Croydon Council goes into property development

By - Thursday 1st September, 2016

Robert Ward takes a look at Croydon Council’s property development company, Brick by Brick

In response to the need for more housing, Croydon Council has set up a wholly owned development company, Brick by Brick Croydon Limited. The council describes this in self-congratulatory tones as a move that several other forward thinking local authorities have made in order to seek a greater commercial role in development and house building.

An in-house competitor to a mainly externally provided activity can be a good thing. The owner, in this case the council, has greater control, so the in-house provider offers the opportunity to accelerate projects. Having an in-house team actually participating in development improves understanding of the market, in particular by providing a benchmark for costs and better knowledge of the marketplace and opportunities.

But there are downsides and risks. If badly run, it can become a high cost, high risk home for pet projects. Having a political element risks manipulation for electoral gain. There are also the more fundamental questions of whether councils should compete in commercial activities and, more importantly perhaps, whether they are able to do so effectively.

Why should public money go elsewhere if the same work can be done by the council and the profit retained for public benefit?

On the face of it the fifteen percent or so profit that commercial property developers might make on individual projects is an attractive sum that the council would like to capture rather than have it go somewhere else. Indeed, why should public money go elsewhere if the same work can be done by the council and the profit retained for public benefit? The answer, is that the same profit probably won’t get made by a council-run entity.

The return, whatever it may be, is a reward for taking risk. Sometimes projects costs will escalate, or money may be spent and the project never goes ahead or is greatly delayed. Equally there will be occasions where profits will exceed expectation. Balancing those risks and making judgements as projects proceed are something the private sector does well.

In spite of the council’s assertion that Brick by Brick will be flexible and quick to respond the public sector generally finds judgements on efficiency or responding to changes in the market much more difficult. On a level playing field the likelihood that Brick by Brick will deliver the same returns as a commercial entity is in my opinion, low.

How accountable is Brick by Brick to the council, and to the public?

This is made more likely by the council requiring all disposals to be subject to claw back clauses so that if the final schemes generate higher value, the council’s position will be ‘protected’, meaning gains of private sector partners, and Brick by Brick, will be capped. One presumes that in the event of the return being less, no cross-subsidy would be allowed. A limit to the upside but no limit to the downside makes such projects less attractive, risking Croydon projects being pushed to the back of the queue.

All this does not necessarily mean this is a wrong decision. One might argue that even if the return is only one percent, that the people of Croydon are getting a good deal because one per cent staying in the borough is better than nothing.

So how might the people of Croydon know whether this new venture is good value? How accountable is Brick by Brick to the council, and to the public?

As the owner, the council will review and presumably approve the Business Plan. The company will provide an Annual Report. However, complex ownership arrangements and multiple projects can make it hard to figure what is going on. How, for example will projects and resources be prioritised? How will costs be allocated? How will progress on individual projects be monitored? The level of detail that might be included in these documents and how much of any of this might be made public is not clear.

The devil will be in the detail and good (and poor) ideas can be well or poorly executed

There is a crucial role here for the non-executive members of the Brick by Brick board. They need to act independently even though they are appointed by the council, the company is owned by the council, borrows from the council, pays dividends to the council and the executive members of the board are council staff. A tough brief, and if there were to be a canary in the coalmine, it would be if we saw resignations from these crucial roles.

Aside from the efficiency and effectiveness of the Brick by Brick model, there is a particular source of concern for people living close to potential Brick by Brick developments because of the council’s multiple roles and financial interest. The council also owns the planning process.

Imagine that you are objecting to a proposal knowing that the council is lined up behind it, holding all of the cards. The first consultations seem to have been rather imperfectly carried out, which doesn’t help.

So is Brick by Brick a good idea? Maybe. The devil will be in the detail and good (and poor) ideas can be well or poorly executed. Watch this space.

Robert Ward

Robert Ward

Engineer and project manager specialised in helping businesses make better strategic decisions and improve safety, quality and effectiveness. Conservative Party Councillor representing Selsdon and Addington Village on Croydon Council. He tweets as @moguloilman.

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