Council chiefs have lost almost £6m of taxpayers’ cash setting up a property company - and then kept the scale of the damages out of the public domain, we can today reveal.
Norwich City Council formed the company, called Norwich Regeneration Ltd (NRL), in 2015 to build 1,000 new homes at Three Score in Bowthorpe.
NRL has borrowed millions of pounds from the council for the project, called Rayne Park, a figure which could eventually rise to £27m. The first homes were completed in 2018 by builder RG Carter and 174 are now complete.
But we can today reveal:
NRL has sold each home for £20,000 less than it cost to build
It was overcharged by a contractor, according to a confidential report
It signed what lawyers described as an “unusual” £30m deal with RG Carter
Serious criticisms over how council chiefs oversaw NRL as losses mounted
A council report, written last year but never published, reveals the Labour-run authority lost almost £3m on the first phase of the scheme of 80 homes and is expected to lose another £2.8m on the rest of the initial 150 homes.
The report, by NRL’s managing director David Shaw, said the Achilles’ heel of the project was the extra cost of building the homes to “Passivhaus” standards - an energy efficient design which the council also used at is award-winning development on Goldsmith Street.
It has added around 15pc to build costs, the report said.
But the opposition Green Party said the blame should not fall on the eco-friendly design. Mr Shaw’s report also revealed other widespread problems with the project.
Build costs overran with each home costing £240,000 on average, but they sold for an average of £220,000 each.
NRL’s contract with RG Carter was also criticised in the report for not fixing costs or timescales and has now been renegotiated.
With costs mounting, NRL could not afford to pay back an outstanding £6.4m loan to the council last year, so in November 2019 the council voted to loan it up to £11.4m to keep it going. That could eventually be extended to £27m if all NRL’s planned projects go ahead.
In response the council said it had a “fantastic track record” of building new homes.
It said: “Norwich Regeneration Company was set up as another way to help us deliver our housing priorities, combined with the long-term aim of providing an income stream to buffer us against the huge government cuts that threaten the essential services we provide to residents and businesses.”
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•What went wrong?
Council meetings about NRL are held in private and the council did not answer many of our questions about what happened. It has also not published its internal reports about NRL.
However, extracts of Mr Shaw’s report from November 2019, leaked to this newspaper, found a series of damning reasons for the failures.
It said NRL built homes at Rayne Park which were not “wanted by the market”.
It also found poor sales advice was given on the layout and specification of the houses.
But councillor Paul Neale, from the opposition Green Party, said the problems should not put the council off building energy efficient homes.
“With professional management, appropriate marketing and better contracting, future development contracts at Rayne Park can still be done to Passivhaus or similar levels and to an acceptable marketable price,” he said.
Mr Neale highlighted the Passivhaus Goldsmith Street development which he said worked out at about 10pc above traditional build costs.
“The premium costs at Rayne Park was way above this and are probably due to a combination of factors, some highlighted in the managing director’s and auditor’s reports,” he said.
Mr Neale said Mr Shaw had made “big strides” in turning NRL around since he joined in 2018.
Last year Mr Shaw renegotiated the contract with RG Carter after NRL’s solicitor described the initial contract as “unusual”.
Mr Shaw’s report added that it was “not particularly robust” and did not allow NRL to reach its aims of fixed costs and timescales.
The report also found “issues” with the quality of homes built in the first phase.
It added that fees paid to a building agent called Hamson Barron Smith were higher than expected. Hamson Barron Smith is owned by NPS Group, a company ultimately belonging to Norfolk County Council.
The city council did not answer our questions about the contracts for Rayne Park.
RG Carter declined to comment, while Hamson Barron Smith did not respond to a request for comment.
•More money, please
Papers published from a meeting of the council’s scrutiny committee in February state: “Norwich Regeneration Ltd is currently in a challenging trading position having developed its first scheme at a financial loss to the company.”
It also revealed that NRL did not have the money to pay back a loan of £6.4m to the council. However, councillors voted to extend loans to NRL in November that year to up to £11.4m. The council said its current loan to NRL is £9.4m.
A spokesman said: “The decision to advance further loan financing will need to be supported by robust financial modelling, including sensitivity analysis, as well as a strong economic, commercial, management and strategic case for taking on a new project.”
Council reserves are being used to cover future potential losses at NRL and auditors said that the company was one of the biggest risks to council finances.
A council spokesman said: “It was always anticipated that it would take time for the company to make a profit and we built this risk into our financial planning, including allowing for loans where necessary.
“The council has prudently planned against any risks and has money put aside to support the company in order to weather the ups and downs of the housing market.”
•Who was on watch?
Concerns about NRL first emerged in March 2019.
At the time NRL was asked by the council’s auditors to hold a review into itself. The auditors also came up with a series of recommendations to improve the running of NRL.
But by January 2020 NRL had failed to carry out that review or put in place all of the recommendations.
A report from the council’s internal auditors said: “We have not had any assurance that the recommendations made following the NRL review have been fully implemented.”
Most worryingly, it said that the council was not able to monitor the company’s performance properly.
It found: “The council has no reliable assurance that outcomes expected are being achieved nor any assurance that governance within the company is in line with that expected by the council.”
The council did not explain why NRL had failed to do this.
NRL’s board is made up of some of the same people who decide if the council should give NRL money.
Its directors are Anton Bull, Paul Kendrick and Mike Stonard.
Councillors Kendrick and Stonard are senior politicians who also sit on the body which helps decide if NRL should be loaned money - the council’s cabinet. They declared their interest at council meetings.
Anton Bull is the director of resources at Norwich City Council, which helps oversee financial risks.
The council did not answer our questions about how it manages potential conflicts of interest.
An update on NRL is expected at the council’s next cabinet meeting in June.
In March, the cabinet approved NRL’s business plan, supported the completion of Rayne Park and said the company aimed to make a profit within five years. We have asked for copies of this business plan.
•What the council says
A spokeswoman for the council said: “Last year Norwich Regeneration Company delivered a number of key projects including Bullard Road and the first section of Rayne Park, with more to follow.
“The company has also carried out significant work to help bring forward other potential development sites across the city.
“Clearly there will be challenges ahead that no-one could have predicted because of coronavirus and the effects this may have on the housing market so this is being kept under constant review.
“The development at Rayne Park has huge potential with an estimated 1,000 home capacity and 174 already built.”
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