Cabinet Meeting: 7th May 2013

26/11/2013

CHESHIRE EAST COUNCIL
Cabinet Date of Meeting: 7th May 2013
Report of: Director of Economic Growth and Prosperity
Subject/Title: Development Company
Portfolio Holder: Cllr Jamie Macrae, Prosperity and Economic
Regeneration
1.0 Report Summary
1.1 This report sets out the benefits, implications and proposed approach
to the creation of a new delivery vehicle, to drive forward the
development of the Council’s land assets so as to promote housing and
jobs growth. It summarises the work of Deloitte LLP (business and
financial advisors) and Bevan Brittan LLP (legal advisors), appointed to
evaluate options and report back on a preferred model to provide the
best opportunity to realise the ambitions of the Council, and to create
the infrastructure necessary to ensure greater prosperity for all our
residents.
1.2 The report seeks Members’ agreement to set up a wholly Councilowned
and controlled, arms-length Development Company, limited by
shares, where the Council retains the assets.
2.0 Decision Requested
2.1 It is recommended that Cabinet:
2.1.1 Recommend to Council the setting up of a Development Company – East
Cheshire, Engine of the North, wholly owned and controlled by the Council, in
the form described in this report, to drive forward the development of the
Council’s land assets, as a key element for the Council’s wider plans for
housing and economic growth.
2.1.2 Recommend to Council to appoint initially to the Board of the Company the
following non-executive Directors: Cllr A Thwaite (Chairman), Cllr D Druce
(Vice Chair), Cllr D Newton (Vice Chair), Cllr P Groves, the Director of
Economic Growth and Prosperity ( Caroline Simpson), the newly-appointed
Head of Development ( Darran Lawless) and agree that the Borough Solicitor, (
Mike Rowan ) take on the role as Company Secretary.
2.1.3 Recommend to Council that a Shareholder Committee is established
comprising of the Leader, Deputy Leader, Portfolio Holder for Prosperity,
Portfolio Holder for Resources and the Chief Executive.
Agenda Item 10
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2.1.4 Give delegated authority to the Interim Chief Executive and Interim Monitoring
Officer to take forward the actions required to implement the recommendation
and set up the Development Company, reporting back to Cabinet in October
2013 on progress. Specific actions to take forward are:
Set up the Company as operational (separate legal entity) and establish
its Memorandum and Articles of Association by end May 2013.
Finalise initial staffing arrangements and related HR considerations;
insurance arrangements; and other operating procedures to ensure that
the Council’s budget envelopes and capital plans in relation to the
activities of the Company are clearly understood by end May 2013.
Develop a 3-Year Business Plan for the Company, to establish
the portfolio of assets it is required to act upon; any provision of
resources to facilitate land acquisitions; and set objectives against
which its performance will be measured. Also draw up Company
Objects and, if relevant, an Agency Agreement by end October 2013
3.0 Reasons for Recommendations
3.1 Following the Council's recent options appraisal on the most effective
approach, and having received expert external advice and assistance from both
Deloitte and Bevan Brittan LLP, the preferred option is delivery of the Council's
objectives through a wholly-owned and controlled arm's length company, where
the Council retains ownership of the physical assets.
3.2 It is considered that the principal advantage of this option, over all others, is
that it allows the Council to focus its delivery through the separate arm's length
company, without distracting the company's management and staff with the
Council's other day-to-day operational requirements. The Company can also
better promote the Council's land and property assets for development through
the Local Plan and planning process.
3.3 In addition, the Company can be used flexibly by the Council as its agent,
without tying the Council down to a single delivery model (as would a "local
asset backed vehicle" (LABV) or transfer of assets). It is believed that this
vehicle, also is likely to be regarded as more attractive by the Cheshire and
Warrington LEP and possibly other public sector bodies, as a delivery vehicle
for their purposes, than direct contract with an in-house Council team or a nonwholly
controlled Council company/ joint venture.
4.0 Wards Affected
4.1 All
5.0 Local Ward Members
5.1 All
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6.0 Policy Implications
6.1 The recommendation supports the Council’s priority of promoting and investing
in local economic growth and the outcomes set out in the Three Year Plan,
particularly in relation to ensuring Cheshire East has the infrastructure
necessary for a strong, diverse and resilient local economy, and that the area is
a good place to live and work.
7.0 Financial Implications
7.1 In February this year Cabinet approved spending of up to £100,000, from an
existing Economic Development earmarked reserve, on independent legal and
financial advice on the best way to take forward this initiative. Spending to date
has been contained well within that envelope; the remainder of the reserve can
be used to cover further Company set-up costs (e.g. marketing).
7.2 The Council’s Budget for 2013/14 provides for an enhanced Economic Growth
function, in terms of both Revenue and Capital budgets, and the operational
activities of the proposed new Development Company would be financed from
within those approved resources. In future, it is envisaged that the Council’s
Capital Programme would benefit from the work of the company e.g. through
the realisation of capital receipts, from the sale of assets or from attracting
additional inward investment.
7.3 Along with evaluation of options and matters of governance, the brief to Deloitte
included a requirement for advice on related finance and accounting issues,
particularly the relevant tax considerations. This report and its
recommendations reflect the advice received.
7.4 As noted in section 14 below, the Company would be a provider of professional
services; the Council would pay for the services of the Company as for any
other external provider of consultancy services, on an appropriate value-formoney
basis.
8.0 Legal Implications
8.1 It is proposed that the new delivery vehicle be a company limited by shares,
due to the limited profit available and given the legal considerations highlighted
in Bevan Brittan LLP's Advice Note. Section 6 of this Advice Note sets out
various mitigation strategies in relation to the risks identified with the preferred
option.
8.2 It is important for the Council to:

