Luton Borough Council Accounts 2018-19 / Part 2

But The Numbers Still Don’t Seem To Add Up!

Having given a flavour of the Auditors Draft Audit Results Report for 2018/19 presented at the Luton Borough Council (LBC) Audit and Governance Committee on Thursday 20th July, we would now like to explore further the financing of the Development Consent Order (DCO) Application for Airport Expansion.

Section 2, page 181, of the report covers Areas of Audit Focus-Significant risks. 

From page 187 is where we find the detail behind the Inappropriate Capitalisation of Revenue Spend on the DCO. Page 189 is where you will find the background to their process and conclusions the Auditors arrived at.  

EY commissioned the services of their in-house Aviation Finance specialist, to review the figures and reasoning of PricewaterhouseCoopers, the Auditors who had worked for Luton Rising the DCO Applicant on the Capitalisation of the project for the accounts.  The effects of Covid-19, and the uncertainties going forward for Aviation, and specifically Luton Airport, would play a part in that process.  

The Concession Agreement with the Airport Operator was also given careful consideration in regard to expansion.  

The Process Covered:

• An overview of the Planning Environment for airports through independent research of Airport Expansions in the UK.

• Obtaining and reading documentation which supports the feasibility of the DCO.

• Review of financial modelling supporting the DCO.

• An expert view on the incentives in the existing Concessionaire Agreement for the operator to finance each phase of the Airport Expansion schemes proposed in the DCO.

The Proposed Expansion of the Airport is split into three phases:

Phase 1 which is for adaptations to the existing Terminal 1 to increase the capacity of the airport to 21.5 million passengers per annum (mppa) at a cost of approximately £274 million.  This Phase crucially for us at SLAE also involves the destruction of Wigmore Valley Park with new car parks.  This is still the plan of despite large areas of derelict/underused land within the current airport site being available for those car parks.  

Phases 2a) and b) which is for the addition of a new Terminal and related infrastructure works to increase the capacity of the airport to 32 mppa at a cost of approximately £2.7 billion  

The Conclusion was that Expansion of the Airport in line with Phases 2a) and b) of the DCO is highly speculative, uncertain and is likely to have a reduced net present value. 

The report then details that their Conclusion is supported by the findings of the Council’s own external expert, Arup! That fact should not surprise anyone who has been with us since the beginning of our campaign, it is typical of what we have experienced with LR/LBC.  Spend a fortune of public money on expert advice, and then ignore it because it is not what they want to hear.  

Arup’s computer modelling does show an increased net present value of the Airport for Phase 1. However, at this point, Planning Permission has not been obtained beyond 18mppa, there is no approved Business Case for the scheme and the financing and viability of Phase 1 remains uncertain.  Further, under the terms of the Concession Agreement, LBC does not have Contractual Rights to enforce the Concessionaire to undertake and finance expansion of the Airport.  LBC/LR will therefore need to renegotiate the Concession Agreement to seek the Concessionaire to carry out the expansion.  

Remember the current Concessionaire launched several Force Majeure cases against LR for loss of revenue when Covid struck, won them all and then took £45 million from LBC/LR coffers, money which was sorely needed in Luton.  That does not fill us with confidence as it shows clearly, there is no assurance that such an arrangement could be reached on mutually acceptable commercial terms.  In addition, further risks to expansion to Phase 1 could be brought about by ongoing legal challenges, objections, and environmental considerations. All the factors pose a significant risk to deliverability and timing of proposed Phase 1 expansion.  

Considering all these issues, the Auditor concluded that a material value of Capitalised Expenditure at the end of 2018/19 on Luton Airport expansion schemes in the Council’s group financial statements does not meet Capitalisation criteria under IAS 40 as an Investment Property asset under Construction.  They have not been able to obtain sufficient and appropriate evidence from LBC that the costs incurred to 2018/19 on the DCO Application are all, or in part, eligible to attributable to Phase 1 of the proposed expansion. 

They are unable to conclude whether any of the £20.3million of capitalised costs have been reliably measured and accounted for as a capital asset in the Group Financial Statements as at 31st March 2019.  They therefore propose to qualify the 2018/19 Financial Statements opinion in the form of a Limitation of Scope.  

What is a Limitation of Scope?

A Qualification like this arises when the Auditor does not receive all the information and explanations that are deemed necessary for the completion of their Audit.  The Auditor cannot give an objective conclusion of their analysis with regard to a company’s economic status.   

This situation could be due to all relevant information not being available, or destruction and loss of records.  

We have always known that the one-eyed obsession LBC has with airport expansion being the only way to save the poor of the town, was the wrong way.   

We now have proof that they have ignored the expansion advice by their own experts to chase that cause, and where that will now lead, who knows?  

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