06 November 2023

Council bankruptcies underline the need for good governance

Council bankruptcies underline the need for good governance image
Image: ChristopherGeorge / Shutterstock.com

Penny Rinta-Suksi, partner at law firm Blake Morgan, argues that innovative policies that aim to enable efficient service delivery must be built on the foundations of good governance. 

Birmingham City Council’s recent declaration of effective bankruptcy is a powerful reminder of the importance of good governance for local authorities. Over the past decades, a difficult economic climate has increasingly put strain on councils across the country. At the same time, national governments facing their own challenges have resisted significant increases in the support offered to councils.

Creative councils have looked for increasingly innovative policies and mechanisms that better enable the efficient delivery of core services, give value to their communities, and raise income – from new housing companies, to investing in events such as Birmingham’s Commonwealth Games. However, it is becoming increasingly clear that to be done well these policies must be built on the right governance foundations.

Questioning the business case

At the heart of any successful new policy or decision must always be a business case. A robust case will demonstrate the balance of risks and returns, costs and benefits, that is key for the proper and considered spending of public money. Local authorities have talented teams able to set out and evaluate business cases. However, councils are not traditional businesses, and unlike a firm, they have additional political considerations.

This can lead to a risk that political outcomes take precedence over long-term strategic planning. Thinking big is great, as is raising money from public or private sources, if it will make a real difference to people in need. However, creative policies still need robust assessment to ensure they are viable and will genuinely benefit people. Solvency and pragmatism are political imperatives, even if that means tough decisions in the short term.

Issues can occur particularly when importing ‘successful’ policies from other authorities without proper scrutiny. For instance, the first councils to develop their own housing companies did so on sound grounds, and they worked in their local contexts. Other authorities importing this idea in a different context, and without a robust business case, ran into difficulties. Councils must stick to their best governance practice, leadership should listen to the best internal and external expert advice, and most of all – they need to follow the business case.

Frameworks for long-term thinking

A second and connected part of good governance is ensuring long-term thinking. Councils must put in place the frameworks and processes to allow for long-running, complex policies and programmes to deliver successfully in the fullness of time. Even with a solid business case in place for a decision, authorities face unique challenges from changing leadership and members through political cycles, often with shifting agendas and policy priorities.

This uncertainty and potential for change can harm policy delivery and outcomes for people. In capital investment, for example, a business case will put in place requirements for review and maintenance that will retain the value of the underlying asset and ensure long term usability and returns on investment. But when the initial money has been spent, it is easy for a future leadership team to cut the maintenance programme and undermine the business case.

Anticipating these issues can lead structural decisions to be made by one administration to ringfence funding outside of the hands of the next administration – often putting it into private hands. This can work, but only if that money is available for the planned purpose and not extracted by a firm through other means such as shareholder dividends. Ensuring this requires its own due diligence and oversight from the council.

Underpinning this is a fundamental but underappreciated element: the importance of excellent record keeping. With so much change and staff churn across authorities, continuity of knowledge needs to be maintained to avoid problems and mistakes. For instance, reports from Birmingham City Council point to poor record keeping between administrations resulting in the undervaluing of equal value claims – which became a key factor in their bankruptcy.

If no one can recall the reasons why money is being spent, it is more likely to be cut, even if it was essential to the original business case.

Similarly, if there is no corporate memory that the private partner is holding funding for maintenance or risk share, the value offered by a project will not be properly monitored, delivered and measured.

Successful authorities find ways to put frameworks in place that enable this passing on of knowledge and records. To deliver for the community, it’s vital to keep one eye on the past as well as one on creative new ideas. With further economic and social challenges on the immediate horizon – now is the time to reassess the basics, and either bolster the frameworks that already exist or set up robust new frameworks for good governance.

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