Identify the scope of the agency role and its’ arrangements with the
company;

Consider who will be Board Directors and how such a role is to be
reconciled with any role within the Council, taking into account actual and
perceived conflicts of interest and bias, particularly with regard to planning
matters, where in effect the Council is both the promoter of a development
and the planning authority deciding on it;
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Consider the necessary constitutional and administrative processes which
the Council has and make any necessary amendments to these, to ensure
that the Company can be used effectively and efficiently to improve delivery
timescales

Consider the effective drafting of the Memorandum and Articles of
Association of the Company, to give the Council the necessary degree of
control (e.g. the Council would approve any Business Plan (i.e. the
overarching "envelope" of the Company's activities), scrutinise the
Company's performance and Board activities (directing the Board where
necessary to act or not act in a certain way) and exercise a veto at Board
level on all or key, strategic decisions affecting the Company), without
hampering the day-to-day operations of the Company or discretion of it’s
Board so it retains agility and flexibility;

Consider a clearly defined funding model for the Company; and

Consider the clearly defined staffing arrangements for the Company
9.0 Risk Management
9.1 The potential risks associated with creating and operating a new delivery
vehicle of this type, as recommended in this report are summarised in Appendix
F, along with related impacts and how those risks may be mitigated or
eliminated.
10.0 Background
10.1 In February Cabinet considered a report setting out the strategic case
for creating a new delivery vehicle, to drive forward the development of
the Council’s land and property assets, to promote housing and jobs
growth. Cheshire East has ambitious growth plans - with expected
targets of at least 20,000 additional jobs and 27,000 new homes by
2030. We are aiming for at least 7,000 new homes in the next five
years.
10.2 It is important that the Council is seen to drive forward its economic
growth agenda through accelerated development of its assets, both
strategic sites identified in the Development Strategy and smaller sites
which can deliver investment and growth and contribute to housing
supply. A new focused delivery vehicle will galvanise efforts to speed
up the development of our own assets to bring about essential
investment in new infrastructure and new housing, economic growth
and capital receipts.
10.3 The earlier report to Cabinet in February recommended the
engagement of legal and business/ financial experts, to evaluate
options and report back on a preferred model to provide the best
opportunity to realise the ambitions of the Council, in this regard.
Following an appropriate procurement exercise, Deloitte LLP were
appointed as financial advisors and Bevan Brittan LLP as legal
advisors to the Council for this project.
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10.4 The comprehensive project brief given to the consultants included the
following elements: Consideration of options; Governance and scope;
Financing of the vehicle; Financial, accounting and taxation matters;
and Risk management.
10.5 Deloitte have prepared a report for the Council and Bevan Brittan LLP
have complemented this with an advice note on legal matters; their
Executive Summaries are shown as Appendices A and B respectively.
This report summarises their work, makes clear recommendations on
the preferred approach, and describes the next steps to
implementation.
11.0 Consideration of Options
11.1 Following an initial review of the options for creating a delivery vehicle
the expert advisors summarised the potential models for consideration
as follows:
1. Status quo – continuing with the current team, without changes to its
capacity and capability;
2. Self-delivery – strengthening the current team and making alterations
to internal working practices;
3. Wholly owned and controlled arms length company
a. Where the Council transfers the assets
b. Where the Council retains the assets;
4. Wholly owned, not controlled, but influenced arms length company
a. Where the Council transfers the assets
b. Where the Council retains the assets;
5. Public/ private joint venture.
11.2 Clearly, the preferred delivery vehicle must be fit for purpose and
capable of realising most or all of the Council’s objectives. The criteria
against which options have been evaluated reflect the Council’s
ambitions for speedy, large-scale housing and business growth, and for
the new Company. They are shown in Appendix C; and they include
the following objectives:

