Independent report

6th Quarterly Report of the Improvement and Assurance Board

Published 2 September 2022

Applies to England

Introduction

The 5th Quarterly Report of the IAB focused, in large part, on the progress that the City Council had made in delivering the Council’s recovery and improvement plan following the demise of Robin Hood energy.

Particular attention was given to the completion of the planning processes relating to finance, governance, transformation, companies and human resources. The Board placed particular emphasis on the need to have those plans in place and approved by 31 March 2022. That objective was met in large part, although the transformation plan was not complete at that point, but the overriding concern of the Board at that time related to the very significant misappropriation of HRA monies over a six year period. This report provides updates on progress of the Council plans and the HRA situation. Importantly, the Board is also tracking implementation and delivery of the key plans, and an assessment of how these are progressing is provided here.

Transformation Plan

As previous reports have indicated transformation is key to the recovery and significant improvement of Nottingham City Council. A fundamental strategic review is implicit in the recommendations of the Caller review and was first heralded by the Council’s strategic plan, but the changes required to deliver transformation were, initially, slow to emerge. The last six months has seen significant progress in the development of the transformation plan and this has been accompanied by organisational change and the creation of specific and detailed divisional plans which illustrate how change will be delivered by the workforce as a whole. The performance management process, which underpins the outcomes from transformation, has now been strengthened together with a robust appraisal scheme across the Authority.

Transformation is also linked to the Council’s responsibility to deliver best value in the delivery of all its services and the measures to test efficiency and effectiveness are now featuring in performance management. Ultimate accountability for this is imperative.

Transformation is inextricably linked to the achievement of the four-year medium term financial plan (MTFP) and, although the first years of the plan present balanced budgets there remains a deficit of at least £4 million in 2024/5, an issue which is covered in more detail later in this report.

Corporate and service plans

Establishing a clear corporate approach to transformation and the fulfilment of service requirements within available resources is an area that the Council has pursued diligently over the past six months. The Strategic Council Plan elucidates service priorities and manifesto commitments and this has been accommodated in the corporate planning approach now in place. The efficacy of each service plan must be tested with appropriate emphasis given to key statutory services and this is work in progress. Attention is also been given to providing the necessary mixed economy in service provision. The Board is also aware that the Council is securing external help and consultancy support in seeking to improve the quality and cost effectiveness of services, thereby contributing to the delivery of Best Value.

Human resources plan

Previous Board reports have stressed the importance of effecting the required cultural change in the behaviours and working practices of all employees if transformation is to succeed. The Council have adopted a programme of training and induction to support its workforce in adapting to a new environment arising from fundamental change. There is recognition in this approach that the workforce must be reshaped and re-configured to achieve the best outcomes. It should be noted that a number of key positions within the authority are currently filled on an interim basis, and it is important that plans for establishing permanent appointments in these areas are put in place as soon as possible. The Board is generally encouraged by the development of human resources plans but seeks assurance that change is comprehensive and sustainable.

Financial Resilience and Sustainability

The CIPFA estimate of some £40 million of misused HRA resources will impact the latest judgement of the Council’s financial resilience. The first £15 million, revealed in CIPFA’s report in November last year, was covered by identified reserves; the additional £25 million now reported was clearly unplanned. £17 million of this relates to the misuse of HRA resources within Nottingham City Homes (NCH). The Council is currently closely examining NCH’s accounts and assets, and is reporting qualified confidence in its ability to repay this sum without recourse to the Council’s own reserves. While this is welcomed the Board has yet to see the specifics relating to how this is to be achieved. The remaining £8 million will be met from the Council’s reserves; however, as noted in the Board’s last report, the Council’s improved reserves position should prove sufficient for this sum to be financed.

