LAI0011

Written evidence submitted by Ed Hammond Ed Hammond, Director of Campaigns and Research

Introduction

1.               The Centre for Public Scrutiny (CfPS) is a charity focused on providing expert support, advice and guidance to organisations on governance and scrutiny. CfPS supports councils to strengthen their governance systems and to support effective independent overview and scrutiny carried out by elected councillors. In order to carry out this support role in local government CfPS receives funding from the Local Government Association.

2.              We approach the twin issues under investigation by the PAC from the perspective of governance and scrutiny, our primary areas of focus.

3.              As things stand, there will be a number of drivers which will influence how councils consider, and act on, their exposure to risk on finance and commercial investment. Traditional council investment now delivers close to zero yields. The financial crisis affecting the sector will be more severe, by orders of magnitude, than it appeared in February on account of the COVID-19 crisis. Pressures on social care – arising from the crisis but also systemic and long-term – force councils into a position where they have to manage demand in a way that feels unsustainable.

Commercial investment, risk and scrutiny

4.              CfPS has carried out recent research[1] on the way that effective oversight of commercial activity (including commercial investment) might be carried out within councils.

5.              Commercial property investment is usually one element of a wider range of local authority commercial activity. The NAO’s report identifies income generation and assisting in regeneration as being two primary objectives for commercial property investment, but other drivers may exist for this and other commercial activity.

6.              Our research suggests that councils are able to take a more sustainable and robust approach to commercial activity where they align its objectives with the objectives of the wider organisation. Challenges can come when councils set up separate trading companies or investment arms to carry out commercial activity, because the objectives of these separate organisations may come to diverge from those of the “parent” organisation. This is the reason why the culture and mindset that underpins commercial activity is critically important.

7.              Failure to take account of the need for cultural change could end in a situation where councils can fail to recognise the risks they face, couldfail to put in place the local oversight mechanisms to manage this risk, and could  make the assumption that commercial activity carried out on the sidelines is a means for them to continue with “business as usual”, rather than a spur to rethink fundamental assumptions about core corporate priorities.

Culture and mindset

8.              Adopting a different attitude and approach to risk is all about culture change – a shifting of mindset and expectations. Risk and culture are bound up in politics and the attitude and approach of the council’s leadership and of senior officers.

9.              Effective risk management works against centralised oversight, because the way that risks, culture and objectives intersect will be profoundly different from area to area. Central frameworks and guidance can assist councils in making informed choices in a systematic way, but a system whereby the Department, HMT or others begin to second-guess the decision-making of councils may lead, paradoxically, to a more diffuse and uncertain kind of accountability which lies neither with local or national actors.

10.              Culture change does presente, we think, the greatest challenge to effective and safe commercial activity because it cannot be carried out overnight; however, councils’ current financial situation requires quick action. The mindset of the organisation may struggle to catch up. This is why the establishment and support of strong local mechanisms for governance and accountability should be the priority.

11.              These complexities provide further reasons why local, not national, governance in this area needs to be bolstered. The Department and HMT may need and require assurance on councils’ approach to commercial activity. But this assurance will be impossible to arrive at on the basis of entirely original national research. At worst, it may lead Government to have a false sense of security; such research could not surface the many complex cultural and political issues, and organisational drivers, which inform commercial decision-making.

12.              If local authority overview and scrutiny functions (and other local functions) are able to carry out robust and vigorous local scrutiny of these issues, the outcomes of some of this work could be used by national bodies to carry out broadbrush evaluation of the sector’s general exposure to risk. But this would require sustained investment in such local mechanisms for governance and accountability.

Appropriate local governance systems

13.              The culture, mindset and objectives relating to commercial activity will influence the most appropriate governance and oversight systems. Oversight should be risk based, and risk judgements will look different from council to council and between different sets of commercial activity. The NAO report alludes to this fluidity at paragraph 2.19-2.21 (p31) but we consider that this central feature of the landscape needs to be more carefully considered. The conclusion, for example, that risk aversion drives many member interactions with these issues may hold for some members in some councils, but the NAO’s analysis of this issue feels to us oversimplified. Conversations that we have had with members, and senior officers, reflect a more nuanced set of drivers behind members’ views.

14.              This said, tolerance and attitude towards risk will ultimately be set by elected members, advised by finance professionals. Local, political judgements such as these should be subject to political accountability at a similarly local level.

