The overview and scrutiny (O&S) and internal audit processes at Tees Valley Combined Authority (TVCA) were beset by multiple failures in the period leading up to the £560mn Teesworks scandal, official documents reveal. Next week Tees Valley Mayor Lord Ben Houchen, Tees Valley Combined Authority (TVCA) and South Tees Development Corporation, both of which he chairs, their senior officials and Overview and Scrutiny Committee (OSC) will have to start dealing with the consequences.
Houchen and the STDC face tighter scrutiny by backbench councillors on the OSC – if they are up to the job – as well as oversight by a number of independent outside experts as the mayor, the combined authority, the development corporation and their officials face the daunting challenges arising from the Tees Valley Review into their mishandling of the Teesworks regeneration site (formerly SSI steelworks).
The Review was set up by former Levelling Up Secretary Michael Gove following revelations in Private Eye and allegations of corruption in the House of Commons by the (now) Middlesbrough and Thornaby East MP Andy McDonald, and reported in January. It found that £560mn of public funding had been poured into what is one of the largest, if not the largest, brownfield remediation projects in Europe.
In negotiations led by Houchen for STDC, a joint venture (JV) had been set up with two Teesside businessmen, Chris Musgrave and Martin Corney (the JV private sector partners) who were eventually handed a 90% interest in the site in return for their leverage in facilitating its acquisition.
The Review found that while the JV partners had pocketed £45mn in profit and held another £63mn in cash without making any financial investment, with none apparent in the near future, STDC and TVCA had run up debts of hundreds of millions on behalf of the public without much awareness of what they were doing, as reported by North East Bylines in February.
The Review made 28 recommendations and Gove gave Houchen until September to let the government know how he intends to implement them. TVCA will, it is intended, agree its response at a series of meetings in September, starting with the OSC on Wednesday.
Critical moment
In preparation for this critical moment for Houchen, the TVCA, STDC, OSC and their officials, a host of outside experts has been called in to oversee, advise and assist the Tees Valley establishment as it faces the challenges posed by the Tees Valley Review and its 28 recommendations.
A Local Government Association (LGA) representative has been appointed to work with TVCA to provide independent oversight of the implementation of the recommendations and to undertake the training required. This oversight will include a board of three people who will review the proposed changes to governance as well as undertake a session with TVCA cabinet members to ensure that progress is being made on understanding the required cultural changes, staying in place to support in the months following implementation.
Independent law firm Bevan Brittan was called in to advise to what extent, if at all, legislation permits the OSC to have a remit over a development corporation such as STDC. Another law firm, Endeavour, was asked bring together all the JV arrangements into a single summary document and to identify any areas in the arrangements that they considered were capable of renegotiation, in line with one of the recommendations of the Tees Valley Review. The Centre for Governance and Scrutiny (CfGS) was brought in to consider the effectiveness of the scrutiny arrangements at TVCA and the Chartered Institute of Finance and Accountancy (CIPFA) was asked to review the internal audit arrangements.
The 15 members of TVCA’s backbench (OSC) meet at Teesside International Airport on Wednesday to start the process of improving the culture at TVCA and turning the almost 800 pages of paperwork presented to them into effective action to rebuild confidence in the mayor, the combined authority and its subordinate institutions.
Origins of the scandal
The Teesworks scandal stems in large part from the failure of the OSC to monitor what was going on at STDC, even though TVCA provides funding for the Corporation. This failure dates back in turn to advice given to the OSC on 15 September 2021 by TVCA’s then monitoring (legal) officer that “whilst the remit of the committee [OSC] extends to the combined authority [TVCA] including the decisions relating to funding given by the combined authority and [the] role the combined authority takes, its reach ends with the combined authority’s] decisions and does not extend inside some of the principal funding recipients such as [STDC] and Teesside International Airport.”
Independent legal advice now received from law firm Bevan Brittan and being presented to the OSC on Wednesday takes a much more nuanced view. It concludes that: “Whilst there is a chain of bodies whose legal independence is to be respected, in our view there is potentially no real impediment to the [OSC] or the [TVCA] in being able to undertake or require, in the words of the Tees Valley Review, ‘appropriate oversight by [OSCs] to enable value for money to be delivered and evidenced through effective scrutiny of significant decisions’ concerning [STDC] and its activities.
