Agenda item

To provide an update to the Overview and Scrutiny Panel of the work of the Investment Board from April 2021 to March 2022.

Members considered the Commercial Investment Strategy and Investment Board Update. Peter Catchpole, Councillor Boden and Councillor Tierney were welcomed to the meeting.

Members asked questions, made comments and received responses as follows:

·         Councillor Mason recognised that things had slowed down recently but it would be interesting to know what developments were likely to proceed in the next year. Councillor Boden replied that he could not give a definitive answer to that question as opportunities crop up unexpectedly, the Council had to be prepared to move quickly on the internal evaluation and with external assistance for assurance when making any decision to move forward. He informed the panel that they had agents to notify them of new opportunities when they present themselves. In terms of planned development over the following year, Councillor Boden advised they were developing the Elms in Chatteris followed by the Nene Waterfront in Wisbech and explained that both projects were being pushed forward together. He stated that lots of the preparation work had already been completed and that they were moving forward on these developments.

·         Councillor Mason noted that any investment had many consultancy fees and asked where the Council stood regarding consultancy. Councillor Boden explained that they were constrained by being a public body despite having Fenland Futures Limited (FFL) set up as a subsidiary company and commented that this required them to go above and beyond what would be required by a purely commercial organisation. He clarified that with the two projects mentioned, there would be no external consultancy for a valuation if they were undertaken commercially but due to the Council being a public body, they were required to undertake this to show accountability and transparency. Councillor Boden made the point that with the transfer from the Council to its wholly owned subsidiary there were Section 151 legal obligations which could not be satisfied by using inhouse staff as it would not stand up to scrutiny making the use of external consultants absolutely necessary.

·         Councillor Yeulett asked whether they had made a profit yet and, if so, how much it was. He also asked how they saw the Investment Board’s activity progressing in the current economic climate. Councillor Boden explained that in Council terms they were not and never would be making a profit as they were not a profit-making organisation and in terms of revenue, he informed the panel that, as of yet, they had not started any development and so were not producing any revenue. He explained that the company had not yet completed its first year and had made no sales so there had been no profit, it would show a loss in the first year and that this was always the case for any development company. Councillor Boden stated that the way that the Investment Board works and acts was not affected by the economic environment and that only the potential outcomes of the various opportunities would be affected and whilst it was quite certain that there would be a difficult economic time ahead it did also create opportunities for the Council. He said that the challenges with inflation and build costs had been identified, and that they knew how much leeway they had. Commenting on the housing market itself, Councillor Boden stated that as a development company they ultimately need to be able to sell the houses and flats built, with an integral part of the probability of the enterprise is how much the houses are sold for which relies on the local market and national financial situation. He admitted that they had little idea on what would happen over the next two years and found it hard to believe what the experts were saying as they got the predictions completely wrong during the Covid period when they stated that housing prices would fall significantly. He made the point that there is the need to be prepared for variations in either direction and explained that it would force them to pay more attention to sensitivity analysis and what would happen if the assumptions were wrong.

·         Councillor Yeulett agreed that there would be volatility and asked whether they believed they would be adaptable enough to match that. He asked whether they knew when they would be able to provide a figure or indication of how they performed over the year and questioned whether they would be reporting this on an annual basis.  Councillor Boden explained that the ability to rapidly adapt was one of the reasons why they set up FFL in the first place as it allowed decision making to take place quickly. He informed the Panel that there had been an informal meeting between FFL and Investment board which had been valuable as it allowed them to challenge the work done so far by the FFL board which would not have been possible in a normal official Council format. Councillor Boden stated that they were able to go into a lot of detail that was commercially sensitive and subject the directors to a robust challenge which was matched by their response. He stated that the directors were able to achieve what they had as they were not subject to the normal Council process and were able to proceed with what was requested and subsequently challenged allowing the process to move significantly faster. He surmised that they may need to maintain or increase their “fleetness of foot” as they need to be adaptable with the volatility especially as they do not know which direction it will be volatile in.