15.              In some councils member governance has not caught up with commercial activity. We use the phrase “member governance” advisedly, as we have seen no evidence that suggests that the fundamental requirements of corporate governance with respect of commercial undertakings has been found lacking other than in a tiny minority of cases.

16.              The NAO makes reference to this concern being felt by external auditors at paragraph 3.33 (p52) and this is an assessment with which we would generally agree. Where our opinion would diverge is in how we consider “skill and expertise”. Councillors do need more and better training and information but the role that they perform in scrutiny and oversight does not need to be a technical one, requiring significant knowledge of the investment landscape and/or financial issues. Members instead need to bring their political judgement to bear on how risk is analysed, and think about the overall impact and objectives of commercial activity.

17.              Our concerns on governance are about:

• Local leadership (ensuring that councillors understand the profiles of risk and opportunities relating to commercial activity and ensuring too that they understand the fluid nature of those risks and opportunities, especially in light of the impact of COVID-19);
• Strong local accountability (ensuring that non-executive councillors have the skills and information at their disposal – as described above - to carry out focused, proportionate oversight of commercial activity);
• The partnership complexity of commercial activity. Commercial activity may involve a shift in expectations around the councils’ relationships with other bodies. The commercial activity of the council will have a substantial effect on the wider place, both by virtue of the substantive activity itself and by virtue of the changes in mindset that will lead to these shifts in relationships.

18.              Solutions are likely to be different from council to council. Decisions will have to be made on the following issues:

• There will need to be clarity on priorities and objectives from the council’s leadership;
• There will need to be assignment of responsibility and clear decision-making on risk;
• S151 officers will need to assure themselves (and oversight will need to exist to check) that the range of skills needed to appropriately manage commercial activity, including risk, is present in the officer corps;
• A clear and defined role for the council’s audit committee will be necessary;
• Commercial activity may – building on our earlier comments on mindset and culture – need to be driven forward as part of a broader organisational development strategy;
• There will need to be a clear role for scrutiny which attaches itself to any perceived gaps or weaknesses in the governance framework set out above.

19.              The role of scrutiny itself needs particular care. We think that scrutiny in relation to commercial activity can have five tasks:

• Helping to drive forward cultural transformation (further work on the cultural dynamics of change)
• Helping to make judgments about the rationale underpinning commercial activity
• A focus on risks
• Oversight of governance itself – executive side management systems and the relationships between partners
• Oversight of performance monitoring (rather than performance monitoring itself, which will largely be managed by traditional means, and within contract) with a strategic eye on whether objectives, outcomes and benefits are being achieved

20.              We therefore disagree with the assertion that more rigorous oversight from the Department and HMT is the primary mechanism for assuring more prudent commercial property investment, or for commercial activity more generally.

21.              In our view this presents too significant a risk of overreach in how the Department and HMT would need to investigate and review councils’ activities on an ongoing basis.

22.              It may be that in light of the COVID-19 crisis, Government could put in place systems, processes and frameworks that could assist councils to quickly and robust reassess their exposure to risk, and the risk profile of their investments and commercial activity. But as we have noted above, it is not easy to demarcate in practice “commercial” activity from “everything else”, and such an exercise would essentially become a more general reappraisal of council priorities across the board. This is likely to be necessary but we think it is best managed locally by councils themselves, and nationally by the sector support systems which already exist, led by the Local Government Association.

The impact of COVID-19 on council finances

23.              The impact of the pandemic on local authority finances remains highly uncertain. What is clear is that over the course of the next few months councils will need to completely reappraise their short and long term financial planning to account for a world whose economic and social priorities are profoundly changed.

24.              Local authority governance will not be able to operate effectively unless councils have certainty over their likely budget position in 2021/22 and beyond. Government’s continued reluctance to provide clarity to the sector on the liabilities and expenses it has incurred – in contrast to other parts of the public sector – will make it difficult for councillors to systematically and reflectively plan for the rest of the year.

25.              We are concerned that the situation will lead to authorities being forced to make significant and profound decisions on service delivery in order to deliver a balanced budget without sufficient oversight. Some councils may only be days or weeks away from having to make these decisions. Councils do not have the capacity, at the moment, to properly understand the impact of these decisions and to plan their implementation. In the context of remote working and social distancing, managing effective oversight of these decisions will be a challenge – previously committee meetings and public meetings would have provided the space for debate on such matters.

26.              For councils’ overview and scrutiny functions to have the space to have an informed discussion about shifts in priority and changes to services, and for those wider discussions to influence and inform policy decisions as they develop, more certainty is needed now.

May 2020

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