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Comment and Analysis Masthead

Best value inspections and Northants

Money iStock 000008683901XSmall 146x219Secretary of State Sajid Javid has said he is minded to send commissioners in to Northamptonshire County Council. Dr Paul Feild sets out the lessons from the troubles faced by the local authority.

This article examines the lessons to be learnt from the Peer Review [1] and the March 2018 Best Value Inspection under Part 1 the Local Government Act 1999 (1999 Act) as amended by the Local Audit and Accountability Act 2014 (2014 Act) of Northamptonshire County Council (NCC) carried out by Max Caller CBE (Caller, 2018). He was directed to take account the governance functions that relate to functions exercised under section 151 of the Local Government Act 1972.

This is the first Best Value Inspection located primarily at finance. Previously the key reasons for intervention were political governance (Tower Hamlets LBC and its elected mayor) and inability to manage a statutory key service (Rotherham BC and its children’s safeguarding), now a third has emerged being a failure to manage the core responsibility of ensuring a council is legally and soundly managing its budget and finance arrangements according to law. Unlike the other authorities mentioned it is not a matter of standards of politicians and behaviour, the NCC failings appear to be due to organisational complexities with separate entities which contributed to a complete lack of clarity as to what was going on.

Previous interventions

The latter part of 2014 and early 2015 saw three major investigatory reports on local government. The first being the report by PricewaterhouseCoopers [2] (PwC). It was called for by the Secretary of State to investigate his concerns regarding the governance of the London Borough of Tower Hamlets (LBTH), the second was a report by Professor Alexis Jay (2014) into the response of Rotherham Borough Council to organised child sexual exploitation and finally a follow-up by Louise Casey (2015) again called by the Secretary of State to investigate his concerns regarding Rotherham’s governance.

Tower Hamlets

To recap, PwC were commissioned by the Secretary of State to carry out a best value [3] compliance inspection of LBTH pursuant to section 10 of the 1999 Act (as amended by the 2014 Act). It appears his motivation was a BBC Panorama broadcast [4] which made allegations regarding the probity of decision making regarding property disposals and the payment of grants. There was also a concern about LBTH spending on publicity related activities. The intervention was not welcomed by the authority. LBTH sought to resist the intervention by resorting to judicial review and was accused by PwC of not cooperating in supplying documentation (PwC 2014). LBTH's efforts to resist the inspection failed and in due course PwC’s report was published [5]. The key findings were that there was a lack of transparency in the awarding of grants including to organisations which were apparently not eligible under the LBTH’s own grants criteria. PwC identified failing in governance and observed:

in our view the current governance arrangements do not appear to be capable of preventing or responding appropriately to failures of the best value duty of the kind we have identified. This calls into question the adequacy of these governance arrangements and the extent to which they are sufficiently robust to enable the Authority to prevent or respond appropriately to other failures of a similar nature.

Para 2.230 PWC 2014

As a result, the Secretary of State appointed Commissioners to run the aspects of the council identified in the PWC report. One of the Commissioners was Max Caller, who in turn would lead on the NCC Best Value inspection.

Rotherham Borough Council

On 21 August 2014, Professor Jay’s report on child sexual exploitation in Rotherham was published. She was commissioned to do so by the independent safeguarding board. Jay identified serious short fallings of the organisational culture of Rotherham Council which had contributed to the failure to tackle long-term sexual exploitation of young people.

The report received heavy media coverage. The Secretary of State responded utilising again the best value intervention power in the Local Government Act 1999 as used in LBTH. This time a different approach was used, and an investigation was carried out by a team led by Louise Casey CBE [6] rather than an accountancy firm. Casey reported in February 2015. She found a breakdown of governance. Furthermore, she found a corporate governance inspection of 2002 which noted a lack of information, silo thinking and lack of clear plans as to priorities to be the same in 2014 (Casey 2015). The most damming comment was in the summary:

Overall inspectors have not been impressed with the calibre and grip of leading Members. We have reluctantly concluded they cannot be left on their own to lead the Council out of its current responsibilities

(Casey, 2015 p.74)

Within days of the report being published the whole Rotherham cabinet resigned. The Secretary of State again used his powers under the Local Government Act 1999 and sent in commissioners to run specific aspects of Rotherham Council.

