To all residents and businesses in Surrey Heath:

THE FINANCIAL FUTURE OF SURREY HEATH BOROUGH COUNCIL

Background

In May 2023, after forty-nine years of continuous Conservative administrations, the people of Surrey Heath voted overwhelmingly for the Liberal Democrats to lead Surrey Heath Borough Council and to place accountability, community, and transparency at the heart of our Borough Council’s culture and operations.

We knew that we would be inheriting a challenging financial position from the previous Conservative administration, and that we had to deal urgently with the continuing fallout from the purchase of The Square shopping centre (then known as Camberley Mall) and the House of Fraser buildings in 2016. Over the past few months, as top priority, we have worked to assess the state of our Borough Council finances, our assets, and liabilities, particularly property related.

This is why we are communicating with you today.

Documents released

This week Surrey Heath Borough Council has published for the first time all the original reports and meeting minutes available that led to the decision to purchase both The Square and the House of Fraser building in 2016. These documents can be found via this link.

Additionally, to complete the picture, the Council has published all documents relating to the investigation of the purchase of The Square by the special working group of the Performance and Finance Scrutiny Committee, undertaken in 2020.

Implications for the Council’s finances and for our community

In November 2016, Surrey Heath Borough Council purchased The Square and the House of Fraser building for a combined total of ~£113 million. Latest valuations from 2022/3 put the value of these properties at ~£33 million – a loss of value of ~£79 million (71%).

{The Square was purchased for a total of £94,100,000 (Purchase price: £86,000,000. Refurbishment costs: £7,000,000. Purchase fees: £1,100,000. 31/3/2023 valuation (incl. land): £30,200,000). The House of Fraser building was purchased for £18,526,218 (Purchase price: £17,600,000. Purchase fees: £926,218. 31/03/2023 valuation: £2,920,000).}

These purchases have left a huge debt for all local Surrey Heath taxpayers to repay in future years at a time when the Council budget is already under severe pressure from the combined effect of soaring inflation, high interest rates, and increasing residents’ service needs due to the cost-of-living crisis. Due to the previous administration’s insistence on using risky, short-term loans, our repayments could be increasing by around ~£1.4M/yr, mounting further pressure on the Council’s ability to deliver the services you want and expect.

{The Council’s net short term debt (short-term borrowing less Investments) is ~£61M (Treasury Management 2023/24,1st Quarter 2023, dated 14th August 2023). Weighted average interest rates differenIal comparing August 2022 to Feb/Apr 2023 is ~2.3%.}

These debts will take decades to pay off. Even if we ceased all Borough Council-provided services and expenditure today, it would still take in excess of 10 years to pay off the debt. No one can have failed to notice the increasingly poor state of repair of The Square and the now empty House of Fraser building.

Given its age, The Square will require many millions of pounds of investment over the next few years for critical maintenance and upgrade, just to keep it open to the public and attractive to businesses and shoppers. The House of Fraser building will also require significant multimillions of pounds of investment to make it safe and fit for any future housing, retail, or commercial purposes.

Looking forward, it may be possible to find the necessary finances for the maintenance of The Square, which is vital to our town’s prosperity. However, because of the debts incurred by the previous administrations, we have neither the cash nor the ability to borrow prudently for the planned redevelopment of the House of Fraser building and will investigate other lower cost and risk options to provide regeneration opportunities.

Based on the latest approved budget, Surrey Heath Borough Council is facing effective bankruptcy in ~3.5yrs, although high inflation and increasing debt repayments could foreshorten this to as little as ~2yrs.

Identifying cultural and procedural failures

The documents released this week represent a complete record of information held by Surrey Heath Borough Council related to the purchase of The Square and House of Fraser buildings in 2016. Together with other information already in the public domain, they illustrate a corrosive leadership culture within previous Conservative administrations that were blind to risk and ignorant about good governance.

If any further documentation should be found, I have asked Council Officers to mark this for my urgent attention and I will ensure that (in the absence of strong legal or commercial constraints) it is published and shared with you.

The sum total of documentation detailing the financial case for the purchase of the House of Fraser building was 1.5 pages of A4 paper. The purchase was fast tracked on the authority of only two signatories, using a procedure in place for things like the management of real civic emergencies.

Governance failures identified include:

● Failure to stay within the competency of the Council team

● Failure to identify and understand the financial risks involved, and mitigate them

● Failure to obtain sufficient, and independent of the transaction, professional advice on retail property markets

● Failure to follow normal Council approval processes

● Failure of most Councillors to challenge the lack of information supplied for a major purchase

● Failure to execute the approved funding strategy of long-term loans

● Failure to produce a range of related reports and maintain proper public records

What I find particularly disturbing is how ‘thin’ the documentation from 2016 is. Given the sums involved, and the responsibility that goes along with spending public money, I’m concerned that there was such little due diligence or proper consideration of future risks.

I would like to highlight that none of the senior Council Officers involved in the 2016 purchases any longer work for Surrey Heath Borough Council.

Looking ahead

I‘m sorry that I am forced to share such a sad history and a bleak financial picture with you today. We, of course, suspected that the financial position we were inheriting would be challenging, but this is worse than anyone could have reasonably planned for.

My Liberal Democrat group recognise that we are custodians of taxpayers’ hard-earned money. We take the management of our public finances extremely seriously. That is why we will be introducing policies and procedures that will require this and future Surrey Heath Borough Council administrations to follow best practice in the sector – in investment decisions, governance processes, and scrutiny of decisions.

In pursuit of this goal, we are fortunate to have a new team of capable Council Officers who will help ensure that past errors of process and judgement cannot be repeated. I can already confirm that the key findings from the 2020 report into the purchase of The Square have already been fully implemented.

We have very challenging times ahead of us. Some exceptionally painful decisions will need to be taken. We must be honest enough to acknowledge that even the most difficult decisions may not be enough to avert insolvency due to the constraints placed on the Council by national government and past local Conservative administration property investment decisions.

I can assure you, though, that decisions will not be taken lightly, the opinions of residents will be sought throughout, and that we will communicate with you openly and transparently at every stage.

Thank you for taking the time to read this, and may I also thank Council Officers and fellow Councillors for their enormous hard work since May in serving you the residents and businesses of Surrey Heath.

Shaun Macdonald

To view the recently disclosed documents please visit: https://www.surreyheath.gov.uk/councilfinances/purchase-square-and-house-fraser-store