To inform Members about Hereford Futures Limited (‘HFL’); the council’s financial and other support for HFL; council liabilities going forward; HFL’s achievements; and any matters of general applicability to companies established by the council.

The Vice-Chairman introduced this item by noting the length of time it had taken for the Committee to receive a definitive report on Hereford Futures Limited (HFL) and thanked the Solicitor to the Council for preparing it.

 

The Solicitor to the Council provided an overview of the different sections of the report, the principal points included:

 

Company ownership

 

1.         HFL was a company limited by guarantee.

2.         The HFL Chief Executive had confirmed that all directors of HFL were also members of HCL.  Therefore, the directors of HFL owned the company.

3.         The company was not a ‘regulated company’ for the purposes of the Local Authorities (Companies) Order 1995.  This meant that HFL was neither a ‘council controlled company’ nor a ‘council influenced company’.  It was noted that the company had been a vehicle through which the Council had taken forward its economic regeneration of Hereford City.

 

Funding of HFL

 

4.         Appendix 1 set out the funding of HFL by the Council and Advantage West Midlands (AWM).

5.         Although it appeared that the Council had provided just under £2.9 million of funding to HFL, £845,000 of this figure had been ‘passported’ through the Council; £165,000 from Sanctuary Group and £680,000 from Stanhope PLC.  Therefore, the net funding from the Council was just over £2 million.

6.         AWM had provided over £14.5 million of direct funding and rental income contributions.  In addition, some £88 million of private sector funding was being invested in the retail quarter development.  It was commented that there was, therefore, a high rate of return on Council investment, alongside other benefits such as job creation and increased income.

 

Council’s future liabilities in relation to HFL

 

7.         Reference was made to a letter dated 30 May 2013 from the Council’s former Chief Finance Officer to the directors of HFL to confirm the Council’s funding commitment and to record that the Council has requested HFL to continue to trade and then wind down the business and affairs of the company.

8.         It was identified in the letter that the Council would ‘provide funding of a maximum value of £695,000 … during the financial years 2013-14 and 2014-15’.  The HFL Chief Executive had advised that the maximum liabilities of the company were unlikely to exceed £525,000.

9.         Assurance had been sought from Worcestershire County Council Pension Fund as to whether there were any residual liabilities arising in respect of the HFL Chief Executive’s pension.  A definitive answer was awaited but this would be circulated by email to Committee Members and to Mrs. Morawiecka once it was received.

 

HFL’s achievements

 

10.      The report identified some of the key achievements.

 

Matters of general applicability to companies established by the Council

 

11.      The Committee had discussed matters relating to the Freedom of Information Act and the Local Government (Access to Information) Act at previous meetings.

 

Further to minute 71 above, the Solicitor to the Council drew attention to the supplement to the agenda and commented as follows:

 

Page 4, response to question 6 from 11 November 2013:  It was corrected that the previous Chief Executive and Leader of the Council had been directors of HFL but no serving officers of the Council were currently directors.

 

Page 7/8, responses to questions received for this meeting (full, written responses would be provided to Mrs. Morawiecka):

 

a.         Response to Question 1: The Council’s aim was to ensure that there was an orderly conclusion to HFL activities and that the debts incurred by the company in undertaking projects on the Council’s behalf were met.  The Solicitor to the Council added that this seemed entirely appropriate and there would be a further report to Cabinet setting out any other liabilities if they were to be taken on by the Council.

b.         Response to Question 2: The remuneration of the HFL Chief Executive was a matter for the HFL’s Remuneration Committee and was signed off by its Board.  It was noted that there were experienced people on the Board and they would need to be satisfied that package was appropriate for the work undertaken by the Chief Executive.

c.         Response to Questions 3 and 4: Directors had a fiduciary duty to act in the best interests of the company.  Directors remained under this obligation at all times.

d.         Response to Question 5: The position regarding conflicts of interest within the Articles of Association was not considered unlawful.

 

A Committee Member welcomed the report, noted that delays in responding to public concerns could generate a culture of suspicion, and said there were substantial lessons to be learned from the experience gained in relation to HFL, especially in terms of governance and the accountability in the use of public money.  Reference was also made to the work of the Parliamentary Public Accounts Committee on the use of public money by arm’s length companies.

 

In response to questions, the Solicitor to the Council advised:

 

·                The company was in effect the vehicle with which the Council had delivered the Old Market project and other projects around the city.  The company was doing the things that the Council had asked it to do and it was appropriate that those activities were brought to a conclusion in an orderly manner to enable HFL to be wound up as a solvent company.

