What lies beneath

On 21 June last year, staff at the London-based social housing pro-curement consortium Cyntra arrived at work. But the longest day of the year was, for them, also one of the shortest.

By lunchtime the half-dozen remaining employees and sub-contractors were out of a job and were owed a total of up to £90,000 in redundancy and holiday pay.

It was a very different story when the company was launched in 2005, originally as LAPN Limited. It was formed by 10 London-based arm’s-length management organisations that had decided economies of scale could drive down the cost of repairs and maintenance of their social housing stock.

Driven as much as anything else by the bonanza that was the decent homes programme and emboldened by the pre-recession macro-economic climate, the consortium’s plans were ambitious. Its original business plan stated it wanted to procure £1 billion of contracts through its framework agreements.

With members paying £50,000 per year as membership fees plus a 1.5 per cent fee for all work procured via the consortium, everything should have pointed to a strong financial base.

Cut to a fraught Cyntra board meeting in May 2012 and the decision was made to wind the company up. There was money in the bank at this point but nowhere near enough to cover debts that, at the time of writing, have spiralled to more than £2 million.

The abrupt demise of the company has left former employees - as well as soon-to-be out of pocket creditors - wondering how things could go so wrong in such a relatively short space of time. Furthermore, what will happen now to those left in the lurch? Will anyone shoulder the blame for such apparent mismanagement? And, with public sector spending being squeezed even further, are there warning signs for other procurement consortia across the country?

Changing landscape

According to some, the story is remarkably easy to tell: as the level of non-decency across the sector, and particularly across the local authorities in which Cyntra’s owners operated, fell, so the nature and scope of capital works spending changed.

‘The big thing was that there used to be such big programmes,’ explains Robert Black, chief executive of Kensington and Chelsea Tenant Management Organisation, one of the original owners of the consortium. ‘But as soon as the decent homes programme got done, everyone had smaller programmes and they could do it locally.

‘The obvious thing is that the market is disappearing. People have got their individual solutions [to repairs and maintenance work] so there’s fragmentation.’

There may be a lot of truth in the assessment provided by Mr Black, who took over as chief executive of the TMO in 2009 - long after Cyntra was formed. But it does not explain the continuing - and apparently healthy - existence of 13 other procurement consortia across the country.

Furthermore, there is another side to the story when it comes to decent homes cash. The allocation of money to councils and their ALMOs was based on a star rating system, with more stars given to those procuring authorities that demonstrated they were working collaboratively through, for example, setting up a procurement consortium.

Between them, the member-owners of Cyntra received around £1 billion of decent homes money from the government. Under the consortium’s fee structure, that sort of spend would have generated an income of £15 million - more than enough to keep it liquid through the lean times. But one well-placed former Cyntra insider estimates that just £150 million of the decent homes money was put through the consortium’s expensively arranged framework agreements.

An Inside Housing investigation supports this claim. The total repairs and maintenance spend put through Cyntra up to the end of 2011/12 by the eight owners that responded to a freedom of information request was just £129.4 million. Those spends range between the £36.9 million spent by Hillingdon Homes - and latterly the council once it took its ALMO in-house in 2010 - and Kensington and Chelsea TMO’s £376,000. It’s all a far cry from the ambitious projections of the early days.

Red herring

Peter Kitson, a solicitor at Trowers & Hamlins, which acted as an advisor to Cyntra and was instrumental in setting up its framework agreements, says the decent homes issue is something of a red herring.

‘The problems at Cyntra were not to do with the decent homes programme coming to an end and spending being limited. It was obviously an issue to the extent that authorities needed to give a likely value [to that work], but in the context of repairs and maintenance there is still plenty of work to be done.’

According to Mr Kitson, the problem is the ready availability of alternative ways of doing that work.

‘The Cyntra model is fine,’ he continues, ‘as long as you have buy-in from the owners. If you do not then it’s a problem, as events have demonstrated.’

But it wasn’t always like this. Adrian Lampard, financial controller of Cyntra from 2007 until the liquidators stepped in last summer, insists the early days were relatively lucrative.

‘We had three years where we made a profit and at that time we had the owners on board and willing to put some money in,’ he remembers.

So, what changed?

