MHCLG urged to closer monitoring of council commercial activity

As councils consider house-building ventures, Commons report warns of a need to monitor the overall scale of long-term risk posed by commercial investments.

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With more councils considering house-building ventures, a Commons committee report says MHCLG must start to formally monitor commercial activities and other non-traditional operating models adopted by local authorities.

The report from the Public Accounts Committee (PAC) identifies “a complete lack of transparency” over MHCLG’s informal interventions in councils with financial or governance problems and the results of its formal interventions.

MHCLG is recommended to start formal assessment and monitoring of the scale of long-term risk that councils could have exposed themselves to through commercial investments and ventures.

PAC chair Meg Hiller MP said the government needs to recognise the extra pressure that squeezed budgets and increased commercial risks are having on local government and make sure it is monitoring the risks effectively.

“On the rare occasions a local authority fails, the impact on local citizens is severe. Residents facing decimated services get no comfort from being told that their council’s dire finances were ‘an open secret’,” said Hiller.

“We have seen examples of local authorities which have had inadequate governance arrangements and been unable to provide assurance that hard pressed budgets are being properly spent.”

The LGA told PAC that cuts have meant councils taking on “more risky commercial activities” to raise income with some borrowing very large amounts to fund commercial investment, creating long-term financial risks if investments do not deliver as expected.

New powers to borrow and invest in new and existing housing look set to be used by most councils. But in March this year, an LGA survey said further reforms are needed to spark a genuine renaissance of social housing.

The survey further revealed that 94% of housing stock-owning councils said they will use the new powers to accelerate or increase their home-building programmes to build homes in their communities.

Against this, the report sees MHCLG’s risk monitoring as primarily aimed at identifying immediate financial concerns, rather than the longer-term exposure of councils to financial risk.

MHCLG oversight of local authority governance is slammed in the report as “reactive and ill-informed”, though there’s acknowledgement the department has now recognised the lack of leadership needed to drive improvement.

Equally encouraging is the commitment to MHCLG enhancing its oversight role and producing a proactive work programme to deliver this change.

But the report’s overall conclusions are damning:

  • There is a complete lack of transparency over MHCLG informal interventions in councils with financial or governance problems and the results of its formal interventions

The report says residents and taxpayers have a right to know if there are serious problems, but current arrangements mean that if there is a problem with the finances of a local authority or how it is being run, then that information may not be available on a timely basis.

  • Awareness only for those ‘in the know’ is not good enough.

MHCLG is acknowledged as accepting greater transparency is desirable and exploring options for enhancing it.

However, the report says the department has previously said that it would explore publishing lessons from formal interventions but has yet to commit to doing so.

MHCLG is recommended to set out how it will improve transparency over its engagement on governance issues with individual councils, including a review of the information the LGA is required to publish under its sector-led improvement work, funded by the Department, and the steps it will take to publish information and learning following formal interventions.

  • MHCLG is not yet providing effective leadership of the local governance system

PAC is “particularly concerned” about the gap between substantial intervention powers of the Secretary of State and the daily operation of a largely unregulated sector.

Rather than simply waiting until things have gone wrong locally and resorting to statutory intervention, MHCLG should, the report says, be a system leader to ensure that the whole system is effective and that the key organisations involved in the framework are working in an effective and coordinated manner.

MHCLG acknowledges that it has been too reactive in its oversight and leadership role, and the committee welcomes the Department’s commitment to improve its oversight and leadership of the local governance system.

However, meaningful change must be delivered by the Department rather than just warm words, the committee says.

The Department is said to still make confusing statements that do not express clearly enough its overall ownership of the governance system, and also needs to assure Parliament and the public that the promised local governance panel will be more than a talking shop.

On this, PAC is “yet to be convinced”, with MHCLG seemingly unable to describe any new concrete actions that will flow from its new approach.