Northamptonshire County Council – Peer / Sector Review

In the autumn of 2017 NCC sought a LGA Peer Review. The LGA’s [7] object is to support, promote and improve local government in England & Wales [8]. It works with local authorities to improve their performance and carries out peer reviews also known as ‘sector reviews’. These involve a panel of members and officers from other authorities led by a LGA appointed chair visiting another authority by invitation and carrying out a review of the authority which they put into a report with recommendations for improvement and reflection. They consider in their sector / peer review how well an authority is faring by looking at its:

1. Understanding of local context and priority setting

2. Financial planning and viability

3. Political and managerial leadership

4. Governance and decision-making

5. Organisational capacity.

(LGA 2015 p10)

A Peer Review is not an inspection, it is to inform for improvement action. For NCC the Peer Review focused on the following:

1. Financial leadership: Does the authority have plans for its long-term financial sustainability which are owned by its councillors and officer leaders?

2. Financial strategy, planning and forecasting: Does the authority understand its short and long-term financial prospects?

3. Decision-making: Are key decisions taken in the understanding of the financial implications, risks and options?

4. Financial outcomes: Are financial results (including those of the council’s capital investments and transformation projects) monitored and acted upon so as to realise the authority’s intentions?

5. Partnership & innovation: Is finance at the cutting edge of what the authority is working to achieve, working with partners and seeking innovative approaches?

Their conclusions were difficult reading for the authority, the Peer Group observed at leadership level there was no collective ownership to solutions to an anticipated 2017-8 overspend, no medium-term financial plan and no financial strategy to deliver a sustainable budget. More worrying was the repeated observation about the lack of evidence-based decision making. For example, there were unrealistic savings targets built into budgets without evidence [9], further there was little challenge from members and officers who were found to put trust in plans without evidence to back them up [10]. The key concern was that the proposed new operating model of the council, called the ‘Next Generation Council’ had been challenged by their auditors KPMG and it appeared to the Peer Group that there did not appear to evidence-based responses to the auditors' concerns or universal buy-in to its vision [11]. The picture painted was not pretty.

The Best Value Inspection of NCC

The review was carried out in accordance with the powers given to the Secretary of State under the Local Government Act 1999 as amended. His reason for intervention was concern about the adverse external audit value for money opinions and the peer review finding regarding the Next Generation Council and the mismanagement of finances [12]. As mentioned above, this inspection was led by Max Caller CBE. He has extensive experience with dealing with local authorities being a chief executive of many years including Hackney LBC and a Commissioner at Tower Hamlets LBC following the PWC best value review. Within a short time, he asked that a member of the Peer Review [13] a highly qualified CIPFA experienced former Director of Finance join his team as Assistant Inspector. Caller’s verdict was blunt [14]. He found NCC had failed to comply with its duty under the 1999 Act to provide best value in delivery of its services [15]. The cause was identified as being that NCC had “lost tight budgetary control and effective budget setting scrutiny" [16].

The Inspection found that finances pressure had built up following an Ofsted inspection rating the council as “inadequate” and although there were portents of the budgetary failure, NCC’s transformation programme ‘Next Generation’ sapped scarce resources which would have better been directed to tackling the financial crisis. Furthermore it emerged that there was questionable use of capital receipts which appeared to be utilised contrary to Statutory Guidance [17]. To compound NCC’s financial meltdown, in February 2018 during the Inspection NCC’s Chief Finance Officer issued an Unlawful Expenditure Notice under Section 114 Local Government Finance Act 1988. Such a notice requires consultation with the statutory officers of Head of Paid Service and the Monitoring Officer. Its impact was that no new expenditure – other than on statutory services for safeguarding vulnerable people would be permitted. This was the first time such a notice had been issued in 20 years [18].

The dire position turned into a perfect storm when the 114 Notice was followed by a Section 29 and Schedule 8 Advisory Notice under the 2014 Act by the council's auditors KPMG [19] which advised:

the Authority’s estimate of the expenditure which it will incur in 2018/19 in performing its functions and is chargeable to a revenue account in accordance with proper practices, is or will be unlawful and will give rise to an unlawful decision as to the Authority’s council tax requirement for 2018/19 under Section 42A(4) of the Local Government Finance Act 1992.

It was therefore no surprise with the events occurring during the inspection that Caller and his team concluded that NCC was failing. Indeed, it would be difficult to see how they could have come to a different conclusion.

