1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Housing, Communities and Local Government (the Department) about local authority governance and the Department’s accountability for it. We also took evidence from the Local Government Association, Stevenage District Council, the Chartered Institute of Public Finance and Accountancy, and the Centre for Public Scrutiny.
2.Local politicians and council employees operate within a governance framework of checks and balances to ensure that decision-making is lawful, informed by objective advice, transparent and consultative. Key elements of the local framework include officers with statutory powers and responsibilities; internal checks and balances such as audit committees and internal audit; and external checks and balances such as external audit and sector-led improvement overseen by the Local Government Association.
3.While elements of these local governance arrangements are locally defined, core components are set out in a statutory framework of legal duties and financial controls overseen by the Ministry of Housing, Communities & Local Government (the Department). The Department is responsible for ensuring that this framework contains the right checks and balances, and for changing the system if necessary. The Secretary of State also has powers to intervene in cases of perceived governance failure. These arrangements represent a significant reduction in central oversight in recent years following the government’s decision to abolish the Audit Commission and the Standards Board for England as part of a broader reform of local audit, inspection and reporting.
4.The new, more localised framework has had to function effectively at a time when the process of governance itself is more challenging and complex, and when reduced resources mean that the implications of governance failure are increasingly significant. Council spending power (government grant, business rates and council tax) has fallen in real terms by 28.6% from 2010–11 to 2017–18. Spend on services other than social care fell by a third in real terms from 2010–11 to 2017–18, as did spending on corporate and democratic support activities. Authorities are innovating in response to financial pressure but shared services, outsourcing and commercial activities can all add complexity to council governance arrangements.
5.Witnesses with detailed knowledge of local government told us that the governance system in local authorities is fundamentally sound. 98% of council chief finance officers are confident in their ability to provide advice to elected members that they might find challenging, and external auditors are confident about the effectiveness of most key governance arrangements at most councils. However the Centre for Public Scrutiny also told us that “the amount of pressure that is currently on the system is having an impact. We are starting to see that the new demands and the amount of complexity that councils are dealing with are creating some challenges for governance.” 27% of external auditors did not agree that audit committees provided sufficient assurance about authorities’ governance arrangements, while seventeen per cent did not agree that risk management arrangements were effective. In 18% of cases, external auditors did not agree that internal audit was effective in the council they audit, and in 16% of cases auditors did not agree that arrangements for scrutiny, challenge and debate were effective. CIPFA told us that “the risk is that governance is seen as a costly overhead and so perhaps should be cut when councils face pressure, when actually that is a time when you need better governance and you need to invest in that overhead”. Resources to support governance fell by 34.2% in real terms between 2010–11 and 2017–18.
6.The Secretary of State for Housing, Communities and Local Government can use statutory intervention powers to remove control from local elected politicians if there are sufficiently serious value for money risks at an individual authority. However, CIPFA told us that there was “a big gap” between the normal, highly localised operation of governance and the “nuclear powers” of the Secretary of State, acknowledging that “The question for all of us involved in trying to advise about good governance is what preventive steps can be taken to strengthen local governance in order that that can be avoided.” The Centre for Public Scrutiny told us that “there are potentially little pockets of that sort of insight that are not getting joined together soon enough” across organisations. The Department accepted that “Our job in the Department is to make sure that those systems are there and that they are as strong as they need to be.” The Department understands the need for it to be more active to provide leadership to drive coordinated change across the system. However, “We have perhaps been a little bit ad hoc about where we have drawn that assurance in the past.” The Secretary of State has written publicly to Parliament to say that in the current context we “want to enhance our role on oversight of the system”, propose to “play a clearer role as convenors of the accountability framework” and work more closely with other government departments. The Permanent Secretary told us “What I think we will do is work much more openly and in a much clearer way with all of those bodies that at the moment oversee parts of the system for us … What I would like us to improve on is, first, being clear what the work programme of system and sector oversight is for each of those bodies—we are sometimes commissioning and sometimes they are doing the work anyway … and also to pull everybody together so that they can share risk and issues”.
