Independent report

5th Quarterly Report of the Improvement and Assurance Board

Published 23 June 2022

Applies to England

Introduction

The Board commenced its work in January 2021 following the outcome of the Caller report of November 2020. The remit of the IAB is to oversee, review, monitor and challenge the development and implementation of Nottingham City Council’s Recovery and Improvement Plan in the light of the Caller findings.

From the outset, evidence has been sought from the council’s members and officers that the following principal requirements relating to the Authority’s performance were being addressed:

• Financial Resilience and Sustainability over the medium term

• Strong and robust governance in all aspects of decision making

• A fundamental review of all the council’s companies

• A Transformation Plan which ensures all services are delivered cost effectively to Nottingham’s citizens

In each of the Board’s quarterly reports the progress that the council has achieved in meeting those requirements has been identified. Although the council undertook to put plans in place to address the shortcoming and weaknesses in its operation, and improvements were apparent in some areas, the pace of change was initially considered to be inadequate. At that stage the sense of urgency necessary to address serious shortcomings in financing, administration and service delivery was lacking in part. More recently, there has been a significant acceleration in a number of aspects of the Recovery Plan and the way in the council has responded to the Board’s challenge is set out below.

Financial resilience and sustainability

The established practice of the council for some years had been to take a one year view of financial planning, thus a balanced annual budget was the objective. Consequently, insufficient attention has been given to medium to long-term financial sustainability. The four year medium term financial strategy and plan was established to address this. This also demanded a consistency and coherence in the development of the Recovery, Strategic, Service, Transformation, the Medium Term Financial Plan (MTFP) and the Capital Investment Plans. This has now been achieved to a significant extent but the momentum must be maintained.

The medium term financial planning process was designed to determine spending plans over a four-year period which accommodated key service pressures, including those which are statutorily based. In balancing these requirements with available resources, whilst the objectives set in the recovery plan for a balanced four year programme have not been fully met, this represents a significant improvement on the previously reported position.. The council’s proposals represent a balanced picture for the years 2022/23 and 2023/24, a small residual gap in 2024/25 and some £4 million in 2025/26 which is to be bridged by a further phase of transformation work currently being finalised. The Council believes that it is moving towards a balanced four year MTFP. The whole MTFP strategy acutely relies upon the delivery of a number of transformation projects being developed during 2022/23 with the savings crystallised in the following three years, most significantly in Children’s and Adult Care Services. All such projects have sound business cases and support for actual delivery has, or is, in the process of being procured. Change management and robust implementation must follow.

When testing the achievability of budget reductions which impact services from 2022/23 onwards, the council has carried out a public consultation exercise involving meetings, surveys and focus groups. The areas it covered included libraries, leisure centres, children’s centres and public conveniences and the council has adjusted some of its proposed reductions in the light of the representations received. The fourth quarterly report highlighted a concern that the residual gaps between spending and income remained significant at that time. However the better than expected financial settlement from government and the council securing further savings in central/corporate areas improved the medium term outlook but also the means by which the council will deliver a balanced budget for 2022/23. It is also worth noting that, in part as a result of spending controls applied during the year, the Council is on track for an under-spend in 2021/22.

Mention, however, must also be made of the misappropriation of housing revenue account funds to the general fund. For this malpractice to have continued for some six years is deeply concerning and the independent investigation commissioned by the Council points to failure by both the Council and Nottingham City Homes to detect these unlawful transactions. The faults were ultimately identified by officers and the particular practices have now ceased although other irregularities have since been highlighted and these, too, are a worrying development, the magnitude of which has yet to be determined. The findings now emerging from the second Cipfa report and the Independent Investigation by Richard Penn also give cause for concern.

These reports further emphasise the failings by the Council but also evidence a demonstrable lack of sound financial management and control, which must be addressed as a matter of urgency. The Council must also determine the future of the ALMO in order to ensure robust arrangements are in place to protect the interests of tenants. The issues surrounding the Housing Revenue Account add to the problems in closing previous years’ accounts together with the risk of audit qualification. Checks and controls are being put in place to avoid a recurrence of any such misappropriations in the future.

