Agenda item

Cabinet Member: Leader of the Council, Councillor Hamida Ali

Officer: Interim Chief Executive, Katherine Kerswell

Key decision: yes

The Leader introduced the report noting that it marked a significant moment in the context of the council’s recovery and thanked Chris Buss, Consultant, for his work in reviewing the options for the future of Brick by Brick. Options before Cabinet were the product of two sets of detailed analysis which had been undertaken. The first of which was assess how the company was operating and the council’s relationship with the company. That report had also identified a series of possible options which required further analysis. It was reported that following that initial report in November 2020 progress had been made to progress the recommendations with the appointment of non-executive directors with significant financial experience. Furthermore, the company had appointed a Finance Director, which had been a key recommendation from PwC, and significant work was underway to review and reconcile the loan agreements which were in place.

 

It was stated that the second analysis, which was contained within the report before Cabinet, had been designed to support the council to make a decision on how to move forward in terms of the future of the company. The Leader stressed that a fundamental principle driving the consideration of the most appropriate option had been to minimise the loss to the public. The first report had set out seven options and following further analysis an additional option had emerged; that the council conclude its relationship with Brick by Brick in October 2021 with the completion of the 29 remaining sites. Cabinet were asked to agree that option, subject to further exploration of possibly selling the company which still posed risk and challenge, as outlined within the report, but it was felt that there was less risk to the council with this option.

 

The Cabinet Member for Culture & Regeneration thanked those involved in undertaking the assessment and developing the report. It was highlighted by the Cabinet Member that the report recommended loaning Brick by Brick an additional up to £10m; as such he sought reassurance that any additional lending would be monitored by the council to ensure terms and conditions were adhered to and that the money was repaid to the council. In response, the Leader confirmed that there was recommendation for the council to make up to £10m available to Brick by Brick. It was further confirmed that the sale receipts from those sites which were due to complete before October 2021 would be used by Brick by Brick to limit the lending to the company. Work was also underway to reconcile the number of loan agreements which were in place to ensure there was absolute understanding between Brick by Brick and the council on those agreements.

 

Chris Buss, Consultant, confirmed that the loan agreements between the council and Brick by Brick were being worked through and that following a Cabinet decision a meeting would be held with the lawyers to review and finalise an agreement. Members were advised that the council would be, following agreement of the recommendations, dealing with an organisation with a finite future and as such there would not be an open ended arrangement in place. In terms of the loan of up to £10m, the Consultant advised Cabinet that the total amount was felt to be adequate based on the information which was available. It was recognised, however, that there was one large indeterminate which, was the level of sales. Should the anticipated sales not take place then the Consultant advised Members there may be cash flow issues which would then have to be considered.

 

The Cabinet Member for Resources & Financial Governance recognised that residents would be concerned that the council was proposing to lend Brick by Brick up to a further £10m. It was queried whether this proposed loan would be a better option in the long term and what the range of the loan would be. In response, the Consultant informed Members that the proposed loan would be up to £10m and would be the amount the company required. Two cash flow forecasts had been created which set the loan amount required to be between £5m and £10m.

 

The Consultant advised Members that the proposed loan was the equivalent to a bank overdraft and was a cash flow requirement. It was recognised that there was significant value in the properties which were almost near completion, however to reach the point where the full value could be realised a small additional loan was required. It was understood there would be scepticism as to whether an additional loan was required but the Consultant confirmed that he and the PwC consultants had looked at the issue in detail and the new cash flow forecasts had been provided by the Brick by Brick Finance Director; as such it was felt there was more certainty as to the reliability of the figures compared to those approved in the previous year’s Business Plan. Whilst there was more certainty, the Consultant stressed that it was not guaranteed as it relied on people wanting to buy the properties when it was anticipated they would be sold.

 

The Cabinet Member for Croydon Renewal highlighted recommendation 1.2 of the report which was a change to a 100% debt model from 75%. It was noted by the Cabinet Member that external legal advice had been sought, which was included within the report, and suggested that there was not a concern in relation to subsidy control on the basis that the council was acting as a rational private sector party. However the Cabinet Member noted the council was not a private sector organisation and requested assurance that the 100% debt model was a sound and justified approach. In response, the Consultant noted that local authorities were governed by the Wednesbury Principles and he advised Members that he was satisfied that the recommendations contained within the report were ensuring the council was acting in a reasonable manner as it would protect as much of the investments it had made as possible. The council would be acting as a private sector company in such a situation; that is if a small investment was required to realise a substantial amount of the whole investment made previously then it would be considered the rational approach as opposed to not making that investment and losing more money. To that end, the Consultant advised Members that it was felt that it was perfectly rational for the council to move to 100% debt model.

