1.  BACKGROUND

  1.1  From appointment in the summer of 1995 by Denbighshire I, as Chief Executive, and subsequently the Director of Finance and Director of Planning and Economic Development sought information from Rhuddlan Borough Council on the extent of the commitments arising from Rhuddlan's Capital Programme which would need to be met by Denbighshire in 1996-97. It was appreciated that Rhuddlan Borough Council had a large and ambitious capital programme principally designed to regenerate the tourist trade upon which the economy of the Borough depends. The main schemes were as follows:

—  The Children's village

—  The Ffrith Beach Development

—  Railway Station development.

  NB A full list of the schemes pursued in the period 1993-95 is provided in appendix 1 of the District Auditor's Public Interest Report. A large part of the funding for these schemes came by way of external grants including £4.7 million European money and £4.5 million of WDA money. Additionally, several schemes were part funded through SDS grants.

  1.2  As confirmed subsequently by the District Auditor, (see DA's PI report p3 point 10) the person with formal responsibility for the developing the capital programme financing was the Chief Executive of the former Rhuddlan Borough Council, Mr E Lake. Based on his advice concerning rollover payments in February 1996, it was estimated that a sum of some £425k was needed to meet these commitments. Mr E Lake informed officers that he would be making available files critical to understanding the capital programme on 1 April 1996; the date of reorganisation, and he required the files in the interim for his own work.

  1.3  Upon reorganisation a team of officers comprising staff from: economic development, design services, legal, accountancy, audit and tourism was established to review all extant Rhuddlan contracts in order to assess Denbighshire's liabilities. It was quickly realised that the estimated future commitments were at least £2 million. It was only later on in the year (Nov 1996) that the full scale of the funding gap became clear which by then was identified as £7 million. This was subsequently reported on to County Council in December 1996.

  1.4  The figure of £7 million was confirmed by the District Auditor in his Public Interest Report of July 1997 which showed that Rhuddlan had overspent £4m in 1995-96 on its capital works after all available money had been utilised and in addition there were bills and credit cover of £3 million falling to be met by Denbighshire. (see DA's PI report p9).

  1.5  The debt placed Denbighshire in the following dilemma.

(a)  The debt was unauthorised and therefore the authority could not attract the normal standard spending assessment (SSA) assistance for capital schemes.

(b)  It exceeded Denbighshire's basic credit approval (BCA) allocation.

  1.6  To meet these difficulties Denbighshire sought assistance from Ministers. Additional borrowing power was provided to regularise the debt, but this assistance fell short of the full figure. The way in which the debt has been financed is as follows:

The £4 million deficit

  1.  For 1995-96 the Welsh Office agreed to give £2.5 million of additional borrowing power. This additional borrowing was to be returned to the Welsh Office at the rate of £500k per annum commencing 1999-2000, but the Secretary of State has agreed to waive this requirement for 1999-2000 and 2000-01. He has done this in view of the requirement to repay ERDF grant in respect to the Ffrith Beach (see 2.5 below). This condition is to be a deferment not an expunging of the £2.5 million debt.

  2.  The Welsh Office permitted Denbighshire to recycle £1 million of Housing Renovation Grants.

  3.  Denbighshire's own capital resources.

  NB The permission of the District Auditor was secured to enable the authority to carry over the debt burden.

The £3 million excess capital liabilities

  This was met from Denbighshire's own capital resources and has been achieved by maximising resources and managing payments to spread the burden over a number of years.

  1.7  In consequence Denbighshire has had to forego pursuing many of its objectives and has been forced to concentrate largely on servicing its inherited capital commitments.

  1.8  As the District Auditor's report makes clear the largest single financial liability arose from the Ffrith Beach development which was £4.5 million more than its original estimate. (See DA's PI Report page 24 appendix 3 (i)). The decision to proceed on the landscaping contract for the Ffrith was made in March 1995, two months prior to the formation of the Shadow Authority, thus predating the requirement under section 51 of the 1994 Local Government (Wales) Act, whereby former authorities required the consent of the successor shadow authorities before proceeding with capital contracts over £1 million. (The cost of this phase was some £2 million; see DA's PI report p23) Rhuddlan Borough Council was not therefore required to consult the new authority on its expenditure plans at this time. The Authority has not been able to determine from the available records how the scheme was intended to be financed.

