The way in which Northumberland County Council previously loaned money to its development company Arch has been described as ‘scandalous’.
Loans from the local authority are expected to total £275million by the end of this financial year and, with Arch set to be replaced by a new company, Advance Northumberland, new regulations are to be put in place.
A report to councillors sets out a revised decision-making and governance procedure for future loans, which would be approved by the cabinet next month, while there are also moves to refinance the net debt position.
At the corporate services committee meeting on Monday, Coun Nick Oliver, the cabinet member for corporate resources, described the recommendations as ‘a really important piece of work in terms of protecting the council and protecting the council taxpayers of Northumberland’.
He outlined a situation under the previous administration in which the former chief executive and council leader would agree projects – ‘some very worthwhile’ – with Arch officers as part of the investment committee and then agree the loans from the council to fund them.
“That cannot be right and there’s a massive conflict of interest,” he said.
Coun Oliver also pointed to the previous administration’s budget for 2017-2020 which delegated authority to the chief executive and leader to agree individual loans to third parties, primarily Arch, from a three-year pot of £450million as a ‘situation with no proper scrutiny or control’.
He described the new process to be put in place, which includes the creation of an external loans board, as a series of ‘high bars and clear criteria for the management of Arch, or Advance Northumberland as it will become’.
Coun Gordon Castle said: “Arch does some things right and some things well, but let’s have proper oversight.”
The committee chairman, Coun David Bawn, described the previous lack of checks and balances as ‘eye-opening and scandalous’.
A number of core principles will apply under the new set-up, including the council not being willing to offer a loan facility over 100 per cent of the asset value to cover various fees or charges.
Plus, not all loans will be interest-only moving forward, while interest rates may be floating rather than fixed where the rate risk is judged to be high.
The report explains that the base rate for loans to Arch was set at 5.75 per cent, but various loan rates have been used historically for different developments or sectors, ranging from one per cent to 4.5 per cent.
This means that many of the loans ended up costing the council money, given the three per cent average interest on the money it borrows plus the 2.5 per cent minimum revenue provision (MRP) it has to set aside each year for its capital debt and credit obligations.
‘These rates were personally agreed by senior officers within the council, but were never formally approved or reported upon,’ the report adds, highlighting that when the Arch board approved a scheme, the interest rate would be set by the board at that point.
Best practice sets out four risks which should be assessed in relation to each loan – liquidity (when someone cannot meet short-term debt obligations), interest rates, market and State Aid.
But the report says: ‘The assessment of these risks has not occurred in the past and there are clear examples of where these risks have materialised.’
After the meeting, Coun Grant Davey, the Labour leader and former council leader, said: “Once again, the controversial cabinet member for finance excels in the art of misrepresentation.
“He forgets to mention his leader Peter Jackson sat on the capital works working group where the business plans were drawn up and agreed by a cross-party working group. This group also decided if the projects should be undertaken through the council or Arch.
“Arch projects were then considered along with projects designed by the North East LEP and the investment committee, including elected members, agreed on the nature of the deal to underpin the project.
“The lending rates were set by that committee not individuals at a level which ensured maximum benefit for the taxpayer, but then the results were fed through the council’s treasury management system and then onto the audit committee which was cross-party and met in full public scrutiny.
“Coun Jackson was involved in every juncture from start to finish when the projects were at Arch from board level through to Arch’s audit committee which included Coun Jackson.
“At no stage did he ever raise a single concern about methods or delivery within either the company or the council and now Coun Oliver seeks to peddle misrepresentation and smear through a pseudo policy designed to cover up serious concerns about the current direction of Arch.”
Coun Davey also said that Coun Oliver should ‘stop hiding behind innuendo and show us the evidence’.
Ben O'Connell, Local Democracy Reporting Service