Independent report

Nottingham City Council: Improvement and Assurance Board report (2 February 2023)

Published 2 February 2023

Applies to England

1. Introduction

The Improvement and Assurance Board (IAB) independent members were given powers of direction by the Secretary of State at the beginning of September 2022. Following this change in status the IAB issued Nottingham City Council with a Statement of Requirements. This followed a period of continuous challenge by the Board since their initial appointment at the beginning of 2021.

The principal purpose of the 67 requirements was to secure clear evidence that all aspects of the Council’s recovery and improvement plan had been delivered or, in some cases, progressed in a timely fashion. To that date in September 2020 the pace of change in a number of key areas had been disappointing.

The Board’s Quarterly Reports to the Secretary of State, commencing in March 2021, have consequently and continuously emphasised the weaknesses and shortcomings in the following areas:

• Governance
• Transformation
• Finance
• Companies
• Housing
• Workforce planning
• Culture

Underpinning the need for significant improvement in these areas is the Council’s statutory duty to deliver best value.

This report analyses the Council’s response to the Secretary of State in respect of the Statement of Requirements and provides its assessment of whether the local authority’s plans and performance meet the necessary standards, and whether resourcing and delivery of its services is credible and sustainable.

2. Governance

The new constitution adopted by the Council in September 2021 addressed the principal shortcomings in the governance that prevailed in the authority under the previous Administration. The key weaknesses identified by the Caller report, and subsequently by the Improvement and Assurance Board, were the processes relating to decision-making both within the Council and the companies owned by the local authority. A revised constitution introduced clarity of decision-making, which was previously lacking, together with a scheme of delegation to officers detailing actions and decisions that would be taken without recourse to Committees, Executive Board or Council.

Progress has been made in delivering the changes, including the ability for officers to agree proposals with spending of up to £250,000 (previously £50,000). A protocol has been put in place which codifies the member/officer interface, giving guidance on how senior officers and portfolio holders should engage at the time of decision making. This includes officers providing technical and professional advice to members, as appropriate, at the point of decision. There is evidence that the speed of decision-making has improved in some areas.

While the IAB is encouraged by these improvements, concerns remain about the inability, in some cases, for officers to exercise their delegated authority in a timely and efficient way. Pressure is sometimes brought to bear, directly or indirectly, so that decisions are delayed, deferred or resisted, meaning that the business of the Council can be frustrated or compromised. This problem is by no means universal and good governance is evident in some areas but there must be recognition that the constitution is not being observed in all respects. The solution lies in an honest conversation between the leadership, both members and officers.

The IAB’s Quarterly Reports have consistently identified this practice as unsatisfactory and, whilst there now appears to be some acknowledgement of this problem, action to correct this fault has been slow. The IAB, in its quarterly report, has also pointed to shortcomings in the governance arrangements pertaining to local authority owned companies. Much of what was lacking has been addressed through the creation of a shareholder unit within the Council, reinforcement of the role of the 3 statutory officers, and formal training for council members sitting on company boards. The demise of Robin Hood Energy alerted council officers and members to the need to ensure that the fiduciary responsibility they carry on behalf of the citizens of Nottingham must be taken seriously.

The apparent weaknesses in the performance of audit and overview and scrutiny committees, in terms of fulfilling their roles relating to risk and the facility to challenge prospective decisions, have now been dealt with by strengthening the terms of reference, together with robust training programmes, and this is now more evident in the current operation of those committees. The Council has now overhauled its approach to risk. A new policy relating to risk has been articulated and approved, alongside guidance and training relating to risk appetite, tolerance and a system of risk management and accountability. Work is underway to ensure that risk awareness, management and good practice are embedded at all levels of the organisation. Risk is also a basic discipline in all decision-making. Given the recent history of Nottingham it is vital that there is no relaxation in this approach.

3. Transformation

Nottingham’s Recovery and Improvement Plan contained a number of key developments in the way the Council was to deliver services within available resources. For this approach to be successful, fundamental change is essential. After some initial delay the Council appointed a Transformation Director who, in turn, presided over the development of a transformation plan. A significant amount of progress has been achieved over the last 6 months which stipulates an approach requiring organisational changes and a major review of the Council’s delivery of service, including in-house and outsourced provision. Commissioning and procurement of services has been overhauled and the positioning of these in the departmental structures recognises the importance of professional knowledge and awareness of services provided in contract specifications.

