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.
So the council are setting up a Housing Association which will enable them to deliver social housing to meet their targets as no private developers are willing to give them what they need.
ReplyDeleteThat is one way of looking at it but I think the WOC goes a lot further. It may be an imaginative solution to the failures of private developers to deliver truly affordable housing and that is very welcome. However as the report acknowledges there are risks attached and those are shifted from the Council to the directors. The WOC has to eventually generate a surplus to be viable but the extent of the surplus is limited by the its income as rents will be at sub-market levels. That is quite a narrow operating area. This problem may be addressed by the ability to operate commercially in some areas, raise rents or dispose of property presumably at market prices. There are other options to change the nature of the company or seek other partners. The WOC is only 2 months old but has a 30 year business plan. Another issue is the WOC's relationship with the Council's independent planning committee when the WOC is involved in plasn for redevelopment of Council owned lands or estates.
DeleteI am drawing attention to the WOC as it appears to be a major project with wide implications that has slipped in under the radar. It merits wider discussion and scrutiny.
I,too,am worried about what has gone on here with no pre-indication or discussion. I think we have a right to know what is going on.
ReplyDeleteThe item was No 15 on the November 15th Cabinet agenda which spent some time on the Granville issue. These are the minutes of the discussion on the WOC. Note Cllr Warren's reservations:
ReplyDeleteWholly Owned Investment Company and Subsidiaries
Councillor John Warren, Brondesbury Park Ward, expressed concern about the monitoring arrangements in place. he expressed reservation at the appointment of Councillor Crane to the Board.
Conrad Hall, Chief Finance Officer, outlined the monitoring arrangements in place.
Councillor Margaret McLennan, Deputy Leader, reminded Members that Cabinet had approved Brent’s investment strategy at its meeting on 11 April 2016.
This strategy was designed to set the framework through which the capital programme will help to deliver the council’s long-term vision to “make Brent a great place to live and work...” and to help deliver the five Brent 2020 priorities.
She stated that the Strategy explicitly signalled a shift away from short-term solutions to long-term public investment, and envisaged a council embracing more innovative and agile corporate structures to enable a more enterprising culture focused on seizing opportunities and managing rather than eliminating risks.
One action was to establish a local authority controlled company, originally envisaged to enable speedy delivery of the temporary accommodation reform plan. Councillor McLennan stated that the report therefore includes a focus on how the WOC will help deliver the Council’s targets for the development of new affordable homes and why establishing a Company will offer the Council flexibility to intervene strategically to ensure that new housing development can contribute fully to strategic priorities.
RESOLVED:-
i. Cabinet approved the establishment of the wholly owned company, to be called “Investing 4 Brent”, for the objects and purposes set out in the report
ii. Cabinet agreed to appoint the following as Directors of the Company, with all the responsibilities under the Companies Act that flow from that:
- Councillor George Crane;
- The Strategic Director of Community Wellbeing (Phil Porter); and
- The Director of Policy, Partnerships and Performance (Peter Gadsdon).
iii. Cabinet noted that the Board of the Company will be chaired by an independent voting Director, and that Martin Smith, the former Chief Executive of Ealing Council is proposed for this role.
iv. Cabinet approved the Articles of Association and Shareholders Agreement as set out at Appendices One and Two.
v. Cabinet approved the company’s initial business plan, which is set out at Appendix Three.
vi. Cabinet authorised the loan facility between the council and the company, as summarised in this report, and authorise the chief finance officer to finalise the legal documentation accordingly and thereafter to authorise loans on the terms set out in this report.
vii. Cabinet delegated to the deputy Leader, in consultation with the Chief Finance Officer, the precise mix of loan and equity funding, for the reasons set out in paragraph 6.8.
viii. Cabinet approved the provision of an initial loan of £1m to meet the working capital (cash flow) requirements of the company on terms as summarised in this report and delegate authority to the Chief Finance Officer to finalise the legal documentation accordingly.
ix. Cabinet noted that the company is intended to be incorporated by the end of the calendar year, and as soon as practicably possible following expiry of the scrutiny call-in period.
x. Cabinet delegated to the deputy leader, in consultation with the chief finance officer, authority to finalise the Articles of Association and other legal documentation required formally to incorporate the Company in accordance with the requirements of the Companies Act 1985.
