Sunday 4 October 2020

Brent Cross - what are the risks of this massive scheme

As part of my recent inspection of the accounts, I identified that Barnet had paid Capita £14.1 million on the Brent Cross project. A significant sum, but what I also discovered was that last year alone Barnet paid out £45.5 million on Brent Cross and a further £30.3 million since April.  Much of this money is recovered through a central government grant but what worried me was the lack of transparency about what is happening with this project and how the financial risk to local Barnet residents is being managed. 

According to the Barnet Council website:

"One of the biggest regeneration projects in Europe, the Brent Cross Cricklewood scheme will see the comprehensive regeneration of 151 hectares to create a sustainable new town centre for Barnet and North London including substantial residential and commercial uses.

The project comprises three components:
  • Brent Cross London — a modernised and extended shopping centre and improvements to critical road infrastructure as well as cycling and pedestrian access. Delivered by Hammerson and Standard Life Investments. 
  • Brent Cross South — the creation of a new high street south of the North Circular, including 6,700 new homes, commercial development and new and improved community facilities and public spaces.
  • Brent Cross Thameslink — a new, additional Thameslink station and associated infrastructure works to provide pedestrian, cycling and vehicle links across the railway, and replace outdated waste and freight facilities". 

Each element is quite different with its own history and risks.

Brent Cross London:

Originally, the shopping centre was to be expanded and redeveloped and the additional business rates it would generate would be ring fenced to pay for the new Thameslink station. 

However, even before Covid-19, the retail sector was struggling and in 2018 the planned extension was stalled. This had a serious impact on the funding of the Thameslink station so Barnet were forced to go to Central Government to get them to underwrite the station construction costs. 

With the shopping centre redevelopment on hold and Government have agreeing to step in and fund the Thameslink station what is not clear is who will fund the north side infrastructure and how dependent Brent Cross South is on that infrastructure. For example,  I understand that Brent Cross London are responsible for the replacement of the Templehof Bridge and the construction of the new Living Bridge. My concern is what happens if this infrastructure is not built, is it critical for the additional traffic flow to the southern development and is the energy centre on the north side linked to the southern development? Also, it is not clear what will happen to the development of plot 114, identified for housing, and the re-routing of the River Brent and how important they are to the success of the overall project. The shopping centre site is large, with a tube station to the east and the new Thameslink station to the west. My big concern is at what point does the site become worth more for housing than for a shopping centre and if that happened what impact would it have on the Brent Cross South development.

Brent Cross South:

This is a massive development with around 6,700 new homes and 3,000,000+ square feet of office space along with shops and restaurants. It also involves the rebuilding of three new schools, including an expanded Claremont Primary School. To make this development happen required the compulsory purchase of a number of homes, including the Whitefield Estate, and these tenants will be rehoused in the new development as shown below.

Brent Cross South differs from the shopping centre site in that Barnet Council are joint venture partners, something they entered into in 2016. You can read the details here. This JV entitles the Council to share in profits generated by the scheme. Senior council officers sit on the Joint Venture Board but there is also a Shadow Shareholders Board made up of five councillors who are suppose to "meet monthly to monitor and review project progress, and to consider and make decisions as required by the Council in its capacity as shareholder". I have never seen any minutes of these meetings nor do I know if they still sit. They may well be doing so but the issue here is about transparency.

Prior to Covid-19, the level of risk may on this development may have been much lower, but working from home looks like it may have a permanent impact on demand for office space. With plans to build 3,000,000+ square feet of office space, there must be a real concern about whether there will still be demand for this amount of office space on the North Circular and who it will be targeting. The developer, Argent, was also responsible for the Kings Cross redevelopment which has attracted high profile tenants, such as Google and Universal Music. However, Brent Cross is definitely not Kings Cross and, as such, it is not clear who they will be targeting and how successful they will be in securing tenants. The other big risk is that it simply sucks out office tenants from existing Barnet town centres, moving jobs rather than creating them.  

While Canary Wharf is a beacon of success today, I am old enough to remember how the original developer went bust due to the downturn in the office market in the early 1990’s, something that must at all costs be avoided on this scheme. 