 

The Cabinet Member for Croydon Renewal further noted that recommendation 1.4 of the report required a report to go to a future meeting of Cabinet which set out the proposals for sites that Brick by Brick was returning to the council. Given the concerns related to those sites, the Cabinet Member queried when that report would be received by Cabinet. In response, the Interim Director of Homes & Social Investments, Ozay Ali, informed Members that a large amount of work had been undertaken to identify the large number of sites which were at various stages of development. One of the areas of work, Members were advised, had been to develop a resource plan to ensure the council could move forward, including purchasing properties and converting them to affordable rent. Additionally, the council was looking at how it could progress some, if not all, of the site for the delivery of future affordable housing. The Interim Director advised Members that this work would be progressed in the next quarter of the year and a subsequent report would be brought to Cabinet, outlining which sites could be delivered within the framework of an affordable housing programme, which could be sold to housing associations and which could be sold on the market. It was highlighted that not all sites would be suitable for the council to develop and those sites would be sold in line with the Interim Asset Disposal Strategy.

 

It was noted that some Members had expressed concern that some sites had been omitted from appendix 4 of the report and in response, the Consultant advised Members that in the body of the report it was recognised that the list was incomplete. Members were thanked for passing on additional information and were advised that the list was still being worked on to ensure it was as complete as possible. It was felt that it was important that officers were given some time to ensure the list of works by Brick by Brick was comprehensive.

 

In terms of the risk, the Cabinet Member for Croydon Renewal stated that he felt that the options before Cabinet were sensible but noted that there was a risk that Brick by Brick staff, which were essential to the company delivering schemes, would look for alternative employment before the final completion date of October 2021. Risks were also highlighted in terms of suppliers and contractors in terms of payment terms. In light of the identified risks, the Cabinet Member queried how they would be managed. In response to the Cabinet Member’s question, the Consultant advised that he had been holding conversations with the non-executive Directors of Brick by Brick on how to ensure the organisation was able to manage during what would be difficult period in terms of staffing and managing suppliers. Members were advised that the council would be effectively underwriting Brick by Brick’s cash flow with a loan which would give suppliers and contractors some confidence that the company would not renegade on sums due as it was not in the council’s best interest to allow them to do so.

 

The Cabinet Member for Economic Recovery & Skills queried whether the potential impact of covid-19 and further lockdown restrictions had been taken into consideration. It was noted that the construction sector and its supply chain were able to operate during national lockdown but that there was a risk that the government guidance may change in light of new variants which were being transmitted. In response the Consultant advised Members that this had been considered by the consultants when they considered the options. The view was that impact of covid-19 restrictions would be negligible in terms of the build out progress, however should a more virulent variant of covid-19 come to the fore the government guidance may change. In terms of the current guidance, it was felt that there should be no impact other than that mentioned within the report.

 

Concerns were raised by the Cabinet Member for Children, Young People & Learning that some sites were missing from the list contained at appendix 4 of the report. Residents, it was reported, had queried whether sites would be developed by the council or an alternative developer and whether residents would be able to speak on further alternative proposals. Members were advised that each site would be considered individually and consideration would take into account resident concerns. However, it was noted that the council would need to take into consideration that there remained a need for affordable housing.

 

Members were informed by the Chair of Scrutiny & Overview Committee that the Committee had considered the report at a meeting held on 9 February 2021 alongside the Interim Asset Disposal Strategy. It was noted that the conclusions and recommendations from this meeting were contained within the Scrutiny Stage 1 report which was due to be considered later in the agenda of the Cabinet meeting. The Committee thanked the work of the consultants and officers for ensuring Members were briefed on the work being undertaken. It was reported that Members were satisfied that the proposed way forward represented the best option for the council; particularly in light of its reduced risk appetite. The Chair stated that he was supportive of the treatment of Fairfield Halls to return it to the public books in terms of debt.

 

Cabinet were informed that the Scrutiny & Overview Committee had looked at the risk in terms of the additional loan to Brick by Brick and whilst recognising that the loan was necessary, the Committee had requested a mechanism be put in place to enable further scrutiny of further loans. The Committee, it was reported, had welcomed the reassurance that new risk management processes were in place but felt that the financial processes should be transparent as there would be intense public interest in the financial details of the company as set out in the Part B report. Whilst Members of the Committee understood the reason for confidentiality, they requested that it continually be reviewed and information be released to the public when it was no long commercially sensitive.

 

The Chair reflected that when government policy or legislation changes it was pertinent that the council reconsider the mechanisms which it had put in place. It was felt by the Scrutiny & Overview Committee that a lesson should be learnt that when the council embarked on major programmes, review points should be put in place and the council should consider whether it should continue with the programme.

