A fact-finding review of the loan of £9 million by the former Scarborough Borough Council to a private developer has concluded councillors made decisions in the interests of Scarborough and its residents and to ensure the regeneration of The Sands Development was completed.
However, it also found there were some key weaknesses in how the information was shared, risks were assessed and recommendations were presented.
Key learning points in the report into the financing of the Alpamare seafront development include:
- a lack of clarity in the council reports and presentations regarding whether this was a commercial loan or an investment by the council
- in some cases, risks were not fully and properly articulated. Insufficient attention was also given to the actions which could be taken to mitigate those risks
- the key risk that the water park might not be commercially viable was not adequately addressed
- officers also failed to provide a recommendation to full council based on their professional knowledge and assessment of the risks. This was a particular omission given the complexity of the proposed agreement with Benchmark Leisure Limited
- with hindsight, it is clear that the decision to approve the loan to Benchmark Leisure Limited was based on incomplete information and therefore put the borough council at increased risk
- potential income levels from visitors and local residents proved to be over-ambitious and expert advice to Benchmark Leisure Limited, which questioned the initial consultant findings on the financial business case, was not heeded
- the lessons from this review should inform the decision-making processes for future regeneration projects. In particular, the need to effectively identify, report and mitigate potential risks
The review, undertaken by our internal auditors, Veritau, was focussed on the strength of decision-making to try and establish the reasons why all the risks relating to the loan were not properly identified or mitigated.
The former Scarborough Borough Council approved the granting of a loan of £9 million to Benchmark Leisure Limited on 9 September 2013 to help finance the construction of a new water park.
The water park was a key element of a regeneration project covering The Sands and the wider North Bay area of Scarborough. The borough council had identified the need to provide a 'principal visitor attraction' to support the local tourism economy and in turn to bring growth, jobs and further investment into the area.
Benchmark Leisure Limited was selected as the borough council’s development partner following an informal tender process.
Scarborough Borough Council would fund the loan through external borrowing. It was also proposed that Benchmark Leisure Limited would make rental payments equivalent to £440,000 to the borough council. The rent received would be used to service the loan.
In addition, it was proposed that eight per cent of the annual turnover from the water park would be paid into an ‘improvement fund’ held by the borough council. This would be used to fund the future replacement of equipment within the water park, for example the slides, subject to the agreement of Benchmark Leisure Limited and Alpamare UK Limited.
A supplementary agreement was then finalised and signed on 25 April 2014. The agreement was structured so that Benchmark Leisure Limited provided the initial £5 million of funding and the loan from Scarborough Borough Council was then used to fund the final stages of the build costs. The loan itself being drawn down in stages as the work progressed.
The company also accepted the full risk of any potential cost overruns arising from the building work. Scarborough Borough Council was required to charge a commercial rate of interest of 5.85% on the loan to Benchmark Leisure Limited to comply with the European Union state aid rules and Benchmark Leisure Limited had to follow a full procurement process to award the construction contract. The rate of interest was fixed for the duration of the loan.
Due to a number of delays, the waterpark opened later than expected in July 2016.
The building included a wave pool and a number of slides, a splash and play area and outside pools. There was also a café and outdoor bar.
A luxury spa was supposed to form part of the initial waterpark development, although Benchmark Leisure Limited delayed work on this part of the project. The company only informed Scarborough Borough Council of the delay towards the end of the construction programme.
The spa itself was only completed and opened to the public in March 2019.
Benchmark Leisure Limited arranged for a separate company, Alpamare UK Limited, to operate the Waterpark.
Within two years, Alpamare UK Limited was experiencing cashflow issues and it was unable to pay HMRC and a number of suppliers.
On 15 August 2018, Alpamare UK Limited’s main creditor, British Gas, commenced the process to have the company wound up. In turn, Alpamare UK Ltd petitioned for, and secured, a company voluntary agreement on 21 January 2019.
From April 2019, Benchmark Leisure Limited ceased to make regular rental payments to Scarborough Borough Council. The borough council therefore had to take legal action to recover the outstanding debts of about £7.9 million.
Benchmark Leisure Limited announced the temporary closure of the water park on 12 October 2023, and the company then entered into administration on 20 October 2023. Scarborough Borough Council was owed approximately £7.9 million by Benchmark Leisure Limited at this time.
This situation was inherited by ourselves on 1 April 2023, when eight councils became one under local government reorganisation.
We took full possession of the water park site on 20 December 2023.
Reviewing the investigation report, our leader, Cllr Carl Les, said: “The decision to grant a loan to Benchmark Leisure Limited was undoubtedly risky, particularly as the company had reportedly failed to obtain a loan from its bankers or other sources.
“While the report concludes that councillors understood that there were risks with the proposed agreement, it’s also clear that these should have been set out more clearly.
“The report states that in the circumstances, it is not possible to know whether the decision by full council would have been different, but at least councillors would have been better informed.
“However, it seems fair in the context of the day to conclude that senior councillors may have been concerned for the whole development and decisions made at a time when generally councils were encouraged to adopt a more commercial approach at a time of austerity.
“It’s important we understand what went wrong here so that all learning can be applied to future regeneration projects to make sure that when we invest on the public’s behalf, we do so based on sound information and expert recommendations.
“It’s also important to make the point that the Alpamare Water Park is today very much part of Scarborough’s visitor offer as well as being enjoyed by very many local residents.”