The HRA findings also put pressure on the Council’s MTFP. The Board has previously reported that the MTFP was balanced, predominantly, over four years, though heavily dependent on future transformation savings with a gap still to be bridged of some £4 million in year four. The MTFP now must be reviewed as a further £8 million of cumulative, unplanned, savings over the plan period is now required to correct the inappropriate HRA recharges contained within the plan, approved at the March 7th Council meeting. This, in turn, will require further specific transformation actions. The Council’s HRA work on securing assurance that there has been no other inappropriate use of ring-fenced resources is progressing but has yet to be finalised. The Council also applied for, and has received, a Ministerial direction to repay part of the HRA monies.

As the Council does not have the internal capacity to undertake much of this work it will have to procure consultancy support. The Council has undertaken to share assurance reports as and when each component part has been reviewed. This work will also be crucial to the work of external audit as both the HRA issues, and the outcome of other potential override areas, will at the very least impact the timetable for the closure of current and previous years’ accounts. It is also possible that this will result in the formal qualification of the accounts covering a number of years.

Notwithstanding the above and providing NCH cash and assets can cover its £17 million share of misused resources, the Council’s reserve position remains stronger than thought although some key challenges remain. Furthermore, the Council is heading for a significant underspend in 2021/22, which will help to improve its resilience. While the Board wishes to commend the Council’s approach to planning its capital programme it remains dependent on securing future capital receipts. It also acknowledges the protocols put in place to identify and secure those receipts but it expects continued focus to secure the stream of receipts needed to fund its future capital programme without putting pressure on reserves or on planned new borrowing. In that context it is, at this stage, not possible to see how additional receipts of scale could be found to fund significant near-term, but currently unfunded, ambitions such as district heating.

As previously reported, and sadly exemplified by the HRA failures, the Council needs to put in place a properly resourced Council wide finance improvement. In advice to the Council’s leadership four key interrelated pillars of such a programme are particularly pertinent to Nottingham’s current position:

• Financial Leadership and Capacity

Continuity, structures, skill sets, deployment and resilience

• Budget Integrity and Planning

Short and medium-term planning, both capital and revenue, and crucially the understanding and integrity of current base budgets

• Financial control processes

The whole ambit, from proper accounting systems, and accurate application, to reliable forecasting, to day-to-day monitoring, and to the final accounts processes across capital and revenue

• Organisational Mandate and Accountability

The role of members and offices in ensuring sound finances, whilst observing the proper constitutional position of finance in the organisation together with training across the Council and the accountability and responsibility of all budget holders

The Council is currently relatively weak in these areas and a proper plan to support improvement is sought by the Board. There is also serious concern about the level of key vacancies in the finance function together with the impact this could have in producing its 2021/22 final accounts on time. Senior finance leadership has some certainty until March 2023, although this includes interim appointments in key positions. The level of understanding of base budget variation to actuals remains a concern, especially in the adult social care area which is showing a very significant underspend for 2021/22.

The Council should now be addressing the production of a rolling four-year MTFP and this is the time to set out the financial planning protocols and guidelines to enable that to happen. The Board expects to see these protocols in the near future, incorporating the necessary learning from last year’s processes.

The Council is, of course, not alone in facing inflationary pressures but has, helpfully, put in place a contingency planning process to help manage this issue. The Council is also having to react to the impact of changing citizen behaviours in relation to use of bus and tram provision, for which the Council remains directly or indirectly liable. In the case of bus provision the scope for amending services in line with reduced demand is more apparent than in relation to the tram services, which are heavily geared by way of a PFI solution. Close monitoring, scenario planning and risk management in these areas are very important going forward.

Council Constitution and Governance

The new constitution was established in September 2021, as previously reported. Since Council approval at that time, a considerable amount of work has been undertaken to put in place the necessary arrangements to support the new governance code. The scheme of delegation has been introduced alongside a member/officer protocol. Initial indications suggest that this is working well but, given that this represents a significant change in the culture of the organisation, the Board will continue to monitor its practical implementation from both a member and officer perspective.