  1.9  As a footnote to the Ffrith Development, it should be noted that the Authority has had to face further consequences arising from the project. Residents living nearby have complained to the Ombudsman concerning the use of their road as an access road for the Bowling Centre at the Ffrith. The Ombudsman's Report records that in January 1989 the former Rhuddlan Borough Council granted itself planning permission for the construction of an indoor bowling centre with two outdoor bowling greens and that prior to April 1995 visitors to the centre obtained access from a service road through the Ffrith Beach site. The Ombudsman found that the planning application for consent for the entertainment complex now at the Ffrith Beach failed to give a clear and unambiguous account of the proposal to use the complainants' road as a new access to the Bowling Centre. He found that failure to amount to maladministration.

  1.10  In his report the Ombudsman stated that the evidence suggested to him that although reference was made to a possible car park access from the complainants' road considerable emphasis was placed on the temporary nature of any such proposal but there was no condition limiting the period of use of this access in the eventual permission that the Council granted itself in December 1993. Having found injustice as well as maladministration, amongst his recommendations the Ombudsman proposed that if Denbighshire decided that the complainants' road was to be used as a permanent access or for a period of longer than one year from his report made in August 1996 then the Council should pay the complainants compensation equal to the extent of any devaluation of their homes arising from the increased use of their road as an access to the Bowling Centre.

  1.11  The authority accepted the Ombudsman's findings and recommendations but sought an extension of the one year period to enable other solutions to be explored. Although the authority remains hopeful that an alternative access can be provided it has concluded that this will not be achieved in the short term and has accordingly instructed the District Valuer to establish the extent if any of such devaluation.

2.  OTHER FINANCIAL LEGACIES—EXTERNAL FUNDING ISSUES

  2.1  Following a petition to the European Union from a local resident regarding the use of its grants on Ffrith Beach, a Control Mission (Audit Team) visited the Welsh Office and Denbighshire in June 1998 to check whether the Ffrith Beach scheme complied with the basic requirements of European Regional Development Fund (ERDF) grants.

  2.2  This was a complicated issue for Denbighshire for several reasons:

—  the sheer volume of records covering the years of the regeneration strategy.

—  the absence of detailed managerial knowledge of the various programmes once the former Rhuddlan Borough Council Chief Executive had left the employment of Rhuddlan Borough Council at reorganisation. (see section 10 of the District Auditor's Report).

  2.3  This meant that Denbighshire had to carry out an exhaustive study (estimated as two years of experienced officer time) of the records on the Ffrith Beach, including both Welsh Office and WDA files, in order to obtain a coherent interpretation of the capital programme going back to 1991.

  2.4  The European Union was sympathetic to the problems that Denbighshire faced as a successor authority but it had to have regard to its responsibility to ensure ERDF grants were properly applied. In October 1998 the EU control team wrote to the Welsh Office confirming that the project did not comply with the original plans approved for European grant aid in April 1993. The team specifically criticised the following:

—  the lack of a feasibility study

—  inadequate enquiry regarding the expected private sector investment promised by the former Rhuddlan Borough Council

—  the failure of both the Welsh Office and the former Rhuddlan Borough Council to ensure that the work which went ahead on the site corresponded to the description in the approved grant submission application. In fact the work carried out departed significantly from the submission. Changes were undertaken without the appropriate notification being made and permission being secured. In particular the introduction of a major new building (the entertainments complex) constituted a significant departure from the approved scheme.

—  Compliance with the time period of the programme.

  2.5  In view of the work which Denbighshire County Council had commissioned on the Ffrith Beach since it inherited the site in April 1996, the European Control Mission decided the following:

—  Denbighshire be allowed to keep £356.5k of the original £1.125 million grant if the authority can meet, by the end of 1999, the original output promised by Rhuddlan Borough Council, in terms of jobs and visitor numbers: originally estimated as 80 permanent jobs, 10 indirect jobs, 250k visitors per year.

