Who Runs Teesworks?

Part 2

Shy Partners and Asset Strippers

A digger inside a subterranean chamber at the former Cleveland Ironworks

Scott Hunter

27 January 2021

4 October 2021, and Michael Gove delivers his speech to the Conservative Party Conference. It is Teesside that is on his mind as he stands up to address the party faithful. Teesside his inspiration.

“Tees-side…neglected for decades under Labour…. its proud heart nearly broken…. now revived …. regenerated, renewed …. by the CONSERVATIVE LEADERSHIP ... of the amazing … BEN … HOUCHEN!”

A week earlier he had visited the region, had been taken to Teesworks, the site of the UK’s largest regeneration project and its largest freeport. And as he stood among the rusting hulks of a bygone era of heavy industry, Gove had a vision of the new Jerusalem in the twisted metal and poison earth of the wasteland; a region revived, regenerated, and renewed. A beacon of our Libertarian future. It must have been a spellbinding moment.

And thus his vision turns to dust …

At the end of November the STDC reduced its share in Teesworks Limited from 50% to 10%, which, since then, has been 90% owned by two local property developers, Chris Musgrave and Martin Corney. The endless stream of good news from Tees Valley mayor, Ben Houchen, about rapid progress on the Teesworks site is starting to look a little jaded. Houchen has claimed in a recent statement to ITV News Tyne Tees that the alternative to this change was for the whole project to be mothballed, effectively admitting that it has been chronically underfunded.

Mothballed? The key driver of Teesside’s economic regeneration? The freeport? Houchen’s flagship achievement? 

And furthermore, it seems that while Houchen really, really wants to offload the project, the developers really, really want to acquire it.

How did it come to this? What is motivating the property developers? And what’s contained in the new deal?

To understand what has been happening it is necessary first to look at Corney and Musgrave’s involvement with the STDC, and also to look more closely at the new shareholding.

Corney and Musgrave Gatecrash the Corporation’s Party

When Corney and Musgrave became joint venture partners in Teesside Airport Business Park in March 2020, it was done in a blaze of publicity.  We learn from Darlington Borough Council papers of March 2020 how that applicant came to be selected (several local councils have a shareholding in the airport). Two things were of primary importance – that the developer should be locally connected and would be prepared to make their return in the long term through dividends. The document is detailed and shows that the successful applicants thus had to make specific commitments in order for their bid to be accepted. 

It was also in March 2020 that STDC director of finance, Gary Macdonald, recommended to the board of the Development Corporation that they set up a joint venture partnership with, as it turned out later, the same two developers.

Of the major differences between the two ventures, one is that there is no corresponding document in the public domain that states the nature of the partnership, or the commitments made by the developers to STDC. And when this joint venture partnership was made public, it wasn’t in the minutes of a meeting of the board, but at a Tees Valley Business Club event in July of that year.

Another is that, while at the airport a joint venture company was set up, at the Development Corporation a pre-existing company owned by Corney and Musgrave co-opted the STDC chief executive, Julie Gilhespie, and the company changed its name, from South Tees Enterprise Ltd (STEL), to Teesworks Limited. Four shares were then issued – two owned by the Corporation and one by each of the developers respectively.

A third and final difference is that it was quite explicit at the airport what the venture was. This was not the case at the Corporation. So, in August 2021, as we reported in an earlier article,  we wrote to Gary Macdonald to ask, initially, who the partner was.

We got no reply. So, we sent a FOI request to the TVCA to find out the identity of the partner and what the venture was. About a week later we wrote to the TVCA again to ask for acknowledgement of receipt of the FOI request. We have received neither.

At a later stage the Corporation set about creating another joint venture – a partner with whom to share the establishment of a power network for the site.  A specific project with specified outcomes, and tender issued. All at odds with the partnership created with Corney and Musgrave.

Shy Partners

Eventually, we found the information we wanted for ourselves. Well, up to a point, anyway. The following statement appeared in the board agenda papers in November 2020:

There are two things to observe about this statement. One is that, as explanations go, this is not the best. It is a far cry from the detailed statement given about the business park venture at the airport. The other thing is that it was inserted into this annual financial statement only at the behest of the Corporation’s auditors, Mazars LLP (as evidenced on p.98 of the same document). Had it not been for them, we might still have no idea about what Teesworks Limited actually does.

