Reddish Business Incubator

Tuesday 26th April 2011 Westminster Hall

13:00

[Andrew Gwynne (Denton and Reddish) (Lab)]

It is a pleasure to see you in the Chair today, Mr Scott. I would like to place on the record my thanks to Mr Speaker for granting me this debate.

I wish to raise a number of issues about the Reddish business incubator, a business support project that has been operational in the Stockport part of my constituency since 2008. When I secured this debate, there was confusion among officials in the Department for Communities and Local Government about whether the debate should be for them or whether it fell under the remit of the Department for Business, Innovation and Skills. I can assure the Minister, for whom I have great respect, that it most certainly falls within his Department’s responsibilities, because most of what I want to say concerns the ineptness of the Liberal Democrat-run Stockport metropolitan borough council.

I would like to highlight a number of the irregularities that have dogged the business incubator project since its inception and continue to do so to this day and, more importantly, the consequences for Stockport’s hard-pressed council tax payers. The situation is so serious and complex that it is difficult to do it full justice in the time allotted for the debate, so I will briefly outline the main issues.

Some of the main points are: for a long time the business rents on the incubator units have not been collected; there are ongoing financial problems with the whole project; and there is a complete lack of transparency in how it has operated finically in the recent past and how it will do so in the future. This series of failures has ultimately led to Stockport metropolitan borough council having to offer additional financial assistance, and to take over the project just to keep it afloat, despite Councillor Dave Goddard, the leader of the council, being on the company’s board—a real conflict of interest, which I will explore further in my speech.

The project’s troubled history began back in 2008 when the Stockport Business Incubator Community Interest Company, a provider of business incubation facilities, started trading as a social enterprise, owned 50% by Stockport council and 50% by Broadstone Mill Ltd. At that time, Stockport council matched Broadstone Mill Ltd’s £315,000 investment—a substantial amount of council tax payers’ money. The council subsequently invested an additional £150,000 via the local authority business growth incentive, further to extend the incubator and develop the Stockport enterprise centre, which, in January 2010, resulted in the incubator moving to the third floor of Broadstone Mill. Almost £500,000 of local taxpayers’ money was therefore invested in the project.

Let me clear: it is not a bad thing that local councils want to invest in business support and help businesses through these tough economic times; indeed, neighbouring Tameside council, which is also part of my constituency, did just that with its very laudable Tameside Works First programme, and Stockport followed suit with Stockport Boost. Nevertheless, I and a number of others in Stockport have for some time had serious doubts about the Reddish business incubator and its financial viability. Those fears are justified because, as the incubator was set up as an arm’s-length company, there has always been an unclear understanding of exactly how its financial dealings could effectively be scrutinised.

I know that the Minister champions valiantly the cause of open government, and that he will understand the concerns of my constituents who have paid a lot of their money into supporting the project. Here is an issue for him: Stockport council has failed properly to scrutinise the running of the facility. An inspection of the company’s board meeting minutes, which were released under a freedom of information request, paints an interesting picture. We are told that in October 2008 the build costs had stayed within the £630,000 budget, and so all appeared to be fine and well. Even so, early concerns were expressed about the failing global economic situation, and in late 2009 there were concerns that the occupancy take-up at the incubator had not been as high as anticipated, and that the flow in the pipeline of new-entrant companies had stalled during the year. By this time, we are told, working capital had been hard to secure. Indeed, that was such a concern that the board started to operate a policy of ensuring that new-starting companies had at least several months’ working capital. However, despite the warnings, the business incubator company minutes of March 2010 show that things were still okay at the mill, with a 70% occupancy rate. Indeed, board members, including the leader of the council, were also informed that the project would financially break even by March 2011.

Here is the real irony: just a few weeks after the general election in May 2010, the newly appointed Secretary of State for Business, Innovation and Skills, the right hon. Member for Twickenham (Vince Cable), was only too happy to hot-foot it up north to visit the incubator, as an example of the Liberal Democrats in action and, as was reported in both the Manchester Evening News and the Stockport Express, he was only too happy to praise the project. As well as stating that it was a shining example of what could be done to help economic growth, he said:

“Local initiatives like these are exactly what the country needs.”

Given his party’s subsequent actions regarding the education maintenance allowance, tuition fees and the cuts to council budgets, the support of a Liberal Democrat Cabinet member was pretty much a kiss of death to the Reddish business incubator project.