·         Councillor Mason stated that the concern for the committee was that FFL had been set up to make a profit and that they wanted reassurance that they were on the right lines to do so. He stated that if they were not on the right lines then they would need a plan B. Councillor Boden explained that the company would produce annual accounts which will be on record at Companies House, but it would be several years before the company reached a financial profit but that the Council would benefit before this. He stated that FFL was effectively looking at means by which capital appreciation can be translated into a revenue benefit for the Council, which was achievable legally and had been done elsewhere in the country and that they were looking to ensure that they are gaining revenue benefit from something that will be a capital appreciation in the future.

·         Councillor Hay identified that within the expenditure and commitments to date there were approximately £217,000 recharges of which £174,000 were for FCD and asked what the recharges were for. Councillor Boden explained that the recharges represent costs incurred by FDC officers working on FFL items and there was not yet a service level agreement in place but that there was one in draft which would be taken before the Investment Board in June and will be fully open for scrutiny and challenge. He stated that the document would make it clear how, why and by what method, costs incurred will be recharged to FFL, which not only covered officer time, but also many service recharges from various service areas. Councillor Hay asked whether the recharges would be allocated across the Nene Waterfront and Chatteris set ups. Councillor Boden informed her that there was no legal requirement to do so as they were not being set up within FFL as separate accountable entities. He surmised that it was likely that they would end up setting up individual subsidiaries of FFL to achieve specific projects and create one legal entity for one project however the costs and recharges would stay with the overarching company. 

·         Councillor Count stated that he could not distinguish between the investments of the Commercial Investment Board and FFL, giving the example of the return of £230,000 on a commercial property in Wisbech stating that he thinks that this had not gone through FFL but was unaware as they had only been financed a certain degree so far. He stated that it would be useful to separate who is responsible for what and where the monies are. In terms of the example given above, Councillor Count commented that there was an indicative 6% return on that, but it was not very detailed around what that 6% is and concluded that it may be a gross profit that they receive every year from the property. He noted that there may be other fees that reduce this, but it was still better than anything else they would get. Councillor Boden stated that he was correct that the figure provided was the gross figure and that the net figure was significantly less than that and would be disclosed when appropriate. He agreed that it would be important to sperate the investments held by FFL and FDC especially as the figures increased and stated that he would make sure that the distinction becomes greater as they move forward. Regarding the specific project mentioned Councillor Boden explained that this was undertaken by FDC by default as FFL was not ready on a legal basis to undertake the work at the time. He informed the Panel that it would be unlikely that the investment would be moved to FFL as it would be subject to stamp duty land tax making it foolish to transfer now. Councillor Boden stated that they would ensure the clarity of separation as part of transition of the Elms and Nene Waterfront as the land will be sold by FDC to FFL and they will need to ensure that this transition is clear and straightforward. He noted that both Fenland and FFL will need evidence that the transitions are legal.

·         Councillor Count accepted that initial investments take a while to hit the breakeven point and that there may be opportunistic investments at certain times but stated that he would like to see minimum expectations in a multiyear business plan to give an idea of when they will hit the breakeven point and beyond. Councillor Boden agreed that it was a reasonable request but emphasised that the number of different opportunities made it difficult to find the breakeven point for the whole company. He explained that it was not until March that they had sufficiently detailed figures to even begin this process and some of the assumptions made were still challengeable meaning that they were not yet able to produce the figures as requested.

·         Councillor Booth identified that FDC had contributed £3.8 million so far and that it was important to distinguish between the two as it could become a confusing matter. He identified that the reports so far were that FDC had contributed £355,000 and asked if this was correct. Councillor Boden informed the Panel that information regarding the Wisbech investment will be seen soon as the investment formed part of the 2021 accounts. Regarding the contribution, he explained that they needed to carefully separate the recharges and costs as most of the costs would have been incurred by FDC anyway such as time of officers. He stated that they were not additional costs to the Council but ones that had been taken out of the Councils books and been charged to FFL, which was completely legitimate, legal and in accordance with normal accounting practices. Councillor Boden stated that FFL have no money of their own, only money lent to them by the Council at a commercial interest rate. He explained that this was all designed to reduce the Councils costs and utilising them against the eventual capital profits from FFL and creating a revenue stream in terms of the interest all of which is being offset against the future capital profits which will be made on the developments. He stated that they were simply copying what had been done across the country which had been mostly successful.

