A letter to the District Auditor

The following letter was submitted to the Audit Commission in February 2010. There is further coverage of the wifi deal on my blog.

Transactions between Swindon Borough Council and Digital City UK Ltd.

Background

Swindon Borough Council has provided a loan of £450,000 on commercial terms to Digital City UK Ltd (registered no. 06990831). In return for that loan it has received a 40% equity stake in the company. If the loan is repaid within 2 years, Avidity Consulting Ltd (registered no. 06990825) has an option to purchase 5% of the company’s shares from the council for £1. Avidity Consulting already has a 25% stake in the company. The other shareholder is aQovia UK Limited (registered no. 06846037), which holds the remaining 35% of the company. Digital City UK Ltd is intending to install wireless internet across the entirety of the borough of Swindon.

The decision to make the loan was made by three council officers with the approval of two councillors who are members of Swindon Borough Council’s cabinet.

I have a number of concerns in relation to this undertaking.

1) Both Digital City UK Ltd and Avidity Consulting Ltd were incorporated on 14 August 2009 as ‘off-the-shelf’ companies. They became active on 22 September 2009 and 21 September 2009 respectively. They thus have negligible track record. aQovia UK Limited was incorporated on 13 March 2009, appears to have become active on 16 September 2009 and thus also has limited track record.

In these circumstances, considering the lack of history, trading records and accounts for Digital City UK Ltd, Avidity Consulting Ltd and aQovia UK Ltd, I would expect Swindon Borough Council’s due diligence to pay particular attention to the plans of Digital City UK Ltd. Much of the information in relation to this has been withheld by the council on grounds of commercial confidentiality. However, in a Cabinet Member Briefing Note to Councillor Mark Edwards (Cabinet Member for Finance and Benefits) and Councillor Roderick Bluh (Leader of the Council and Chair of the cabinet), dated 12 October 2009, that was made available to Swindon Borough Council’s Scrutiny Committee meeting of 14 December 2009, it is stated that:

“The success of the company, particularly in the early stages, and consequently the potential for Swindon Borough Council to achieve a return from its shareholding will depend to a large extent on the success of the marketing campaign. A formal marketing plan has not yet been developed, but a Brand Consultant and Marketing Specialist have been informally assisting the project and will be formally engaged once the company is live.”

It thus appears that at the time the decision to invest £450,000 was made, the plans of Digital City UK Ltd were not yet well formed. Furthermore, the response by the council in relation to diligence (in the minutes and annex to the minutes of that Scrutiny Committee meeting), appear in tone, in my view, to be dismissive rather than suitably detailed.

2) The Managing Director of Digital City UK Ltd is Mr John Richard Hunt (commonly known as Rikki Hunt). He is also owner of Avidity Consulting Ltd which is providing consultancy services to Digital City UK Ltd, and a non-executive director of Swindon Commercial Services Ltd (registered no. 06969563) which is Swindon Borough Council’s direct services company and the main contractor to Digital City UK Ltd for installation and maintenance of its wireless network.

Mr Hunt is also Chair of Swindon Strategic Economic Partnership (SSEP), which is charged with implementing some of the council’s social inclusion objectives under the Swindon Local Area Agreement, including the Swindon Digital Challenge proposal, and a non-executive director of The New Swindon Company Ltd (registered no. 04509901) of which Swindon Borough Council is a major funder, and a board member of the Swindon Partnership which is tasked with producing the Swindon Local Area Agreement.

By virtue of his close association with Swindon Borough Council and in particular the SSEP, Mr Hunt may have been in receipt of privileged information in relation to the council’s and SSEP’s plans for widening access to the internet. As a consequence of this it is possible that a conflict of interest could occur in his company’s approach to the council. Under Section 175 of the Companies Act 2006, a director has a duty to ensure that they avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. In light of that Act and of the sixth of the Seven Principles of Public Life, I would expect, given Mr Hunt’s close connection with Swindon Borough Council that, as part of its due diligence, the council would ensure that no such conflict had occurred. However, the information made available to the public by the council provides insufficient evidence that this assurance was obtained.

