In 2020, having got Tees Valley Mayor Ben Houchen and South Tees Development Corporation (STDC) over a barrel, as we saw in Part 1 of our detailed examination of the Tees Valley Review, the Teesworks (TWL) Joint Venture (JV) Partners, businessmen Chris Musgrave and Martin Corney, moved to strengthen their position still further.
The review was established last May by Levelling Up Secretary Michael Gove under the leadership of Angie Ridgwell, Chief Executive of Lancashire County Council, following allegations of corruption in the House of Commons by Andy McDonald, MP for Middlesbrough.
Tees Valley Mayor Lord Ben Houchen, who is seeking re-election on 2 May, has expressed delight that the review did not find evidence of corruption, but McDonald has described it as damning.
The Supplemental Deed V3
On 11 June 2020 a Supplemental Deed was signed by the STDC chief executive and JV partners. “The innocuous title and diminutive page count contrasts with the practical impact of this legal document, which amends the…agreements signed in March 2020 which granted options to TWL over the entire Teesworks site,” comments the review (16.31).
“The amendments added wording which provided express permission for TWL to enter any of the option land and to remove all minerals, aggregates, metals and equipment and title to such items passes to TWL on removal from the property. The effect of this was to transfer to the JV Partners 50% of the value of the recyclable materials (16.32).
“The significance of this change isn’t fully apparent until the full value of the recyclable materials is known. The indications from the cash flows moving through TWL which it is understood arise from the sales of the recyclable materials show the value is in excess of £100mn…Estimates within STDC documents have indicated the full value to be £150mn, which means that the Deed had the effect of transferring £75mn to the JV Partners.” (16.33).
In addition, amendments provided that the owner (STDC) could not remove from the property or dispose of any of the recycleable materials without the prior consent of TWL or as directed by TWL. “This is a notable provision,” says the review, “because it has the effect of preventing the land-owner (STDC) from removing their own recycleable material from their land without first obtaining the consent of TWL. On the face of it such a clause is at odds with the spirit of a 50/50 JV (16.34)”
The review adds: “There is no evidence of any formal decision-making process regarding the signing of the Supplemental Deed and given its financial impact alone (£75mn) it should have been taken to the STDC Board for consideration and decision. It is arguable that a referral back to TVCA…or for consent as financial assistance [under the Localism Act 2011] was appropriate” (16.35).
The effects of the Deed were amplified in August 2021 when ownership of TWL was amended from 50/50 between JV partners and STDC to 90/10 in favour of the private businessmen.
The 90/10 deal (JV2)
During the summer of 2021 the TVCA group chief executive, Julie Gilhespie, brought a proposal to the STDC to change the ownership of TWL from a 50/50 deadlock company to a 90/10 division of shares in favour of the private sector partners (17.1).
“STDC lost all meaningful control over the running of TWL as it could be outvoted by the JV Partners on all decisions within TWL,” says the review. “The proposed 90/10 model cannot reasonably be characterised as a JV company in the same sense as the initial JV arrangement (17.2).
“Conversely, the proposal resulted in a significant improvement in the financial outcome for the JV partners and they also achieved effectively absolute control over the company to the extent that the JV partners would be able to make almost any decision without the necessity of obtaining the agreement of STDC” (17.3).
In addition, the revised model included a change to the valuation of land in the land options granted to TWL in 2020. Originally the options provided for a land value based on market value, and this was now changed to a fixed value of £1. “On the face of it,” says the review, “this has the potential to significantly increase the financial returns available to TWL and the JV partners and conversely reduce the proceeds realised by STDC on sale of the land to JV partners (17.4).
“Due to the variations in the value of parts of the Teesworks sites this fixed valuation is likely to result in sales at less than best consideration. This is acknowledged in the STDC Decision Notice dated 26 November 2021 which records that the mayor provided approval…for disposal at less than best consideration” (17.5).
This raised again the question of whether STDC could do this without the consent of TVCA – or of the mayor, as the DLUHC later ruled (16.8). Meanwhile, the question remains whether what the review still, two years later, calls the “proposed” decision was entered on the TVCA forward plan and whether a Decision Notice was issued to enable the Overview & Scrutiny Committee (OSC) to review it and potentially exercise call-in (17.5).
In any event, the new agreement was approved by the STDC Board at an extraordinary meeting on 18 August 2021 (17.9).
