Sunday, 3 January 2016

'Financial health' check reveals debt mountain

DOUG COLLIE on why Scottish Borders Council may have been so keen to protect a private firm's 'economic interests' from public scrutiny

A ruling by Scotland's information commissioner which dashed Scottish Borders Council's hopes of covering up damaging financial facts about their former waste management contractor marked a fairly minor breakthrough in the long campaign to get at the truth behind the disastrous loss of millions of pounds of public cash.

But subsequent material compiled by Not Just Sheep & Rugby researchers may demonstrate why the local authority did not want the 'financial health' of New Earth Solutions Group opened up to scrutiny by council taxpayers and critics.

The Dorset-based company was selected by SBC in 2011 to deliver a £65 million contract including the development of a modern waste treatment plant at Easter Langlee, Galashiels. Original estimates valued the 24-year deal at up to £87 million.

But it became apparent in early 2015 that NES could not fund the project while their plans had also encountered insuperable technical issues. The entire contract was torn up and abandoned with SBC forced to write off the millions it had squandered over four years.

When faced with one of several Freedom of Information requests linked to the fiasco SBC refused to reveal a passage of text from a confidential March 2012 committee report, arguing that disclosure would substantially prejudice NES's legitimate economic interests.

The council told Commissioner Rosemary Agnew that the sentence they wished to hide contained information which would "give a clear indication of the financial health of NES".

But in her decision report Ms Agnew rightly asserted that the company's financial status was readily accessible in annual accounts lodged with Companies House. She went on to point out that since 2012 NES had submitted two sets of accounts which clearly contained information on its 'financial health'.

So what kind of financial picture was painted by the New Earth Solutions Group accounts for 2010/11 - BEFORE the council signed its original deal with NES in April 2011? 

Well, in the 12 months to January 2011 the business recorded a loss of £8.358 million on an annual turnover of £11.103 million. The NES net debt totaled £55.572 million compared to £26.992 million in 2010.

SBC has been asked to disclose details of financial and technical checks carried out on NES prior to the contract being let. But the council has refused, again citing grounds of commercial confidentiality, and disclosure now hinges on further decisions from the Scottish Information Commissioner.

At this stage it is not clear whether councillors were aware of NES's 2011 losses and sizeable debts as they negotiated the multi-million pound contract. But the annual accounts for that year, running to 50 pages, included a detailed catalogue of the firm's indebtedness.

Here is a summary of various debts which formed part of the profile of NES's 'financial health':

“Nord LB bank has a fixed and floating charge over certain Group assets and contracts. They also hold the right to set-off on certain project account balances. £18.47 million of the Nord LB bank debt is repayable in instalments by July 2022 with interest fixed at 6.76%. £9.203 million of Nord LB bank debt is repayable in instalments by July 2017 with interest fixed at 6.19%”.

NES also had loan notes of £1.5 million with an interest rate of 10% repayable by September 2012; £3.029 million of loan notes at 15% repayable by September 2020; £4.133 million of loan notes at 12% repayable by September 2022; £12 million of loan notes at 8.75% repayable by June 2023; £6 million of loan notes at 8.75% repayable by March 2025, and £13.478 million of loan notes at 12% repayable by March 2025.

Did any of these significant entries from the NES financial records feature in risk assessments or "due diligence" reports considered by elected members in 2010 and 2011 prior to the crucial contract being rubber-stamped? Only the council knows the answer to that question, although surely the public has a right to know having seen large sums of their money disappearing with nothing to show for its loss.

When the contract notice inviting bids for the so-called Borders waste treatment solution was first published on January 7th 2009 the requirements were set out in great detail.

Unfortunately the failure of NES to deliver on the terms of their contract, and the years of dithering and delay by the local authority means the Borders is already missing Government targets on recycling and diversion from landfill by a country mile.

A key condition attached to the contract notice read: "All candidates will be required to produce a certificate or declaration demonstrating that they are not bankrupt or the subject of an administration order, are not being wound up, have not granted a trust deed, are not the subject of a petition presented for sequestration of their estate, have not had a receiver, manager or administrator appointed and are not otherwise apparently insolvent".

But waste management "specialists" with burgeoning net debts of £55 million were not excluded from the tendering process, and were expected to source the £23 million needed to build the Easter Langlee facility. It seems to have taken SBC four years - not to mention more than £2 million of wasted expenditure - to realise this financial scenario amounted to Mission Impossible.

Other important conditions outlined during the bidding process were apparently designed to ensure the local authority had access to the state of the successful tenderer's "financial health".

Those conditions were:

"All candidates will be required to provide a statement, covering the three previous financial years including the overall turnover of the candidate and the turnover in respect of the activities which are of a similar type to the subject matter of this notice.", and "All candidates will be required to provide statements of accounts or extracts from those accounts relating to their business."

The question is, did those councillors, senior officials and highly paid consultants responsible for drawing up and finalising the costly and ultimately useless contract study the figures and conclude that the "financial health" of NES was robust enough to deliver a 24-year solution for the Borders' waste management service? If they did, then it seems they made a dreadfully expensive mistake.

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