 

The Chair of Scrutiny & Overview Committee concluded that further investigations were required to understand how the past lending arrangements had been arranged and to ensure they were legally compliant.

 

The Leader thanked the members of the Scrutiny & Overview Committee for their work in considering the report and for providing recommendations on the report. It was noted that the external auditors, Grant Thornton, were undertaking a review in relation to the Fairfield Halls refurbishment works. It was further confirmed that work was ongoing to understand the previous loan agreements to Brick by Brick and potentially reconcile them into a single agreement which had clear terms and conditions.

 

The Deputy Chair of Scrutiny & Overview Committee queried whether it would be possible to publish on the council’s website up to date information on Brick by Brick; including the sites which would be transferred to the council as concerns were raised that the information on the Brick by Brick website was misleading. Furthermore, the Deputy Chair queried whether the council had learnt from the experiences of other councils, such as Merton Council, when the options for the future of Brick by Brick were developed.

 

In response, the Consultant advised Members that following a decision by Cabinet officers would discuss updating the Brick by Brick website with the Directors to reflect that they would only be working on 29 sites. It was suggested that councillors could inform their constituents that if the site local to them was not listed one of the 29 sites listed in appendix 2 then the site would not be developed by Brick by Brick. Members were advised that a full appraisal process would be undertaken by the council on the remaining sites and once that had been completed there would be a report to Cabinet which would likely be considered by Scrutiny & Overview Committee before a decision was made. In terms of lessons learnt; the Consultant advised Members that he had not spoken to colleges at Merton Council as their development company had only reached the embryonic stage so it was felt that little could have been learnt from them but that they may learn from Croydon’s experience.

 

The Shadow Cabinet Member for Homes & Gateway Services expressed concern that Brick by Brick would continue to be funded by Croydon tax payers. Whilst it was recognised that commercially sensitive information was contained within the Part B report, it was felt that residents had the right to know the details of the expected costs of the company. As such, the Shadow Cabinet Member requested confirmation from the Leader that all details and the impact of the decisions in relation to the future of Brick by Brick would be made available as soon as possible.

 

In response, the Leader stated that the work to agree the future of Brick by Brick had been undertaken to find the option which best protected and limited any further loss of the public’s investment. However, to ensure the council secured the best result for tax payers it was appropriate that some information was restricted due to commercial sensitivity. In terms of the time frame that information could be made publically available, the Consultant advised Members that it would be dependent on how the council concluded its relationship with Brick by Brick; should the council sell the company early in the new financial year then the information could be released on the completion of the sale. However, should the council be required to remain involved until the completion of the build out in October 2021 then it may not be possible to release the restricted information until that point. The Consultant stated that he would not advise releasing the information as it included the council’s assumptions of sale price and interested parties would base their offer on that price whereas it was felt that it may be possible to get a better deal if they did not know the council’s assumptions.

 

The Vice Chair of Scrutiny & Overview Committee noted that previous documentation relating to Brick by Brick had included a funding agreement of 25% equity to 75% loan; however the reality had been 100% loan. As such, he queried who had made the decision and under what authority to change the loan agreement previously. The Consultant advised that he had been requested to look at the company and resolve the issues going forward and that he had not been asked to look at past decisions. The Leader stated that she was unable to confirm who had made the decision as she had not been involved in those discussions. It was however noted that the issue had been raised within the Report in the Public Interest. Given the council’s concerns in relation to investing public money, the Leader stated that the 100% debt model was preferable.

 

The Shadow Cabinet Member for Children, Young People & Learning reported that residents had expressed concerns in relation to two sites in her ward, Drovers Road and Selsdon Road, which had not been transferred to Brick by Brick and queried when there would be certainty as to the future of the two sites. In response, the Leader confirmed that sites listed in Appendix 4 of the report would not be developed by Brick by Brick but officers would undertake an assessment on all the remaining sites. A report following that assessment would be considered at a future meeting of Cabinet but that a date for that report being ready was not yet available.

 

The Cabinet moved the recommendation to Exclude the Press and Public (minute no. 26/21) to discuss the Part B report. The Cabinet made the decisions below in Part A following the discussion in Part B.

 

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

 

RESOLVED: To

 

1.     Consider the PwC report including recommendations at Appendix 1 of the Part B agenda and the options set out in this report; agree to proceed with the option set out as scenario 2 of that report, which is a build out of sites by Brick by Brick combined with a sale of sites under construction whilst still considering the option of a sale of the business, with a further report to Cabinet in April / May 2021.