These are all positive steps but the full benefit of such transformation will not be realised until the end of 2024. The biggest challenge facing the Council is the need for cultural change throughout the local authority at both member and officer level. The recruitment of 15 Change Academy graduates has made an appreciable difference in the attitudes of many staff and this initiative is to be extended. That said, there is much still to be done if full transformation in service delivery is to be effected. Importantly, these changes are also fundamental to the achievement of a balanced medium term financial plan in the later years 2025–27.

4. Finance

The latest prediction for 2022/23 shared with IAB at its meeting on 30 November shows a predicted year end deficit of £12.2m, actually an increase on the previously reported position. Key elements driving this overspend are pay awards, energy and other abnormal inflationary pressure affecting all local authorities but also non-delivery of planned savings. The Council’s core strategy to deal with the overspend amounts to a continuation of spending controls introduced at a time similar to last year and the ‘praying in aid’ of the fact that it delivered a significant underspend from a not dissimilar level of predicted overspend this time last year.

The Council has put in place new budget oversight arrangements, helping to deliver clearer accountabilities. PWC has been retained to advise on establishment control, improving purchase to pay arrangements, reviewing proper allocations of grant receipts and improving the visibility of budget variances to relevant managers. All these improvements are acknowledged as positive points of progress but most are yet to flow through to real and embedded change in core accounting practices. Due to the inherent current weaknesses in basic financial practices, commented on later in respect of progress in putting in place a ‘Finance Improvement Programme’, it is extremely difficult to rely on the quality of the forecast shared with the Board. The Section 151 officer has reported at previous IAB meetings, his limited confidence in the forecast for the same reasons. He has further indicated that the eventual underspend in 2021/22 is unlikely to be repeated in 2022/23 with the result that the Financial Resilience Reserve is being held to cover the predicted outturn deficit of £12m.

The Council’s draft budget for 2023/24 shows an outturn gap at this stage of circa £3m. The process and timelines put in place during the summer were sound, again another positive compared to the previous year. It is also encouraging that the Council is seeking to eliminate historical and erroneous savings built into previous budgets which are not capable of being delivered, and are also employing realistic resource assumptions. However the current position reveals that some £14.3m or 46% of the savings required to balance 2023/24 are essentially one-off available technical or corporate adjustments. Fundamental consideration of an affordable service offer, across all service areas, within a significantly reduced envelope of resources remains very much work in progress.

Some departments/areas are much further advanced on wide scale transformational challenge, e.g. in the social care area, but on the whole the Council’s planning process is simply moving too slowly and without the required focus to achieve that necessary goal. The imposition of a planning task by the Chief Executive for his senior managers to show what could be delivered within 85% of resources, that both maximised intended outcomes and minimised risk, was a positive intervention but it came late in the process and lacked underpinning task protocols. As a result it produced variable and mixed responses. It also showed very clearly that the cultural leadership and acceptance of the importance of the task by second tier management (under the corporate director level) was worryingly mixed. The delays in the process mean that while arithmetically the Council leadership can claim the gap for 2023/24 is relatively small as at the end of November, few of the proffered savings that close the gap have actually been risk assessed as to their actual deliverability next year.

Turning now to the Medium Term Financial Plan, covering both capital and revenue, the Council has expanded its specific areas of intended transformation and identified increased savings targets, especially for 2024/25 onwards, as a result. It currently predicts that in large measure this will enable not just balanced overall revenue budgets in 2024/25 onwards but surpluses to reinvest across the Council. As covered elsewhere, the Board remains positive about the specific leadership and process put in place to drive transformation; however, the key points of concern at the current time are two-fold. Firstly, the expanded list of transformation projects are yet to be subject to full business case scrutiny to confirm the scale of savings claimed. Secondly, and perhaps of more concern, is the need for a credible plan to pay for transformation which by definition is relatively front loaded with the benefit accruing being more end loaded. On this crucial question the link with capital and especially generating capital receipts is vital. The Council’s current Medium Term Plan set last March placed the bulk of the cost of transformation to be met from the allowable use of capital receipts. In our report on progress at the end of 2021/22 we commended the improved medium term planning at the Council and a largely balanced MTFP.

We also commended the new and structured process put in place by the Council to identify and secure capital receipts. However we also commented that the scale of reliance on capital to fund both capital schemes and transformation results in a challenging target requiring constant attention. We are content that proper focus has been brought to bear but the market has undoubtedly changed as a result of sharp rises in the cost of borrowing in particular. This has delayed and may potentially derail some major planned sales of complex sites. As it stands, even assuming delay rather than derailment, the Council estimates a shortfall in receipts to meet the costs of transformation of some £21m over the medium term planning period. Understandably, the Council is seeking to bring more properties and sites onto the pipeline but at the current time, given that investment shortfall, the headline MTFP, relying as it does on significant financial savings arising from transformation, cannot be considered as credible.