Using general and earmarked reserves as a key marker of financial resilience, the Council can now demonstrate a stronger position than previously thought. The level of general reserves will be 6% of the net budget at 1 April 2022 rising by £1m per annum by 2025/26. The Council also starts the year with £186.7m of earmarked reserves amounting to 82% of its net budget. Excluding specific and significant reserves such as PFI, schools, collection fund movements, insurance and £15m to repay HRA, it will leave the Council with a sizeable opening balance of more flexible risk reserves in 2022/23.

Turning to the capital programme, its construction follows a sound approach to prioritisation which distinguishes between committed and new or rolling programmes. A significant element of the transformation programme, normally revenue in nature, is to be funded from capital receipts in 2022/23 together with anticipated capital schemes. This results in a minimum of circa, £32 million of new capital receipts being required in 2022/23. The sum is within the most likely risk assessed level of receipt achievable through the asset disposal process. Nevertheless the council will need to ensure a strong focus on securing this to avoid pressure on reserves and/or the voluntary borrowing cap. It can be noted that, as a result of the council’s Voluntary Debt Reduction Policy and delivery of the Asset Rationalisation Programme, overall debt is due to reduce to £900.9m by the end of 2021/22 which represents an improvement, £90.1 million of which some part relates to slippage, against the initial target. This is a positive outcome having regard to previously expressed concerns regarding the council’s levels of debt.

Supporting the five year general fund capital programme and helping to fund transformation implies some £62million of new capital receipts will be required between 2022/23 and 2026/27. Whilst this sum is within the broad assessment of the council’s future pipe-line, the council will need to maintain a strong focus on the actual achievement of those receipts, particularly in the later years of the programme. It is clear, however, that there are no capital receipts of scale currently available to fund significant new investment involving the District Heating Station replacement and Broadmarsh coming to the fore from 2023/24 onwards. The council is relying on securing special grants from the government and/or private sector funding and these alternative plans will need to be developed during 2022/23.

In summary, judgements on financial resilience and sustainability must also be informed by the basics of financial control and financial management. In that regard there are three areas requiring particular attention:

• The satisfactory closure of accounts remains a challenge. Progress has been less positive in this regard and that view is shared by the council’s external auditors with both 2019/20 and 2020/21 accounts still open, and a risk of formal qualification in respect of one or both years
• The quality of financial planning, management and control across the council is such that it requires a credible and properly resourced improvement programme to be put in place, none more apparent than in housing finance.
• There should be certainty regarding the key finance leadership roles as both section 151 and deputy 151 officers are filled on an interim basis. The former is due to leave in June 2022 and the latter at the end of March 2022. The plan to recruit permanent replacements must be progressed as a matter of urgency.

Strong and robust governance

The council, as indicated in the fourth Quarterly Report, approved a new constitution in September 2021, which sought to update the Authority’s governance arrangements. A key element of the constitution is to establish greater clarity and accountability in decision making. The Board sought to ensure that a sound and enforceable protocol was in place relating to the respective roles of members and officers in decision making, including the scheme of delegation to officers. Training has been provided to reinforce the application of the new constitution, which will also be subject to annual review. In terms of accountability, a revised performance management regime is now in place underpinned by clarity of roles and purpose of officers. Clear objectives are to be set and the council has adopted an extensive performance appraisal process. The practical application of the new governance provisions will be monitored closely by the Board.

Fundamental review of the council owned companies

As part of the Recovery and Improvement Plan, the council commissioned CIPFA to undertake reviews of its companies and these have been supplemented by the council’s internal inquiries. The reviews have revealed issues that were unknown when the Recovery and Improvement Plan was prepared in January 2021. The volume of work required to mitigate the risks has therefore been greater than anticipated and actions have had to be prioritised. The council has taken a number of significant decisions about its companies, including bringing Enviro Energy in-house.

The council has brought in a credible external commercial support. and a Shareholder Unit is being recruited . Basic governance around performance and risk monitoring has been improved and is being applied as and when issues arise. However, progress towards integrated governance structures has been slow and remains incomplete. The council’s external auditor has also remarked in his February report to the council’s Audit Committee on the slow pace of necessary improvements in companies’ governance by the council.

Insufficient resources have been applied to improving companies’ governance. This has now been partially tackled with additional external support and recruitment of permanent staff underway. It is critical that the resourcing gap is addressed so that the council has the necessary commercial capability to deliver a coherent and effectively managed strategy.

