Prudence and culture in municipal enterprise – lessons from Thurrock and Woking

In May 2023 a report following a review of the governance, finances and commercial activities of Woking Borough Council (WBC) commissioned by the Secretary of State¹ reveals that two of the council’s commercial schemes – both regeneration projects, account for the majority of its £1.9 billion debt, and finds that the WBC’s historic investment and borrowing decisions were disproportionate to its ability to manage complex commercial activity. The report concludes that despite the best efforts of a new chief executive and senior leadership team, WBC has neither the skills nor the capacity to devise a long-term strategy to resolve its commercial arrangements, the scale and complexity of which will require the onboarding of a partner(s) with significant experience prepared to share the risks as well as any potential returns. The consequences of the council’s parlous financial situation will be many, varied, wide-ranging and reverberate for many years.

Published in June 2023 a best value inspection report into Thurrock Borough Council² found that inadequate governance and a ‘dereliction in political and managerial leadership’ enabled the council to pursue an investment strategy which has ultimately resulted in the council’s financial collapse with debts in excess of £1 billion.

The report makes for alarming reading and identifies multiple failings at Thurrock BC – many of which are in common with the findings of similar best-value and public-interest reports published in recent years. The report found a ‘culture of insularity and complacency’ prevailing at the council at the time as a consequence of:

• a lack of openness and transparency;
• the discouragement of internal challenge and the routine dismissal of external challenge and criticism;
• a reluctance to disclose ‘bad news’;
• inadequate reporting and information provision (to members);
• insufficient scrutiny;
• insufficiently evidenced and/or unlawful and/or unrecorded or incorrectly recorded decision-making;
• a failure to understand and sufficiently assess risk;
• inappropriate levels of delegated authority; and
• high-risk investments made without the necessary skills or experience.

Thurrock BC now also has a new political administration, chief executive and senior leadership team and is working with commissioners to develop a recovery plan but the journey ahead will be long and difficult for the council and residents alike with serious implications for service provision.

While in terms of the money involved Woking and Thurrock may be extreme many of the underlying causes of their current difficulties, which can be summarised in the whole as ‘governance failings’, are unique to neither and have become a recurring theme in the findings of reports following statutory and non-statutory interventions concerning the finances, governance and commercial activities of several local authorities in recent years. So too, as I have commented on before, in our findings where local authorities or their companies have instructed us to review and advise on their governance arrangements. 

With the pressure on local authority budgets unlikely to ease anytime soon and the scrutiny of local authority investments and commercial ventures intensifying, if they are not already doing so in the aftermath of the May 2023 local elections, Woking and Thurrock may serve as a further reminder for local authorities to review their investments and commercial operations. Such a review might best be undertaken by a scrutiny committee (or equivalent) or a similarly appropriate body and could consider particularly:

• is the investment or activity provided for in the constitution, in the budget/policy framework and the investment strategy;
• is the investment or activity (still) serving the purpose for which it was intended and delivering the results or returns envisaged;
• is the investment or activity (still) satisfying ‘best value’ obligations;
• are expectations (still) realistic;
• is the investment or the activity and its business adequately resourced and managed by people with the necessary knowledge, skills and experience;
• are delegations appropriate and documented;
• are risk assessments up-to-date and risks fully understood;
• are governance, reporting and scrutiny arrangements effective;
• is challenge and questioning encouraged and ‘bad news’ delivered as well as the good;
• are informed decisions being made by the right body on the basis of sufficiently detailed and accurate information;
• are decisions accurately recorded and retained;
• is (external) advice sought as appropriate and followed; and
• does the investment/activity have a defined ‘redline’ and an exit strategy.

On the whole, Woking and Thurrock might also serve as a catalyst for local authorities to review their overall investment strategy in consideration of the statutory guidance4 produced by the as-was-then DCLG. A local authority should publish each financial year an investment strategy approved by full council which contains the disclosures and reporting requirements specified in the guidance (unless they are published elsewhere⁵), including indicators which enable elected members and the public to assess the total risk to which a local authority is exposed as a result of its investments. While neither report appears to make an express reference to the investment guidance, it would seem to have been given little regard if any by either Woking BC or Thurrock BC. The investment guidance also sets out the criteria by way of which a local authority can loan money to a subsidiary company whilst continuing to have regard to the wider requirements of the guidance, and in such respect, what must also be included in an investment strategy in these regards.

Additionally, from 4 July 2023 to 15 August 2023 (2359hrs) the DLUHC is consulting on draft statutory guidance for local authorities on the best value duty6. The guidance proposes a principles-based approach to ensuring that best-value authorities comply with their best-value duties. Also proposed in the guidance are seven overlapping ‘best value themes’ of good practice, in part derived from previous best value interventions, and sets out for each theme various ‘characteristics of a well-functioning authority’ and ‘indicators of potential failure’. As such, and albeit as yet in draft form, the best value guidance may also assist local authorities in assessing their best value performance in the exercise of their various functions – including not least as regards financial management, investments and governance.

While the challenges currently being faced by local authorities and the demands upon them may be hitherto unprecedented their responsible stewardship of public money has never been more important. While they may have limited ability to influence matters at the ‘global’ level, in proactively reviewing their current and potential future investments and commercial activities, in consideration of their overall investment strategy and best value obligations, and then being candid and pragmatic in view of the findings, local authorities can, however, help themselves and in doing so might also avoid inadvertently storing up, and adding to, future financial difficulties and potential best value failings.

¹ Governance, financial and commercial review of Woking Borough Council for the Secretary of State for levelling up, housing and communities, May 2023

² Thurrock Council best value inspection report, May 2023

³ See for example Re. Nottingham City Council, London Borough of Croydon Council, Northumberland County Council and Spelthorne Borough Council.

⁴ Statutory guidance on local government investments (3^rd Edition) 2018

⁵ E.g. a capital strategy prepared in accordance with the prudential code or a treasury management strategy prepared in accordance with the treasury management code

⁶ DLUHC best value standards and interventions – a statutory guide for best value authorities (draft) July 2023

If you would like to find out more about prudence and culture in municipal enterprise, please contact Matt Marsh.

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