7.We welcome these new intentions and are determined that they must be matched by the delivery of meaningful change despite the absence of clarity in the Department’s evidence to us. The Department referred to other organisations “who own the system with us”; but, when challenged, accepted that this was not a correct description of the relationship. The Department remains committed to localism but this should not mean any confusion about where formal responsibility and accountability to Parliament lies. After hearing about the government’s new intentions we challenged the Department to demonstrate that the clearer convening role meant more than ‘getting everyone together for a chat’. However, the example that it gave of a concrete action under the new approach, a review of the local audit regime, was one that “we have always promised that we would do”. Accordingly, we have not seen yet that the Department is demonstrating a changed approach.
8.The Department does not systematically collect detailed information about how well key aspects of local governance are working. In each authority there are three key officers who have been given legal responsibilities and powers to protect good governance under the legal framework that the Department is responsible for overseeing: the head of paid service, the section 151 officer and the monitoring officer. When we asked the Department what information it collected or had access to that would enable it to assess the status and capacity of monitoring officers to deliver their role, we were told that such data is not collected for the statutory officers. The Department accepted that this was a gap, saying that they had started work aimed at filling it . The Department told us that the Department had worked with CIPFA to change codes governing local authority commercial activity, giving this as a positive result of their oversight. However, when we asked if the Department’s monitoring provided a comprehensive list of council interests in commercial entities or risks from new models of delivery the Department stated that it did not monitor in that level of detail.
9.The information that the Department does collect is sometimes from sources that can be very patchy or else in decline. The Department described its approach to ‘soft intelligence’, commenting for example that “We are at conferences. We are visiting local authorities. … local authorities talk about other local authorities.” But the Department accepted that “To some extent, it [soft intelligence] is gossip”. Similarly the Department was clear about its reliance on journalism: “Often it is journalism that throws up things that nobody else knew about.” However the Government has accepted that public interest journalism, such as investigative journalism, which “helps us to shine a light on important issues, in communities, in courtrooms, in council chambers” is “under threat, especially at the local level”. In the 10 years to 2018, the circulation of local newspapers halved. The Department accepted that these aspects of its processes for monitoring changes in the sector, such as the shift to delivering more activities through companies, were informal and needed improvement.
10.The Department told us that thematic reviews of aspects of governance, to improve understanding and give a health check, were “very much what we want to be doing more of in the future, or encouraging others to do more of”. Such an improvement is important because we heard from the Centre for Public Scrutiny that at present “councils that are not necessarily where Northamptonshire were, but are a couple of stages before” may “hit the stage of wanting to keep things to themselves” so “it can look as if everything is fine” from the outside despite the problems. The Department accepted that “Requiring publication of peer reviews, rather than the sometimes slightly glossy summaries that we see” could be advantageous and is under discussion with the LGA on this. However, the coverage of peer reviews is still not universal. These discussions are ongoing so it is not clear what the outcome will be. Currently the Department relies on the LGA’s view of what information to share from peer reviews, since the reviews themselves are not automatically shared.
11.Local authorities spent £3.7 billion on the acquisition of land and existing buildings in 2017–18, a sharp increase from the £1.1 billion that they spent in 2015–16. This increase has coincided with some very large council purchases of commercial property in order to generate income. In 2016–17, one council bought a business centre for £385 million, financed through borrowing of £410 million over 50 years. Financial risks exist until the end of the term of the loan. This council now has total commercial investments valued at £933 million and borrowing of over £1 billion, The Local Government Association told us that “we have to take more risky activity than we used to” as “those services that people rely on will still have to be delivered”. In the LGA’s view this was a situation of Government’s making: “The Government could not have it both ways: you could not give us less, but expect us to do more and then say, ‘Don’t take any risks.’”