·                Whilst acknowledging the achievements of HFL, there were lessons to be learned from all projects.  A different consideration could have been given in the setting up of such companies to give emphasis to ensuring that the expenditure of public money could be examined in an open and transparent way, perhaps requiring procurement procedures to be more analogous with the Council’s own procedures.  In accordance with company law, HFL had an audit and accounting process, albeit this was different to that of local government.

 

A Committee Member commented that the reported achievements of the company and issues of governance and accountability should be separated out.  He added that, given issues regarding the valuation of the land, some considered that the level of total subsidy for the Old Market development was greater than the direct investments identified.

 

A Committee Member noted the obligations of directors but, given that there were currently no Council nominated directors, questioned how public money was being safeguarded.  In response, the Solicitor to the Council advised that: the Articles required interests to be disclosed; majority decisions were made by the Board, so there was ‘safety in numbers’; directors would not want to breach their fiduciary duties by doing anything improper; there were project milestones, so there was accountability to the Council; it seemed appropriate for the Chief Executive and the Leader of the Council not to take positions on the Board given that it was being wound up; it was understood that the company was a necessary vehicle to secure funding from AWM and it was a common form of structure; and the authority no longer needed such a delivery vehicle and its activities were being brought to an end in a managed way.

 

The Vice-Chairman questioned how, with an organisation set up to create additional economic development capacity on behalf of the Council and the people of Herefordshire, Council nominated directors should find themselves with any conflicts of interest.  The Vice-Chairman also felt that, as identified in the purpose of the report, ‘matters of general applicability to companies established by the Council’ could have been covered in more depth in the report.

 

In response to a question, the Director for Economy, Communities and Corporate said that some of the costs during the wind down period would relate to the letting of some contracts but most would be associated with staff and redundancy costs. 

 

The Director advised that, at the time the company was set up (as Edgar Street Grid (ESG) Herefordshire Limited), equivalent urban regeneration companies had been set up around the country to drive different schemes.  The formation of the company was subject to a Joint Venture Agreement between the Council, AWM and ESG Herefordshire Limited.  The agreements and subsequent major decisions had been dealt with through Cabinet and had been subject to scrutiny by this Committee and its predecessors; Appendix 2 to the report identified the HFL related reports to Cabinet.

 

In response to questions from the Vice-Chairman about the intentions behind the company and expectations about funding, the Director advised that:

 

i.           The Joint Venture Agreement had anticipated a longer redevelopment period but the economic downturn and other changes meant that it was not viable to proceed with a separate company.

ii.          The company had helped deliver a retail development quarter and a flood alleviation scheme, had secured planning permission for the link road and would prepare for the compulsory purchase order inquiry process, and had undertaken soft market testing with housing developers.

iii.         It was anticipated that there would be further private sector investment, particularly as the Urban Village came forward, and further Government support, potentially for the link road scheme.  Other developments in the area included the conversion of the Blackfriars offices into a free school and negotiations to deliver private sector investment into the redevelopment of the two ends of the football ground.

 

The Vice-Chairman questioned why HFL was not considered a suitable vehicle to continue to take an active part in the economic development of Herefordshire, particularly given the aspirations of the Marches LEP.  In response, the Director said that a Cross Party Member Working Group had assessed the future of the company, in the context of the economic downturn and the availability of public funds, and it was concluded that it was not affordable to continue.  Further to minute 72 above, the Solicitor to the Council noted that a Task and Finish Group was to be convened on the governance of the LEP and expressed the view that HFL was a Hereford-centric company, whereas the LEP involved a much wider area and other local authorities.

 

The Vice-Chairman commented on the need for a handover during the final stages of HFL to provide understanding of the systems, networks and relationships.  The Director confirmed that a handover meeting was to be held at the end of March 2014.  A Committee Member added that the HFL Chairman was also undertaking research with people involved in the company.

 

The Solicitor to the Council left the meeting due to another commitment.

 

A Committee Member made a number of points, including: the need to retain corporate memory within public bodies; some of the issues with HFL flowed from the commercial sensitivity of the work undertaken with developers and retailers; apart from the need to form the joint venture to access funding, HFL had involved senior business people and had been well-regarded; the original mandate had expanded but there was a strict interface between HFL and the Council in the form of a ‘gateway committee’; it was emphasised the economic impact of the investment secured by HFL would not just benefit Hereford but also the county and the region; the Marches LEP involved Herefordshire, Shropshire and Telford & Wrekin and there was a need for clarity about Herefordshire’s own regeneration plans going forward; and, although there would be lessons to learn, the achievements of the company were considerable, especially delivering the Old Market development despite the recession.

