from a firm of accountants and the subsequent advice was for a firm more specialised in the building markets and so could give a clearer idea of the build out option. In February it was felt that it might be possible to recover cost invested, but having received professional advice this appeared to be less credible.

 

The Leader of the Opposition (Councillor Jason Perry) noted that the options before Cabinet maintained a large risks to the council and council taxpayers. It was stated that the best case scenario was a cost of £26 million to taxpayers, whilst a worst case scenario saw the figure rise to £53 million. However, the Leader of the Opposition stated that those figures did not include the costs of the refurbishment of Fairfield Halls at £73 million. Concerns were raised that the council had squandered money and blighted a number of communities across the borough with developments. To this end, the Leader of the Opposition queried how people could trust the council to effectively manage the ongoing risks.

 

In response, the Leader of the Council stated the work to address the future of Brick by Brick had been driven by making the right decision in terms of the investment made by residents via the council. The importance of the deliberation of ensuring the best result for Croydon taxpayers was highlighted by the Leader. It was recognised that the recommendation before Cabinet carried greater risks but how the council would manage that risk was contained within the report. In terms of the Fairfield Halls, Members were advised that it was being treated separately as part of the capital programme.

 

The Shadow Cabinet Member for Resources & Financial Governance (Councillor Simon Hoar) noted the potential financial loss from the sale and the higher risks of the build out option, however given the council’s financial management in previous years he queried whether anyone could have faith that the risks would be appropriately managed.

 

The Leader responded by stated that she felt the current administration had consistently demonstrated a significant risk appetite and were led by the two guiding principles of reducing risk and maximising return for Croydon taxpayers. She highlighted that a report due to be considered later in the agenda reported an 80% reduction in the capital programme which showed a shift in approach at the council to ensure best value for Croydon residents.

 

In light of the recommendations of the Scrutiny & Overview Committee, Cabinet amended recommendation of the two of the report to defer the sale of the Belgrave and Grosvenor site subject to the completion of a stock survey and for the final decision to be taken by Cabinet at a future meeting.

 

The Leader of the Council delegated authority to the Cabinet to make the following decisions:

 

Cabinet RESOLVED (acting, where relevant, on behalf of the Council exercising its functions as sole shareholder of Brick by Brick Croydon Ltd) to:

 

1.         Reject the offer for the purchase of Brick by Brick (Croydon) Ltd.

 

2.         It was agreed that a modified build out scenario of 23 sites will be implemented and to note that in order to deliver that, Brick by Brick will require additional management and technical support, the costs of which are factored into the costs shown in this report and as further consequence of this decision that Brick by Brick will return 5 sites to the Council on the basis that they will be marketed for sale (and on the basis that site ownership will either remain with Brick by Brick or transfer to the Council, whichever is most efficient for maximizing value or the efficiency of the sale process). The remaining site of Belgrave and Grosvenor to be deferred pending the completion of the stock survey being undertaken in adjoining council buildings and to be brought to a future Cabinet meeting for final consideration.

 

3.         Agree that the decisions made under this Report shall take effect as amendments to the current Business Plan of Brick by Brick (and as a shareholder decision under the Articles of the company). In addition, and also as shareholder, the Council will require Brick by Brick to issue monthly reports to the Council to update on its financial position, progress with development of sites, sales, any key contractual issues and any other relevant matter (as needed). Such reports are to be presented to the Cabinet on a quarterly basis.

 

4.         Confirm that, in accordance with the February Cabinet report, sales receipts may continue to be recycled by Brick by Brick and agree that the S151 Officer, in consultation with the Chief Executive and Monitoring Officer be given authority to approve those ad-hoc sales receipt recycling requests from Brick by Brick, up to a total amount of £5m in any one transaction and following the terms of the consolidated loan agreement, reporting on a quarterly basis to Cabinet.

 

5.         Delegate authority to the Section 151 Officer, in consultation with the Chief Executive and Monitoring Officer, to make any necessary formal shareholder resolutions in order to give effect to the above recommendations and to authorise the entering into any of the necessary formal legal documentation that arise as a consequence (including (i) to confirm the appointment of consultants to provide the necessary additional management and technical support, and (ii) in respect of the sale of the 6 sites, as are referred to in recommendation 2).

 

6.         Delegate authority to the Section 151 Officer, in consultation with the Chief Executive and Monitoring Officer, to vary the loan agreement in respect of the sites returned to the Council sites (subject to SDLT and various other tax advice) and with any such modifications being reported in the quarterly report to Cabinet.

 

7.         Otherwise note the progress made with regard to Brick by Brick.

 

8.         To thank the Improvement and Assurance Panel for their advice and support in the production of the report.

Supporting documents: