Dirty Deeds Done Dirt Cheap IV : Endgame?

After a wait of years, the Wales Audit Office has finally
delivered its verdict on the RIFW land sale scandal.
(Pic : BBC Wales)

It's been three years in the making, but at long last the Wales Audit Office have delivered their verdict on the Regeneration Investment Fund for Wales (RIFW) and the sale of land parcels to an offshore company, South Wales Land Developments (pdf).

It doesn't make good reading for the Welsh Government. At all.

It's so serious it warranted a special episode of Week In, Week Out : The Big Welsh Land Scandal? which will be broadcast tonight at 10:35 (iPlayer link).

A Brief Recap

The core issue is how or why RIFW sold widely-known lucrative development
land (like Lisvane, above) for significantly less than its proper value.
(Pic : Wales Online)

• Dirty deeds done dirt cheap (18.9.12)
• Digging deep into dirty deals done dirt cheap (11.2.13)
• Dirty deeds done dirt cheap – Round III (17.7.13)

RIFW was established as an arms-length public body by former Deputy First Minister, Ieuan Wyn Jones. Its primary goal was to sell Welsh Government-owned land to raise match funds for regeneration projects in the EU Objective One area (West Wales & The Valleys).

In 2012, RIFW sold a parcel of 15 pieces of land to South Wales Land Developments (SWLD), which was based in the tax haven of Guernsey. This includes land in Bridgend (Pyle and Brackla Industrial Estate), Lisvane in Cardiff (now being developed as Churchlands), Wrexham and Llandudno Junction.

Former police officer and Conservative AM for South Wales West - now MP for Gower - Byron Davies, referred the sale to the Wales Audit Office (WAO). It was understood the land was sold for a total of just £20.6million.

There's nothing controversial about that in itself; however, because the land was certain to be developed for housing – particularly the Cardiff plot – the actual value of the land would've risen considerably, meaning RIFW (effectively the Welsh Government) sold lucrative land for significantly less than it was worth. From the Cardiff land alone, at the time it was estimated the Welsh Government will have missed out on a potential ~£120million.

There were "claw back clauses" inserted into the deal to ensure that if the value of the land rose, the Welsh Government would get some extra money back, but the exact details were unclear. The implication was that the land was deliberately or accidentally undervalued, the sale was rushed unnecessarily or that someone passed insider information to SWLD.

The Welsh Government suspended RIFW projects in February 2013 (except one in Neath town centre) and ordered two internal investigations. The Wales Audit Office also referred the deal to the Serious Fraud Office (SFO).

The WAO Report Key Findings

1. The RIFW Concept

• The RIFW concept was "innovative", but the requirement to sell property distracted RIFW from its core purpose. There's no criticism of the concept, and WAO actually praise it – particularly providing regeneration funding in a period when accessing finance was difficult. Because there were (supposed) deadlines on the EU component of funding, the need to generate funding from land sales should've been acknowledged as a risk and perhaps distracted officials from the task of working on regeneration projects themselves.
• Progress was slower than expected. The Welsh Government underestimated how long it would take to establish the fund, many projects were not deemed "investment ready", and there were delays as officials worked with interested developers to develop more robust plans – compounded by the economic conditions at the time.

2. Welsh Government Oversight

• The Welsh Government failed to set out the oversight mechanisms for RIFW as an "arms-length body". RIFW was established as a limited liability partnership (LLP), wholly owned by the Welsh Government, with Welsh Ministers and officials as board members – having obtained legal advice to ensure it complied with EU law.
• Amber Infrastructure Limited and Lambert Smith Hampton acted as independent fund and investment managers respectively. But because RIFW didn't have a chief executive, it was unclear who was accountable as all executive functions were carried out by Amber. This is described as a "complicated contractual arrangement" which hampered oversight.
• RIFW would've appeared in the Welsh Government accounts and should've subsequently been subject to scrutiny from the Welsh Government's Corporate Governance Committees – but it never featured at committee meetings.
• It was unclear where legal responsibility stopped because RIFW crossed a boundary between the Welsh Government and an entirely private company – this should've been cleared up in unambiguous guidance which was never issued.
• The Welsh Government were represented at board meetings by an "observer", who expressed no concerns over the land sales. This involvement in itself would've compromised the "arms-length" nature of RIFW and could be interpreted as tacit Welsh Government approval of the sales.
• Further oversight was hindered by departmental reorganisations between 2011-2012 following the 2011 Assembly elections, where responsibility for regeneration shifted and officials who were familiar with RIFW's work were moved. Vital information wasn't transferred with them.
• RIFW's board was too small, meaning absences impacted performance and the large amount of work the board needed to get through placed burdens on all board members, many of whom were unpaid. An independent board member rarely participated due to a conflict of interest.
• These weaknesses aren't contained to RIFW, as the Welsh Government internal investigation findings (Lloyd report) are relevant to other "arms-length" bodies.
• Actions undertaken by the Welsh Government since the issue was raised (i.e. internal investigations and taking direct control of the fund) are described as "appropriate".