—  768.5k , to be repaid.

  NB. The Welsh Office, as the responsible authority for ERDF grants, is seeking clarification of how the European Control Mission arrived at the particular figure of £768.5k.

  2.6  In anticipation of an adverse Control Mission report, Denbighshire County Council, as soon as it had completed its examination of the Ffrith Beach papers, sought an urgent meeting with Welsh Office Ministers to discuss a further fundamental problem, namely that the situation may be replicated with other grant funded Rhuddlan Borough Council capital schemes.

  2.7  There are several other Rhuddlan schemes upon which the District Auditor has expressed concern and which in some cases have not been subjected to detailed audit and in others no certification has yet been obtained by the District Auditor. These schemes include the Children's Village and the Railway Station, but the full list is provided in the Annex.

  2.8  Given the issues that have emerged in the case of Ffrith Beach, neither myself, the Finance Director or Monitoring Officer of Denbighshire County Council are prepared to certify any final claims without subjecting the entire schemes to as thorough an analysis as Ffrith Beach, and this point was made clear to Welsh Office ministers.

  2.9  The Welsh Office was further informed that due to the fact that those schemes date back to 1991 and as there are no officers currently in the Authority who were employed by the former Rhuddlan Council on the capital management of these schemes, the Authority did not have the requisite resources to study from scratch all the relevant documents. In consequence the Welsh Office has recently agreed to give Denbighshire permission to borrow £100k to finance the necessary work for completion during this financial year 1998-99, and assistance has been sought from a firm of Chartered Accountants with experience of public sector finance and grants to enable it to be undertaken in this short time scale.

3.  QUESTIONS RAISED BY THIS ISSUE

  3.1  The size of the liabilities inherited by Denbighshire County Council relative to its resources and the continuing problems caused has led the Authority several times to call for the Secretary of State for Wales to hold a public enquiry. Specifically the Authority believes that the public deserve an explanation of how the former Rhuddlan Borough Council could have created the problems outlined in this paper.

  3.2  It believes that since so many public bodies in Wales were involved in scrutinising Rhuddlan's tourism related capital expenditure, only an independent examination could be seen to be impartial.

  3.3  The District Auditor's report remains the major study of the Rhuddlan capital debt as regards 1994-96, but the County Council regards this report as too restricted in its analysis.

  3.4  Denbighshire County Council has two principal reservations regarding the District Auditor's findings:

—  Was it reasonable to suppose, as the tenor of the report suggests, that the whole problem originated in the last year of Rhuddlan? The District Auditor had made minor observations on the capital programme and its management in his 1994-95 Management Letter; (see DA's Pi report p4 point 21) but given the fact that the European Control Mission has identified substantial difficulties regarding scheme compliance with grant criteria, should the District Auditor's audit procedures also have uncovered these problems?

—  Most of Rhuddlan's Capital Programme was dependent on grants from elsewhere, especially European Regional Development Funds. Since the practice was not to audit these funds until the final grant claim was submitted, there are question marks about the validity of the accounts certified by the District Auditor for the final years of Rhuddlan Borough Council. I understand that the District Auditor is reviewing audit practices in the light of these difficulties.

  3.5  The District Auditor commented on the weaknesses in Rhuddlan's control procedures for its capital programme, (see DA's PI report p7, point 30, p8, point 39, p17, point 86-88) but there are several important questions regarding the external grant making regime which remain unanswered:

—  what controls were exercised by the grant making bodies? The Control Mission's work on Ffrith Beach shows that had the Welsh Office monitored effectively the ERDF grant, it would have noticed that what was being built differed from the grant application.

—  to what extent did the individual grant making bodies consult with each other to ensure that there was no double funding and that the projects were viable?

—  given the extent of public money involved it seems surprising that the District Auditor did not identify the risks earlier; is there perhaps a need to consider the extent of the District Auditor's scrutiny role?

—  Are there lessons to be learnt when an Authority has an unexpected and crushing burden placed upon it by the actions of a former public body?

