Nearly £15m of European aid not already allocated to managers of the under-spending venture capital programme will be handed back for use in more efficient projects, papers from a recent showdown with ERDF bosses reveal.
The minutes of a special meeting of the Local Management Committee of the European Regional Development Fund North West, held on 15 June to tackle ongoing problems with the North West Fund, were published this week.
Minutes reproduced in full below
Andy Leach, who has since left his post as chief executive of NWF, presented to the monitoring committee, chaired by Philip Cox, director of the Department for Communities & Local Government, and deputy chairman Sir Howard Bernstein, chief executive of Manchester City Council.
In the committee's response, there is strong criticism of the level of management fees paid to Leach and the fund managers appointed by fund holding company North West Business finance.
Committee member Flo Clucas, of Liverpool City Council, 'queried the fact that the management fees are already paid, which is not acceptable given the level of investments by some fund managers'.
Bernstein agreed and criticised Leach's apparent defence that certain quarters of the year had a slower 'run-rate' than others.
Bernstein said: "It is imperative to avoid a situation where people are paid to do nothing."
Leach 'did not accept the comment on management fees'.
The North West Fund is a £185m debt and equity vehicle launched in December 2010 financed by ERDF and European Investment Bank. The fund is split into six sub-funds either by sector or size, some of which have performed well such as the sub-fund for the biomedical sector. But others, for instance the development capital fund which can invest between £100,000 and £2m in growing companies, failed to make a single investment in the first year.
At the time of Leach's departure in mid-July, the whole fund had made £29m of investments in 100 businesses. The fund had until the end of 2015 to allocate £185m, but that has now been trimmed to £170m.
Mike Emmerich, chief executive of New Economy, Manchester's policy think-tank, told the meeting 'the development capital figures seem very poor…a corporate finance level of expertise is needed in this situation. It is inexplicable how this fund is so under-invested.'
Clucas added if the North West Fund fails 'there will be a much more difficult scenario for financial engineering instruments in the next programme in the North West [from 2013-20]."
As well as spending rates, the venture fund was also pulled up over job creation outputs.
Andy Churchill, Merseyside voluntary sector representative, said the 'overall strategy for job creation…appears to be taken passively in the presentation'.
After the NWBF presentations and committee response the three-strong fund team left the meeting and the monitors discussed a remedy.
Cox said: "It may be necessary to use a firm hand, and presumably nobody wants to leave the £14.8m with the NWF. In addition NWBF be put 'on probation' with a further review in three months time [September] to see what progress has been made."
Bernstein called the situation 'untenable in the current climate'.
In concluding the meeting, NWBF was told to accept all the recommendations of a review by consultants Ekos aimed at speeding up delivery, return unallocated money to the ERDF programme, produce a revised business plan, and appoint three Local Enterprise Partnership representatives to the NWBF board.
The deadline for the actions to be implemented is the end of September
The meeting was attended by 29 people; 16 members of the committee, four ERDF programme delivery team members and nine observers and guests, including Leach and the other fund management representatives.
Subject: MINUTES OF THE MEETING 15 June 2012 (JEREMIE)
From: Programme Delivery Team
To: Local Management Committee
Members / Alternates
- Philip Cox (Chair) Director CLG
- Sir Howard Bernstein SHB Deputy Chair Regional Leaders Board Manchester City Council
- Jackie Arnold JA Cumbria (LEP) Cumbria Chamber
- Kath Boullen KBo Merseyside (LEP) NW CCI
- Cllr David Brown DB Cheshire (LEP) Cheshire East
- Keith Burnley KBu HEI Sector NWUA
- Andy Churchill AC Third Sector Merseyside Network
- Flo Clucas FC European Affairs Advisor Liverpool City Council
- Ian Brooks IB Sustainability Environment Agency
- Mike Emmerich ME Manchester (LEP) New Economy
- Guy Flament GF Desk Officer European Commission
- Richard Guy RG Manchester (RLB) Manchester Solutions
- David Higham DH BIS Local BIS Local
- Alan Manning AM TUC NW TUC
- Cllr Terry O'Neill TO Cheshire (RLB) Warrington BC
- Cllr Michael Ranson MR Lancashire (RLB) Ribble Valley CC
Programme Delivery Team
- David Read DR Director, European Programme
- Ruth Hollis Committee Support Officer
- Nicola Lavin NL ERDF Head of Projects
- Gemma Perry ERDF Contract Monitoring Manager (FEI)
Observers / Guests
- Lord Daresbury LD Chairman of the Board, North West Business Finance
- Brenda Smith BS Investment Advisory Panel, North West Fund
- Andy Leach AL CEO, North West Business Finance
- Eleanor Carter RLB (RLB) Halton BC
- Paul Dickson Merseyside (RLB) TMP
- Paul Evans Manchester (RLB) AGMA
- Francis Lee Cheshire (LEP) Chesh West & Chester Council
- Sean McGrath Lancashire (LEP) Lancashire CC
- Paul Roots Sustainability Environment Agency
Introduction and Apologies
The Chair opened the meeting at 14.08, thanking all for attending this special meeting to discuss the JEREMIE project [Joint European Resources for Micro to Medium Enterprises], the North West Fund; and outlining the proposed schedule for the meeting: – the representatives from North West Business Finance (NWBF) would be invited in to make their resentation, followed by questions from the Committee. NWBF would next be asked to leave the meeting to enable discussions and decisions among Members. The Chair, Deputy Chair and Head of PDT would then meet the NWBF representatives again to advise them of the conclusions.
