The watchdog that's no bark and no bite

However, documents obtained by the Sunday Herald show that the housing watchdog does not instinctively bark, let alone bite, on behalf of those among ­Scotland's 590,000 social housing tenants who claim to be victims of bad decisions by landlords.

No alarm was raised by the SHR after Scotland's second-largest housing association, Dumfries and Galloway Housing Partnership (DGHP), awarded a £38 million public housing contract in Stranraer and Dumfries to failing local builder R&D. The company is alleged to have stinted on materials and used unpaid and late-paid subcontractors to fund work in progress in a desperate attempt to stay in business.

Following the collapse, instead of investigating the deal, the watchdog appears to have rolled over and have its tummy ­tickled by the landlords who did the deal.

DGHP's actions, long the subject of complaints to the regulator from tenant representatives, were of the sort to make any alert watchdog prick up its ears.

In 2008, the housing association tendered a £38m "neighbourhood renewal" contract for the rebuilding of more than 300 council houses in Stranraer and Dumfries. Major contracts were in short supply in the aftermath of the global financial crash, so there was an extensive line-up of builders to choose from - including Cruden Building & Renewals, the Edinburgh firm which eventually took on the contract after R&D's collapse, at a cost of £15m.

Documents released by DGHP and examined by forensic accountants and housing experts on behalf of this newspaper, indicate to an unexplained determination by DGHP to award the contract to R&D Construction, despite many obvious ­question marks over the company's ability to fulfil the contract.

Run by Edinburgh-based businessman John Hume, R&D Construction was one of 14 subsidiaries of R&D Holdings, a many-tentacled reincarnation of a venerable local building company taken over by lender Royal Bank of Scotland and sold to Hume in partnership with HBOS at the peak of the boom.

Soon afterwards, Hume's business empire, like that of many similar land-banking developers bankrolled by HBOS at that time, was imperilled by the collapse in property values. R&D Holdings' accounts for 2008 show it to have haemorr­haged £11m in cash in the course of a single year, to have a £28.7m debt to Bank of Scotland (25% up on the previous year), and to have paid up share capital - the best indicator of a company's worth - of only £1.3m, plus a pathetic £1000 of cash in the bank.

Shot though the company's finances were, the same accounts show that Hume - who alternated between a chauffeur-driven Bentley Continental and a chauffeur-driven Mercedes S-Class - paid himself £270,000, plus a major portion of a dividend of £234,000.

DGHP has, on several occasions, claimed to the Sunday Herald that it was unable to access 2008 financial information when the deal was signed in 2009 because the accounts were not yet filed with Companies House. This is not true - any company tendering for a major contract expects to have to produce up-to-date numbers, including current or "management" accounts, as part of normal due diligence.

DGHP also ignored its favoured ­company's dismal credit rating, and appears not to have sought standard assurances from Hume's bankers that their credit lifeline would continue.

Instead, DGHP claims to have taken at face value a worthless "guarantee" by R&D Construction's sick parent that it would honour the debts of its subsidiary. If this assurance was given (no evidence has been provided), it turned out to be false. In the event, it was the collapse of the holding company that brought down the subsidiary two years later.

It gets worse. DGHP was informed in September 2009, the same day that the contract award notice was published, that R&D's credit score by rating company Checksure - assessed at a mediocre 42/100 or "above average risk" six months before the deal was signed - had plummeted to 12/100, or "very high risk", a sign that collapse was imminent.

DGHP chose to suppress this information, failing to inform fellow investors Dumfries and Galloway Council and the Scottish Government, which respectively had £13m and £16m in the project.

It also failed to warn contractors - already forced by John Hume to accept specially extended payment terms - who worked on unawares until April 2011 when R&D's collapse put many of them out of business.

On the issue of the credit rating, DHGP said: "The contractual relationship was between DGHP and R&D Ltd. It was not a multi-agency contract, therefore it was DGHP's sole responsibility to strategically manage risk.

"Checksure ratings can change on a daily basis and the deterioration in R&D's rating was closely monitored. The rating of 12 improved to 50 - the average you would expect in a construction company - in a relatively short period, demonstrating it was a 'blip' as we had assessed at the time.

"It's also worth noting that R&D went on to deliver over 200 properties over the next two years."

That explanation - which fails to acknowledge that the credit rating only improved because DGHP had thrown it a lifeline public contract - is unlikely to console subcontractors whose livelihoods depended on their employer's ability to pay.

Local SMEs feature prominently on the list of the 500-plus creditors left out of pocket when R&D went bust, leaving an £8m trail of debts. Nor will DGHP's retrospective justification have helped tenants, living in expectation of new houses until the day they heard of the news that R&D had collapsed, its 200-strong workforce was being sacked, and their half-built new houses abandoned to the elements.

Some tenants were moved to badly-built and (in a few cases) health-hazardous new properties with undrained gardens, from where they bombarded local politicians including Stranraer councillor Willie Scobie and Dumfries MP Russell Brown with complaints. Others were left in limbo. The last of the remaining 100 or so houses are only being completed five years later.