A particular area of governance which is also of interest to the Board relates to the interface between the arrangements in place at the Council and those prevailing in Council owned companies. Recent history suggests that the key principles and practices relating to the Council’s governance procedures are not appropriately replicated in companies’ governance. The roles of the three statutory officers are particularly relevant here and the Council has taken steps to ensure that the fiduciary position at the local authority is properly recognised and protected in the companies’ operations. The Board will, however, keep this matter under review. The processes that have been developed do take account of the latest thinking in local government. This will help guide members and officers, staff and board members of NCC companies in their dealings with each other and with the important business that is conducted by them. This programme of work to improve the specific governance of its companies and intervene where necessary to manage risk and achieve better value for money continues. Progress has, however, been delayed as more companies related issues have been revealed, and the recruitment of appropriate resources also remains a challenge.

A key area of concern in respect of delivering good governance is risk. The Council has reviewed its risk policy and has introduced an updated approach to risk awareness, appetite, and tolerance from the local authority perspective. It has further produced an updated register, identified risk ownership and accountability and delivered training to members and staff. These developments are encouraging but the Board will wish to continue tracking progress in this area given the significant failings arising from the recent past caused, in part, by poor risk management.

Review of Companies

Following the regular and unlawful misappropriation of HRA funds the Council served a 12-month notice to terminate (in April this year) the housing management services provided by NCH. The Council has formed a project team and established a budget to take the necessary steps to deliver an affective transfer of housing management functions back to the Council. New articles of association will empower the Council in regard to the appointment of the Chairman and CEO and control over use of loans and assets. A detailed understanding of NCH Ltd and its two subsidiary companies (NCH Registered Provider Ltd and NCH Enterprise Ltd) needs to be established, as well as the intergroup arrangements. These companies own a large number of non-HRA properties. Once NCH’s housing management services are brought in-house the optimum structure will be put in place.

In partnership with Sport England, a review of the National Ice Centre (NIC) is being commissioned. It will support the Council and Sport England to attain the most effective long-term strategy for the future of NIC facilities and associated business operations.

Following the discussion to bring Enviroenergy in house, liquidators have been requested to complete the closure by the end of the year. It is expected to take until spring 2023 to complete the work required to determine the future of all the Council subsidiary companies. The Council also has a large number of non-subsidiary (minority interest) companies. It will take until late 2023 to complete that review.

Work continues to transform the commercial operating model. This envisages bringing commercial policy, procurement, contract management and companies’ governance into a single commercial function. A key addition will be delivery model assessments that will periodically review whether the Council should deliver a service, or part of a service,

in-house, procure from the market or adopt a hybrid solution (such as Council investment in a company). The new operating model highlights the current resourcing/skills gap which needs to be addressed promptly so that the Council has the necessary commercial capability to deliver a coherent and effectively managed strategy.

Conclusion

This report has highlighted the Council’s performance over the past 15 months against its commitment to deliver a recovery and improvement plan following the Caller recommendations. The Board has focused on the way the Council has developed and structured its plans to deliver the required fundamental change to achieve best value in the provision of services to its citizens. The situation has, however, been significantly influenced by recent findings in respect of the housing revenue account. Since November last year the IAB independent members have also been monitoring the Council’s response to the misappropriation of up to £40 million. The problem, one of such magnitude, has yet to be resolved but, inevitably, it has impacted the Council’s recovery.

Taken in isolation of the HRA issue, the Council has made good progress in a number of areas including transformation, governance and cultural change. In terms of finance, medium-term planning has developed well, although year four has yet to be balanced in full and the HRA implications will add to financial pressures in future years. As this report states, it is essential that the Council takes urgent action to ensure all financial, budgeting and accounting systems are sound. Outstanding company reviews must also be tackled as soon as possible. There is real commitment amongst members and officers to deliver all the necessary change but this must be supported by sound governance, financial resilience and a fully skilled workforce to deliver best value outcomes for citizens. The Board remains of the view that the Council’s delivery plan to achieve the requirements of full recovery must be completed by 30 September 2022.