 

Another Committee Member commented that: the directors had links to Herefordshire and had been involved in high profile companies, they would not wish to do anything that might damage their reputations; the people involved could be asked to help and advise the Council and the LEP on similar projects; and being a director of the company and Leader of the Council put the office holder in very difficult positions at times, especially given the nature of some of the opposition to the Old Market development.

 

The Chairman commented that the LEP would be a different organisation but there still needed to be transparency and accountability in relation to public money.

 

The Leader of the Council commented that, whilst the authority would seek to make improvements, the balance being sought in terms of the disclosure of information could compromise the ability to get the best deals for Herefordshire.  The Chairman added that people could understand the need for commercial confidentiality in certain circumstances but he did not consider that the authority communicated the reasons effectively.

 

A Committee Member said that transparency would have been enhanced in relation to HFL if the minutes of all Board meetings, suitably redacted, had been published and clarity was sought about the role of the gateway committee.

 

The Director advised that the gateway committee: had been set up when the remit of the company had been broadened to include the whole of the City; involved representatives from the Council, AWM (latterly the Homes & Communities Agency) and the company; had the primary purpose of admitting new projects into the work programme of HFL; had stopped meeting due to the company being wound down and there were no additional pieces of work being added to the work programme; and had been attended by the Leader, relevant Cabinet Member and the Director.  Further to this: briefings had been held for Cabinet Members with the HFL Chief Executive and the Director; meetings had been held where the Local Ward Member and the City Council were briefed, alongside the Cabinet Members; the Director held one-to-one meetings with the HFL Chief Executive, so the work programme continued to be managed; the Director held meetings with officers involved in delivering a range of projects, as a number of projects had been developed jointly by the Council and HFL; and the Council’s Chief Financial Officer or his representative attended the Audit Committee of HFL.  The Director, using the Old Market and the Butter Market projects as examples, emphasised that important decisions had been reserved to the Council.

 

A Committee Member commented that: many of the decisions had been taken some time ago and the background and operation of arm’s length companies had not formed part of the induction of new Members; it should be recognised that companies followed different rules and standards to public bodies; the Local Ward Member had been invited to regular meetings about the Old Market development but subsequently decided not to attend; some directors might not have participated as fully if board papers were released as a matter of course; whilst it was important to ensure that public money was being spent correctly, the Committee needed to be mindful of the extent to which it could scrutinise other bodies; and communications should be improved but without compromising negotiations with third parties.

 

The Vice-Chairman summarised key points, including the need to: capture organisational memory; learn lessons in terms of minimising personal positions of discomfort for Councillors involved in arm’s length companies; consider potential improvements to communications going forward; consider the potential utility of the recommendations from the Parliamentary Public Accounts Committee; consider how there could be a presumption of openness, with clear caveats relating to commercial confidentiality issues; and review issues relating to the Marches LEP through a Task and Finish Group.  The Vice-Chairman emphasised the need to learn lessons from HFL whilst there was still plenty of organisational memory and an appetite to make improvements in advance of any future joint venture arrangements; it was suggested that a further Task and Finish Group could help to facilitate this.

 

A Committee Member commented that there had been a cultural collision in recent years in terms of how public money was used by public services and by private companies.  He felt that public concern in terms of HFL had arisen because it was structured as a private company but was mostly funded by public bodies.  It was recommended ‘That work is urgently undertaken, jointly with Audit and Governance Committee, to review the governance and accountability, financial probity, and liabilities to this Council in the wind up of HFL to ensure that lessons learned from the Council’s experience in the formation and operation of HFL can be applied to other current and future partnerships with arm’s length companies, and to other entities including the Marches LEP’.

 

The Cabinet Member Corporate Services felt that some comments inferred inappropriate practice but there was no evidence that anything untoward had happened and the company had delivered substantial benefits to the county.  Some Committee Members commented on the need to explore all aspects of the Council’s experience.

 

The Leader of the Council said that the authority should record its thanks to the company for its achievements and to those involved for their hard work.

 

A Committee Member suggested amendments to the recommendation to recognise that Audit and Governance Committee was the appropriate body to consider the issues identified and to broaden the scope to include all arm’s length or joint venture companies.  This was supported by other Committee Members.  The Chairman re-iterated that matters relating to the Marches LEP would be taken up by a Task and Finish Group.

 

RESOLVED:  That the Audit and Governance Committee be requested to review the governance and accountability, financial probity, and liabilities in the Council’s involvement in any arm’s length or joint venture companies both now or in the future.