GOVERNMENT officials were warned that a controversial North-East development agency had cash flow problems two years before it was wound up, a damning report reveals today.

Auditors expressed concerns about the solvency of the Teesside Development Corporation - but civil servants elected to do nothing.

They feared Government intervention would shatter confidence in the TDC and plunge the agency - tasked with attracting £1bn of private money to regenerate the area - into a crisis from which it would never recover.

Instead, today's report by the Parliamentary Public Accounts Committee (PAC), says the TDC was left to rack up losses of £23m - which could rise to as much as £40m.

Last night, Ashok Kumar, Middlesbrough South and East Cleveland MP, one of the TDC's fiercest critics, said that he would be pressing Deputy Prime Minister John Prescott to ensure board members who left debts to the public could be fined in future.

Today's report reiterates accusations made by the National Audit Office earlier in the year, of corporate mismanagement, breaking Government rules and selling land too cheaply.

But the accounts committee also reveals how the TDC ran into financial difficulties during the mid-1990s and was plagued by cash-flow problems because of the way it handled its regeneration programme.

Its grand vision became "critically dependent" upon the timing of cash receipts, particularly from sales of land and property.

Financial difficulties and delays in bill payments led to a trail of angry contractors and creditors. One developer had to issue a writ before the corporation repaid £1.9m.

The TDC's chief executive, Duncan Hall, who gave evidence to the committee, also comes in for fierce criticism.

The report says his explanations for many of the "unconventional" deals were not convincing and that there was evidence of "poor risk taking," such as entering into leases for TDC premises at above market rates.

It recommends changes to the way Government departments monitor the performance of similar redevelopment organisations in future.

However, it acknowledges that during the TDC's reign, the region did see many benefits including the regeneration of Hartlepool Marina, Teesside Retail Park and Middlesbrough FC's Riverside Stadium.

Chairman Sir Ron Norman said last night: "Many of the items of criticism levelled against us arise because we did indeed put Teesside first and certainly we often put Teesside before bureaucratic considerations."