Woking’s Past Financial Decisions ‘Potentially Unlawful’ Says Damning Report

Published on: 6 Nov, 2024
Updated on: 6 Nov, 2024

By Chris Caulfield

local democracy reporter

Bankrupt Woking Borough Council’s failure to heed debt warnings was “potentially unlawful”, the long-awaited independent deep dive into its financial crisis has claimed.

The results of Grant Thornton investigation into how the council went bust were published yesterday (November 5).

The forensic accountants said the scale of Woking’s borrowing, which it often lent to its 24 loss-making companies – as well as third parties – may have been so extraordinarly imprudent as to be unlawful.

The review looked back at the council’s “long and atypical history of borrowing from the Public Works Loan Board” between 1999 and 2020.

The money was used to fund capital projects, investments and loans – not all associated with the core business of a district council. During the 2000s borrowing levels increased with debt spiralling from about £400 million in 2017 to £1.8 billion in August 2022.

What the report did not do, was carry out a comprehensive review of evidence or assess whether there was non-compliance with the law. There was no analysis of whether any actions gave rise to misfeasance in public office, or criminal offences. It added that unless otherwise stated, nothing should determined as to whether any act or omission did not comply with the law.

Prior to 2022, the council lacked any corporate plan or strategic approach to borrowing, the report read, with investments “made on an ad hoc, opportunistic basis”.

Former Woking Borough Council chief executive Ray Morgan.

This wave of extreme borrowing between 2012 and 2021 was overseen by a senior officer team comprising former chief executive, Ray Morgan, the former deputy chief executive Douglas Spinks and former monitoring officer Peter Bryant. They were joined in 2014 by director of finance, Leigh Clarke. None had any significant experience outside the council.

The report read: “There was a strong message, over a period of many years, from the former CEO, Ray Morgan, that if debt could be serviced it was possible to borrow as much as the council wished, for whatever purposes it chose.”

However, it added: “The council’s governance arrangements and decision-making processes in relation to borrowing and investment decisions were wholly inadequate.”

And: “The political and managerial leadership of the council failed to ensure that borrowing and investments were proportionate to the council’s size, levels of income and management capacity.”

The council used borrowed money to support commercial activity of its 24 “not profitable” companies, often these loans were used to pay interest on previous loans.

The report read: “It should have been apparent to councillors from 2016 onwards that the council’s companies were not profitable and that further loans were being made to them to enable them to pay interest on earlier loans.”

It added: “During the 2000s the council continued to borrow, invest and make loans on the understanding that their loans… would be paid back over long periods, of up to 50 years.

“During this time several other land and asset purchases were made, and some investments and loans agreed with third parties.”

It found: “The council delegated an inappropriate level of control over investment to the former CEO, without any requirement of independent valuations.”

Grant Thornton said the council’s debt levels indicated former bosses failed to ensure finances and businesses were managed prudently and lawfully and that the council failed to give “sufficient consideration to whether they were contravening the state aid rules then in place”.

The report read: “In our view, no reasonable council could have failed to consider the risks that the companies could not repay the loans from the council, or considered that its approach was prudent, when calculating its minimum revenue payments to exclude those debts.

“Its approach was, on this basis, potentially unlawful.”

Adding: “The scale and basis of the council’s lending to its companies and third parties was clearly imprudent, perhaps so imprudent as to be unlawful, making this a matter of law, and not just financial prudence.”

The 38 page report grouped its findings under seven key themes. They were:

the leadership of the investment strategy
the lack of a strategic approach to investment
the lack of the necessary capacity and experience to manage investments
the lack of effective governance over companies, including management of conflicts of interest
the failure to address MRP risks
the failure of internal safeguards against poor governance and financial mismanagement
the failure of external safeguards.

The investigation found instances where the council borrowed to lend to third parties, for purposes outside a local authority’s functions and responsibilities – citing the example of the loans lent to the Old Woking private school, Greenfield.

The auditors also found the council lacked a strategic vision and that often investments were made on a “piecemeal and opportunistic basis”.

Former CEO Ray Morgan had his own £3 million “Opportunities Fund” with “decisions being made, for the most part, by him, in consultation with other senior officers, with the broad support of the administration at the time”.

A stark example given of the council’s poor decision making, was when it anticipated borrowing £450 million in 2016 to invest in the Victoria Square development.