Among other provisions of the 90/10 agreement, the arrangements for sharing scrap income continued to mirror the 50/50 deal with the payment to STDC of £60mn in the form of a service fee rather than dividend (19.24). “The scrap and aggregates agreement was not reported to STDC Board at the time it was entered into,” reports the review, “and some Board members only became aware of the significance of scrap income at the time of the 90/10 JV…[T]he existence of scrap largely flowed from estimated spend of £42mn on demolition and an unquantified spend on initial remediation entirely funded by the public sector” (19.11).
The review panel was told that the revaluation of the option land to £1 was to be in return for a commitment by TWL to undertake future remediation and development activity. However, the legal documentation did not impose any such obligation and there was no evidence that TWL had yet done so (17.14).
“The key reason given as the driver for JV2,” says the Review, “was the stated need to accelerate the remediation process in order to more fully exploit the tax concessions associated with the Freeport status which had been announced in March 2021. In turn, the consequence of acceleration would be a faster depletion of the available public funds for regeneration and due to the finite nature of public funding the only source of further funding would be from the private sector” (17.9)
If this was supposed to mean that the JV partners would be investing their own money in the site, it was a vain or at least premature hope: “It is noteworthy that at the point when the JV90/10 was enacted and up to the present day, it is understood that the JV partners have yet to introduce any equity or loan funding into TWL. They have received at least £45mn from the sale of recyclables. TWL has received £93mn from the sale if an Income Strip relating to the SeAH wind farm facility. TWL has made payments to TVCA and STDC as well as HMRC for tax due. £63mn is retained to fund development works and further commercial obligations” (17.15).
What the JV partners had done, says the review, was contribute their intellectual capacity and human resources, and brought pace to delivery in a way that STDC could not have done alone.
The review panel notes that notwithstanding the significant financial implications of renegotiating the deal from 50/50 to 90/10 for both TVCA and STDC it was not referred back to TVCA, and there was no evidence of any referral to Overview & Scrutiny or Audit & Governance Committees (17.13). On the contrary, it was kept confidential to a degree at odds with the constitution, legislation and guidance (17.18).
“The negotiations for the 90/10 JV were always going to be constrained by virtue of the existing arrangements where the balance of power sat with the JV partners,” says the Review (10.10).
The four proposed amendments
The JV partners still hadn’t finished seeing if there was any further advantage, or reduction in their own liabilities, they could extract from their deal with STDC. They entered discussions with officials on four proposed amendments to the agreement (18.2).
- The Remediation Amendment. This affected parcels of land over which TWL enjoyed an option to purchase. In simple terms, says the review, the parties wished to take the benefit of new legislation (not yet in force) that would provide certain tax incentives for public authorities to remediate contaminated land.
- The Infrastructure Amendment. TWL had stated, according to the review, that it would not exercise its option to “call off” the trunk roads, bridges and other major access infrastructure within the site. It wished to amend the agreements between the parties to provide that responsibility for maintaining that infrastructure would lie with STDC and to make provision for how STDC would fund the necessary works. There was no estimate of the cost of this, but according to outside legal advice it could be a breach of Subsidy Control regime (20.8).
- The Quay Operating Facility Amendment. TWL and STDC, says the review, had already entered into an agreement relating to a quay at the site. That agreement omitted to make express provision for the construction of a quay operating facility. The parties now wished to amend the terms of their agreement to include the construction and delivery of a quay operating facility before transfer to TWL was completed.
- The Ongoing Contamination Amendment. TWL proposed that STDC take responsibility in the future for the economic (and other) consequences of any contamination on plots of land after they had been called off and purchased by TWL.
Exactly what all these proposed amendments involved or just what the financial implications for STDC would have been is not clear, though they would have been negative for the public sector. The review comments that they “may have a significant financial impact on STDC and indirectly on TVCA” (18.1).
The proposals, says the review, would have been likely to trigger consent requirements and/or the referral requirement [i.e. have to be referred up the TVCA Cabinet]. Some of the amendments may also have constituted a breach of the Subsidy Control provisions and may not have represented best value for the taxpayer (18.4).
These potential difficulties seem to have warned off the JV partners and the STDC officials involved in the talks who, apparently and surprisingly, did not include the mayor. The review comments: “The panel are advised by the executive that these were exploratory conversations and are not now being pursued. This is positive; however, we were surprised to learn that the board or mayor had not been made aware of these discussions. It may have been helpful to get a steer from the board before pursuing the matter in detail” (18.5).
In the third Part of this examination of the Tees Valley Review, North East Bylines will look at how another large North East company failed in the competition for involvement in the Teeswork site, and at a case of alleged “blackmail” by TVCA in Redcar.