3) Mr Hitesh Kumar Patel was appointed director of Digital City (UK) Ltd on 26 September 2009. Mr Patel is also Group Director Business Transformation and in that capacity one of the authors of the Cabinet Member Briefing Note to Councillors Edwards and Bluh, dated 12 October 2009 and mentioned in (1) above, that recommended providing the loan of £450,000 to Digital City (UK) Ltd. There is no mention of this directorship in the briefing note, nor in any of the other information presented to Swindon Borough Council’s Scrutiny Committee meeting of 14 December 2009. As Mr Patel’s directorship pre-dates his advice to Councillors Mark Edwards and Roderick Bluh, in the absence of further information to the contrary this would appear to present a conflict of interest which, under the Seven Principles of Public Life, Mr Patel had a duty to disclose.

4) It has been repeatedly stated publicly by the council leader, Roderick Bluh, in comments reported in the local press that this was a delegated ‘investment’ decision, and this is also mentioned in the Cabinet Member Briefing Note shown to the Swindon Borough Council Scrutiny Committee. Mr Hitesh Patel has also stated that the decision to provide the loan was made by the Director of Finance (Mr McKellar), the Director of Law and Democratic Services (Mr Taylor) and himself, the Group Director Business Transformation.

The delegated authority for such a decision originates from resolution (5) at Minute 28 of the Cabinet meeting of 23 July 2008, subsequently ratified by full Council on 13 November 2008.

“That the Treasury Management performance for 2007/08, be noted, and the Council be recommended to approve the proposed change to the Annual Investment Strategy, as detailed in paragraph 2.6.7 of the joint report (In respect of joint venture arrangements, to permit the Director of Finance and the Director of Law and Democratic Services, in consultation with the Cabinet Member for Resources, to invest in such schemes provided that the overall terms of the arrangement are suitably advantageous for the Council, subject to the Soft Loan Accounting requirements contained in the 2007 Statement Of Recommended Practice.).”

with paragraph 2.6.7 of the ‘joint report’ being

“In order to pursue its regeneration objectives, the Council is planning to enter into a series of joint venture arrangements with private sector partners. There may be circumstances in which it is advantageous in financial and risk terms for the Council to consider acting as banker for a scheme, subject to the terms and exposure being acceptable. In this context, it is proposed that the annual investment strategy is amended to permit the Directors of Finance and Law and Democratic Services, in consultation with the Cabinet Member for Resources, to invest in such schemes provided that the overall terms of the arrangement are suitably advantageous for the Council, subject to the Soft Loan accounting requirements contained in the 2007 Statement Of Recommended Practice.”

Whilst the decision may have been within the letter of this resolution, it does not appear to have been within its spirit. The decision was not made in pursuit of regeneration objectives, but, according to the Cabinet Member Briefing Note, primarily in support of social inclusion and sustainability objectives. Also, the decision was not made as a consequence of a decision by the full council or cabinet to implement town-wide wireless internet access, but as a result of the company approaching the council seeking investment.

5) If this decision were not within the scope of investment decision described in (4), the council’s constitution does permit delegated decision by individual cabinet members in certain circumstances. That delegated authority is specified on page 5 of the constitution:

“To speed-up decision making and to allow the Cabinet to concentrate on major matters, Cabinet Members have the delegated power to make day-to-day decisions in relation to the areas within their portfolio.”

Given that the decision to loan £450,000 and take a 40% share in Digital City UK Ltd for the purpose of it providing boroughwide wireless internet was announced with a press release on 16 November, and the launch of the service in Highworth was by a member of the parliamentary opposition’s shadow cabinet and accompanied by further press coverage, it seems to me that this decision is firmly in the class of ‘major matters’ for which the delegation described on page 5 of Swindon Borough Council’s constitution should not occur.

6) Swindon Borough Council is allowing Digital City (UK) Ltd to send and receive commercial and private internet traffic via its own Local Authority access point(s) to the internet. I am concerned that this may have serious implications under the Government Code of Connections (’CoCo‘), and that Swindon Borough Council may be inappropriately subcontracting or reselling internet service supplied to local authorities.

Whilst none of these issues individually may be cause for great concern, taken together I believe they are sufficient to warrant further investigation. Given the complicated nature of company law I would like the audit commission to examine the commercial relationships mentioned above and clarify whether they are appropriate and represent acceptable and best use of public money.