Antagonism and mistrust
The consequences of the OSC’s misguided belief that it was not empowered to scrutinise STDC are spelled out in a separate highly-critical report by the Centre for Governance and Scrutiny (CfGS), also being presented to the OSC on Wednesday. It says that despite evidence of some improvement in the course of 2023/24, the O&S function at TVCA is [still] not effective and that this assessment is shared by most stakeholders.
Scrutiny at TVCA, says the CfGS experiences a number of the same challenges as some other combined authorities. But there are also three additional TVCA-specific issues which cause further tension and difficulty:
· an antagonistic relationship between the mayor and some members of the OSC which has degraded the overall environment in which scrutiny is carried out;
· a mistrust on the part of some members towards officers of the TVCA; and
· a disagreement on the core principle of the OSC’s role in respect of bodies beyond the TVCA’s institutional boundaries (eg STDC, but also other bodies in which TVCA holds a stake or interest).
“There is” says the CfGS, “a combative relationship between some scrutiny members and the mayor. Issues around mayoral attendance (and the behaviour of the mayor and members of the [OSC] on those occasions when the mayor does attend) have become a dominant feature of the relationship, leading to tension and disagreement. Meaningful preparation for this set-piece mayoral scrutiny activity is not carried out either by the scrutiny function or by the executive side of the [TVCA], leading to interactions that are unfocused, unproductive and bad-tempered…
“The disagreement between the [OSC} and the mayoral and officer leadership of the [TVCA] about the scope of the committee’s ability to scrutinise STDC” adds the CfGS “crystallises the wider challenges around scrutiny’s role and its relationship with others. This issue has become totemic, and the failure to resolve it has become a major barrier to improvement.”
Strengthening scrutiny
Now, to address the problems outlined above and the 28 recommendations of the Tees Valley Review, the TVCA – starting with the OSC – is being asked to approve a number of measures, many of which are designed to strengthen scrutiny. They include (but not only):
- semi-annual reports by STDC to TVCA;
- an annual report on the finances of STDC including the medium-term financial plan, borrowing position and future revenues, incorporating business rate assumptions
- an annual report on activity and outputs to include an update on the business case outputs;
- adoption by TVCA of the Ministry of Housing, Communities and Local Government’s Scrutiny Protocol;
- an amendment to the TVCA constitution to comply with its duty to keep the STDC’s existence under review;
- inclusion of a statutory officer conflict of interest protocol in the TVCA constitution;
- all mayoral development corporations (STDC, Middlesbrough and Hartlepool) to be required to report to TVCA cabinet on a rolling basis each quarter in addition to the annual reporting requirements;
- training in conflicts of interest to be provided by an independent law firm for statutory officers/officers with decision-making responsibilities and members, early September; to be rolled out to other officers as considered appropriate.
Separately, new personnel are being brought in to strengthen the TVCA executive team. A chief operating officer has already been appointed at STDC and a chief operating officer post is proposed for TVCA to cover Hartlepool and Middlesbrough Development Corporations, and an operations director for TVCA.
Audit standards only partially met
The Chartered Institute of Public Finance and Accountancy (CIPFA) which carried out a review of TVCA’s internal audit arrangements, reports that: “[We] consider that the combined authority only partially conforms, or does not conform, to seven of the 11 Public Sector Internal Audit Standards (PSIAS). We consider that TVCA generally conform to only four of the standards.
The PSIAS standards include, among others, integrity, competence, independence, continuous improvement and effective communication.
“We would particularly draw attention”, adds CIPFA, “to the non-receipt of internal audit reports for the previous 15 months by the audit and governance committees, engagement with audit reviews, the lack of a self-assessment by TVCA and structural issues around the assessment of risk and internal audit coverage of the TVCA group.”
Renegotiating the JV deal
The documents going to Wednesday’s OSC meeting reveal what a poor deal STDC negotiated with its JV partners at Teesworks, Chris Musgrave and Martin Corney, which gave the businessmen a 90% stake, and what a weak position TVCA and STDC are in when trying to renegotiate the deal, as recommended by the Tees Valley Review.
The Review said that: “STDC should explore opportunities to influence when and how land is drawn down and developed and if possible renegotiate a better settlement for taxpayers.”
TVCA chief executive Julie Gilhespie wrote to Musgrave and Corney (“Dear Chris and Martin”) on 5 August 2024 to say: “One of the concerns that the Review panel had about the Teesworks JV is the fact that Teesworks is not obligated to draw down land, leaving the concern that the site may not be fully drawn down, leaving the public sector with significant liabilities.”