The other concern is the demand for housing. While I am sure there will continue to be demand for housing in London, the big issue will be the style and tenancy of the homes. It is interesting to see how there seems to be  a real shift to people either wanting gardens/more outdoor space or moving out of London. Below are just a few of the many recent articles on this subject:

Half of Londoners wanting to move home want out of London

Demand for apartments flat-lining in Britain

Homes with gardens become the new must have

Renters fleeing London

Brent Cross Thameslink:

This is a massive infrastructure job with a massive price tag to match. Although the actual station itself is "only" costing c.£50 million to build, creating the space for it and relocating the other services that are in the way, such as the waste transfer station, the rail freight depot and realigning the tracks is costing at least £200 million. 

In terms of the Thameslink Station, while the Government has agreed to provide funding, my understanding is that this is capped and, based on the response I had from Barnet's Director of Finance, Barnet Council are exposed to the risk of any cost overruns.  This something that concerns me greatly. Many seasoned Barnet watchers may remember the Aerodrome Bridge fiasco where costs over ran by £11 million.  The problem is that this project is of a different magnitude where even a 10% cost overrun, which would not be unusual on a project of this scale, would have a serious impact on Barnet’s finances. In addition, the Joint Venture agreement identifies that the Council is also responsible for funding any operational subsidy to the Train Operating Company until the station becomes self-financing. This becomes much more of an issue if the build out of the 6,700 flats is slower than anticipated and could mean that Barnet may be liable for station operating costs for years to come. 

It is interesting that Capita have been replaced as project managers for the station and instead Barnet have brought in Mace who are an experienced project manager for this type of infrastructure project. As an aside, I wonder if Capita are claiming the 14.3% "Overhead and Profit mark up" when using external resources, that is written into their Re Contract.

Financial Reporting:

In terms of reporting spending, it would be helpful to break this down into capital and revenue and to understand what is covered by grants, JV partners or Barnet, either through the revenue account or through loans in the capital account. In addition, providing a forecast budget would help to identify which elements of the scheme have a cost overrun liability enabling remedial steps to be taken before the overspend is incurred. Set out below is what was provided at Policy & Resources Committee but relates only to capital expenditure and does not appear to include any of the revenue costs such as professional fees to Capita/Mace or  loans associated with the scheme. For example, where is the £148 million Home England loan accounted for or the £14.1 million paid to Capita Re last year on Brent Cross?

Risk Management:

Given the scale and complexity of the project and the level of risk involved, I would have thought this would warrant a separate sub-committee at which the Deputy Chief Executive/Director of Growth and possibly a representative from Mace/Argent Related could attend. It may mean that parts of the committee are held in private session but it would allow more councillors genuine scrutiny of the project. All too often Barnet use what are known as lagging or trailing indicators - they tell what has happened, how much things have cost and how far behind schedule projects are. However, on this project it is essential that any committee monitoring the project have a decent number of leading indicators which, for example, would look at demand for flats and office space, how much has been pre-let, forecast costs, a decent project management (Gantt) chart showing where the scheme is on the critical path and understanding what elements of the project might delay delivery. In this way problems can be identified early and decisions taken to hopefully prevent them from getting to a scale that has a major financial impact. Currently Brent Cross is discussed at both  Housing & Growth and Policy & Resources but the risk is that they take decisions without be need to be aware of the financial consequences and risks they are taking. I am sure the developer and officers are reviewing this type of information but ultimately it is councillors who are are accountable to the public and, as such, they need to be fully aware and up to speed on the project's progress.

I raised my concerns about Brent Cross with the external auditor but due to delays between them and Barnet, I missed the chance to lodge a formal objection, specifically asking for this to be the subject of a Public Interest Report. I believe that Barnet are looking into my concerns in more detail but I just wish there was the reassurance of much greater scrutiny and transparency on what could be a massive financial risk for Barnet. I will update you with details as or when they become available.

1 comment:

  1. Thorough. It would be interesting to hear your view now that the station is soon to be completed.