The agreement under which South Tees (Mayoral) Development Corporation (STDC) “purported” to enter a 50/50 Joint Venture (JV) with two local businessmen was, according to legal advice, beyond its authority and therefore only provisional (16.6).
A subsequent ambiguously recorded decision by the Tees Valley Combined Authority (TVCA) Cabinet to delegate the necessary authority to STDC may have been unlawful (16.23).
Tees Valley’s five council leaders making up the cabinet, lacking written legal, governance and financial advice, may not have even have understood what they were agreeing to on behalf of the people of Tees Valley when they indirectly authorised the establishment of Teesworks as a JV company with two private partners (16.24).
The JV is one example in the Tees Valley Review of what the authors describe as “a number of decisions taken by the bodies involved [which] do not meet the standards expected when managing public funds.” (1.7).
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.
In today’s first part of an examination of the Tees Valley Review, North East Bylines considers how two private businessmen got a foot in the door at STDC that eventually enabled them to take complete control of the UK’s largest brownfield regeneration site.
The Tees Valley structure
Tees Valley Combined Authority (TVCA) is at the head and South Tees (Mayoral) Development Corporation (STDC) at the heart of the structure established to regenerate the former SSI steelworks site. Teesworks Ltd (TWL) is a JV partnership set up by STDC to enable the comprehensive regeneration of the South Tees Development Area. The partners are identified in the Review as Chris Musgrave and Martin Corney.
Understanding the entangled relationship between these corporate bodies and individuals is essential to understanding what has gone on in Tees Valley,
STDC was set up by the mayor and TVCA cabinet in August 2017 to lead the regeneration of one of the largest brownfield sites in Europe and consisting mainly of the former SSI steelworks and land belonging to Tata.
So far, according to the review £560mn has been invested in the regeneration, including £246mn in government grants and £257mn in prudential borrowing. (1.2).
STDC, which is chaired by the mayor (as is the TVCA cabinet) has sought to operate as far as possible independently of the supervision of the cabinet and the scrutiny of back bench councillors from the five Tees Valley councils serving on the Overview & Scrutiny Committee (OSC).
The relationship between the cabinet and the STDC board came to the fore – we now know, thanks to the review – in late 2019/early 2020 when STDC moved to acquire the South Tees site from its private owners. Tata agreed to sell for £12mn but three Thai banks which had a charge on the SSI land refused. STDC decided to seek a compulsory purchase order (CPO).
Meanwhile, in November 2019, Musgrave and Corney had secured an option on 70 acres belonging to Redcar Bulk Terminal (RBT), which they used as leverage to remove the objections of the three banks to the CPO. They reached a compromise with the Thai banks but in the end the banks did not confirm it (16.26). Following a public inquiry, the CPO was granted by an inspector in April 2020 (3.9).
A new agreement was then reached with SSI/Thai banks under which STDC made a single payment of £15mn for their remaining land. It was circulated to STDC Board members of 14 July 2020 and signed the same day. “During interviews,” according to the review panel, “it was apparent that there was a lack of awareness of the second agreement and at least one STDC board member confirmed that they were unaware of a second settlement agreement” (16.28).
The “purported” JV agreement.
As part of the CPO negotiations STDC, Musgrave and Corney (the JV partners) agreed to create a 50/50 partnership (Teesworks Ltd – TWL) which the STDC Board approved in February 2020 before the TVCA cabinet delegated to the board the power to confirm the deal in March 2020 (3.10).
It is this deal that the review finds to be one of the most troublesome incidents it uncovered. It is complex and worth spending some time on.
STDC board met on 10 February 2020 and approved a report containing a number of recommendations to implement the CPO compromise, which was at that time expected to go ahead, and the agreement negotiated with the JV partners. “[T]here are a number of concerns regarding the content of the report and the nature of the proposed approach to the decisions-making process,” says the review (16.2).
“The approvals being sought from STDC concern the settlement agreement SA1 [the CPO compromise with the Thai banks] and the JV arrangements which between them have significant implications for STDC, its future revenue streams and land it holds as a public authority for public benefit. These agreements require the transfer of ownership of CPO land and the acquisition by STDC of company shares…(16.2).
“The report itself,” adds the review…”didn’t include any specific legal advice regarding the proposed arrangement and in particular the potential for State Aid and the implication of the Public Contract Regulations which were binding on STDC as a public body.”(16.3).
Nevertheless, there was a clear rationale for doing a JV partnership deal with Musgrave and Corney, the review argues. In return for STDC making a 50/50 JV agreement the JV partners would use their RBT option as leverage to negotiate a Settlement Agreement (SA1) with SSI under which it would withdraw its objection to the CPO in return for 300 acres of its land and surrender of the RBT option (10.3).
A50/50 deal was said by external advisers to be “critical” to getting agreement with the banks (10.1). In weighing up the options of pursuing the CPO or a negotiated settlement with SSI facilitated by the leverage provided by the JV partners’ option on the RBT land, according to the review, the mayor took account of the following factors (14.10):
- The risk that the CPO would be unsuccessful in whole or part;
- If the CPO was successful the valuations may prove unaffordable for TVCA;
- The CPO process might take too long to enable maximum exploitation of the available public funds or concessions.
On the other hand were (14.11):
- Loss of control by TVCA/STDC;
- Reduction in financial reward for TVCA/STDC which would offset the significant amount of public money spent to make site viable and attractive;
- Loss of long-term income stream from tenants.