to accelerate growth in terms of housing completion and jobs
investment, using Council-owned land and property assets;

to maximise development and minimise risk to the Council, by
providing dedicated delivery arrangements and relevant and up to date
property and commercial expertise;

to secure additional private sector, Government and European Funding
investment into the Borough, through creating a stronger focus on
delivery; and providing a mechanism with the potential to deliver larger
scale development schemes locally for the Cheshire & Warrington
LEP;
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to create profitable and transparent relationships with developers and
investors which deliver financial and regeneration benefits; and

to capture the financial benefits and tax efficiencies of a dedicated
delivery vehicle, which is Council-controlled, but can benefit from agile
operating arrangements that can be developed at a later date when it is
fully established.
11.3 Following evaluation and moderation of the options, by officers from the
Council’s Regeneration, Legal and Finance teams, the preferred
delivery model is Option 3b: Wholly owned and controlled arms
length company, where the Council retains the assets. Against the
objective-based criteria described in Appendix C, this is considered to
provide the best opportunity to realise the development ambitions of
the Council; (a Summary of Evaluation Scores is shown as Appendix
D).
11.4 This approach will allow the Council to focus its delivery through the
separate arm's length company, without distracting the Company’s
management and staff with the Council’s other day-to-day operational
requirements. In addition, the Company can be used flexibly as an
agent, without tying the Council down to a single delivery model (as
would be the case,say, with an asset-backed Joint Venture company).
11.5 Furthermore, by creating a new identity and brand in this way– with a
high profile and an “open for business” attitude – Cheshire East is likely
to be seen as more attractive by developers and other external
investment bodies and partners, than through a direct contract with the
Council, or a non wholly-controlled Council company/ joint venture.
11.6 In addition, in keeping the structure/ scope of the vehicle simple in this
way the Council would avoid the potential for “tax leakage” (i.e.
unnecessary exposure to Stamp Duty Land Tax, Corporation Tax, etc.),
that would otherwise be the case if the Council’s assets were
transferred to the Company (or asset acquisitions were made by the
Company rather than by the Council).
11.7 In effect, the Development Company would in future provide
professional services for the Council, acting on its behalf in the
promotion of its assets for disposal and development, proactively
creating productive relationships with developers and investors,
negotiating agreements for sale, lease, or acquisition of sites for
housing and business growth. In terms of the best legal form of such a
corporate entity, the experts would recommend a “Company Limited by
Shares”.
11.8 This is because a company limited by shares is a "tried and tested"
corporate vehicle used widely within the public and private sectors, with
a separation of risks between the shareholder ( in this case the
Council) and the company and with a clear decision-making forum for
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the formulation of business strategy (the Board of the Company).
Whilst both a company limited by shares and a company limited by
guarantee are able to distribute any profits made (with a share-based
company being marginally easier), a company limited by shares is
more readily capable of being transferred to another party if required in
the future. This means that if the Company had value (i.e. another
party was willing to pay to own the Company in place of the Council),
the Council's shares could easily be transferred to that other party.
11.9 Whilst there are some tax benefits to the use of a limited liability
partnership over a company limited by shares or guarantee, given that
profit generation and distribution will be limited, an LLP structure is not
critical (see the Deloitte Report for details). In addition to this, there is a
legal consideration for discounting the LLP model. Under section 4(2)
of the Localism Act 2011, if a local authority does anything for a
commercial purpose in the exercise of its general power of
competence, it must do so through a company. Exercising the power
for a "commercial purpose" is not defined in the 2011 Act, but the
definition of "company" does not include LLPs. Where the
development vehicle is generating profits from outside the Council's
area and/ or those profits are not then recycled towards wider Council
aims (for example, regeneration, housing, public realm works), it is
more likely that the development vehicle's purpose is seen as
commercial in nature. Using a company structure rather than an LLP
structure avoids any later issues under section 4(2) of the Localism Act
2011.
12.0 Governance and Scope
12.1 Whilst it is for the Council to determine its preferred approach, the
Deloitte report recommends that the Board of the Company should be
constituted with a relatively small number of individuals in order to be
the most effective.
12.2 Based on their experience, Deloitte have suggested that six directors
(comprising a mix of Members and senior officers of the Council) would
provide the appropriate balance of focus and resource to lead the
strategic direction of the Company. Deloitte and Bevan Brittan LLP
have each provided advice regarding the best means of ensuring
conflicts of interest are avoided, in relation to membership of the Board:

It is easier to manage the potential conflicts for an "officer director",
as the Council can agree to the officer continuing to act in their
substantive role despite potential conflicts; can agree not to take
action against him where he is required to act contrary to the
interests of the Council due to his role as a director; and can agree
to his remuneration as a director if applicable. The selection and
involvement of senior officers acting as directors to the company will
require careful consideration by the Council for these reasons.
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Where a "councillor director" is concerned the Council, (as owner of
the company and ‘ controller’ of the Board of Directors) can agree to
him or her acting as a director, but under the provisions of the
Localism Act 2011, the councillor would need a dispensation to
enable him to act as a councillor where a conflict of interest arises
or is particularly likely to do so, for example, where a Company
Director is also a Cabinet Member. Dispensations may be able to
be granted as the provisions of the Localism Act are fairly wide and,
for example, a dispensation can be granted if the authority,
"considers that granting the dispensation is in the interests of
persons living in the authority's area", or "considers that it is
otherwise appropriate to grant a dispensation". The member must
apply for the dispensation in writing and it does not avoid the
requirement for registration of interest or of disclosure whenever a
matter of Council business affecting the company is being
discussed.

It is also important to remember, that despite all of the above being
in place it can be very difficult to avoid the perception of bias, which,
if proven, can invalidate the decisions of the Council and give rise to
a public perception of wrongdoing which can be very difficult to
resolve. For this reason, care needs to be taken over the selection
of those elected Members who will serve on the Board of the
Company.
12.3 With the above advice in mind, it is suggested that the Council agrees
to appoint initially the following non-executive Directors: Cllr A Thwaite
(Chairman), Cllr D Druce, Cllr D Newton, Cllr P Groves, the Director of
Economic Growth and Prosperity ( Caroline Simpson), the newlyappointed
Head of Development ( Darran Lawless) and agree that the
Borough Solicitor, ( Mike Rowan ) take on the role as Company
Secretary. It is recommended that the core role of the Chair and the
Board of the Company is to ensure the work programme of the
Company fits within the Council’s corporate objectives; to develop the
strategic work programme; and importantly to monitor and drive
forward delivery through robust performance management.
12.4 Bevan Brittan have advised that Directors' remuneration with the
wholly-owned company will be governed by the provisions of the Local
Authority Order 2005, which restricts the amount of remuneration that
an elected Member may receive. In effect, this means that they cannot
receive any additional remuneration from the Company for acting as a
director, which is beyond the special responsibility allowance they
would have received had the activities of the Company been
discharged by the Council. Any remuneration they receive will be
deducted from the SRA that they receive within the Council and they
may only claim mileage and subsistence at the rates that apply to
councillors.
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12.5 Clearly, in order to implement this initiative, the Council will need to
review and revise its decision-making structures. This will include
defining the operating parameters of the Company – e.g. which assets
are available for disposal or development; and giving the delegated
authority required to negotiate agreements for sale or lease to
developers, investors or end users or development agreements with
developers; etc. – in such a way as to provide assurance to the Council
regarding the proper management of its property assets.
12.6 The Council would exercise control of this new vehicle also by agreeing
a 3-Year Business Plan for the Company, which establishes the
portfolio of assets it is required to act upon as a priority; any provision
of resources to facilitate land acquisitions; and set objectives against
which its performance will be measured. This Business Plan will be
specific to the Development Company but fit within the overall Council’s
reporting arrangements.
12.7 With regard to the accountability of the Company, the Council needs to
determine reporting arrangements for the scrutiny of the Company’s
performance. As a provider of services helping to deliver the Council’s
economic growth agenda, the Company’s activities would fall within the
remit of the Portfolio Holder for Prosperity & Economic Regeneration
and would be subject to the normal scrutiny arrangements of the
Council. This would involve regular quarterly performance reports to
Cabinet and Corporate Scrutiny Committee.
12.8 It is proposed that a Shareholder Committee is established comprising
of Members from Cabinet and the Chief Executive to oversee the
operations of the Company. It is recommended that the Shareholders
Committee is comprised of the Leader, Deputy Leader, Portfolio Holder
for Prosperity, Portfolio Holder for Resources and the Chief Executive.
The proposed governance model is outlined in Appendix G.
12.9 As noted above, a key objective of this initiative is also to create the
potential for the vehicle to operate outside the Council’s geographic
boundaries and provide advisory services for the Cheshire and
Warrington LEP (and possibly other public sector bodies). Deloitte have
noted that the Company would need to develop its service offer and
commercial arrangements with the other authorities; and also have
regard to associated resourcing requirements as well as to consider