 

                  i.           Note that, with any option, there will be further costs/resourcing (in particular the sale of the business option, in order to ensure the proper advice is obtained regarding valuation, legal and financial implications) and some write off of the Council’s investment (as further explained in the Part B report)

 

2.     Agree that revised funding arrangements be entered into with Brick by Brick to reflect the current loan positions and proposals for the future, including, where relevant, moving to a 100% debt funding position (as opposed to 25% equity and 75% debt); extending relevant loans and repayment periods; allowing  delays with repayments of existing loans; agreeing to further funding of no more than £9.99 million in relation to sites proposed for Brick by Brick to continue developing (and only where absolutely necessary within an appropriate repayment period), and:

 

                     i.        Agree that the Interim Chief Executive be given delegated authority to finalise and agree the terms of new/varied funding agreements to be entered into between the Council and Brick by Brick in consultation with the Section 151 Officer and Monitoring Officer and in consultation with the Leader, Deputy Leader and Cabinet Member for Resources and Financial Governance.

                   ii.        Note the progress of the loan agreement review (recommendation 19 of the Report in the Public Interest), as detailed in paragraphs 3.13-3.15 of this report.

                  iii.        Note the advice at paragraph within the Part B paper regarding the legal implications of these proposed revised funding arrangements.

                 iv.        Agree, where practically possible, to apply all funds being received from Brick by Brick first to the accrued interest and any subsequent funding will be used to pay back the principle loans

           

3.     Agree for the necessary steps to be taken, in accordance with the Council’s Tenders and Contracts Regulations, to appoint marketing agents to consider the disposal options for the College Green site (note, this is the site adjacent to Fairfield Halls which was due to transfer to Brick by Brick, but is currently held by the Council); the outcome of this options appraisal shall be reported back to Cabinet in accordance with the Council’s governance processes.

 

4.     Agree for the Council to review those sites Brick by Brick propose not to develop, as identified in Appendix 4, and to receive a future report to Cabinet on the potential use and future of each site (note, these are sites that had originally been intended to be transferred to Brick by Brick but are still held by the Council).

 

5.     Agree that the plans to transfer the four sites identified in Appendix 4 from the Council to Brick by Brick proceed and, note, these sites will then be dealt with in accordance with recommendation 1.9 below.

 

6.     Approve that the Council’s Housing Revenue Account (HRA) can acquire residential units from Brick by Brick as part of this review and note that the concurrent report to Cabinet regarding the arrangements for the future development of social housing within the Housing Revenue Account business plan will include Brick By Brick developments sites as potential development options. The acquisition and development will be subject to a review of affordability and HRA revenue implications.

 

The Cabinet, on behalf of the Council, exercising its functions as sole shareholder of Brick By Brick Croydon Ltd, is recommended to:

 

7.     Agree that Brick by Brick continue to build out those schemes currently on site and due to complete by October 2021 (as identified in Appendix 2)

 

8.     Agree that, in the event risks arise which affect timely completion of those sites referred to in Recommendation 1.7, agree that:

 

                      i.          Brick by Brick shall report to the Council’s Interim Chief Executive regarding those risks, including any development, operational, legal or other risks;

                     ii.          The Council’s  Interim Chief Executive, in consultation with the Section 151 Officer and Leader, be authorised to decide:

a.      whether the risks are such that selling the site(s) urgently would be more economically advantageous and in those circumstances, shall have the ability to authorise Brick by Brick to sell those relevant sites; or

b.      whether a further review is to be carried out and reported to Cabinet for a decision.

 

9.     Agree that, for those sites which have estimated completion dates beyond October 2021 (as identified in Appendix 2), Brick by Brick be authorised to:

 

                        i.        market the sites for sale and report back to the Council’s  Interim Chief Executive and Section 151 Officer regarding offers received;

                       ii.        Subject to any objection by the Council’s  Interim Chief Executive  in consultation  with the Section 151 Officer  and the Leader (note, this is to allow the Council the opportunity to consider whether continued build out of these sites might be more cost effective than offers received), sell those sites and, where necessary, novate any relevant contracts, such as building contracts, to the purchasers (for the avoidance of doubt, should the Council’s  Interim Chief Executive object, Brick by Brick shall not have the shareholder’s authority to sell those sites).

 

10.Agree with the recommendation of the board of Brick by Brick to depart from the current Business Plan and no longer develop any site other than those sites identified in Appendix 2 (note, potential future transfers of interests in the work already undertaken will be the subject of a future report to Cabinet in accordance with recommendation 1.5 above).

 

11.Agree that these recommendations be adopted by way of shareholder resolution as revisions to the Business Plan of Brick by Brick Croydon Ltd, thereby requiring the company and Directors of the company to act on these recommendations and to carry out all necessary actions to give effect to them.

 

12.Require the Board of Brick by Brick to prepare and submit a revised Business Plan (by no later than May Cabinet) for adoption by the Council as shareholder, reflecting the decisions made under this report and to include the consequential impact on staffing and other relevant matters.