Lessons from the Inspection

So now let us see what key lessons can be learnt. Firstly, it is important to highlight that unlike Tower Hamlets with its elected mayor leadership failings or the Rotherham cabinet failings no evidence emerged to either the sector review or the Inspectors of inappropriate actions or behaviours of Members so there does not seem to be a question of standards or code of conduct at least under the current Nolan framed definitions [20].

Lesson 1 – The Loss of Financial Control

The Secretary of State set the following brief to the Best Value Inspection requesting consideration as to whether NCC [21]:

  • Has the right culture, governance and processes in place to make robust decisions on resource allocation and to plan and manage its finances effectively,
  • Provides clear, useful and sufficiently detailed information to councillors to inform their decision making,
  • Allows for adequate scrutiny by councillors,
  • Has strong processes in place to manage services within the budget constraints – within the Council’s finance department and also within service areas,
  • Has and shares appropriately the right data to support spending decisions and to support the management of services,
  • Is organised and structured appropriately to ensure value for money in delivery of its functions.

The loss of control is highlighted by the issuing of the two notices which are rare events. It is also worth comparing the tone of the two reports produced within the same financial year. That NCC’s finances were precarious was well- known indeed there had been speculation that a s.114 notice would be issued in 2016. The peer review flagged up that the ‘Next Generation Council’ model was not viable, lacking in evidence that it would be able to deliver on its promises and, in any event, there was a lack of confidence in it at officer and member level. Yet at that stage it was not scrapped. It may be that the fact the Inspectors were on the turf gave the impetus for the Notices to be served. Both persons (S.151 and the external auditors) knew perfectly well that in terms of timing issuing the Notices could not possibly come at a worse time for NCC. This appears to be a signifier of a culture where bad news was difficult to break and that the ‘nuclear option’ was the only choice left open.

As the Best Value inspection delved further into NCC’s affairs it heard concerns that a grant from Public Health England was not being applied correctly. While the team did not investigate it they gave enough details for it to be clearly identified [22]. The Best Value Inspection identified lack of compliance with the Statutory Guidance for flexible use of capital receipts issued under section 15 of the Local Government Act 2003 and found as fact no report to members which complied with the requirements; this had also been picked up by KPMG [23].

The key lesson from this aspect is the need to ensure that basic finance rules regarding use of receipts are highlighted in reports to members because it is a legal requirement, furthermore if grants are received they must be applied to the purposes of the grantee and not for other purposes.

Lesson 2 - Managing Services

NCC saw its future as being a council with a small commissioning core with specific delivery vehicles i.e. specially defined organisations to carry out delivery. While this sounds like an efficient means of supplying services it can create a complex set of different bodies and lead to greater costs and silo thinking than a single organisation. Caller observes:

3.37 The original component of this was LGSS which was set up as a joint arrangement between Northamptonshire and Cambridgeshire County Councils in 2010. This was not a separate company but was controlled as a non-statutory joint committee. In structural terms there are no particular benefits or savings from doing this and, in practice, it appears that staff working on NCC projects are employees of NCC and staff working on Cambridgeshire projects are CCC employees. When Milton Keynes came on board in 2016 their employees remained as Milton Keynes employees.

3.38 It appears that, as a consequence, staff are not deployed flexibly to meet need nor are they working to common standards. LGSS is just a collection mechanism with a top layer of management working across all 3 authorities and winning a number of smaller contracts.

3.39 LGSS claims to have delivered significant savings over its period of operation but it is very hard to see what additional saving has been produced by the structural grouping and what could have been generated by normal management action. Further, much of the reported saving is not more for less but routine service reductions.

So, the use of the LGSS structure did not reveal to the Inspectors any savings other than cuts. There was no evidence it was either more efficient or effective as a way of working. The Inspectors found an absence of evidence of sound business planning for the Next Generation Council and observed:

3.45 In essence, no effective work had been done by NCC to turn a radical vision of a future operating model for a County Council into a practical system which recognised the need to join up services and ensure effective controls for the use of public money. Instead the approach adopted made it very difficult for any backbench councillor to establish what was going on and the absence of effective controls made the job of budget management an exercise of hope rather than expectation. Indeed, the inspection team received evidence that the control environment was not something that was considered as an intrinsic part of the design, it could come along later. The complexity of the structure is best illustrated by the following diagram produced in mid-2017.