I must congratulate the persistence of the Stockport council Labour group, and particularly that of Councillor Philip Harding, who had real suspicions about the project’s finances and put in freedom of information requests to shed some light on how the project was operating. As a result, we now know that concerns were raised by the Reddish incubator company’s board in September 2010, when two tenants’ unpaid rents totalled approximately £20,000 and there were further reported cash-flow problems, leading to wider questions about why the project was facing a financial deficit. The documents released under the Freedom of Information Act show that concerns were raised at a very senior level about the governance issues, and about how they should be looked at as part of a financial review, and that there were concerns that roles and responsibilities in the venture should be made clear for all parties and individuals concerned.

Stockport council Labour group’s suspicions proved correct when we saw reported in the Manchester Evening News that in September 2010 a further £38,500 of Stockport council tax payers’ money, which could well have been used to protect vital local services, was transferred across to address the increasingly perilous cash-flow situation. However, as we were to see, that was not even enough to balance the books. Meeting notes from October 2010 show that further questions were asked about why the business incubator’s financial situation was so poor when a report to the March 2010 board meeting had suggested that the incubator should have broken even by March 2011. They also outlined how monthly project expenditure was significantly exceeding income.

By November 2010, it was becoming clear that there were very serious financial problems with the Reddish business incubator, that ongoing difficulties with collecting rents and other factors were making it run deeply into the red, and that it would need immediate payments to become economically viable. Furthermore, the board minutes show that for the incubator to run as a viable project it would have needed to attract 80% occupancy by March 2011, to rely on significant and difficult-to-achieve cost reductions, and to recover all previous bad debts. As we have seen in a leaked council cabinet report in the Manchester Evening News, in March this year it fell yet again to Stockport council financially to bail out this ill-fated project. Indeed, the confidential report to the council’s executive tells us:

“The company is projected to be in deficit by £160,000 by the end of the current financial year”

due to both

“lower than expected income”

and

“higher than expected expenditure”.

The report adds:

“The company does not have sufficient funds to clear the outstanding deficit.”

The leaked report also recommended that the council should directly oversee the future management of the incubator facility with a business plan to make the facility viable by 2011-12, and that Stockport council should take out a new 25-year lease with the landlord of Broadstone Mill. That is a shocking situation for the Liberal Democrat-run Stockport council to find itself in. It will effectively have to bail out its own scheme entirely from Broadstone Mill. Then again, the council certainly has form when it comes to wasting council tax payers’ money shamefully. Only last year, the arm’s-length organisation responsible for managing Stockport’s council homes spent £20,000 throwing a massive birthday party for itself, to which it invited some 370 revellers. The Minister will no doubt be pleased to hear that I declined my invitation.

We must put the matter into the context of today’s economic background and all the cuts that Stockport council plans to implement. So far, Stockport council plans reductions of about £17 million this year, and about the same amount is due to be cut from its budget the following year. That means that £123,000, allegedly in efficiency savings, will be cut from the welfare rights and debt advice service, and £250,000 will be saved by effectively doing away with the community meals service, or meals on wheels, in its current form. Perhaps worst of all, £100,000 will be cut from the school crossing patrol budget, which might mean that one third of the lollipop ladies and men in the borough will be lost.

There are important questions that must be answered, given that Stockport council seems intent on throwing good money after bad. The council must come clean and tell us exactly where the £160,000 will come from to keep the Reddish incubator afloat. It also seems that the council’s strategy to keep the project running banks heavily on increasing the number of businesses operating in the centre, although no increase is certain. The plans to make the scheme a success seem to be based on an assumption that the current financial position will be turned around, but no thought seems to have been given to the possibility that the scheme will just rack up more debt and become an even bigger burden to the council tax payers of Stockport.

As the council’s own report indicates, it runs significant risks in taking on the scheme itself. It needs a significant increase in rental income, vastly improved occupancy rates and robust rent collection activities, all on top of a marked reduction in expenditure and rigorous cost control. Given that Stockport council was naive enough to invest £500,000 in this folly during some of the worst economic times in recent years, the latest development does not inspire many with confidence for the future. It is recommended that the council bail out the project at a cost of £160,000 and take over its running entirely. As I understand it, that could well be on a 25-year lease, with no first break for 10 years, so the council tax payers of Stockport might have to prop up the project for the next decade or more.

Councillor Dave Goddard, the Liberal Democrat leader of Stockport council, has been a member of the board of that rotten council tax-sucking company, which I feel raises many uneasy questions about conflicts of interest. Councillor Goddard should be ashamed not only to have been a member of the board of a community interest company so financially inept that it has failed miserably to collect rents or even cover its own costs, but to have ensured, as leader of Stockport council, that his administration wrote blank cheques to keep the scheme running. Now the council is effectively being authorised to take it over completely. It is frankly wrong that members of Stockport council have been kept in the dark about that costly but cosy arrangement, and that it took freedom of information requests and a leaked cabinet document for it to be placed in the public domain. Frankly, it stinks.

