A company with just £24m annual revenue goes bankrupt with £1.9 bn of debts and a further £0.6m financing commitments. It made two appallingly large and risky investments that, not surprisingly, went disastrously wrong. It should have made national headlines amid demands for prosecutions and disbarments, as well as calls to tighten company law and the Corporate Governance Code.
Except that it isn’t a company. It’s a local authority, Woking Council, and those debts are government loans. Woking however is not alone, as Thurrock, Slough and Croydon councils, controlled by different political parties, have fared almost as badly.
The Financial Reporting Council is again updating the UK Corporate Governance Code to reflect new legislation and political pressure. But governance standards are dramatically diverging between the state and private sectors. Companies are being nagged into ever more formulaic and demanding governance rules. Where are the equivalent rules for the public sector?
The recently published review into the governance, financial and commercial in Woking shows how public sector governance failures can happen so disastrously with no effective regulation. A small local council decided to invest in two large speculative property redevelopments. What could go wrong? It’s not rocket science: Here are some clues from the report;
Out of their depth:
“The council’s historic investment and borrowing decisions are disproportionate to its ability to manage complex commercial activity and the council lacks the commercial skills and capacity to identify a longer-term strategy to resolve its commercial arrangements.”
Ponzi-style economics:
The Council borrowed at cheap rates from the Public Works Loan Board then re-lent on to its own property company at a higher rate. This interest rate margin was then used to fund day-to-day council expenditure, but was in fact just taking a profit from lending to itself. The business cases stretched for 50 years to give a payback, well beyond any of the participants working lives. The Council prioritised social over commercial infrastructure, delaying any financial returns into the far future.
Lack of expertise:
The Council has not and will “never have the capacity to effectively manage all the commercial and economic considerations“. “What is clear is that the investments by the previous leadership were made with little provision or consideration of the council capacity and capability to manage these programmes effectively and efficiently.”
Lack of controls:
“There is little evidence to suggest that the systems and processes were initially put in place to ensure that the developments were delivered in an effective way from the outset”. The Chief Executive had delegated authority to spend up to £3m on regeneration projects (12% of annual revenue), which he used to buy, amongst others, a farm and two pubs. The report tactfully explains; “the paper trail is limited in respect of valuations, shareholder directions and company board minutes”.
Lack of proper decision-making:
“There is some evidence to suggest that some investment decisions were made without appropriate business cases and records of robust land valuation.”
Weak finance and accounting:
“It is difficult to conclude the council has complied historically with accounting best practice and the Prudential Framework.”. “The finance function has no management accountancy or commercial finance expertise.”
Inadequate risk and legal assessments:
Woking worked with a developer, but took 100% of the risk. “The arrangements … were taken without an adequate assessment of the risks to the council or a full assessment of the legal considerations”.
I’ve seen some poorly run businesses in my time, but never anything remotely on this scale of incompetence and blind over-reach. Local Authority Chief Executives and Finance Directors may be removed and councillors voted out, but what is to stop such failures repeating?
Where is the clamour to review governance for the public sector? The need for effective risk-management, internal controls, financial assurance, management quality, decision-making processes and individual responsibility is every bit as vital in the public sector as it is in the private. Politicians delight in telling business to obey more rules and tighten governance, but why are they so silent when the public sector shows such egregious failure?
Maybe the government doesn’t want to criticise councillors from its own party? Maybe the Treasury doesn’t want to remind people that it happily loaned billions of pounds to councils to go on commercial spending sprees? The governance failures are not limited to local authorities.
How come the government knows so clearly what company boards need to do, yet fails even to interest itself in its own problems? As the Hebrew proverb might have said: Politician, heal thyself.
All quotes are from the government commissioned report into Woking Council, May 2023