3. Value for Money

• 23 plots were drawn up to be transferred to RIFW in 2009, it was estimated their total value was between £29.8-£35.6million (the higher figure being optimistic/"hope value").
• The plots were transferred in 2010, however many of them were said to be unready for marketing and sale, plus information was inaccurate with "unresolved issues" at some sites.
• It's acknowledged that many of the sites had "long-term development potential" if included in Local Development Plans, so a quick sale would minimise returns. RIFW weren't advised to keep hold of high-value land (like Lisvane) and were pressured to sell quickly because of various deadlines (explained later).
• The Welsh Government published information that became known within the Welsh property industry (i.e. land values, cash requirements) and subsequently weakened their negotiating hand. This information was circulated to six unnamed property companies with interests in Wales, or clients with interests in Wales.
• There was no December 2015 deadline to sell the land to meet EU match-funding requirements. Some high-value assets could've been held back for the second phase of RIFW beyond 2015. RIFW only had to raise ~£6million to meet the requirement because it was established with £9.4million in cash and had to meet a match-funding target of £15.4million. They were also wrong to assume they needed to invest £55million in the first phase by 2015.
• The plan for a phased sales was abandoned when they received a written £23million offer from Guernsey-based GST Investments for all of the land. GST were operated by Barclays on behalf of Peter's Foods Sir Stanley Thomas, and were represented in negotiations by Langley Davies. Rightacres also submitted a bid of £17.7million.
• After torturous negotiations, the sale was agreed for £20.65million, which didn't reflect the market value. Only two voting board members were present at the meeting which accepted the deal. In 2012, the purchaser changed from GST Investments to newly-registered South Wales Land Developments, also in Guernsey - the sale value increasing to £21.75million. These changes weren't properly reported to the RIFW board.
• There was no independent valuation or open marketing as well as weak professional advice. Phased disposals (instead of selling the sites in one swoop) could've yielded at least an extra £9.2million (£30.9million in total based on District Valuer estimates).
• The sales agreement didn't allow RIFW to benefit from increases in value. Only sites in Lisvane and Monmouth had "claw back" clauses which entitled the Welsh Government to a share of future profits – potentially worth £20.7million at 2013 prices. It's unclear how much they could've clawed back from other sites which are now being developed, like Pyle and Brackla.
• The sale of public assets at significantly below market value could be interpreted as unlawful "state aid". The Welsh Government should discuss whether the EU Commission should be informed by the UK Government.

4. Conflicts of Interest

• Lambert Smith Hampton (Investment Manager) – After the sale in March 2012, LSH were appointed as managing agents for SWLD at some sites, including Brackla Industrial Estate (though that sale was conducted after they were appointed). There's no evidence of improper conduct, but there was a clear conflict of interest which breached their investment manager agreement.
• Jonathan Geen (Independent Board Member) – As a solicitor he had undertaken work for one of the potential purchasers. He immediately notified the board and left the meeting, though later got permission from the board to act for the purchaser. Again, there was no improper conduct and he took no part in any sales decisions. However, the WAO say it would've been more appropriate to turn down Mr Geen's request to act for a purchaser due to the board's small size.

What does this mean?

If any crime's been committed here it's criminal incompetence.
(Pic : Wales Online)

There were two main scenarios as to what this constitutes : fraud, or incompetence. According to the report, the SFO have decided it's not something which "falls within their remit for investigation" unless further information is brought to South Wales Police or the SFO themselves.

That leaves one other scenario, doesn't it?

I suspect it boils down to the misinterpretation of the December 2015 EU match-funding deadline – the deadline that never really existed in the WAO's verdict. That's presumably why quick sales were pushed so hard and why a sale of all of the sites in one package looked tempting.

RIFW was clearly a good idea which was rendered dysfunctional by its own governance arrangements. SWLD saw an open goal to make money and took it – you can't blame them either. From their end, apart from moral questions that surround being based in a tax haven, everything they've done sounds above board.

The WAO say the value of the Lisvane land, originally estimated by King Sturge, may not be as high as the often-quoted £120million figure because not all of the land can be developed – only about 58-63% can (a proportional £69.6-£75.6million).

The only hard figure of how much the Welsh Government "lost" is in the region of £9-15million (the difference between the sale price and the most optimistic actual values); but when you factor in all the parcels of land without "claw back" agreements, plus the potential value of the workable land in Lisvane alone, you're looking at something approaching £90-100million.

The National Assembly's Public Accounts Committee have also announced today they'll hold an inquiry into RIFW, so it's not quite over yet. The current Natural Resources Minister, Carl Sargeant (Lab, Alyn & Deeside), will be in the firing line as the last minister in charge of RIFW, but due to reshuffles he can argue this is something he inherited from others.

Politicians and civil servants are human and will err from time to time - sometimes at great cost. The price we pay for democracy is that the right person for the job won't necessarily be the one elected or appointed.

Is this the worst blunder involving public funds in the devolution era? It's got to be up there.