Then, what followed in the BV report was a diagram entitled NCC plc and Group [24] setting out the Next Generation model. While such a drawing is understandable to us in local government, the question that matters - is it workable? In reality it would be challenging to establish governance and accountability and would inevitably lead to a proliferation of silos. This can happen with arm’s length companies as they are deliberately insulated from the authority. The observation of William of Occam [25] comes to mind being: “Non sunt multiplicanda entia sine necessitate”. The danger with a multiplicity of bodies is how do you monitor and ensure they are doing as they should and looking after the shareholder/ stakeholders’ interests? This is commonly known as the agency theory problem.

The implications for leadership from this are that the creation of a commissioning organisation may lead to a breakdown of leadership responsibility due to a fragmentation of accountability and an impossibility of ensuring decisions are transformed into actions [26]. Such schematics are often drawn up with the very best of intentions but may rely on the use of professional organisations to actually service them [27]. The key lesson is if the local authority cannot properly monitor and scrutinise performance delivery, efficiency and costs it should not adopt the model.

Lesson 3 – Leadership Working Together

Later in the inspection report observations are made about the chief officer cadre and lack of attendance during the peer review, which seems rather unnecessary, but their verdict was clear that there did not appear to be [28] a corporate sense of leadership or even urgency to address the finance situation. In the case of NCC it had already lost unity of purpose, Caller observes [29]:

The impression the inspection team got from the lower managerial tiers is that working together to understand the impact that decisions taken in one area have on another and addressing the conflicts is not encouraged. The inspection team heard from councillors, officers and partner organisations that NCC works in silos and does not communicate well internally or share common objectives. This is not a recent phenomenon.

Again, the entity of LGSS was identified in terms of fragmenting the expertise available to support the strategic financial aspects [30]. This observation makes a great deal of sense. Once you create separate entities the fluidity of cross working is inevitably going to be moderated by defined spheres of operation and a need to work to service level agreements. The Inspectors observed that the relationship with LGSS at best confused accountability and at worst prevented it [31]. They observed that in the areas of finance there was a lack of directly employed staff, but for Human Resources and Organisational Development (OD) there was no NCC officer instead the role was commissioned from LGSS. The key point to learn from this is the importance of the council having a key strategic role rather than letting the contractor set the scene. Incidentally, while they identified no OD the other HR ‘OD’ (Organisation Design) needs to be considered too.

Lesson 4 – Need to have evidence based decision making

At paragraphs 3.66-67 the Inspectors make a key and damming observation about NCC’s governance – its lack of evidence-based decision making. Ultimately this is unlawful simply because it is irrational. The Inspectors comment:

3.66 The council’s approach comes across as sloppy, lacking in rigour and without challenge. It is particularly concerning to see this approach in all subsequent years. There does not seem to be any understanding of the difference between a budget pressure (that needs to be managed), contingency sums, spending where there is a choice and what is truly inescapable.

3.67 The non-delivery of savings has been mentioned elsewhere in the report and here the lack of accountability for that non-delivery is manifested with budgets being reinstated without any attempt to explain why the saving was not achieved. The same applies to budget overspends, which seem to be classified as ‘pressures’ and then just added into the budget the following year with limited challenge.

After such comments there was no going back for the council.

Lesson 5 – Effective Scrutiny

The way that NCC went about its scrutiny function brought very strong words from the inspectors. They noted that a number of councillors told them that they had been refused information. They cite a specific example which I extract below:

Perhaps the clearest demonstration of this unnecessary secrecy during the inspection took place at the Cabinet meeting on 13th February 2018.

3.80 Agenda item 11 was titled Capital Asset Exploitation. This was in fact a proposal to sell and lease back the recently completed HQ building at One Angel Square. This disposal is a potential £50m in value so it would be reasonable to expect a full options appraisal and some clear professional valuation advice as to the likely quantum of proceeds and the ways in which a disposal might be handled to best achieve a best value result. It is likely that much of this information would be exempt information so that there would be a confidential paper appended to the agenda. If that information was not available then it could only be on the basis that it was not being relied on in taking a decision.

3.81 At the meeting a number of questions were raised on these very matters and Cabinet members stated that they were privy to confidential information which supported their recommendation but that it was not available to other members.