Apologies were noted from:
- Louise Barry Equality & Diversity Merseyside Disability Federation
- Val Jones Third Sector Merseyside Network
- Cllr Tony Markley Cumbria (Regional Leaders Board) Cumbria CC
- Gillian Elliott (Alt) Cumbria (RLB) Cumbria CC
- Dennis Mendoros Lancashire (LEP) Private Sector
- Steve Moore Sustainability Environment Agency
- Cllr Sue Murphy Manchester (RLB) Manchester City Council
- Cllr Phil Davies Merseyside (RLB) Wirral Met. Borough Council
Declarations of Interest
No Declarations of Interest were received prior to or at the meeting.
Item 1: JEREMIE – the North West Fund
Three representatives the North West Fund attended the meeting: Andy Leach, Chief Executive Officer of North West Business Finance; Lord Daresbury, Chairman of the North West Business Finance Board and Brenda Smith, Member of the Investment Advisory Panel for the North West Fund.
LD introduced the guests; AL presented a PowerPoint presentation.
1.1 ME reported positive conversations with AL and good performance from the Biomedical Fund, but the Development Capital figures seem very poor. The Ekos report was good, but a Corporate Finance level of expertise is needed in this situation. It is inexplicable how this fund is so underinvested.
1.2 AL replied that NWBF is proposing to reallocate capital between the sub funds; most can do this without impinging on their ability to complete investments.
1.3 FC queried the fact that the management fees are already paid, which is not acceptable given the level of investments by some fund managers. The suggestion just supplied is not enough of a remedy. What questions had the Investment Advisory Panel (IAP) raised when these issues were brought to their attention?
1.4 AL replied NWBF manage the fund managers closely but do not to get involved in investment decisions. The Board had discussed the management fees in March and deferred for review until June.
1.5 FC stressed that in the first year, the Development Capital fund did not make a single investment, which caused concern for LMC, a concern which should be transmitted to the NWBF Board. Secondly, she raised concerns about the fund meeting the EU Regulatory 60/40 split between RONW and Merseyside. If this JEREMIE project fails, there will be a much more difficult scenario for Financial Engineering Instruments (FEIs) in the next Programme in the North West.
1.6 RG attended the fund managers' presentations on 15 June. It was clear from the performance data that the Development Capital fund is the one to be reduced, but also the Business Loan fund gives some concern due to level of job creation.
1.7 AC suggested it is very important to understand the overall strategy for job creation, which appears to be taken passively in the presentation. This is the largest fund in Europe – are there comparisons with some others?
1.8 The Chair responded there has not been a detailed analysis, but the Yorkshire JEREMIE is experiencing similar issues on their equity funds.
1.9 KBu referred to the underachievement on the outputs, and vfm relating to management fees.
1.10 IB noted the management fees and queried the final percentage. AL responded this would be much lower.
1.11 SHB agreed there was a lot of information to digest, much of it being based on the "run-rate" of a particular quarter. It is imperative to avoid a situation where people are paid to do nothing. We also have to understand what processes are deployed by the Board and the NWBF team to ensure high quality investments are made to maximise employment in the North West over the next 2 years.
1.12 DH asked to what extent are the funds competing against each other; and what is the risk mitigating strategy, which he had expected but couldn't see in the presentation. DB asked where are the outputs defined in the presentation?