12.Ultimately local government exists to deliver services to their local communities, shaped by the wishes of the local electorate and service users. The Department’s own account of the accountability of local authorities emphasises the power of the ballot box and other mechanisms for public scrutiny. However, delivery of these services depends on sound council finances. This is why the Department leads cross-government work to assess the funding needs of local authorities at Spending Reviews, and conducts ongoing monitoring of the sustainability of the sector. This monitoring covers risks to non-fulfilment of the ‘best value’ duty covering decisions about service provision. We note that local auditors are less positive about councils’ risk management arrangements for commercial investments than they are about councils’ overall risk management arrangements.
13.We have previously highlighted that many authorities, particularly those with social care responsibilities, are showing worrying signs of being under financial pressure. We have also challenged the Department about the fact that their assurance about financial sustainability is very short-term in its focus: only covering the remainder of the Spending Review period. We asked the Department how their risk monitoring would capture the exposure to longer-term risks of councils with large commercial investments, even though the immediate effects of additional income appeared positive. The Department’s answers either did not directly address this point or were unconvincing. For example, the Department highlighted its ability to identify increases in debt. However the Department also pointed out that its source sets out the amount of borrowing but “does not talk about what it is borrowed for”. The purpose of borrowing is crucial in assessing the risks that come with that borrowing.
14.We asked about commercial models, such as private sector borrowing by council-owned companies or joint venture vehicles. The Department confirmed that such approaches might not be identifiable from data within its monitoring framework. The Department does not comprehensively monitor non-traditional operating models or subsidiary companies.
2 , HC 1738, 27 March 2019.
3 C&AG’s Report, paras 1 and 1.6
4 C&AG’s Report, paras 2, 20 and 1.7
5 Comptroller and Auditor General, Financial sustainability of local authorities 2018, Session 2017–19, HC 834, 8 March 2018, para 1.5; C&AG’s Report, Figure 2, and Figure 6
6 Qq 1- 3, 28
7 C&AG’s Report, paras 2.6 and 2.11, and Figures 9 and 11
8 Q 2
9 C&AG’s Report, paragraph 14
10 C&AG’s Report, paragraph 14
11 Q 3
12 C&AG’s report, paragraph 11
13 C&AG’s report, para 3.16
14 Qq 3, 28
15 Q 30
16 C&AG’s Report, paragraph 21
17 Qq 57, 64
18 , dated 25 March 2019, published by the Committee on 2 April 2019
19 Q 40
20 Qq 104, 105
21 Qq 39–45.
22 C&AG’s Report, paragraphs 3.9 and 3.10
23 C&AG’s Report, paragraph 2.2 and Figure 7.
24 Qq 88 to 92
25 Qq 88, 90
26 Qq 41, 53, 58, 97
27 Qq 104,108, 110
28 Q 101
29 Q 120
30 Qq 59 and 120.
31 Secretary of State for Digital, Culture, Media and Sport, oral statement on the publication of the Cairncross Review into the sustainability of high-quality journalism, 12 February 2019, Hansard volume 654, columns 772–3.
32 Q 104.
33 Qq 89, 94.
34 Q 24
35 Qq 76, 77
36 Q 117
37 C&AG’s Report, Figure 3.
38 KPMG, External audit report 2016–17: Spelthorne Borough Council, 5 February 2019
39 Spelthorne Borough Council, The Capital Strategy of Spelthorne Borough Council, approved 21 February 2019
40 Q 1
41 Qq 60 and 61
42 Comptroller and Auditor General, Financial sustainability of local authorities 2018, HC 834, Session 2017–19, March 2018, paragraphs 4.4, 4.27, 4.34, 4.40
43 C&AG’s Report, paragraph 2.14 and Figure 26.
44 Committee of Public Accounts, Financial sustainability of local authorities 2018, Fiftieth Report of Session 2017–19, HC 970, June 2018, paragraphs 4 and 7
46 Qq 96–97
47 Q 96
48 Qq 98 to 100
49 Qq 100 to 110
50 Qq 107 to 110
Published: 15 May 2019