Tees Valley Mayor Lord Ben Houchen’s two flagship projects have run up loans totalling more than £520mn from their parent body, Tees Valley Combined Authority (TVCA) and are failing to make the repayments. TVCA is left having to make annual interest payments on the money it borrowed in the first place to lend on to its subsidiaries and will have to borrow an extra £140mn this financial year.
As at the end of September, South Tees Development Corporation (STDC), home to the Teesworks regeneration site, had loans of £393.5mn from TVCA with £6.5mn outstanding repayments, and Teesside International Airport had loans of £128.1mn with outstanding repayments of £26.8mn. Other loans made by TVCA bring the total to £538mn.
Most of the loans came originally from the Public Works Loans Board (PWLB) for the remediation and development of the Teesworks site and the rest from the UK Investment Bank.
TVCA is not fully covered for the STDC and airport bad debts by its so-called minimum revenue provision (MRP), which local authorities are supposed to set aside to cover eventualities such as this. It may have to increase the MRP by what Jo Moore, group director of finance and resources, describes in a report to the cabinet as a material amount.
In an update report on the first half of the 2025-26 financial year, she warns that: “[The} Authority’s cash resources have reduced significantly and there is now a requirement to undertake c£140mn of additional PWLB borrowing before the end of the financial year.”
Due to the part-year effect of the extra £140mn on the revenue budget, and at current PWLB interest rate forecasts, TVCA will be able to meet the repayments within its budget this financial year. Nothing is said about future years.
Luckily, TVCA has just benefited from a windfall which will help bring short-term relief in the form of £27mn of Enterprise Zone funding received in October but not to be spent until late March. This, combined with the £140mn, “will secure liquidity for the remainder of the year,” according to Moore’s report.
Longer-term, TVCA’s auditors, Ernst and Young (EY) in their draft annual report for 2024-25, remind us that the Authority’s revenue reserves are already planned to fall steadily to almost nothing by 2028-29.
“The Authority’s funding model and business plan,” they say, “involve the deployment of almost all of its revenue reserves over the remaining period of the Investment Plan; however the Authority’s borrowing costs will continue for the duration of the Authority’s borrowings. Therefore securing sufficient future funding (either from grants or through the Authority’s income-generating activities) is a key medium-term challenge for the Authority.
More gory details
- The way the loan agreements between TVCA and STDC are drawn up gives the development corporation a one-year interest holiday.
- STDC’s ability to pay interest and principal is reliant on the generation of business rates income arising from the development of the Teesworks site. But this regeneration is a long-term project underpinned by complex public/private agreements and there is a significant period spanning many financial years from the loans being advanced by TVCA to the business rates starting to flow in, enabling STDC to make the repayments.
- A grant of £10.4mn was made by TVCA (chair: Houchen) to STDC (chair: Houchen) on 31 March 2022. Subsequently it was agreed that the grants would be viewed as a loan repayable over 25 years at £401,000 a year. TVCA included this repayment in its 2025-26 budget, but STDC has continued to treat it as a grant. “Further clarification is being sought,” remarks Moore drily.
- Oddly, the airport’s accounts show £24.172mn payable to TVCA. However, there is nothing in the TVCA accounts to show any payment as receivable. ”However,” adds Moore’s report, “given the airport’s financial position, a bad debt provision for the total interest accrued will be…provided for, meaning a net nil impact on the Authority’s outturn position.”
- TVCA has entered a sale-and-leaseback arrangement with a pension fund and commercial entity under which TVCA makes a head lease payment to the pension fund on the land and in return receives a sub-lease rent from the commercial entity. Any default by the entity would expose the Authority to the risk of making the annual payments to the pension fund.
- A risk has emerged over £636,000 interest receivable on an NZT (Net Zero Teesside)loan; officials are working to clarify the position.
- Clarity is being sought on the TVCA’s obligations in terms of the financial liabilities of the Hartlepool and Middlesbrough mayoral development corporations (of which Houchen was chair until June). They have no independent income and have relied to date on £10mn grants from TVCA, which may be exposed to further requests for funding this year and next to ensure their sustainability.
- The TVCA accounts for the past two years are still unsigned and being reviewed by TVCA officials. There is a risk that matters arising may have an impact on the financial position of the Authority.
- The auditors, Ernst & Young, who have been examining the 2024-25 accounts separately but simultaneously, have found “several individual transactions which are different in nature to those typically undertaken by local authorities.” They say that based on their initial assessments there is a “reasonable probability that material misstatement exists, potentially in multiple regards, within the draft statement of accounts.” These transactions are not identified but may be associated with those discussed above.
- TVCA is heading for a £955,000 revenue deficit this year but officials are working to mitigate it.
Comment
Jo Moore presented two updating reports to the TVCA cabinet on 12 December and they are brutal in exposing the way the budgets of the TVCA Group – principally the Authority itself, the STDC and the airport – have managed their borrowing and lending. E&Y, the auditors, whose draft report deals with a previous year, also pull no punches. Houchen has been mayor and thus chair of the TVCA cabinet throughout the relevant time; he was chair of STDC until being forced out by government pressure in June, thus being both a lender and a borrower; and the airport has been his pet project since it formed the centrepiece of his first mayoral election campaign in 2017. He must carry the prime responsibility for the current mess.