Given the debris field surrounding R&D, and the remit of the Scottish Housing Regulator, the history of DGHP's disastrous preference for the company is something that a regulator might want to get its teeth into.

Whatever the motivations of DGHP, the effect was of public money being used to prop up an ailing private enterprise. And it didn't work.

The Housing (Scotland) Act 2010 requires the SHR "to monitor, assess and report regularly on social landlords' performance of housing activities and financial wellbeing and standards of governance, and to intervene where appropriate".

In August - two years or more after Stranraer tenant representatives complained to the regulator about the award of the contract, and three years after R&D collapsed - this newspaper revealed that the Scottish Housing Regulator ("a transparent, responsive best value organisation") had finally "launched an inquiry" into DGHP.

But correspondence between the SHR and DGHP since obtained by this newspaper under Freedom of Information legislation reveals "launched an inquiry" to have been an overstatement. The regulator was less watchdog, more plump pussycat.

Instead of unleashing investigators on DGHPs records, the SHR entered a cosy dialogue with the social landlord, from which emerged an agreement that DGHP would conduct its own self-examination, paid for by itself to the tune of £5400, using audit company Beever and Struthers, to whom it was already paying an annual fee.

A series of private emails and phone-call logs shows the regulator apparently keen to work with DGHP to play down the R&D story, while reassuring the ­housing company that it would not be taking the side of those complaining about its actions.

No attempt appears to have been made to seek the views of DGHP's tenants, and no reference is made to their interests.

An internal SHR email dated July 23 reads: "I spoke to [Ms X, possibly chief executive Zoe Forster] at DGHP yesterday. Her view is that this is a 5 year old issue. She thinks the local press may pick up on it this week but expects it will not go much further than that."

In another dated August 1, a regulator (whose name is redacted) reassures a DGHP counterpart who had sought "a quick word".

"I saw the Sunday Herald article [detailing tenant and subcontractor complaints] when I arrived at the airport … our view is the issues in relation to the properties are ones which you kept us informed about at the time that they happened. The ­articles do take an additional perspective around the impact on local business but this doesn't fall within our remit. So there is no need to complete a notifiable event form. Again if new issues do arise keep me posted."

Even the scope of DGHP's "investigation" into itself seems to have been set by DGHP, not by the regulator, who writes on 15 August 15: "I spoke to [Ms X] at DGHP. She confirms that she will pull together a brief for [Beever & Struthers] to look at the award of the contract. She will get back to me with timescales for this work. Beever & Struthers are on site at DGHP doing another piece of work at the moment."

When DGHP did come up with the brief, the regulator's sole input was to suggest some cosmetic wording changes that would make the conclusion that the housing company was blameless seem less foregone. Where DGHP's version said that it would "undertake a review of the procurement process ­undertaken to appoint R&D Construction and confirm that the procurement policy (at that time) was complied with at all stages", SHR tactfully suggested "it would be better to change 'confirm' to 'form a view as to whether …'".

Strikingly, the regulator's response to the resulting document appears to gloss over the many obvious anomalies in the procurement process; flaws that the auditors felt duty-bound to identify, but nevertheless omit from their conclusion that the award to R&D was "logical".

Even when the Scottish Housing ­Regulator did spot these flashing red lights, it showed no curiosity to probe further, asking only how DGHP had changed certain procedures since. The regulator's response to DGHP's ­obfuscating and at times barely coherent self-scrutiny was "that there was no evidence to suggest that any further regulatory engagement is required at this time in relation to this".

The conclusion can only be read as the SHR acceptance of some clearly ­unsatisfactory responses from DGHP to the regulator's perfunctory follow-up questions. For example, the SHR passes no comment on DGHP's acceptance of the worthless "parent company guarantee" from R&D in mitigation for the builder having the worst credit score among all the companies tendering for the DGHP job.

Despite proclaiming its commitment to "accountability - for the conduct of our work, our impact, costs and decisions", and "transparency - being open about how we regulate and the decisions we make", the £3.7m-a-year SHR has declined to answer detailed questions or comment on the clear breaches of procedure by DGHP highlighted in the body of the report, but which were ignored in its conclusion.

Iain Muirhead, the regulator's £65,000-a-year director of policy and communication, gave as a reason concern for the sensibilities of those being regulated.

He said: "We need to be able to engage confidentially with regulated bodies.

"Registered social landlords are independent businesses, and it is for each landlord to govern and manage its own business and performance.

"Where we have concerns or require assurance from a landlord, we take account of whether the landlord is willing and able to address our concerns, whether it takes the issue seriously and is willing to engage constructively with us. Asking a landlord to commission an independent review [into its own alleged failures] is one technique we use where in our judgment it is proportionate and right for the circumstances. In this case we have the assurance we need at this time."

The regulator, it seems is content to let sleeping dogs lie.

It remains to be seen whether this attitude is shared by Scottish Parliamentarians now examining its actions and inactions in the same basket as those of DGHP.