Our reading of this text is that Teesworks Limited will arrange the leasing of land parcels on the site for the Corporation’s clients, and possibly that it will process payments for those leases, as well as arrange for the provision of services for those clients. Key to this is ‘manages … land once remediated’. Key, because, in reality, the company seems to be involved other activity on the site. 

But to properly understand the relationship between the Corporation and Teesworks Ltd, it is necessary to have some appreciation of the STDC’s business model.

The Business Model

In his evidence to the CPO inquiry (the compulsory purchase of former SSI land), STDC Director of Finance, Gary MacDonald, explained the Corporation’s business model. Redevelopment of the site depends initially on regeneration funding, totalling £331 million, which is made up of £56.5 m loan from the TVCA and the remainder grants from a number of government sources (Macdonald evidence, paragraph 3.5). The government funding is intended to cover the cost of land remediation (decontamination), while final site preparation is not fully funded. MacDonald continues that, given the vastness of the area to be redeveloped, private investment will also be needed. 

The Corporation therefore begins by using the regeneration funding to remediate one section of the land (some areas are much less contaminated than others and can be remediated relatively easily). This land is then to be leased to the Corporation’s/Teeswork Limited’s clients. The income from leases will help to fund further remediation, not solely as direct income, but the leases are to be used as security on which private investment will be based (Macdonald evidence para 3.23 and para 3.26). 

Redevelopment of the site is therefore a rolling programme of land remediation, leasing of land parcels, obtaining income through rental income and private sector investment, leading to further land preparation. One key element of this, which was stressed during the compulsory purchase inquiry that led to STDC acquiring both the former SSI land, and its new partners, is that that the Corporation needed to acquire all of the land on the STDC site (a theme we will return to in a future article).

Plans Begin to Change

Teesworks Limited is created in July 2020. In October of that year, it is announced that the South Tees Site Company (STSC) is to be incorporated into the Corporation.  STSC was the company set up and administered by the BIS (now BEIS) to carry out keep safe work on the site, in particular to maintain existing structures until such time as they could be demolished (or refurbished). It employs around 120 people for this task. This change meant that its budget also came under the control of the Corporation.

In January 2021, STDC takes control of the former SSI land it had obtained through compulsory purchase the year before (according to HM Land Registry records).

In February 2021, the Corporation publishes plans in which the site is divided, effectively, into two zones, East and West, where redevelopment of the East Zone “can be ready for development at the beginning of the Freeports incentives window by avoiding the more difficult to remediate areas of the former steelworks”. All of which is consistent with earlier plans.

It is in March 2021 that plans appear to change and the Gazette announces that the programme of demolitions is being accelerated. While this is presented by Houchen as evidence of rapid progress in remediating the site, it also brings forward the time when STSC workers will be made redundant. Those workers have been told that the majority of them will be made redundant during 2022, as soon as all of the structures have been demolished (a small number of them, who maintain the existing power network on the site, will be retained). But this accelerated demolition involves bringing forward work on the ‘more difficult to remediate areas of the former steelworks’. So, this cuts down on the wage bill, but why the change of plan?

The reason for the change becomes apparent in July 2021, when STDC board agenda papers reveal that project is, effectively, running out of funds:

Where, at the time of the CPO, STDC director of finance, Gary Macdonald, expected ‘capital funding streams’ to be sufficient until 2023/24, they are exhausted a year ahead of schedule. But there are, as stated in paragraph 23, ‘sufficient revenue funding streams … to support operations and site management through to the middle of 2023/24”. What are those revenue funding streams? This is revealed in the same document:

One short paragraph reveals a huge amount about how the scheme is funded and where control lies. We deal with each in turn, starting with the recovery of scrap metal and aggregates.

Where There’s Muck There’s Brass …

If you thought scrap metal wasn’t worth much, think again. While it’s true that there is price fluctuation, underlying demand remains strong. While Houchen wrings his hands about the cost of redevelopment of the site, it appears that Corney and Musgrave set their sights on its pre-existing assets.

