1. Why was this debt allowed to reach such an unacceptable level?
2. Why was the this debt not reported to Councillors much sooner?
3. Why was this large and significant debt not brought to the attention of Councillors when the annual budget for 2013-14 was agreed earlier this year?
The District Auditor asked the Council's Chief Executive to respond to my questions. I reproduce the Chief Executive's reply in full reply below. This reply to my questions provides the most detailed explanation of events surrounding the TansEuropa debt saga to date. It also raises some extremely serious questions about how the Council managed these events, not least of which is how the people of Thanet and the vast majority of their elected Councillors were kept in the dark about the huge gamble with public money for 3 years, and the apparent absence of robust due diligence into TransEuropa and its Italian Investor. I will be raising these questions in future postings on this blog site.
You could help me by post any questions you may have on this scandal and please, please let me have any information you may have which you think is relevant. This is without doubt one of the most serious financial scandals to have hit Thanet Council and I want to ensure that the truth is made public!
Detailed discussions began with Transeuropa back in November 2010. At that time Transeuropa wished to review the tariff agreement it had with the council due to escalating fuel prices. These discussions culminated in a meeting in Ostend in March 2011 with both Transeuropa and the council’s Ostend counterparts. Due to the increased fuel prices and the price war being waged between the cross channel operators (particularly as a result of the French government’s deficit funding for Sea France), Transeuropa requested temporary support to ensure the ongoing future of the business. A three month extension of payment terms for fees was subsequently agreed alongside a payment plan to 2014 for existing debt. Ostend also agreed to provide support by temporarily waiving an element of their charges. Transeuropa then entered into discussions with potential investment partners and requested that the deferral of fees be extended until an investment partner was in place. This was agreed subject to regular review and on condition that payments of £80k per month were received in respect of the outstanding debt. Ultimately an agreement was reached with an Italian investor in November 2012 and the council reiterated the need for normal payments to recommence. A third vessel commenced sailings in February 2013. However, in April 2013, this vessel had to be returned to P&O as the promised funding had not been released from the Italian investor. Some of Transeuropa’s creditors subsequently took the opportunity to seize the remaining two vessels causing Transeuropa to cease operations and prompt insolvency proceedings. A sum of circa £3.4m now remains outstanding to the council. This debt can be broken down as follows:
1. Why was this debt allowed to reach such an unacceptable level?
Throughout the negotiations with Transeuropa, the council was keen to ensure the continuation of Transeuropa’s business. The council worked closely with its counterparts at Ostend who were also keen to work with Transeuropa to help secure their future. The council extended its credit terms on the basis that it was both necessary, to help Transeuropa stay in business, and reasonable, as similar arrangements had also been agreed with the Ostend port.
Discussions with Transeuropa began during 2010/11 when the council first became aware of their financial difficulties. A payment plan in respect of 2010/11 debt was agreed in March 2011, together with a three month extension of payment terms for fees. Discussions during 2012 showed that Transeuropa were actively in negotiations with potential investment partners and it therefore seemed reasonable to allow them time to complete these discussions. A sum of £80k per month was paid off the debt in each month from July 2012 through to September 2012 which was a positive sign that the position was improving. Indeed, in November 2012 agreement was signed between Transeuropa and an Italian investment company. The purpose of this agreement was to secure the long term future of the operation and also to provide significant investment in the operating line.
On 22 November 2012 officers met with Transeuropa and their Italian investors. The council was advised that a 4 year repayment plan had been agreed with both the fuel supplier and with Ostend. They also advised that an agreement had been signed with P&O in respect of a third vessel. The Italians agreed to settle the 2010/11 outstanding debt in two payments of £367k and to pay the balance of the debt over a 4 year period with interest at 3.25%. The first payment was due in January 2013. A draft heads of term was drawn up to reflect this and circulated for comments. All parties agreed that the priority was to get monies flowing again and safeguarding the jobs of all employees associated with the line and the supporting services. At this time, therefore, the council was being given firm assurance that their debts would be repaid.
The introduction of a third vessel to Transeuropa’s fleet, which commenced sailings in February 2013, provided further, material assurance that the new partnership had improved Transeuropa’s fortunes.
However, the payment of the historic debt from the Italians was not forthcoming despite the council chasing by e-mail from February through to April 2013. The Italians also did not provide the promised funding to Transeuropa which resulted in the third vessel having to be returned to P&O. The other creditors consequently seized the remaining two vessels in the Ostend port. There was nothing that the council could do at this stage to prevent Transeuropa ceasing operations.
2. Why was this debt not reported to Councillors much sooner? Throughout the negotiations, the course of action with regards to the management of the debt was shared with the Cabinet Leader and Finance Portfolio holder in administration at that time. The current administration were also kept in the picture with regard to the debt position. However, as there was every reason to believe that the debt would be repaid in full in the fullness of time, there was no reason to report this in a Cabinet report to members.
The position was also not reported specifically to Governance and Audit as part of the 2011/12 closure of accounts process as it was agreed with the auditors that as agreement had been reached over a debt repayment plan, there was no need to make explicit reference to the Transeuropa debt position within the accounts or make a provision for the outstanding debt. Indeed, the first three repayments had been received at the time of the signing of the accounts which provided the auditors (and the council) with assurance that Transeuropa would honour the debt repayment plan.
3. Why was this large and significant debt not brought to the attention of Councillors when the annual budget for 2013/14 was agreed earlier this yearAt the time that the budget was set, Transeuropa had entered into an agreement with the Italian investors and the council had no reason to believe that the Italians would not provide the promised funding to Transeuropa under the agreement and also pay the council the historic debt as agreed. There was also no reason to make allowance within the budget for a loss of income from Transeuropa moving forward as it was assumed that the Italian investment had secured the future of Transeuropa’s business.
However, as part of the budget process, the council makes a financial risk assessment of the level of reserves that it should hold. This includes an assessment
of the risk of a major council customer going into liquidation. The 2013/14 financial risk assessment of reserves was shown as annex 2 to the budget report that went to Full Council in January 2013. The table within this annex which assessed the appropriate level of the General Fund balance allowed for a sum of £2.2m in respect of a major customer (including Transeuropa) going into liquidation. This was classed as being a medium risk as it was thought that the agreement with the Italians had helped to mitigate this risk. However, as a result of this and the other risks identified, the Council increased its recommended level of General Fund balances to 12% of the net revenue budget requirement. The General Fund balance is currently at this recommended level.