Governing risks and rewards: lessons from Teesworks and Croydon

Public institutions exist to ensure that people and communities are invested into, and are not exposed to risk and harm – and this principle must hold when public institutions enter into partnerships with the private sector, or other commercial arrangements. 

This blog will look at two institutions where weaknesses in governance and commercial practice have led to communities being exposed to risk and harm: the London Borough of Croydon (LBC), and Tees Valley Combined Authority (TVCA). In both places, the reasons for seeking private involvement were, and are, legitimate and necessary ones. In the TVCA ‘functional economic area’ the Teesworks project has been established to remediate and redevelop the former Redcar steelworks, with the aim of creating 20,000 new jobs by 2035. In Croydon, the borough’s wholly-owned company Brick by Brick was intended to accelerate housing delivery, notably of affordable housing.

These case studies may seem isolated given the scale of their individual circumstances but the lessons they offer public institutions at large and their private sector partners might be closer to home than on first thought. 

Given this, it is important to learn the right lessons.

Commercial decision-making with public money should not be confidential by default.

There can be good reasons for keeping information out of the public domain. However, the executive decision-making or accountability (audit and scrutiny) parts of public institutions should still be able to access this information, in private sessions. Where necessary, non-disclosure agreements can also be used. In the case of the Teesworks project and the South Tees Development Corporation (STDC), the Monitoring Officer ruled – incorrectly – that the Overview & Scrutiny committee had no right to scrutinise decisions made by that body, and weakened necessary controls around the investment of public money.

Good governance thrives in the light.

Doing the basics consistently and well matters. In Croydon’s case, the problems the council faced following its £220m investment in Brick By Brick were a result of poor execution rather than failure in principle. A series of external and independent reports, prompted by the council reaching crisis point in October 2020, all highlighted examples of where both the council and the company failed to prioritise their governance arrangements, putting public investment at significant risk. 

Does everyone really understand the set-up?

A genuinely shared understanding of both group and company structures, how they interact and how financial transactions flow between them is important in safeguarding public investment. In Croydon, external auditors raised concerns about the circular nature of some of the borrowing arrangements between the council and its companies.

In the Tees Valley Review Report, the Panel highlighted the negative effect of the complexity of group structures, the transactions involved, political and executive leaders holding multiple interests simultaneously, and papers published at the last minute. This meant that portfolio holders had little time to reflect on the business to be discussed or to seek advice from their officials affecting the quality of dialogue and level of challenge that should be surfaced. 

Socialising risks and liabilities, privatising profits.

Where investments are not commercially viable, but necessary to building thriving communities, it is only right that the public sector should use its resources to make the investment more attractive. However, in Tees Valley, the share of risk and reward does not seem to be balanced. There is a high level of unmitigated risk that TVCA will be left with stranded liabilities. Furthermore, the joint vehicle set up by the STDC and private investors – which started as 50/50 ownership – shifted to 90/10 in favour of the private investors, and simultaneously pushed responsibility for developing infrastructure onto STDC. 

In Croydon, while over 750 new homes have now been built with just over 50% genuinely affordable, no dividends have ever been delivered to support the council’s revenue spending, and up to £70m of the council’s original £220m investment will be added to the council’s debt burden. Communities end up shouldering those liabilities which affect the council’s day to day spending to service its debt. 

Beyond these immediate lessons, we at FGF are also interested in exploring longer-term implications of these two examples:

  1. A broad but precise approach to defining cost and value: Not all benefits to communities or the public sector can be monetised – but that approach and the insights that arise from it should inform how much cost or risk it is appropriate for the public sector to bear over the lifespan of a project. Where benefits cannot or should not be monetised, it is vital that a political case should be made for that. 
  2. Use partnership to design out conflicts of interest: The strength of a collaborative organisation like a Mayoral Combined (County) Authority, or even multi-tier local government, is an opportunity to avoid blurred boundaries between roles. 
  3. Get learning…: The Tees Valley Review Report revealed gaps in expertise and insight in all parties and the 2020 Report in the Public Interest in Croydon highlighted a ‘corporate blindness’ driving its governance and financial failures. Chartered Institute of Public Finance and Accountancy offers a comprehensive suite of courses for appointed officials, and there are commercialisation masterclasses available from the Local Government Association to support councillors. However, neither offer is standard issue, or connected to the implementation of a project per se – this could be an opportunity to craft something that becomes core to the process of establishing commercial activity. 
  4. …including in the private sector: Investors seeking to partner with the public sector need to know how it works. Public resources come with public accountability, and side-stepping that accountability is not an option. 
  5. Finally: culture eats strategy for breakfast: Considering the “cultural tensions between the desire to move at pace unencumbered by bureaucracy as opposed to the expectations of accountability and transparency” raised in the Tees Valley Review Report, it would be interesting to explore what a constructive ‘blended’ culture could be, and how people can be supported to lead such a culture.