It also raises a question about the relationship between Stockport council and the scheme landlord, Broadstone Mill Ltd. As the Reddish incubator is owned 50:50 by each, will the Broadstone Mill share benefit financially by being effectively bought out by the council? We certainly need more transparency and clarity about the financial links between the two and what payments have been received to date. To recap, some of the payments that we know have been made between the two include rents, loans of about £40,000 to Broadstone Mill for lift refurbishment and extra payments to make up the revenue deficit on the business incubator. Although those extra payments might not be financially irregular, they must at least be scrutinised fully to eliminate any lingering suspicion of financial impropriety.

I would be interested to hear the Minister’s views on whether the Reddish business incubator scheme does not raise a wider issue about community interest companies, which are funded by local authorities but run at arm’s length from them. It is difficult, if not all but impossible, to scrutinise them effectively until it is way too late or, as in the case of the Reddish business incubator, until one has run into significant financial problems.

I know that the Minister is a great champion of open local government, as is his boss, the Secretary of State. I am sure that he will take a dim view of the goings-on at Stockport council regarding the scheme. I have every confidence that his Department will take a close look at what has happened and continues to happen there, and I am sure that that will further his resolve to ensure that proper scrutiny arrangements are developed for all arm’s-length companies and trusts that operate council services and spend council tax payers’ money. Under his Government’s big society plans, it is likely that even more local services will operate under such loose arrangements.

Councils need the power to scrutinise. To return to Reddish, it is Stockport council tax payers who are bearing all the risk of the scheme and effectively picking up the bill for the inept failures of the community interest company, the council leader and the Liberal Democrat council executive. I am grateful for this opportunity to raise these serious issues in the House, and I look forward to the Minister’s response to the points I have raised.

13:18

[The Minister of State, Department for Communities and Local Government (Greg Clark)]

It is a pleasure to serve for the first time under your chairmanship, Mr Scott. I congratulate the hon. Member for Denton and Reddish (Andrew Gwynne) on securing the debate. To judge from his suntan, he comes hot from the campaign trail. It has been a beautiful weekend to be out on the hustings, and I detected a hint of the hustings in his remarks, if that is not too churlish an observation.

I shall address the context of the business incubator before I turn to the specific issues that the hon. Gentleman raised. As he acknowledged, the Government’s policy is one of localism. It is important that local authorities’ behaviour and policies are held to account by local people—as a local representative, he is taking the opportunity to do so today—but it is not for central Government to comment on the detailed policies and practices of local authorities. They are, rightly, independent of central Government, responsible for their own finances and free to make their own decisions.

As the hon. Gentleman said, the Localism Bill will increase opportunities for local authorities to be relatively free to take decisions and to be scrutinised on them locally. Indeed, we want to go further than that. Beyond the Localism Bill, the local government resource review, which has kicked off, is considering options to allow authorities to keep their business rates precisely so that there can be a better relationship between the opportunities for new business in an area and the rewards that an authority receives from them. It is important that we consider and expand the opportunities available for local councils to engage with their businesses so that there is encouragement for more to be set up.

The potential for increased control of local finances will mean that local councils will be able to consider whether business incubators—or innovation centres, as they are sometimes called in other authorities—are right for them. There is no reason why such types of activity should not be provided by the council or with close council involvement. It was not clear from the hon. Gentleman’s remarks whether he thinks that the innovation centre—the business incubator—should be closed down and its activities ceased, whether it should not have been established in the first place, or whether it should be run in a slightly different way. I will be happy for him to intervene if he can clarify that.

[Andrew Gwynne]

I mentioned that I was supportive of local authorities supporting local businesses. I also mentioned Stockport Boost and Tameside Works First, which are good examples of where that happens in my constituency. What I am concerned about is the bottomless pit that seems for ever to be filled by council tax payers’ money in Reddish. We need to get a grip on this. More importantly, the local community, through the local council, needs to scrutinise that effectively. The real problem in Reddish is that there has not been effective scrutiny.

[Greg Clark]

I am grateful for the hon. Gentleman’s clarification. I take it from that that he is in favour of incubators and of them succeeding. I think that he would want to be the first to congratulate the council on securing valuable jobs. Some 140 people are employed in the incubator, and I think it is important to recognise the potential for increasing employment in small businesses in a part of his constituency that is relatively deprived. I hope that he supports the principle of an incubator, although it would be reasonable for him to set out any concerns about how it has been managed in the past and how it will be managed in the future.