The actual capital programme for 2022/23 will not be compromised by the change in the sales market mainly because the Council is forecasting a very poor delivery of its capital programme in 2022/23, evidenced by a very high slippage rate approaching 80%. The Council will have to review its medium term capital ambitions in the light of the changing receipts environment if it is not to revert to new borrowing, which of course would undermine its current approach to reducing debt.

Ensuring the Council has a sound and competent cadre of finance staff from the most senior to the most junior remains a major concern for the IAB. Mainly due to external conditions but also partly due to a pay policy that is not fit for purpose, the Council has struggled to fill key finance posts with permanent staff. A permanent Corporate Director for Finance will be in place in early January. Other key finance post vacancies are being filled by ‘interims’. who are making a positive contribution, not least in the role of Deputy Section 151 officer, but their contracts, mainly, only run to March next year. The Executive have authorised support for the increased costs associated with ‘interims’ and indeed is willing to invest in additional new posts to bolster finance capacity which is to be commended. Notwithstanding external conditions, such reliance on ‘interims’ is a major weakness and clearly if contracts are extended after March ‘interims’ could still choose to leave the Council.

In terms of the Finance Improvement Programme, the Board has consistently raised its concerns about the quality and application of proper accounting practices across the local authority. These are well below the required minimum standards which not only underpin the reliability of outturn forecasts but also sound budget preparation and accurate coding. It is related to capacity, skill sets, leadership, and crucially, the accountability framework across the Council. At the beginning of the year the IAB called for the local authority to put in place a Council-wide ‘finance improvement programme’ as a matter of urgency to address its poor position. Some positive steps have been taken, including PWC’s work together with a more granular review of reserves and improved budget planning processes. The investment albeit in ‘interims’ to help develop such a programme is also a positive. However, the IAB is disappointed at the pace of change as the programme is in the development phase but there is clear requirement to see embedded improvement coming through in the next 12 months.

Taken as a whole, in terms of finance, some positive progress has been made and should be acknowledged but overall the extent of progress falls short of what the IAB would have expected by the end of November 2022.

5. Companies

The non-statutory review highlighted the need for a significant improvement in the Council’s governance arrangements for its companies, and a review of the entire portfolio, to determine the future of each entity. Almost 2 years on, progress has been far slower than targeted in the Council’s Recovery and Improvement Plan. This has largely been a result of the inability to fill the commercial roles required to implement the plan. In the last 6 months the picture has significantly improved with the appointment of an interim Commercial Director and more recently the governance, finance and legal officers for the Shareholder Unit. The failure to resource the commercial team in a timely fashion has primarily been a result of market conditions but also due to shortcomings in the Council’s policies and procedures that are now being addressed.

Progress on the companies’ governance has accelerated in the second half of the year. A Commercial Strategy and a Companies Governance Handbook have been approved. Related training of shareholder representatives and Council company directors has been delivered. Council board member competency self-assessments have been undertaken and steps to address potential conflicts of interest have been agreed. The need for further governance improvements is acknowledged by the Council including external board competency evaluations, and these are being planned.

The lack of commercial capacity has meant that the companies review has largely been event-driven (i.e. in response to risks or opportunities as they have arisen). In the last 6 months the sale of Thomas Bow was successfully completed and the in-housing of Nottingham Revenue & Benefits was approved. Major project teams are now in place (with SROs) where required to manage or mitigate ongoing commercial risk. This includes the ‘in-housing’ of Nottingham City Homes (NCH) where options have been developed for the revised structure of NCH and its subsidiaries. Events have shown that companies in the portfolio often create risk and complexity for the Council that is far greater than their potential benefits. It is essential that the Council now develops a robust plan to complete the review (and determine the future) of both subsidiary and non-subsidiary companies, and to be tracking progress against this plan.

6. Housing

The IRB expressed its considerable concern with the revelation in December 2021 that there had been a substantial misappropriation of funds from the housing revenue account to the general fund. Further failings were identified in May 2022 which identified, in total, a sum of £40 million credited to the general fund as a result of irregular and illegal financial/accounting transactions over a 6 year period. Following approval by DLUHC a sum of £23m has now been restored to the general fund but some £17.2m remains outstanding as the Council awaits NCH action to repay this sum. These practices, when revealed, were deeply disturbing and raise questions about the standards and integrity of accounting practice by both NCH and the Council.

