Helen Randall: Spelthorne report places spotlight on ‘controls’

Fresh criticism of Spelthorne Council raises the question of what “good” controls look like when negotiating a property deal.

Spelthorne Council’s continuing debacle over property investments resulted this month in a report to elected members raising fresh concerns about the controls that were in place and the steps that were taken.

The report concludes that Spelthorne had “no clearly defined project management methodology”, allegedly “unsatisfactory” management practices and that development plans were being made apparently “without member involvement” outside the local master plan and without any resident consultation.

The report suggests  members had “an insufficient understanding of the property portfolio” and were not “fully aware” of the Prudential Code and what they had to do when considering investment.

If this is what “bad” looks like, what would “good” look like?

Stakeholders

Before any authority embarks on major proposals, it is always good practice, and often legally required, to consult relevant stakeholders in a genuinely open minded way which is meaningful and not just paying “lip service”. The authority’s mind should be “ajar” before the consultation.

Members should know why they are pursuing a particular course of action. They should ask what statutory function of the council is being served and whether it is best served by the acquisition or investment?

It is vital at the start to involve the “Golden Triangle” of the chief executive, chief finance officer and monitoring officer who will help manage the financial and legal implications and prevent stumbling over any potential trip wires.

Investment should be set out in the authority’s investment strategy (which should have been consulted) and take into account all “relevant considerations”. The most important of which is a council’s own budget but also a mature understanding of risk in the long term.

Elected members should understand their stewardship responsibilities over public money and have a basic understanding of local authority accounting and the legal and constitutional framework.

There are some excellent guides produced by the LGA and CIPFA but training will better engage members and enable them to raise queries within their particular local context. Do members, for example, understand the impact of the new PWLB borrowing terms?

Audit trail

Above all, however, there should be an audit trail which demonstrates that elected members are being given an objective and long-term view of the relative risk of an investment is essential.

This last year only served to illustrate how quickly and dramatically markets can change. So, it is also important that alternative options for use of any asset are given some thought, and included in reports, and a business case is compiled applying HM Treasury Green Book principles.

If the authority is proposing to establish a corporate vehicle to invest in an asset then it is essential that the councillors fully understand the distinctions between the roles the council has as an investor/shareholder/owner of the vehicle; the council’s separate commissioning role, if that vehicle is involved in providing any works or services to the council; and the entirely distinct role that any members or officers will have if they are appointed onto the board.

Directorships should be based on skills and relevant experience and not be political appointments.

Care should be taken to ensure that directors appointed by a council are not likely to have conflicts of interest, because their primary legal duty as a director is to act in the best interests of the company, not a council which appointed them.

If a director then has to withdraw due to conflicts of interest, this can lead to disenfranchisement from the company’s operations or, if not addressed, can leave the authority vulnerable to challenge based on apparent bias, conflict of interest or irrelevant considerations.

There should also be provision within a council’s constitution for a formal scrutiny by the investor function.

This could be by a shareholder’s committee or by appointing a suitable non-conflicted officer to ensure that the investment vehicle is meeting its business plan and investment benchmarks. Again, it is often beneficial for members, or officers, exercising the investment-scrutineer function to be trained.

To sum up, any investment decision should be preceded by consultation; compliance with the investment strategy; involvement of the Golden Triangle officers at the outset; a fully considered business case which outlines risk and has contingency planning; and then, after the investment decision is made, a constitutional mechanism which will test how well an investment is performing against defined benchmarks in light of the fact that it is public money being spent.

Helen Randall is a partner at Trowers & Hamlins LLP.