Three days later Gilhespie met Musgrave, Corney and two associates at the Teesworks Skills Academy.
The JV partners state their case
The minutes of that meeting show that the businessmen stated their case robustly and in a way in which they have rarely if ever done publicly before.
Musgrave, according to the minutes, highlighted that all joint venture agreements are legally binding and were entered into with full detailed consideration by both parties and following due process. Both parties had professional legal representation and all contracts were documented in line with the agreed commercial structure. He made clear the private sector partners therefore were not required or obligated in any way to vary the terms of the JV agreement.
Both Musgrave and Corney re-iterated the JV agreement was entered into before the land was formally secured from SSI and the ability to acquire the land was a direct result of their leverage. Musgrave highlighted the public sector would not own all the land if it wasn’t for their involvement. He also stressed, according to the minutes, that the public sector would therefore still be wasting tens of millions a year safeguarding the site, with none of the current development underway.
Musgrave re-reiterated that subsequent amendments to shareholder agreements [the 90%-10% split between the private sector partners and STDC] also fully reflected the development liabilities being transferred, which ran into the hundreds of millions.
Both Musgrave and Corney expressed disappointment that they felt the Review and subsequent public perception were ‘politically focussed’ and did not acknowledge that the site was a ‘dog with fleas’ and the JV partners had worked tirelessly to turn it around to create a site of vast opportunity, securing billions of pounds of investment and thousands of jobs, yet such hard work and success had now led to a significant amount of criticism of them. Corney also raised the point that for the past several years all their senior employees and staff had worked on the Teesworks project full time and parked many of their other business interests, significantly reducing income and loss of business profit.
Reluctant
Nevertheless, according to the minutes, Musgrave and Corney agreed that given the political spotlight that had been placed on the project and to avoid any further negative publicity directed towards the site which would further dent investor confidence and hinder development progress they would reluctantly consider renegotiation on some matters.
Following this reluctant offer, Gilhespie wrote to the partners again on August 9 accepting that legally they did not have to vary the JV contracts or make any amendments to them. But she thanked them for confirming they were willing to consider making some variations given the circumstances.
To help ease tensions around this and create more harmony, she wrote, she would appreciate if they could give consideration to four areas they had discussed: length of option period; land draw down (triggers/obligations); reporting; and any other concessions/amendments.
She asked the businessmen to provide a proposal for consideration as soon as possible.
Finally, in what seems an unusual move by a public authority, TVCA has released independent legal advice which also indicates how difficult it will be for TVCA/STDC to get better terms: “One party cannot unilaterally change or amend the terms of a document on the basis that the terms are believed to be less favourable than they would like. Any amendment would require commercial renegotiation,” The Endeavour Partnership wrote to Gilhespie.
Though this appears obvious, it can be of no comfort to TVCA, STDC, councillors or the Tees Valley public.
Comment
Teesworks is the location of Britain’s largest brownfield remediation project into which hundreds of millions of public funding has been poured, and the focus of many of the Labour government’s green energy revolution hopes. Ministers can hardly leave responsibility for it in the hands of a mayor, combined authority and development corporation that have shown themselves so incompetent in managing it. If we did not know from reading the Tees Valley Review what it meant when it said that “there are issues of governance and transparency that need to be addressed and a number of decisions taken by the bodies involved do not meet the standards expected when managing public funds” then we do now.
The failures of scrutiny and audit that contributed to allowing the JV partners to make fools of Houchen and his officials are now revealed to be more widespread than just the Teesworks case. The reports of the Centre for Scrutiny and Governance and Chartered Institute for Public Finance and Accountancy discussed above make disturbing reading.
Scrutiny in Tees Valley has been feeble since at least early 2019 when Houchen engineered the purchase of Teesside International Airport against the wishes of his entire cabinet. There have been other issues over which the OSC has been worried but has failed to exert itself: diversity, the TVCA constitution and the budget. This will not be news to readers of North East Bylines, which wrote about them last year.
The mayor, combined authority, development corporation and backbenchers on the OSC must act firmly and quickly, by the end of September, to reassure the public that they will do better in future. If they cannot, the government should step in and take control, accepting that devolution to Tees Valley has been a failure. But a better Teesworks deal, whether negotiated by the mayor or the Communities Secretary (Angela Rayner) now seems to depend largely on the good will of Musgrave and Corney.
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