The hon. Gentleman will be aware that the incubator model is typically not financially self-sustaining. Most of those that have been established involve some degree of public support, whether from European funds, as is sometimes the case, national Government funds or local authority funds. For example, his Labour colleagues in Darlington are keen to establish a business incubator and are looking for central Government funds to support that. The model of a business incubator usually involves some commitment of public funds with the intention that that should create jobs and reduce other demands on council revenue and expenditure so that a virtuous cycle is generated.

The hon. Gentleman is a reasonable man and I think that he would be the first to acknowledge that, in times of economic difficulty, small businesses will be affected—perhaps more so than larger businesses, in some ways. I am sure that he would agree that it would not be right to take away something of particular importance at a time of economic difficulty. It is right to keep faith with small businesses, rather than exacerbating the difficulties they might have due to the state of the economy by introducing jeopardy into an arrangement that exists to make sure that there are jobs to replace those that are lost elsewhere in the economy.

[Andrew Gwynne]

I take on board what the Minister says about business support, but does he think that the obligation of the community interest company to the local taxpayers of Stockport should be at least to collect the rents from the businesses in the business incubator?

[Greg Clark]

Of course, and I will talk about the hon. Gentleman’s point later. Any administration of any organisation should be run to standards of good practice, and it is important that that continues. It was the hon. Gentleman’s Government who established community interest companies as a model in which the voluntary sector, communities and the local public sector could come together to pursue not-for-profit opportunities of local benefit, so I hope that he is not suggesting that there is something inherent in the structure of CICs from which we should back away. Obviously, he is right to ask questions and he has obtained information on the running and the practices of the organisation.

The hon. Gentleman will be aware that his council in Stockport and other Greater Manchester authorities have come together to make a successful and impressive proposal, which I think he supports, on the local enterprise partnership for Greater Manchester. The document that was successful in achieving authorisation is clear that the No. 1 ambition of the LEP is to develop Greater Manchester

“as a powerhouse for entrepreneurs, business start ups and innovation”.

I think that incubators such as that under discussion can play an important role, as all Greater Manchester councils, whatever their political complexion, would recognise. I do not think that this is a question about the principle of business incubators or about having community interest companies.

The hon. Gentleman asked about the performance of the incubator in question. On accountability for public funding or any other type of initiative, it is established that there are means—for local councillors, and for local representatives such as him—by which to obtain information and to shine the spotlight on the way in which organisations operate. He has done that by securing this debate, and I know that he has done so locally as well.

When considering Stockport council’s decision to support the business incubator project, it is worth remembering that every authority has a structure in place whereby it has to account for public sector funds. Indeed, legislation requires, and will continue to require, all local authorities to make arrangements for the proper administration of their financial affairs, to ensure that their financial management is adequate and effective, and to have in place a sound system of internal control that includes arrangements for the management of risk. I believe that this particular project was called in by the council’s scrutiny committee and considered in detail. Information has been disclosed through the freedom of information process and the future plans for the organisation have been established. I can tell the hon. Gentleman that, after looking at the matter closely, nothing has led me to believe that Stockport council has not exercised the proper degree of scrutiny. Nothing that the hon. Gentleman has said today has established that the council has been derelict in any of its responsibilities.

[Andrew Gwynne]

Will the Minister give way?

[Greg Clark]

I will not, because we have only a couple of minutes left and I want to conclude my comments. It is not a question of passing judgment on whether Stockport council was wasteful in its decision to provide support to the incubator. That decision has been made by a democratic and independent organisation and by a local authority aiming to help businesses to start up and grow in its area. As central Government, we should respect that.

The hon. Gentleman is right that we should make use of the powers available. He said at the beginning of the debate that I believe in transparency. The measures in the Localism Bill will increase the transparency to which local authorities are subject. I am keen that local people should be able to see what is being done with taxpayers’ funds. The local authority’s business plan for the incubator is in the public domain and people can take a view on whether it is an acceptable way to proceed. If they look at other business incubators throughout the country, they will see that it is rare for an incubator to operate at 100% capacity. The point of an incubator—almost—is to have some space available so that prospective businesses can locate there, so this situation is not out of the ordinary.

I know that that the local enterprise partnership will take a particular interest in the matter. It has made it clear that the facilities will be important for the full employment potential of Greater Manchester to be realised. I hope that the hon. Gentleman and his colleagues in Greater Manchester, including the other authorities, will consider how this particular incubator can be part of a network that the LEP may look to establish across the city so that it can realise the undoubtedly great potential for the small businesses of Greater Manchester to lead the way out of the economic difficulties from which they are suffering. I am grateful that I have had the opportunity to address the hon. Gentleman’s remarks.