It was a tough choice and the mayor decided that on balance the risk fell in favour of the 50/50 JV Partnership (14.12). Whether he made the right decision is another matter. It would be helpful to know the views of the TVCA cabinet and Overview & Scrutiny and Audit & Governance Committees if they had ever been asked. But they weren’t. Instead, decision-making by the mayor and a small group of senior officers wearing several hats because of their multiple appointments gave rise to a risk of ‘group think’ due to the absence of challenge (13.61).
There was no formal procurement process to choose the STDC’s partners as the JV partners were in a unique position because of their option on the RBT land. Both the mayor and Chief Executive explained that there was no negotiation as the JV partners’ proposal was ‘take it or leave it’ (14.6).
Power of consent
The review notes that STDC had received external legal advice in 2018 that for certain types of decision, including acquiring an interest in a company, it needed the consent of the TVCA (16.5)
“The effect of the advice is that, without the consent of TVCA, the STDC Board itself doesn’t have the power/authority to agree the SA1 settlement agreement [the compromise with the Thai banks] or the shareholder agreement and associated documents [creating the TWL partnership]. As such, the board’s purported decision on 10 February 2020 was only provisional in nature.” (16.6).
To get round this, the TVCA cabinet meeting on 13 March 2020 was recommended by officials to relinquish its power of consent in this case and delegate it to STDC (16.15). Bizarrely, this would have given STDC the power to consent to its own proposals and limited TVCA’s oversight. There is a long discussion in the review about whether the cabinet could do that, bearing in mind among other things that under the JV partnership future returns to STDC would be reduced by 50%.
Not only was the decision perhaps unlawful; it was not even clear what the decision actually was: “The recommendation as recorded in the minutes and the decision notice is different to that in the report. It purports to provide an extensive delegation of powers to STDC which effectively removed the checks and balances which were understood to be provided by the legislative framework (16.23).
“The result is an ambiguous record which lacks clarity as to the precise extent of the delegation. Additionally, there is doubt as to whether the TVCA was lawfully able to ‘delegate’ powers to STDC as set out in the minute of the TVCA meeting (16.23).
“Approving a recommendation of such significance without any written legal, governance and financial advice isn’t good practice because it isn’t clear that the decision makers were properly informed of the consequences of their decision. The Monitoring (legal) Officer and other statutory officers should have intervened with a view to ensuring that the decision was clarified and the decision makers properly informed” (16.24).
Nevertheless, there was no attempt at clarification until as late as 7 December 2023, when on the contrary the waters were muddied still more. The review panel asked the Department for Levelling Up, Housing and Communities (DLUHC) for clarification on who held the power of consent under the Localism Act, and the department came up with a new interpretation: “DLUHC officials confirmed the Department’s view that it was in fact the Mayor who held the power of consent and not TVCA.(16.8).
In other words, the mayor could give consent to actions by the STDC (chair: the mayor).
“There was agreement,” says the review, “that the method by which the legislative framework for this Mayor and Combined Authority is created by ‘modifying’ legislation on which the Mayor of London is founded is convoluted and prone to differing interpretations, as to which the present circumstances attest.” (16.8).
The review panel’s concern is understandable when one considers the implications of the deal that the STDC was signing on behalf of the people of Tees Valley with its new private partners:
“Entering a JV deal of this nature and potential value was a very significant step for STDC which would have long-term financial implications due to the act that 50% of any value to arise from the project would be diverted from STDC to the JV and/or the JV partners separately,” says the review”. “Remediation work would still be funded by STDC and as such TWL would benefit from the substantial amounts of publicly funded assistance which would be deployed to clear and remediate the site and make it more developable and therefore more valuable” (16.12).
What is more: “[T]here is no evidence of any scrutiny of this material change in approach by the Overview & Scrutiny Committee. This is at odds with what would be expected of a decision of this nature and scale” (16.25).
Despite any uncertainty over the lawfulness of STDC entering a partnership with a private company without the specific consent of TVCA, the deal was agreed by the Board on 10 February 2020. It gave the JV partners:
- A 30-year option on all STDC land to draw down once remediated by STDC;
- JV to develop and market the site once remediated;
- A 50/50 share in the uplift on market value between the JV Partners and STDC; and
- A deadlock company requiring shareholder approval on all material asset decisions (10.3).
The following month STDC established Teesworks Ltd (TWL) – initially known as South Tees Enterprise Ltd (STEL) – with a 50/50 split between STDC and the JV Partners. The TVCA Group Chief Executive, Julie Gilhespie, was STDC’s nominated director on the new company’s board. “Directors have a legal duty to promote good governance of company affairs and act in the company’s best interest,” remarks the review (10.4).
One of the risks explored by the STDC board in entering this agreement was the fact that there was no obligation on the JV partners to develop the land. The executive’s advice was that this was mitigated by the commercial opportunity offered to the JV to proceed (10.5).
“In reality,” says the review, “under the JV, the JV partners bear no risk or liability if the site is not progressed, whilst STDC have a stated intent to secure the regeneration of the area and a local expectation that this will be delivered as soon as possible (10.5).
“Consequently, when the [Teesside] Freeport opportunity arose and there was a desire on the part of the mayor to accelerate delivery, there was very little leverage available to STDC in the subsequent negotiation. The land was already effectively under the control of the JV…which means development could only progress with the partners’ consent” (10.5).
The JV Partners had the mayor and STDC over a barrel.
In the next part of this examination of the Tees Valley Review, North East Bylines will look at how the JV Partners made use of their position of power.