The Cabinet appointed Cllr George Crane (a former member of the Executive and lead for Regeneration and Major Projects), Phil Porter (Strategic Director of Wellbeing) and Peter Gadson ( Director of Policy, Partnerships and Performance) as directors and former Chief Executive of Ealing Council, Martin Smith, as Chair.
The Resources and Public Realm Scrutiny Committee are due to discuss the Council’s Capital Programme and Investment Programme on January 10th. This includes an accout of the progress of various capital programmes across Brent, including major developemnts and the school expansion prgramme, and ‘Investing 4 Brent’ is mentioned in the umbrella report only in passing. However the Cabinet report on the Wholly Owned Investment Company LINK is included in the subsidiary documents and members may think it merits some scrutiny and discussion as a new departure for Brent Council which raises potential issues of democratic accountability beyond Cabinet oversight.
The Report summarises the Council’s intention:
The proposal is for Brent Council to form a Company under its General Fund powers, which will be 100% owned by the Council. Its initial principal aim will be to assist in the delivery of the Council’s ambitious regeneration plans and housing development objectives, but it is envisaged that this aim will be developed over time.
The rationale for using a WOC, as opposed to developing direct through the General Fund, includes:
. Isolation of some financial risks, which would be borne in the first instance by the Company rather than the Council;
. More focused management of these complex risks, such as cash flow, tax, land development and market appraisals, many of which are not typical of most council services;
. Specifically within the initial focus on housing, absolute clarity that any housing properties delivered will not be council HRA properties and thus will not impact on the HRA borrowing cap. Right to Buy (RTB) does not apply to homes developed through a WOC, as the Company forms a distinct legal entity from the Council.
. Strong and onerous personal obligations placed on the Directors of the company, through the Companies Act, to ensure that the activity receives the appropriate management focus;
. Flexibility to act more commercially and at greater speed than the council can, which is essential in acquiring property and striking development deals and hence emphasises why governance and control are so important; and
. Flexibility to develop the company, once established, into another structure, if so required, allowing for example the development of other companies within the Brent umbrella or sharing of the equity in the company with another partner if that becomes desirable.
It is not intended that the WOC would have a high profile identity separate from the Council, and that, operationally, it would be a “light” organisation with many activities, particularly development, undertaken via consultancy support, contracts and management agreements or via secondment of Council staff. It is expected that by setting up and running the Company in this way the impact on staffing capacity would be low but equally would improve efficiency and maintain employment whilst providing a motivating opportunity for staff to develop new skills. Some direct appointments might be necessary in relation to, for example, management of core functions such as Board papers, audit, insurance, accounting and tax.
The conclusion of this report is that the WOC has significant potential to support the delivery of housing, infrastructure and regeneration strategies directly (i.e. through site development) and indirectly (providing the catalyst for further private sector investment or maintaining the momentum of change). For example, the potential for the Council to be able to directly deliver housing on land that it owns is of clear benefit to the wider regeneration of Brent as it will provide an alternative route to private sector delivery which has been constrained by prevailing economic conditions.Brent Council is currently in the process of bringing the Brent Housing Partnership back ‘in house’ and although a totally different enterprise ‘Investing 4 Brent’ appears to be a form of out-sourcing with its own risks attached. 6.20 indicates that any financial shortfall could be made up by raising rents or selling off property:
. 6.13. Initial modelling has presented a sustainable business plan for the company provided that a number of key targets are met, the key ones being:
. Purchasing a portfolio of properties that generates sufficient income from letting to tenants at sub market rents to cover the costs of operating the company and interest on debt owed to Brent
. Properties are managed in such a way as the costs of operation are optimised and the revenues lost through void and bad debts are minimised
. 6.14. The premise of this company is that it has been established to provide quality housing options at sub market rents. Key to the sustainability of this company is its ability to operational surpluses. However, the ability to make significant surpluses is restricted through sub market rental income. Section 6 of the business plan gives more detail on the critical and other variables that the directors of the company will need to manage to ensure a sustainable, successful and profitable company.
. 6.15. Providing that these key targets are met, the financial profile of the company is that it becomes profitable during the second year, and retains surpluses from which to operate until end of the 30 year business plan period.
. 6.16. It should also be noted that incorporation of a company exposes the operation to liability for corporation tax and VAT. Payment of these taxes has been included in the financial modelling exercise.
. 6.17. Given the target variables as defined above, the company will require a cash flow / working capital facility of up to £1m during the first 4 years of operation. The need for a working capital facility arises from the time it takes from the acquisition of the property to first let. The financial profile for the company is for the company to make a loss in the first year of operation, turn from profit to loss during the second year and to make accrued profits from year 4 onwards.
. 6.18. For the avoidance of doubt, this is a loss within the company. As it forms part of the council’s overall group it is not a loss to the council; indeed, the company will be a part of the council’s plans to reduce its overall costs in managing homelessness. By way of analogy, describing the company as making a loss in its early operation is the same as describing any operational budget as a ‘loss’ which would be meaningless for practical purposes. However, the early loss in the company has a specific meaning within the Companies Act, which is why it is necessary to demonstrate that the company will over time be profitable.
. 6.19. From year 4 onwards the company is self-sustaining, with losses made in later years being offset by further profits made in the earlier years. This is detailed in the appended company business case. Meeting
. 6.20. There are risks of setting up a company, the primary one being that due to unforeseen market changes it may become insolvent. This risk should be mitigated by suitable monitoring arrangements as set out above. It is important that the company maintain the flexibility to set rents and if necessary dispose of properties to meet any shortfalls. The company should not be authorised to borrow or incur long-term liabilities without prior Council approval.
. 6.21. To support the viability of the company and protect the interests of the company a commercial arm will operate alongside the PRS affordable housing. This commercial element will permit greater opportunity to deliver sub market and commercial housing to create a strong and sustainable business and offer accessible housing products to key workers amongst others.