The Penn and CIPFA reviews both highlighted systemic and procedural weaknesses in the Council decision making and financial management. The Council has now agreed to bring the housing service in-house and is currently negotiating those transfer arrangements, scheduled to be completed by March 2023. With the necessary expertise in local authority housing now operating within the Council and good cooperation with new management at NCH this work is being achieved in an effective and timely way. The outstanding challenge for the Council is to provide assurance that no further irregularities have occurred relating to the housing revenue account. Finally, it is important to note the outcome of tenant consultation relating to these events has, in large part, raised no major concerns.

7. Workforce plan

A major challenge for the Council, as previously stated, has been to effect a cultural change in ways of working by employees, at all levels. It has been acknowledged that very many long-standing members of staff demonstrate a commitment to serve citizens well and reveal a genuine caring nature. However, many working practices have not been reviewed for a very long time and alternative, more efficient and effective ways of working are available, offering best value opportunities and significant financial savings.

A plan is underway to re-train and re-skill all parts of the workforce and this is likely to be completed, as previously stated, at the end of 2024. These retraining and redevelopment plans are progressing although the IAB has expressed a view that the redundancy programme, implicit in such change, should be progressed as there has been limited action in this area to date. Concerns remain that a robust recruitment policy has not been fully implemented. Additionally, a realistic pay policy, conducted against the background of a challenging labour market, is essential if the objective of attracting high calibre staff is to be achieved.

A new performance management system has been developed together with a more rigorous appraisal system but this too must be imbedded as soon as possible, demonstrating the overall accountability of the organisation. This approach must also deal effectively with underperformance, not always practised effectively in the past.

8. Corporate and service planning

The Council produces a series of key planning documents including a Strategic Council Plan (SCP), a Medium Term Financial Plan (MTFP), and Divisional Service Plans. Nottingham has illustrated how these interface in terms of an integrated planning process. The IAB is focused on consistency as well as testing whether these plans are realistic and deliverable. The Strategic Council Plan is in progress although, given its role and purpose in setting the strategic direction of Nottingham, the SCP this should lead, guide and influence the structure and content of other plans. This report also details elsewhere how the IAB is questioning the residual budget gaps in the MTFP and how this will be resolved.

The plans taken in their entirety should be a means by which best value can be demonstrated. The plans and their delivery provide the basis for measuring economy, efficiency and effectiveness in the resourcing, funding and provision of services. The divisional plans, in particular, lead more directly to the engagement of staff consistent with the best value concept. The IRB has continuously challenged whether this is integral to the way the authority operates and there is clearly more to do, in planning and delivery terms, if the Council is to provide concrete evidence that best value is fundamental in serving the public of Nottingham.

9. Conclusion

The IAB has, over a period of more than 18 months, acquired a very good awareness and knowledge of Nottingham City Council and how it operates. Following the Caller report the IAB was charged with overseeing, challenging and questioning the City Council’s improvement and recovery plan. It was disappointing to see the initial reaction to our presence as we continuously registered our concerns, during those early months, about lack of urgency and pace of change in addressing very serious failings. The quarterly reports have reiterated these concerns.

However, Housing and Company improvements have now, in large part, been progressed but finance, transformation and culture, although improving, have many challenges ahead in delivering fundamental change within specific financial constraints. The planning process, overall, is now more coordinated and coherent but there is more to be done if the Council performance, as a whole, can be seen to be fulfilling the best value duty.

The last 2 months have seen more concentrated action to address the shortcomings and it is now incumbent on both members and officers to accelerate this if the Council is to meet the requirements, set by the IAB, in full. The Council’s response to the 67 requirements issued in September demonstrates, in large part, a serious sense of purpose in seeking to resolve all the outstanding issues which have been highlighted by the Improvement and Assurance Board.

The challenge is significant, as previously referenced, in the areas of transformation, governance, workforce culture and particularly finance. There must be total commitment to delivering a balanced 2023/24 budget and four medium term financial plan which, in turn, should demonstrate financial resilience and sustainability. Efficiency and effectiveness must be explicit in fulfilling fundamental change through workforce planning, management and transformation in service provision to achieve best value. Sound risk management must underpin every decision, and governance practised in such a way that does not inhibit or impede timely progress.

The capacity for the Council to fulfil these objectives in the timescale set remains a significant challenge and although the progress made in recent months may, in part, be encouraging the ultimate test is deliverability.

Sir Tony Redmond

Sean Nolan

Robin Hughes