Funding cuts have forced local authorities to be more commercial, attracting income to offset grant losses, while being more innovative in partnership working and less risk-averse. But this raises questions about where accountability and transparency sit, since the local authority increasingly presides over a multitude of different joint ventures, partnerships and investment vehicles.

Earlier this month, the National Audit Office produced a survey of local public bodies, expressing concern about their ability to secure value for money (VFM). Eighteen per cent of upper-tier councils received only a qualified conclusion by auditors on their arrangements to secure VFM mainly because of weaknesses in governance arrangements. For all local public bodies the percentage was 22%.

The NAO report, while recognising the ‘increasing financial and demand pressures' on local public bodies, nonetheless insisted they need ‘strong arrangements to manage finances and secure value for money.' Too often, it added, councils were not responding adequately to auditors' concerns.

But, the local government landscape is changing, as councils engage in joint ventures, partnerships and shared services which threaten to dilute lines of accountability and blur governance responsibilities. Some of these challenges were examined at a recent round table organised by the NAO and The MJ, where participants spelled out the pressures.

One consistent theme was the impact of commercialism, as councils attempt to replace funding cuts with new sources of revenue such as from assets and the mixed messages about the level of risk-taking they should accept.

One participant said: ‘Our governance arrangements are traditional, yet we're supposed to be commercial.' One chief executive added: ‘The more commercial we get the less transparency there is compared to other parts of the public sector.' Another commented: ‘We've done a lot of commercial projects, contributing £2m a year to the bottom line, but we're worried about advice from the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Ministry of Communities, Housing and Local Government (MCHLG) advising against commercialism.'

Another participant, referring to recent Government warnings about councils taking too many risks, said: ‘We've got a £4m deficit down to £2m thanks to taking commercial opportunities, but we feel the tide has turned, that we now have to be more cautious.'

One chief executive felt there needs to be a recognition that to be more innovative means taking risks, saying: ‘Statutory officers are essential, but we need a balance on the management team. We want to encourage innovation. We have to give innovation space and we need statutory officers prepared to accept that.' Referring to the council that borrowed and speculated heavily on a property portfolio in a different part of the country, another participant commented that ‘borrowing 30 times your income is ridiculous, there need to be some guidelines'.

One participant also pointed out that the Government itself was impeding innovation, adding: ‘Different Government funding streams encourage short-termism. We're having to bid for eight different funding pots, which is time-consuming. The whole bid culture doesn't serve us well when we're creating over-arching ambition.'

There was general welcome to CIPFA's recent compromise on its resilience index, when it came down on the side of not naming councils. With most councils taking a place-based approach, there was concern auditors were taking a narrow view.

One commentator felt there was too much focus on finances, saying: ‘We need to look at the resilience of the place, such as the number of employment opportunities. The audit committee spends too much time looking at accounts rather than considering whether the community is doing well.'

Another added: ‘We're committed to planning as a place, so our mantra is: we plan for people in the place.' But one chief executive also recognised the challenge to accountability with the place-based approach saying: ‘The challenge is how the council maintains a role at the heart of the community instead of atomising. It's a very live debate for us.'

There was concern about the impact of joint ventures on governance. One delegate commented: ‘We want to create a diverse organisation and have set up two joint ventures and two wholly-owned companies, which is great, but it raises questions over accountability. There is a nervousness among staff and I've had to brief them for reassurance.'

Another added: ‘Accountability is strong at our council, better than central Government agencies. But when we put together joint ventures with other parts of the public sector, we see different accountability arrangements getting in the way.'

Another, referring to local enterprise partnerships (LEPs), added: ‘Accountability in LEPs gets pushed back into central Government rather than locally' – a view echoed by another delegate, who said: ‘My concern is about working across administrative boundaries like health, LEPs, etc. We can't deal with the challenges on our own – but it's one-way traffic.'

One chief executive even felt auditors were not paying enough attention to the issue, saying: ‘There's no one to ask on accountability. The auditors just say everything is okay. There's not the accountability we used to have with a more intrusive audit team.'

There was criticism of the private sector's governance and accountability arrangements, with many of the participants, irrespective of political control, saying they were bringing services back in-house.

One chief executive said that while his administration was Conservative, ‘it's dead set against outsourcing'. Another added: ‘We've set up a number of wholly-owned companies and are just reviewing them. Some will come back in-house.' Another participant commented: ‘Accountability should cover the private sector suppliers as well. It makes no sense just to limit it to local government.'