It is expected to take until spring 2023 to complete the work required to determine the future of the council’s subsidiary companies. The council also has a large number of non-subsidiary (minority interest) companies. It will take until late 2023 to complete the review and effect decisions in respect of the full portfolio.

The development of a new companies’ governance structure and processes is ongoing. These changes take account of the latest thinking in local government. Elements of the new governance arrangements are already in place, in part covered by the revised council constitution. Additional documents and guidance are in the process of being drafted. It is expected that the new governance will be established and the required training delivered by September 2022. The Board has emphasised that, while the Articles of Association are a key discipline for the operation of each company, the council’s statutory officers must represent the interests of citizens in monitoring the activities of companies when discharging their fiduciary roles. This issue is now being addressed.

A separate issue relates to the council’s ALMO, Nottingham City Homes (NCH). The misappropriation of Housing Revenue Account funds was the product of the transactions which took place between NCH and the City Council. In the context of sound governance, systems and processes are to be put in place to ensure that any such irregularities will not occur in the future.

Transformation Programme

The council’s Recovery Plan recognises that there has to be fundamental change in the way the Authority operates. This encompasses strategic, organisational and cultural changes all of which are addressed in the transformation programme. The council strategic plan acknowledges the socio/economic factors that influence the lives of its citizens and sets out ambitious plans to reconfigure services in seeking to manage and support the citizen’s needs and expectations. The plan is underpinned by extensive partnership work with key stakeholders in order that services are delivered in a coordinated and coherent way.

In organisational terms the management structure has been reviewed to ensure clarity of accountability and purpose. Strong leadership and management will be vital to the transformation of the council and the interface between the corporate leadership team and member portfolio holders has to deliver consistent messaging to the council and its workforce. This corporate dimension in communication is being tackled but the momentum must now increase.

The programme entails significant cultural change, with new ways of working essential if the true extent and nature of different modes of operation are to be effected. New skills training is underway and the engagement of consultants, practised in securing these outcomes, is an important support. Transition management is another key challenge alongside the inevitable churn in the workforce which the council is now addressing. The Board also highlights here the importance of sound business cases to support the significant changes to individual services, which are underway and due for completion in the next financial year. The direction of travel is positive. Equally, emphasis has been placed on the delivery plan given the magnitude of the change and this, too, is to be addressed in the early part of the next financial year. The consequence of this timing is that the benefit of reductions in expenditure here will be largely realised in years three and four of the MTFP.

The impact of transformation on citizens is planned to be the subject of consultation. Adult social care and children services, when engaging with vulnerable parts of the community, are areas of particular sensitivity.

Conclusion

The Board has taken a considered view of the progress that the council has achieved in developing and implementing the Recovery and Improvement Plan. Much positive work has been done, however there remains more to do.

In assessing its fitness for purpose, attention has been paid not only to the weaknesses identified following the demise of RHE but also the underlying challenges faced by the council in terms of financial sustainability, good governance, company practices and the culture of the organisation.

Progress has been made in all of these areas although none has reach finality, partly because the initial pace of change was disappointing. This is a fair criticism although the challenge from the outset was considerable and the magnitude of the change required of a very high order. However, it is essential that speed of implementation is now the council’s highest priority together with the delivery of a sustainable medium term financial strategy/plan.

The Board is of the view that the council must implement fundamental change in the structure and organisation of its housing function together with robust financial management and accounting arrangements as a matter of considerable urgency. The Board is assured that this process, the council’s highest priority, is underway. More generally, it also vital that the council gives priority to putting in place a properly resourced programme to ensure a major improvement in financial planning , management and control across the council.

The Board also takes the view that the council’s delivery plan to fulfil the requirements of full recovery must be achieved within the first six months of the coming financial year with completion, therefore, by 30 September 2022. Failure to do this could significantly undermine the Council’s ability to achieve the essential transformational change.

Full assurance regarding Nottingham’s transformation would be difficult to provide at this stage; however, given the financial plans are soundly based, transformation has progressed well and governance arrangements are much improved, this is a reasonable platform from which to complete the recovery. Nevertheless, given the very concerning turn of events relating to the Housing Revenue Account, any such further occurrences could undermine the council’s credibility in achieving sustainable improvement. The council is addressing this as a matter of urgency resulting in a final report by

30 April 2022.