Peer reviews: The heat is on

20 November 2023

Corporate peer challenges (CPC) haven’t got a particularly good reputation in Whitehall.

Privately, senior Department for Levelling Up, Housing and Communities (DLUHC) officials describe the Local Government Association’s (LGA) peer review teams as too ‘chummy’.

The viewpoint, which does not go down well at the LGA, partially explains local government secretary Michael Gove’s drive to create the Office for Local Government (Oflog) in a bid to spot and intervene early in the potential council failures of the future.

Oflog officials are now planning to create their own team to review councils of concern after peer reviewers failed to halt the recent flurry of section 114s.

However, director of improvement at the LGA, Dennis Skinner, was sceptical about anything that might suggest a return to the days of the Audit Commission.

‘There were s114s when the Audit Commission existed,’ Mr Skinner pointed out. ‘The Audit Commission didn’t stop them.

‘I don’t think you can expect a CPC in Thurrock to have spotted what was going on in terms of their actual investments and borrowing.’

The Government was forced to intervene at Thurrock following the council’s issuing of a s114 notice at the end of last year as the authority faced a £470m in-year funding gap.

A CPC of Thurrock in January 2022 did warn the council’s finances were ‘severely challenged’ and said the funding gap it faced would ‘need radical plans to resolve’.

But Thurrock’s failure was caused by poor decisions around risky commercial investments and the CPC had very little focus on these, with the assumption that they were positive news.

‘The investment strategy has served the council well in recent years and largely shielded it from the difficult decisions many other councils have faced,’ peers wrote.

‘The council’s investment strategy has served it well in recent years raising over £115m, it helped to increase historically low reserves [from £8m to £24m] and even during the pandemic it continued to raise funds, given the nature of the investments [renewable energy].

‘Thurrock Council have been fortunate to have skilled and entrepreneurial staff who seized opportunities to raise income, top up reserves and deliver award-winning services during austerity. Thurrock Council has much to be proud of and is delivering above and beyond what can be usually expected for a single council.’

Peers did highlight that governance and oversight of Thurrock’s investments, commercial activity and capital programmes needed strengthening, but the council was unable to steer itself away from its s114.

Mr Skinner suggested it should not all be down to peer reviews to pick up problems and it should be external audit that identifies the risk of a s114.

‘The main check and balance in the system that should spot this is the external auditor and as recently as February 2021 the auditors gave Thurrock a clean bill of health,’ he said.

‘The CPC involves a few days on site and is not a forensic examination of a council’s accounts. It’s an improvement tool and is one important part of the assurance system. It’s one element in a series of checks and balances.’

Moves are already afoot to improve the quality and timeliness of external audits thanks to an increase in fees that will hopefully lead to greater investment.

As auditors have struggled to keep up with the backlog in recent years, CPCs have perhaps had to bear too much responsibility in the sector’s assurance regime.

The peer team that arrived at Slough BC in February 2019 – a little over two years before its s114 – apparently found an ‘organisation that is learning to move away from a time of crisis towards delivering an exciting new future for the borough’.

And peers were similarly enthusiastic about Woking BC in November 2019 – three-and-a-half years before it declared effective bankruptcy over a £1.2bn black hole in its budget caused by ‘extreme’ high levels of borrowing as part of its investment strategy.

In 2019, peers had suggested Woking was ‘actively managing the financial risk associated with significant levels of borrowing’. They found ‘members and officers, by and large, felt comfortable with this level of indebtedness given the value of the assets held and being generated within the portfolio’ though reported ‘some concern by some members and within the community’ about the risks.

Peers also praised ‘ambitious, innovative and creative’ Woking’s ‘can-do attitude,’ its ‘strong and collaborative relationship between members and officers over a number of years’ and reported evidence that ‘senior decision-makers demonstrate a forward-thinking, proactive approach to financial challenges that is more enterprising and bolder than many district councils’.

The LGA has recognised it does need to beef up CPCs, recently introducing the requirement for councils to publish CPC reports, produce an action plan and receive a follow-up visit to review progress.

Mr Skinner continued: ‘We still think all councils should have one, and one of the things we may do is consult with the sector on improving the robustness of CPC. Only a small number of councils are yet to have a CPC. We’re not naming them out of courtesy, but there is a possibility further down the line of naming councils that haven’t had a CPC.

‘We’ve strengthened CPC in recent times. We now require councils to produce an action plan following the peer challenge and then 12 months later we undertake a progress review. One of the things we’re doing is providing a lot more training and development for those peer teams.’

The latest meeting of the LGA’s improvement and innovation board asked officers to ‘prepare proposals for discussion with the sector to further strengthen’ CPC.

Potential measures suggested by the LGA include ‘reinforcing with councils that they are given the opportunity to comment on the CPC report only in relation to factual accuracy, with a deadline of two weeks after receipt of the draft report’ and ‘setting out a programme in advance for each council to receive their CPC (reflecting the draft statutory Best Value guidance that states Government expects councils to have a CPC at least every five years’).

Up to now, however, the LGA has largely been reliant on the co-operation of councils agreeing to have a CPC – and at the right time for them.

Croydon LBC, which issued s114s in November 2020, December 2020 and November 2022 after misjudged investment decisions, had been ‘in active discussions’ in March 2019 with the LGA to carry out a CPC ‘within the next 12 months’.

There was even a date for a CPC pencilled in the diary for March 2020 but the review was cancelled when the country went into lockdown, meaning we will never know whether Croydon’s fate could have been avoided.

Labour-led Birmingham City Council, which is now under Government intervention, had also been under pressure to urgently complete its first CPC before its s114 in September.

Local Conservative opponents had publicly expressed concerns that Birmingham had failed to complete a CPC, with group leader Robert Alden saying in March: ‘We have been concerned about the delays and refusal by the Labour administration to set a date by which they will have a public LGA peer review. The residents of Birmingham deserve the truth.

‘Peer reviews are designed to help improve the running of councils and avoid issues building up. If the Labour council had not continued to delay doing its long overdue peer review some of the current financial mess may have been avoided, saving taxpayers money.’

A Birmingham spokesperson said in January they expected a CPC to take place ‘in due course’.

Whether the arrival of peers would have made enough of a difference for Birmingham to avoid probably the worst crisis the council has ever faced is another question entirely.

Chief executive of the Chartered Institute of Public Finance and Accountancy, Rob Whiteman, recently said the spate of s114s in the sector showed there was ‘no doubt’ the framework for accountability and improvement – of which CPCs are a key part of – had failed.

Elements of the LGA are now understood to be privately moving towards accepting that CPCs should be put on a statutory footing.

With tens of councils said to be at risk of issuing s114 notices, a beefed-up regime surely has a role in boosting assurance and reducing the chances of further failures.

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CIPFA Austerity LGA S114 governance Michael Gove DLUHC Oflog