For one, the framework agreement that was set up in 2007 was reprocured in 2011. At the same time, the company worked on putting together long-term contracts for individual members. The assumption seems to have been that both the framework and the contracts would be used extensively, but that assumption proved to be wide of the mark.

Procuring the 2011 framework agreement cost Cyntra more than £1 million, but the member owners, reduced in number by two after Brent Housing Partnership and Westminster’s CityWest Homes left the consortium in 2009 and 2010 respectively, were still not putting enough work through it.

Mr Kitson accepts that it ‘was very surprising’ that the same owners that put the framework together were reluctant to use it.

He continues: ‘The framework agreement was pretty strong and at the time that it was being drafted it was supported.

‘The anticipated values [of the contracts] that went out were right but made with the assumption that existing members would use them. It wasn’t that it wasn’t good value, just that they [the owners] decided to put the money elsewhere.’

For Mr Lampard, answering the question of why money went elsewhere is easy.

‘There was a lot of buy-in at chief executive level but not at the level of the people who were awarding contracts,’ he explains. ‘They carried on doing everything the way they had done for years.’

In other words, the best intentions of the owners to create a new model for procurement were being hamstrung by scepticism within their own organisations. Nevertheless, Cyntra’s ultimate downfall could have been avoided.

‘My view is where the company fell down was between September 2011 and February 2012,’ Mr Lampard says.

Unused framework

Immediately before that period, in August 2011, six contractors were named on a new framework that promised £800 million of work. At the time, Cyntra managing director Professor Peter Woolliscroft lauded the innovative pricing model that reflected regional variations and promised long-term savings for users.

Just seven months later, Professor Woolliscroft had resigned after asking the board for a cash injection to keep the struggling business afloat. The reality was that the framework remained untouched by the vast majority of members.

Mr Lampard remembers: ‘We were developing the methodology and it was supposed to be so cutting edge that everyone would say they had to use it, but then no one did use it.’

Only Hounslow Homes, whose chief executive Bernadette O’Shea had not long earlier joined the board as the owners’ representative, took up its new long-term contract. Inside Housing made several attempts to contact Ms O’Shea but she was unavailable for comment.

Heading for trouble

Having haemorrhaged cash to put together the paperwork for the individual contracts and the larger framework, it was never likely to be enough for only one member to sign up.

In early 2012 it became clear that money was running out, while creditors started to pile up. By May that year, the board was meeting regularly to decide how to extricate itself from the dire situation knowing that the company was on the brink of insolvency.

Five options were set out for board members, including the option to inject £250,000 as a short-term solution. Ultimately, they chose what was described as the ‘zero cost’ option of ‘walking away’, leaving what were thought to be £700,000 worth of creditors. That figure has since swelled to more than £2 million, including a revised figure of around £50,000 for staff owed redundancy or holiday pay.

‘If I had been them I probably would have done the same,’ admits one former staff member. ‘But I would not have let my subsidiary get into that state in the first place.’

Staff are now queuing alongside former suppliers, waiting for administrator Wilkins Kennedy to come up with a plan to spread the £290,000 in the bank around creditors totalling £2.1 million. Wilkins Kennedy hopes to sell the framework agreement but even the most optimistic estimates suggest it would fetch no more than £300,000.

Even if that happens, a number of companies and individuals will be left severely out of pocket.

In an interim report, the administrator has identified poor cash flow and the high cost of establishing the framework as the reasons for Cyntra’s failure. It is also in the process of filing a report on the directors’ conduct during the company’s demise.

Until that report is complete, the full picture of the mistakes that led to ruin might not be known. For now, Cyntra stands as a timely warning against hubris for anyone trying to save a few pennies on their procurement cost.

Cyntra: who spent what

Cyntra’s initial membership comprised 10 arm’s-length management organisations. Brent Housing Partnership resigned in 2009 while CityWest Homes, which manages the council’s social stock in Westminster, left in 2010.

Ealing, Hillingdon and Hammersmith & Fulham councils have all taken housing management in-house since the consortium was set up in 2005 but remained members until it went into administration last year.

Eight of the 10 original owner members responded to a freedom of information request asking for details of how much they spent on repairs and maintenance work through Cyntra.