·         Councillor Booth expressed his disappointment that the Council did not have a loan agreement set up as of yet which would outline any returns but acknowledged that it should be in place by June. He asked whether there were any other areas that needed urgent attention regarding governance arrangements which may put the Council at risk should anything go wrong. Councillor Boden stated that it would be extraordinary for something to go catastrophically wrong in the next month but agreed that it would have been good to have progressed logically but informed the Panel that they had opportunities that they wanted to take early on. He reassured Councillor Booth that they knew what the terms of the loan agreement would be, but it had not officially been agreed between FFL and FDC. Additionally, Councillor Boden stated that there was another important document needed regarding directors’ liability as the directors were in the position as employees of FDC so should not be put at personal liability for FFL. Peter Catchpole informed them that FDC and FFL had legal advisors working on this and that they had draft agreements in all three of the areas. He explained that the next stage was for them to be taken to an FFL board before they were then taken to the Investment Board and the process should be complete by 13 June.

·         Councillor Booth asked whether they had the appropriate insurances in place to protect FFL and FDC. Peter Catchpole confirmed that these were in place.

·         Councillor Booth stated that with something like a LACTO it was a medium to long term investment with a 3-4 year period needed before they saw any returns and that the Council needed to recognise that. Regarding the separation of duty Councillor Booth recalled comments made in December 2021 on an investment opportunity in Whittlesey and he understood it the decision was going to be down to the Investment Board and he questioned whether it should have been down to the FFL directors. Councillor Boden stated that this was not the only opportunity in the last 12 months, explaining the process taken when the opportunities arise, with firstly, the opportunity being discussed informally to see whether it is something that they could be interested in which would work financially and all too often there are problems underneath which could cause difficulty. He informed members that they were not completely risk adverse but risks that may be taken as a gamble for a commercial organisation cannot be taken under local government early on due to the use of public money and the lack of different projects to offset the risk against. With one investment they found a risk regarding a tenant break contract and whilst it was not unmanageable it was enough to make them feel uncomfortable and was not taken any further. Councillor Boden explained that the initial risk assessment is done without any external assessments to provide an initial evaluation on whether it should go ahead at all, and this does cause them to knock out certain opportunities early on.

·         Councillor Booth asked where the separation was here as it appeared that there was a lot of informal work happening where legally the directors of FFL are the ones who should make decisions as the Investment Board was simply an advisory body. Councillor Boden confirmed that he was correct however they had not got as far as going to FFL or the Investment Board on the items that have been discarded. He explained that the one investment they did have which proceeded to completion was before FFL was properly set up, so it had to be put through FDC. Councillor Tierney added that if they got to the stage where directors were taking a decision that was very different to the advice given then something had been done very wrong. He stated that the process had been working well and that it would be unusual for the directors to make different decisions to the Investment Board.

·         Councillor Yeulett asked whether the members of the two boards were different. Councillor Boden informed him that this was the case.

·         Councillor Wicks asked whether FDC and FFL had received legal advice from two different parties. Peter Catchpole confirmed this was the case.

·         Councillor Count identified that the loan facility made to FFL had to be made at a commercial rate which is set on risk analysis and asked for clarity on whether this would be paid as a lump sum or on a project-by-project basis. Councillor Boden answered that they were going down the company route and not the project route as FFL was wholly owned by FDC there was a potential reputational risk if the company is allowed to fail. However, as it was a completely new company with no history the availability of cheap finance in the outside world would not exist at all and it was not his intention to throw a large amount of money at the company all at once. Instead, he explained that the money would be provided on a transactional basis when needed by FFL and the interest would be worked out on that basis. Peter Catchpole stated that the directors of FFL would not accept a lump sum and informed them that they would be looking at a cash flow in quarterly phases.

·         Councillor Mason stated that it was good to hear that they were learning from other mistakes and hoped they were also learning from successes. He stated that the Panel would like to receive an interim report in 6 months due to the nature and the risk of the Investment Board and Investment Strategy.

·         Councillor Boden emphasised that risk was what they were trying to avoid and that they were alert to danger. Councillor Mason noted this but argued that there was still a large risk. 

The Commercial Investment Strategy and Investment Board Update was noted for information.