1.13 AL responded there is no evidence of competition between funds. He would be happy to re-present the information, but the outputs are defined in the figures shown.
1.14 IB requested the strategy on environmental sustainability, with any examples of where the fund managers have influenced investors.
1.15 BS responded in the first 6 months it was a case of increasing the fund managers' awareness. Some of the investments have enabled applicants to take the next step.
1.16 The Chair summarised discussions, addressing NWBF: in principle you accept all the recommendations in the Ekos report apart from the reduction in funds, though you have not got a specific proposal to show how this will be implemented, and beyond that, whether the failure by the fund to achieve outputs and financial results is caused by the state of the economy or the state of management. He asked for any final thoughts.
1.17 AL did not accept the comment on management fees.
The Chair thanked the NWBF representatives for their attendance, and asked them to leave the meeting.
1.18 The Chair then suggested to members that they may have reached a potential set of conclusions, and invited them to discuss these. He noted nobody had attempted to come to NWBF's defence during the presentation. NWBF are accepting all bar one of the Ekos recommendations, but they made these uncomfortable with caveats. He also felt a fair number of members are not comfortable with the governance position. The recommendation on fund size was to reduce the fund by the £14.8m that has not been allocated to the Fund Managers. It may be necessary to use a firm hand, and presumably nobody wants to leave the £14.8m with the NWF. In addition NWBF to be put "on probation" with a further review in three months time to see what progress has been made.
1.19 DB felt the presentation had shown little regard to outputs, and NWBF seem to have only just realised we need them, when they should have been built in.
1.20 SHB felt the current situation to be untenable in the current climate.
1.21 KBo considered it wrong to "park" £14.8m, it needs to be re-invested – if NWBF does achieve its full potential, then there may be more funding available later.
1.22 TO stated the need to define precisely the required outputs and work towards their achievement. If we don't, we will find ourselves in the same position in 12 months, so a marker must be put down.
1.23 KBu asked how rigorous the analysis we have been given by NWBF is. Until, as ME says, we get some thorough analysis, we can't say.
1.24 GF, speaking from the EC point of view, was disappointed by the presentation.
His view was that a report is needed, by the end of 2012. He queried confidence in the output objectives and whether risks are being addressed. The ERDF proportion of the £14.8m should be returned. He recommended that after the revised business plan is produced there should be an external evaluation of it. This is the biggest JEREMIE in the EC and some parts of it are working very well, others not. He asked members to support the resolution to retrieve the £14.8m by the end of June, and then commission an independent evaluation to give confidence in the figures being shown.
1.25 DH advised if he were on the Board he would have no idea what was going on if presented with the type of information shown here.
1.26 FC agreed £14.8m taken back would send a powerful message, both to NWBF and beyond. Today's presentation provided no evidence of improvement at all.
The money must be spent first in order to get it back.
1.27 MR had doubts that the current governance is appropriate.
1.28 RG felt LMC should not be neutral when it came to job targets, but should be putting pressure on NWBF to maintain jobs, and on the current proposals not allocate more to the loan fund as this would not increase the jobs created.
1.29 The Chair summarised discussions as follows: All Ekos recommendations should be accepted: the fund should be reduced by £14.8m: NWBF should produce a revised business plan: then a further external review should be undertaken.
1.30 SHB added the business plan must maximise outputs.
1.31 The Chair suggested though NWBF accepted the Ekos recommendations, it was in very general terms, so there should be a small, appropriate LMC sub-group appointed to monitor progress.
1.32 FC suggested that would be the FEISC [Financial Engineering Instrument Sub Committee].
1.33 In terms of additions to the NWBF Board, DR noted Manchester and Liverpool have provided nominations, another is needed for RONW. The actions as summarised can be completed in practical terms by the end of September.
1.34 The Chair then announced this is the last meeting for KBu, and on behalf of members thanked him for his services to the Committee and wished him well for the future.
The focus for the 28 June LMC meeting being mainly SFB [superfast broadband], the Chair suggested rescheduling the meeting until mid July in order for an assessment to take place of all applications submitted by 30 June.
All Ekos recommendations to be accepted.
£7.4m ERDF unallocated funding to be returned to the Programme.
NWBF to produce a revised business plan.
Three LEP representatives to be appointed to the NWBF Board.
Actions: Programme Delivery Team
An independent evaluation of the NWBF business plan to be commissioned.
There being no other business, the Chair closed the meeting at 15.30.
Minutes agreed by LMC.
Signed ………………………………………………… Philip Cox