3.82 Even if there was a concern about the publishing of confidential information most authorities have protocols and practices which make it possible for key information to be shared and protect the authority. To refuse it outright is just wrong.

Again, during an inspection, it appears that a decision for members to take was incorrectly presented without the necessary evidence.

Lesson 6 – How others see you

A key measure of governance is how well does an authority deal with complaints. During the Inspection the Inspectors commented that most unusually the Local Government and Social Care Ombudsman contacted them. He said that NCC was one of the most difficult authorities to engage with both in time to respond and also in terms of approach to complaints handling learning from mistakes and remedying injustice [32]. Here again the point emerges that services may well be worse than they superficially appear, but there could come a time when the council is on the ropes and at that point others come forward and say what they really think. It is always sensible to treat concerns by the Ombudsman as meriting a chief statutory officers' agenda spot.

The Secretary of State's Statement

The Secretary of State the Rt Hon Sajid Javid made a statement to Parliament on 27 March 2018. He accepted the Inspection Report. He said that the failure was not due to lack of funding or because NCC was being treated unfairly, he identified that NCC had failed to manage its budget and that the complex structure of finance support meant oversight was difficult and accountability blurred. He observed that the Next Generation Council approach had made it impossible for the council as a whole to know was going on. He said he was minded to use his powers under section 15 Local Government 1999 Act to appoint Commissioners to take over direct control of the financial management and governance of the council.    

Conclusion

As observed NCC failed to manage its finances. The Inspectors thought a s.114 notice should have been issued much earlier [33] in 2015. The Inspectors considered that it was not possible to promote a recovery plan to bring the council back to stability and safety in a reasonable timescale [34]. An organisational culture change could take five years and require a cash injection. The Inspectors veered towards the view of disbanding the current authority and establishing a unitary local government model.

The Secretary of State agreed with the verdict. The sad fate of NCC indicates the risk that the lean commissioning council can end up weakening its capacity for professional finance and governance capacity by drawing a severing line at the wrong point and transferring too much expertise to an arm’s length entity creating silos, and an inability to know what is going on till it is too late. Clearly the next generation council model is dead and sadly the future for LGSS looks bleak too through no fault on their part.

Dr. Paul Feild is a Senior Solicitor working in the Barking & Dagenham Legal Services Governance Team. He can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..


[1] LGA Peer Review of NCC 12-14 September 2017

[2] A major international accountancy firm.

[3] Local government Act Section 3 (1) A best value authority must make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness.

[4] 31 March 2014

[5] 16 October 2014

[6] Now Dame Louise Casey CBE

[7] The LGA is a membership organisation for local government. It includes 351 English councils, the 22 Welsh councils via the Welsh LGA, 31 fire authorities, 10 national parks via corporate membership through ENPAA and one town council – Source LGA Website

[8] LGA Constitution Article 2

[9] Para 4.4.4

[10] Peer Review 4.3.8

[11] Peer Review 4.3.10

[12] Statement by Secretary of State on independent inspection report on NCC 27 March 2018

[13] Julie Parker – Financial Improvement and Sustainability Advisor LGA

[14] Published 15 March 2018

[15] Caller 1.1

[16] Caller 1.2

[17] Caller 1.3

[18] See Local Government Chronicle Room 151 - 5 February 2018

[19] KPMG S.29 / Sch 8 Notice dated 20 February 2018

[20] But this is really a flaw of the Nolan formula should failure to manage financials be outside the standards regime?

[21] Caller 2.4 & 2.6 see Caller Appendix 1 for full terms

[22] See BBC News 12 March 2018

[23] Caller 3.30-32

[24] Sub titled ‘Business as Usual’ also Management Today's strapline!

[25] Occam’s Razor – Entities are not to be multiplied without necessity

[26] In the case of the NCC plc and Group schematic it reminds one of the famous PA Consulting ‘Afghanistan Stability/COIN Dynamics – Security’ PowerPoint Look it up – it’s worth the effort!

[27] Not dissimilar to the aero power-plant industry which makes little from the engines and profits from the servicing?

[28] Caller 3.52

[29] Caller 3.47

[30] Caller 3.108

[31] Caller 3.106

[32] Caller 3.87

[33] Caller 4.16

[34] Caller 4.16

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