Within the next six months, MHCLG is recommended to set out its overall plan for improving its oversight; its progress in working more effectively with other government departments to understand overall pressures on service sustainability; its objectives for the promised local governance panel and the means by which the panel’s effectiveness will be assessed; progress in setting up the new panel, including its work programme and the concrete actions the panel will take; and the timetable and intended outcomes the panel will be working toward.

  • The Department does not know why some councils are raising concerns that the external audit is not meeting their needs

A number of key representative organisations and councils told the committee they had concerns about the external audit, with the report referencing that a quarter of finance directors at councils with responsibility for social care services for vulnerable people would like more value for money work from external audit.

The same proportion feel that audit fees are too low relative to the risk faced by their local authority.

MHCLG believes the focus of external audit on whether arrangements are in place means some councils are concerned that they no longer have sufficient assurance that their organisations are working effectively or that value for money decisions are being made.

While it has committed to addressing this ‘expectations gap’ as part of its review of external audit, MHCLG has not yet decided whether this will be an independent review or carried out by the Department itself.

PAC recommends that the proposed review of the work of independent auditors should be conducted independently and ensure that concerns from some councils over current fee levels and the contribution of external audit are examined “fully and rigorously”.

This review should, the report says, make an assessment of whether external audit is providing an effective service and meeting the needs of councils and, if an ‘expectation gap’ is identified as a factor underlying council concerns with external audit, then MHCLG should identify how these unmet expectations can be met.

  • The Department lacks reliable information on key governance risks, or relies on weak sources of information, meaning it has no way of pinpointing the at-risk councils

MHCLG does not systematically collect detailed information on how well local governance is working.

To the PAC this is a “remarkable” oversight.

Of the monitoring MHCLG does carry out, members were  unimpressed with the  description of the information MHCLG holds on weaknesses and risks within local government governance.

Nor was the committee confident that the current arrangements are enough to identify struggling councils that try to keep their problems to themselves, or to spot emerging wider weaknesses across the sector.

MHCLG acknowledges that statutory officers play a vital role in local governance but does not collect or otherwise have access to information about the status and capacity of statutory officers across the sector.

And the Department is described as being open about its reliance on ‘soft intelligence’ for information on the ways in which authorities may be seeking to circumvent rules – for instance through the creation of innovative delivery and investment vehicles.

MHCLG accepts, however, that to some extent this information is akin to “gossip”.

PAC welcomes MHCLG’s ‘thematic health checks’, but members want assurance about what this will mean in practice, recommending an assessment of the available governance evidence base and a report back to committee by November setting out how identified gaps will be addressed.

  • The Department’s monitoring is not focused on long-term risks to council finances and therefore to services

The LGA told PAC that cuts have meant councils taking on “more risky commercial activities” to raise income, with some borrowing very large amounts to fund commercial investment, creating long-term financial risks if investments do not deliver as expected.

Against this, the report sees MHCLG risk monitoring as primarily aimed at identifying immediate financial concerns rather than the longer-term exposure of councils to financial risk.

MHCLG data on council debt levels does not allow assessment of the level of risk councils are exposed to as a result of that debt, the report says.

Nor does MHCLG formally monitor council’s commercial activities or non-traditional operating models.

The report recommends MHCLG should assess and monitor the scale of long-term risk that authorities might have exposed themselves to through their commercial investments and ventures.

Many councils are overspending on social care and reducing spending on other key services while pursuing shared services, expanding outsourcing and taking on commercial activities.

As significant reductions are made in resources available to support corporate activities like governance, council spending power fell by 29% in real terms between 2010-11 and 2017-18.

Though council governance arrangements are recognised as generally robust, overall governance is under strain.

Audit committees that do not provide sufficient assurance, ineffective internal audit, weak arrangements for the management of risk in local authorities’ commercial investments, and inadequate oversight and scrutiny being among the issues identified by PAC.

The report says this is “not acceptable in the more risky, complex and fast-moving environment in which local authorities now operate”.

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