I still feel very concerned over the whole thing especially as I nite that Cllr McLennan is involved in things to do with it. I feel very much that the tax payers and residents should have been consulted and not this "hole in corner" type of situation.....but sadly this is the way of this autocratic non-democratic council. I need to read through your kindly supplied information a few times with pen and sheets of paper at my side in order to analyse it completely as in typically Cllr McClellan style it is not written in straightforward English (I find it easier to read and adsorb research papers in advanced Quantum Physics than anything that is spieled out by the above councillor)before I can make further judgment.
DeleteBefore I read this blog, I was totally unaware of "Investing 4 Brent". It appears that it has been designed to be not Brent Council legally, but in reality Brent Council in another guise, except that councillors cannot hold it to account.
ReplyDeleteThe Cabinet has agreed that the Council will provide an initial loan of £1 million. If that is to be "at arms length", it will need to charge the "WOC" a slightly higher rate of interest on the loan than it pays to borrow that money. [An extra 0.25% was the norm on local authority loans to housing associations, when I worked for them in the 1970's].
Will this loan be "secured"? If not, any loss by the "WOC" could end up being a REAL loss to the Council. Para 6.18 quoted above is being optimistic when it claims:
'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....'
Who "proposed" Martin Smith to be Chair of the company's board, what directors' remuneration will be payable to him and the other directors for the time and legal responsibility that they will be taking on, and who will approve that remuneration on behalf of the shareholder, Brent Council?
Will the staff "seconded" to "Investing for Brent" (someone has to do the day-to-day work!) actually be treated as employees of the "WOC"? Do they, and the people who will be supervising them, have the necessary skills for this type of commercial operation?
There are definitely risks here - where will the buck stop if things go wrong? Brent's councillors and Council Tax-payers deserve to be told.
Philip.
There is more about the process of appointing Martin Smith in the full report. He is the only one to be renumerated - although the others are taking on quite a risk:
DeleteFrom the report:
A range of potential candidates with the likely experience have been approached, and it is proposed that Martin Smith, the former chief executive of Ealing council, is appointed to the role. It is proposed that the chief finance officer be authorised to agree the precise contractual terms and, for the avoidance of doubt, the role would be remunerated.
4.25. The council nominated Directors of the company would not be remunerated for undertaking the role. However, they would be indemnified in the council’s standard terms.
Thank you for this update, Martin. I admit that I had not read the full report.
DeleteIt is interesting that Brent's Chief Finance Officer is being given a lot of power over the
the detailed arrangements for this "WOC".
I have nothing against Conrad Hall personally, but by coincidence I was speaking to him last month (along with other objectors to Brent's 2015/16 accounts), and the question of indemnities came up then.
This was in connection with Brent paying all of the financial settlement in the Rosemarie Clarke Employment Tribunal case, and all of the legal costs, without recharging any of this expenditure of Council money to Cara Davani. Ms Davani was a separately named respondent in that case, whose victimisation of Ms Clarke (and false accusation of gross misconduct against her), which the Tribunal found were wholly a result of Ms Clarke having complained of being bullied and harassed by her, was the main reason why the case came before the Employment Tribunal and Brent and Ms Davani lost the case.
Brent's Chief Finance Officer told us that: 'it is normal practice for a Council’s defence to include any officers who are individually named, and to indemnify its employees against such action.'
So, if the Council Officers or other nominated directors of "Investing 4 Brent" make any mistakes or do anything wrong, including any breaches of company law, Brent's Council Tax-payers will pick up the bill (whatever the facts of the matter).
I hope that the Council's Resources & Public Realm Scrutiny Committee will give this item a VERY thorough scrutiny tomorrow evening.
Philip.
This was my all my idea. I suggested it 34 years ago to Brent when I was a mere basic grade housing officer.......
ReplyDeleteI was fed up of having to continually fob off tenants in need of transfers with empty statements about how there was no hope of helping them for the forseeable future and also when one day I was left with no alernative but to book a homeless family into what is now the Wembley Hill Road Holiday Inn because we had run out of B and B places and there was literally no room at any other inn.........
The governance of this vehicle needs to be got right and the staffing will be critical, however I can pretty much guarantee they will get this latter element wrong. You read it here first.