‘Significant weaknesses’ at Mid Devon contributed to failure of 3 Rivers

Mid Devon District Council did not scrutinise its property firm 'robustly enough'

Poor oversight of a controversial housing firm owned by Mid Devon Council contributed to its failure and financial losses, a new report has revealed.

External auditors Grant Thornton highlighted two areas of “significant weakness” linked to 3 Rivers Developments, namely that the council did not adequately scrutinise the firm and that the delay in approving the company’s 2022 business plan dented the authority’s reputation.

“The council did not exercise its shareholder role effectively, contributing to the failure of its arm’s length company and a significant financial loss,” the report said, adding that a protracted debate over the firm’s business plan “damaged the council’s reputation and meant the council was not able to set its budget in a robust and timely manner”.

The auditors acknowledged that the local authority did now have a plan to close the company, but its predicted net loss of £6 million could be higher or lower, and that even if it was correct, it represented “a significant amount” for a council of its size.

Andy Nichols, a senior manager at Grant Thornton, which is being replaced as Mid Devon’s external auditor by Bishop Fleming, said that the council’s oversight and stewardship of 3 Rivers was “insufficiently strong”.

He told the council’s audit committee.: “By 2022/23, there had been quite a lot of significant change in the operating environment, and while this was not all in the council’s control, such as rising inflation and interest rates, it’s clear that the council’s original objective [for the firm] in 2017 to deliver a financial return had not been fulfilled.

“The role of a shareholder is to hold a company to account using good quality financial risk and financial performance information, but it is incumbent for the council to ask whether, through the company, it is achieving its objectives, and where that is not happening to stand back and review whether it is achievable.

“That’s always good practice, but that did not take place.”

Mr Nichols added that the debate around the 2022 business plan was “not conducted in a sufficiently constructive and prompt manner”, and ultimately prevented the council from setting its budget for the 2023/24 financial year in time.

The report, which also highlighted “mission creep” from one objective to another, and stated that the council did not routinely compare 3 Rivers’ performance to its expectations, is likely to embolden members of the public who routinely raise questions about the firm and their perception of mismanagement.

Speaking after the meeting, resident Goff Welchman said he and his fellow critics would “keep on and on and on until something is done about it”.

He continued: “Some people will get heartily sick of it, but we won’t let up.

“You can count on me to keep picking at the scab until something happens, as this has had an impact on the public finances.”

He added that one of the authority’s newer councillors had spoken to him after the audit committee meeting to thank him for his persistence.

“The councillor said it was very enlightening for them as they were a new member of the council and so didn’t know as much about 3 Rivers as I do,” Mr Welchman said.

Resident Paul Elstone is also pleased about the Grant Thornton report. “It reinforced our concerns about the way the company was set up, and the lack of full and proper due diligence,” he said.

Mid Devon’s scrutiny committee set up a working group last year to learn lessons, with the aim of outlining mistakes made with 3Rivers and which shouldn’t be repeated if the authority starts another company..

The group outlined 10 lessons. However, critics claim its scope had unnecessary parameters, and that it was not given enough time to thoroughly delve into all the issues.

Councillor Rhys Roberts (Conservative, Cadbury) told this week’s audit committee that the council had taken “difficult decisions” to stem its losses in relation to 3 Rivers, and acknowledged it had been a “difficult process for councillors and officers.

“I believe it has been the right decision [to close the company] but I don’t believe we are in a position to say the lessons have been learned,” he said.

“It would be helpful if we can debate the actions and suggested measures that the working group set out in its report, alongside Grant Thornton’s report, and move to that area of the exercise so that we can repair the reputation of the council and improve public confidence.”