CORRUPTION investigators have exposed a £20 million contracts scandal at a one of Scottish Labour's last council strongholds.

In a secret report obtained by the Sunday Herald, troubled North Lanarkshire's auditors reveal the sheer scale of multi-million-pound unsanctioned overspend at the authority, through massively inflated public contracts. One contractor was paid more than £9m on a contract valued at £1.5m.

These contracts were awarded under the previous leadership of Jim McCabe and his deputy Jim Smith, who were ousted earlier this year. The authority is now led by Airdrie councillor Jim Logue.

Investigators uncovered "significant failures" by officials, including one who took a free luxury train trip and an Irish golfing holiday from one of the firms concerned.

Their unpublished but landmark findings, called Report Examining Allegations of Fraud and Corruption around Aspects of the Council's Procurement and Contracting Arrangements, will send shock waves through Scottish local government.

For the first time investigators have spelled out exactly how businesses – some of which had clear personal connections to the local authority's old Labour guard – are able to inflate public contracts to five or six times their original value.

Their probe – ordered earlier this year by new leader Logue as part of an unprecedented clean-up operation at the authority, tacitly supported by his SNP opposition – has already sparked disciplinary action against serving officials and one retired official.

Investigators are not sure how much of the £20m overspend on what should have been relatively minor maintenance contracts, such as school roof repairs, could have been saved. But their report shows that some of the same work, when re-tendered, was 28 per cent cheaper.

And it finds that the three biggest of seven investigated contract overspends may have been in breach of EU procurement regulations.

A Labour insider said the documented failures to keep tight controls on contracts had cost the council "millions".

Another said: "This is money that should have gone to our most deprived communities."

Logue and his deputy Paul Kelly took control of the council's administration earlier this year from their fellow Labour councillors McCabe and Smith, both of whom have personal connections with two of the biggest contractors benefitting from the overspends.

McCabe earlier this year declared "I am not corrupt" when procurement allegations were first made.

The veteran Labour figure, who led North Lanarkshire for 18 years, is currently subject to an unrelated police probe after holidaying with an executive from another firm, Mears Scotland, which does business with North Lanarkshire. He denies wrongdoing.

Investigators have not uncovered any documentary evidence that McCabe, Smith or any other councillor used their personal links to influence contracts.

In a statement to the Sunday Herald Logue said: "As soon as I received the anonymous allegations earlier this year, I instigated – with the chief executive – the internal audit investigation which has resulted in these deeply concerning findings.

"This reflects my determination that no stone is left unturned in investigating very serious allegations made to me. It is now essential that a robust action plan is put in place to address the issues raised by the report."

Logue is currently fending off a rebellion from those loyal to the old McCabe regime. Rebels last week sought an alliance with the SNP to overthrow Logue in a vote of no confidence. Their overture was rejected.

Jim Logue

Local SNP leader David Stocks said such a deal would have meant "relying on support from rebel Labour councillors who have themselves let North Lanarkshire down in the past".

SNP sources say they are worried that some business people – aware that Labour is likely to lose local government elections next year – are now trying to win friends in the SNP.

The corruption report dates from late September and was sparked by a whistleblowing letters to Logue and The Herald earlier this year.

Investigators looked into the details of seven contracts, discovering that they had been "overspent" by a total of £20.1m Just three contracts – with firms called Ranley Contracts Limited, Taymore and Finco – accounted for most of the extra spending.

The auditors found that firms were getting much more work than their original contracts allowed for and that this work was being carried out at a higher than expected rate of pay.

The report instanced "a significant proportion of the work undertaken under a number of these contracts was paid not at a predetermined agreed contract schedule of rates but as day works".

The document shows Ranley received £9.37m worth of work on a contract initially valued at £1.5m for re-tarring roofs. The council investigators found that 63 per cent of Ranley's work was done at a day rate – a price higher than the bulk discount they would have expected – compared with an agreed original tender of 15 per cent.

Auditors also believe that day rate of £35.64 per hour, per worker charged by Ranley was too high. They said: "We estimate that the council has paid, over the life of the contract, an average of at least a third more for each hour recorded on day-works sheets than the contract conditions allowed for."

Ranley has closed since it lost its council contract. Its former owner, John Buckley, is the first cousin of former deputy leader Smith, but says he barely knows the politician.

Investigators also said emails between Buckley and the council's maintenance and improvement manager, Eddie McCluskey, showed an undeclared "close relationship over and above normal business etiquette". McCluskey, who has been suspended, is understood to deny this.

Buckley told the Sunday Herald: "We have done nothing wrong and have carried out our contract to the rates set by the council."

However McCluskey, the audit found, also enjoyed undeclared free golf outings with three other firms closely associated with other major contracts at North Lanarkshire. These are named as Mears, Martec and Scotshield.

Taymore, the auditors discovered, received more than £6m for work under a contract originally for £1.25m worth of doors, screens and blacksmith works. Some 54 per cent of the firm's work was done at its more expensive day rate, as opposed to the one per cent detailed in the original contract.

Taymore is owned and run by two businessmen, Martin McHugh and Jim Dunsmore. Investigators found a recently-retired senior maintenance and improvement officer called Archie Gray had accepted hospitality from Taymore which he had not declared, including a trip on the Northern Belle luxury train, a golf holiday in Donegal and other golf outings.

Gray did not co-operate with the council investigation. He was also found to have had a "close personal relationship" with McHugh and Dunsmore.

McHugh has denied any wrongdoing. Asked about the hospitality and costs, he said: "I hope somebody has got evidence of this because that is not the way I operate. I have not seen the report so I can't comment."

The auditors also reported: "Although we have identified evidence which indicates a personal relationship between Councillor McCabe and Martin McHugh there is no evidence that Taymore benefitted directly from this relationship."

Jim McCabe

Investigators acknowledged that it was possible for elected members to informally influence contracts but said they had found no documentary evidence that this had taken place. They said: "We identified no evidence of improper involvement by any councillor, either directly or indirectly, in how individual contractors were appointed or subsequently how specific work was allocated."

Paul Jukes, the council's chief executive, said: "The report by internal audit raises a number of serious concerns and what appear to be significant failures of management going back a number of years.

"On receipt of the report, I immediately instructed a disciplinary process with regard to those management issues. The report also makes a number of other recommendations. Members of the council’s audit and governance panel were given an overview of the report at their most recent meeting and will consider more fully the report and its recommendations when the ongoing disciplinary process is completed."