any impact on its tax position. Similar considerations would apply if the
Council wished over time the Company to expand the scope of its
functions beyond its original purpose.
13.0 Management Structure and Initial Work Programme
13.1 The management of the Company would complement the new
organisational arrangements being developed in the Council, with the
most senior role (Managing Director) working under the direction of the
Company Board and with a reporting line to the Council’s Director of
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Economic Growth & Prosperity, relating to the work of a wider Council
team and benefitting from other initiatives being taken forward to
improve and streamline working practices in this context.
13.2 Regarding the staffing of the Company, it is envisaged that there would
be a small “core” team of Managing Director; a Development
Programme Manager; up to three Development Surveyors; a Legal
Advisor; and a Finance Advisor, with ability to flex resource inputs
relative to the needs of the work programme and associated funding as
set out in the 3-Year Business Plan.
13.3 It is recommended that initially staff employed by the Council seconded
to the Company, as required, with appropriate charges made to the
Company’s account for their time, along with associated overhead and
support costs. This approach would be simpler than TUPE transfer of
staff to the Company, and particularly would avoid additional pensionrelated
costs for both the Company and the Council. The Company
may purchase external consultancy services directly though, relating to
the requirements of the work programme and within the budget
envelope and scope of its 3-Year Business Plan.
13.4 An initial work programme for the Development Company is being
prepared for consideration. The Council’s substantial asset portfolio
includes a range of land and property holdings, with the potential for
significant residential and/ or business-led development. Subject to
planning consent and the economic conditions prevailing at the time of
marketing of sites, it is understood that capital receipts in excess of
£100m may be achievable over the next 10 years. The Development
Programme will evolve further as part of implementation, and will form
the first 3-Year Business Plan for the Company.
14.0 Financing of the Vehicle
14.1 As the Company would be a provider of professional services, the Council
would pay for the services of the Company, as it would for any other external
provider of consultancy services. For the Council, such expenditure would be
treated under the usual capital/ revenue rules, and with spending on services
relating to the disposal of its assets chargeable against its associated capital
receipts (subject to the statutory limit of 4% of each receipt).
14.2 As indicated in section 7, the financing of the operational costs of the Company
(e.g. staffing, marketing, other services and support expenses) would continue
to be provided for in the Council’s medium term financial plans – i.e. reflected in
Capital project and disposals programmes, as they develop, with any costs not
chargeable to capital being met from existing Revenue budgets for the
Development Team and its associated support services.
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15.0 Financial, Tax and Accounting Matters
15.1 The Deloitte report contains analysis and commentary on tax considerations, in
respect of Corporation Tax, Stamp Duty Land Tax and VAT. It recognises that
the position of Councils, in relation to tax, is particularly favourable (e.g. with no
liability for Corporation Tax and particular rules in relation to VAT).
15.2 Consequently, in general terms when considering alternative delivery vehicles,
there must be a focus on minimising “tax leakage”. A high level summary of the
tax implications of each of the options for new delivery vehicles is shown in
Appendix E.
15.3 As noted in paragraph 11.3, the recommended option is for a wholly Council-
owned and controlled company, providing professional services. Under this
model - with the Council retaining ownership of its property assets, until actual
disposal to a developer, investor or end user (or indeed the Council acquiring
assets, in relation to acquisitions negotiated by the Company on its behalf) –
the Council avoids over-exposure to Stamp Duty and Corporate Capital Gains
Tax. Furthermore, simple reimbursement of operating costs of the Company
would avoid Corporation Tax leakage, in material terms.
15.4 The external experts have provided information on company accounting,
financial reporting and State Aid. As requested in the brief, they have also given
advice on the financial aspects in respect of the staffing of the company, which
we will need to give consideration to (e.g. as noted above, whether staff
employed by the Council should be simply seconded to the Company; or
formally transferred under TUPE, with the associated complexities and costs of
pension transfers; and insurance/ indemnity matters relating to both officers
and Members).
16.0 Risk Management
16.1 The potential risks associated with creating and operating a new delivery
vehicle as recommended in this report are summarised in Appendix F, along
with related impacts and how those risks may be mitigated or eliminated. A
detailed Risk Management Plan will be developed and put in place as part of
the actions needed to establish the new company.
17.0 Access to Information
The background papers relating to this report can be inspected by contacting
the report writer:
Name: Caroline Simpson
Designation: Director of Economic Growth & Prosperity
Tel No: (01270) 686640 begin_of_the_skype_highlighting (01270) 686640 FREE  end_of_the_skype_highlighting
Email: caroline.simpson@cheshireeast.gov.uk
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