—  Finally, and this point goes beyond the District Auditor's brief: are there lessons related to the management of capital schemes by authorities, taking into account the possible imminence of Objective 1?

  3.6  The Secretary of State has provided two responses to the Authority's request for a public enquiry.

—  16 September 1997

—  23 June 1998

  With regard to its initial request made following the District Auditor's Public Interest Report the Secretary of State responded by seeking a review of the District Auditor's early work by the Audit Commission. The review confirmed the adequacy of the District Auditor's findings, and on that basis the Secretary of State declined the request for a public inquiry.

  3.7  The subsequent request related to the European Grant situation. The Secretary of State, whilst agreeing to offer further assistance to help Denbighshire repay the European Union grant has, however, reserved his position on whether a public inquiry is necessary.

  3.8  My Authority believes this to be an entirely unsatisfactory situation and therefore welcomes the House of Commons Welsh Affairs Committee's intervention in this matter.

4.  EFFECTS ON DENBIGHSHIRE

  4.1  In assessing the impacts of this legacy it has to be borne in mind that there are positive benefits to the people of Denbighshire arising from the legacy, although not all of them are fully realised and much work remains to be done to deliver the promised outputs.

—  the sea front at Rhyl has been transformed in part

—  there are new capital assets.

  4.2  It must also be stressed that there is a difficult climate for developing a traditional tourist resort; a fact which has hampered efforts to find a solution to the Ffrith Beach complex.

  4.3  In assessing detrimental impact it is necessary to examine three aspects:

Annual Revenue Charges

  The capital costs are now covered by credit approvals and the resulting capital financing charges are, therefore, built into SSA and are within the RSG settlement and expenditure guidelines. However, in the first two years of Denbighshire the SSA did not fully allow for these costs with a resulting loss of RSG and a reduced expenditure cap. Further, the reserve funds of the former authority were utilised and were thus not available to the new authority.

The impact on the County Council's Capital Programme

  An estimated £3.4 million has been diverted away from other potential new schemes. Some of this funding could have been used as match funding for ERDF and other grant aided schemes which may have brought the total to as much as £5 million. Examples of projects include: routine highways improvements and much needed school building repairs. The impact on BCA funds has also meant that Denbighshire was deprived of much needed flexibility in setting budgets and this will continue until the £2.5 million arrangement (see para 1.6 above) with the Welsh Office has expired. With reference to 2.9 concerning the external consultant's work on other grant funded schemes, there may be further grant claw back implications which cannot be estimated at this time.

The amount of officer time spent resolving an issue which could have been more profitably spent elsewhere

  Denbighshire has been diverted from pursuing positive programmes for its community into investigating the Rhuddlan legacy with the resulting pressure of work leading to an unfulfilled mission statement and corporate strategy.

4.4  OTHER DETRIMENTAL IMPACTS

  Denbighshire's public image has suffered from poor publicity over a long period undermining the reputation of a new authority with the community it serves.

  Staff motivation has been inevitably affected by the negative publicity resulting from the revelations. This has been made especially bad as the facts continue to unfold and attempts to draw a line under the issue have therefore proved impossible.

  Divisiveness—the issue has exacerbated sub-County differences between ex-Rhuddlan and ex-Glyndwr/Colwyn areas of the County.

5.  CONCLUSIONS

  5.1  The size of the capital debt problem for this authority goes beyond what is reasonable for an Authority by itself to manage, especially as it is itself not responsible for its inheritance.

  5.2  The former Rhuddlan Borough Council had an unusually large capital programme, larger for example than many County Councils. In the circumstances it is unfortunate that the auditing and external grant monitoring regimes were insufficiently robust to detect the possible problems.

  5.3  It is fortunate that Denbighshire as the successor authority to Rhuddlan inherited a range of officers with the requisite skills to unravel the debt issue. Without their experience the identification of this serious legacy would have been delayed and the management of its consequences made much harder. As it is, realising the potential of the inherited Rhuddlan schemes remains challenging and the continuing consequences for other Council services remain substantial.

March 1999