By 2022 this increased to more than £700 million – against assets now only worth approximately £205 million.

The report read: “Both documentary evidence and the information provided by stakeholders make it clear that the former CEO, Ray Morgan, was the principal architect of the council’s investment decisions.

“He was employed by the council for over thirty years from 1989 until 2021. He acted as the (financial officer) from April 1989 until November 2007, as director of financial services from April 1989 until May 2000 and as strategic director until 2006, when he was appointed as CEO.

After his appointment as CEO, he proposed that he continue in the (financial officer) role as well as that of CEO.

“Although this is not unlawful, it is considered contrary to good corporate governance because of the consequent lack of objective judgements on financial decisions.”

It added: “The stakeholders who were involved in the council during the years in which the former CEO, Ray Morgan, was in post provided a consistent narrative that he was the driving force behind the investment decisions and significantly influenced the members’ approach to risk.

“His drive, vision and commitment to Woking, and to the council, were regularly commented on in a positive light.”

The report also notes two former Conservative Leaders, John Kingsbury and David Bittleston, were very closely aligned with the former CEO’s approach to investments, largely with broad support from the Liberal Democrats, for example, the Victoria Square development.

However, not all Liberal Democrats supported the Sheerwater development, the auditors said, because of the scale or the risks involved.

The Liberal Democrats, they added, did not support some land purchases, for example, Brookwood Lye.

Costs for Brookwood Lye amounted to £18.25 million, against a current valuation of the land of £4.25 million, resulting in a re-evaluation loss to the council of approximately £14 million.

This was a deal made between the council and a company where Mr Morgan served a director.

The dual roles of the former CEO, undermined the separation of the council and its companies in the negotiations for the purchase of land, the auditors said.

The report read: “The former CEO frequently paid more than the market price if he wished to acquire a particular asset. As a result, the council now owns several properties which are not able to be developed and are not worth what was paid for them.”

The report added: “We received consistent evidence from both current and previous members and officers, that the former CEO did not welcome challenge of his decisions by other stakeholders and that dissenting officers and members were either persuaded to go along with his decisions or were marginalised.

“This environment developed because both the other former statutory officers and the political leaders of the council in place when the key decisions were made, were highly supportive of the former CEO and did not question his behaviour in any meaningful way, at times working with him to actively mitigate and manage dissenting voices.

“This united front from the council’s core leadership group worked to undermine the effectiveness of the standard management controls and member oversight processes that would normally be expected to prevent a single individual from being able to drive through the high-risk investment strategy that ultimately led to the council’s current financial situation.”

Concluding, Grant Thornton said the council placed too much reliance on its ability to achieve its goals and to generate income through its companies, borrowing and loans and insufficient efforts were made over the last twenty years to achieve necessary savings through service redesign and transformation.

It was their opinion that insufficient attention was paid to the impact of investment decisions on the council’s ability to carry out its statutory responsibilities, including to maintain the council’s housing stock.

Cllr Ann-Marie Barker

Speaking after the report was published, Cllr Ann-Marie Barker, Lib Dem leader of Woking Borough Council, said: “Since my administration gained control of Woking Borough Council in May 2022, we have been focused on tackling the severe financial challenges inherited from the previous administration.

“I welcome publication of Grant Thornton’s Value for Money review into governance arrangements relating to historic investment decisions.

“It represents a pivotal moment in understanding the decisions and actions of the past that have significantly contributed to the financial challenges we face today.

“It is important that my administration, commissioners and senior officers are given time to carefully consider the findings, recommendations and implications of the report before formally responding.”

Sir Tony Redmond, lead commissioner for the government-appointed team overseeing Woking Borough Council, said: “On behalf of the commissioner team, I would like to thank Grant Thornton for producing this comprehensive report.

“Their thorough and independent examination has provided Woking Borough Council with crucial insights into the historic decisions that has led to a legacy of exceptionally high and disproportionate levels of debt.

“The commissioner team will study in detail the findings of the report and work closely with the council to ensure that the lessons from the past are fully reflected in the way Woking operates in the future.”

An extraordinary council meeting will be held at 7pm on Wednesday, November 20, where councillors will consider the findings and issue a formal response to the report.

The LDRS contacted Ray Morgan who said he was aware of the report but felt it would be inappropriate to comment at this stage.