In November 2021 the STDC Audit and Risk Committee reported that, “ [t]o date, 67,607 tonnes of scrap metals have been sold to buyers”. It goes on to say that the sale of scrap started at the beginning of 2021, and monitoring procedures were tightened up during August “due to the increasing quantities and values of the scrap being sold and the need to better report and estimate the income due”. It also states that this process is being managed by Teesworks Limited (which, you will observe, is at odds with the statement given about the purpose of the company to Mazars). 

This may help to explain why Martin Corney spends most of his time on site, as has been reported to us by STSC workers, directing the scrap recovery operation (and that to the exclusion of all else).

As well he might, given the values of the material to be found there. In addition to steel, the site contains vast quantities of underground cable, and therefore copper, which is of higher value.

 And, speaking of high-value scrap, the discovery of an extensive network of subterranean chambers on the site of the former Cleveland Ironworks caused quite a lot of excitement. The concrete-lined chambers were mainly built between the wars, so that the rebar – the steel with which concrete is reinforced – was pre-Hiroshima. And pre-Hiroshima steel (also known as low-background steel) sells at a premium as it is used in the manufacture of scientific instruments.

Teesworks Limited Funds the Corporation

When Teesworks Limited was set up in 2020, four shares were issued – the Corporation held two and he developers held two. So, ownership was a 50-50 split. When the Corporation comes to rely increasingly on Teesworks Limited for its income, the paragraph above shows that it obtains this through dividends. This means that whatever amount is issued in dividends is divided 50-50 between the Corporation and the developers.

The same paragraph also makes clear that future income is dependent on ‘Teesworks Limited’s … realisation strategy’ and also the ‘dividend strategy adopted by the Board of Teesworks Limited’. All of which suggests that the key decisions are now being made by the Teesworks Limited board and not by the STDC board.

As for income from leases, there are none. A skills academy is under construction on the edge of the site, and an incinerator is to be built beside it. Other than that, all other projects are ‘close to agreement’ and ‘heads of terms have been agreed’. That is to say, lease agreements have not been signed. Until they are, there is no further revenue stream.

Yet the Corporation still has bills to pay. It employs the STSC workers; it pays for the construction companies who do the land remediation and site preparation. And, crucially, when the UK Investment Bank recently agreed to lend £107 million to fund the construction of the South Bank Quay, it loaned that money, not to Teesworks Limited but to the Tees Valley Combined Authority. The loan will therefore be repaid from the public purse, not revenue from private sector investors.

All Change

The change in Teesworks Limited share ownership that took place in mid-December has received considerable media attention in recent days. In fact, the changes began in early November. On 1 November, while ownership was a 50-50 split between the Corporation and the developers, the person with significant control was the Corporation.

On 2 November, a first Gazette notice of compulsory strike off was issued by Companies’ House. It was withdrawn a week later but is nonetheless an extraordinary state of affairs for a publicly owned company. On 26 November there is an issue of 96 shares, which results in the Corporation having only a 10% share in the Company. As of that date, the ‘person with significant control’ passes from STDC to DCS Industrial Ltd. While this fact is receiving a great deal of publicity, another is being overlooked. 

New Articles of Association were also issued on 26 November. These show that the shareholdings of the four parties involved are not of an identical type. Shares held by Corney, Musgrave, and their company DCS Industrial are described as types A, B, and C. Shares held by STDC are type D, and type D shares are subject to a number of restrictions.

Type D shares, and only type D shares, may be sold as a whole, but not in part. It appears that the other shareholders have first refusal on them, and some scope to determine the price to be paid for them in the event of sale. This is evidence of a remarkable degree of control of a public asset by private investors.

In the short term it means that, through share dividend, STDC will now receive only 10% of the value obtained through the sale of site assets. Ben Houchen has claimed that the developers are committed to bringing £150 million in investment to the project, but there is no document in the public domain that confirms this. Given Houchen’s track record of overstatement, people might now begin to suspect the veracity of this claim until some real evidence is presented.

It is not unreasonable to conclude from the way in which the shares have now been issued that control of Teesworks Ltd has been not so much given away by Houchen as taken away by  Corney and Musgrave.

As for Gove, he’s nowhere to be seen.