One chief executive, whose council took a major external contract back in-house after 15 years, said: ‘We brought services back in-house by agreement. We didn't feel flexibility was there; when we tried to hold them to account it became expensive.'

In contrast, some felt the debate about insourcing or outsourcing was a red herring, adding: ‘As regards outsourcing, there is a compelling case to do it right,not whether to do it or not do it' – while another participant said looking for new revenue streams ‘isn't a case of being commercial, it's just different'.

Many of the participants said the standards regime for councillors needed reviewing, with one saying: ‘The standards regime for members needs to be looked at again. It's a nonsense. It does local government no good by being so weak.' Another added that ‘scrutiny struggles to get a focus while the standards regime concerns me.'

Several participants admitted their scrutiny arrangements – which should uncover accountability and governance weaknesses before the auditors – ought to be better, with one saying his administration's huge majority meant scrutiny was ineffective.

Most of the participants were balancing long-term planning with the need to keep an eye on the short-term. It was summed up by one chief executive who said: ‘We're a large rural district with a clear outlook and clarity of purpose. We spend a lot of time getting behind the numbers and putting them into a 10-year context. We thought it important to have that discussion to formulate a decision and for accountability. We need to take a longer-term perspective on investment. We spend a lot of time testing our systems.'

Another participant agreed, saying: ‘We're still balancing the short-term with long-term investment and we have to borrow. Debt servicing is high, as members are keen to invest and we're making sure not to just focus on the present.'

Short-term challenges cannot be ignored, as one chief confirmed: ‘We're in year three of a four-year budget but haven't met our savings plan for the last two years. We need to get the basics right.'

Only at the end did the ‘B' word appear ,when one otherwise positive chief executive commented: ‘We've got assumptions until 2021/22. We're making significant capital investment and doing town centre regeneration ourselves as the private sector isn't interested. The future doesn't feel bleak, if only we didn't have the uncertainty over Brexit…'

Why does governance matter?

Good corporate governance matters because the money that local authorities raise and spend belongs to taxpayers and there is a moral and ethical obligation on decision-makers to ensure it is spent as effectively as possible.

Local authorities operate within a governance framework of checks and balances to ensure that decision-making is lawful, informed by objective advice, transparent and consultative. Some parts of the system are set locally, while others are overseen by the Ministry of Housing, Communities and Local Government.

The National Audit Office has been increasingly interested in the workings of the governance system because of the financial pressure local authorities have been subjected to since 2010.

Since then, local authorities' funding has reduced, while demand for services has increased. Authorities have seen a real-terms reduction in spending power of 29% and, for example, a 15% increase in the number of children in care. These pressures raise the twin risks of authorities failing to remain financially sustainable and not delivering services. And the way authorities have responded has tested local governance. Large-scale transformation programmes or commercial property and ventures risk failure or under-performance and add greater complexity to governance. However, spending on governance has also fallen, potentially increasing the risks faced by local bodies.

Some aspects of governance are showing the strain: in 2017/18, auditors issued qualified conclusions on value for money arrangement in one in five single-tier and county councils. Twenty seven per cent of auditors surveyed by the National Audit Office (NAO) did not agree that their authority's audit committees provided sufficient assurance about governance.

So what needs to improve? The department should adopt a stronger leadership role in overseeing the network of organisations managing key aspects of the governance framework. It needs to improve its oversight to help local authorities cope with increasing financial and demand pressures and increase transparency around its interventions.

Governance is important. As the head of the NAO, Sir Amyas Morse, says: ‘Poor governance can make the difference between local authorities coping and not coping.'

Attendees at The MJ / NAO round table

Aidan Rave, chief executive, South Kesteven DC

Joanne Hyde, corporate resources director, Bradford City Council

Denise Park, chief executive-designate, Blackburn with Darwen Council

Kath O'Dwyer, acting chief executive, Cheshire East Council

Neil Taylor, chief executive, Bassetlaw DC

Paul Shevlin, chief executive, Craven DC

Andrew Lewis, Cheshire West and Chester Council

Andrew Frosdick, executive director core services, Barnsley MBC

Ian Fytche, chief executive, North Kesteven DC

Ian Knowles, West Lindsey DC

Lawrence Conway, chief executive, South Lakeland DC

Aileen Murphie, director, MHCLG and local government, National Audit Office

Heather Jameson, Editor, The MJ (chair)

Michael Burton, Editorial director, The MJ