A guide on how to challenge your council’s financial decisions
RECLAIM LOCAL DEMOCRACY
2nd Edition published by Research for Action Ltd in June 2019 (1st Edition: June 2017)
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Reclaim local democracy Democratise your council’s accounts pg.3
Inspect the accounts pg.8
Ask a question to the auditor pg.10
Object to the accounts pg.12
Example objections pg.18
Resources pg.30
Democratise your council’s accounts
Your rights are guaranteed: • In England under the The Local Audit and Accountability Act 2014 • In Scotland under the Local Government (Scotland) Act 1973 and the Local Authority Accounts (Scotland) Regulations 2014 • In Wales under the Public Audit (Wales) Act 2004 and Accounts and Audit (Wales) Regulations 2005 • In Northern Ireland under the Local Government (Accounts and Audit) Regulations (Northern Ireland) 2015, the Local Government (Northern Ireland) Order 2005 and the Local Government (Northern Ireland) Act 2014
Did you know you can inspect your council’s accounts and challenge spending decisions? Here’s how. Is your council cutting jobs and services whilst paying extortionate sums in interest to banks? Do you want to know how much public money is going to private companies running council services? Not getting the information you want and frustrated by lack of transparency? This guide is to help you navigate your legal rights to: • inspect a local authority’s accounts and ask for related documents • ask questions to the local authority’s external auditor • object to items in the local authority’s accounts Council publishes draft accounts (April-May) Council publishes a public notice for the inspection period (May) Inspection period #NoLOBOs (May-July) TAKE ACTION AS A RESIDENT!
June -July 2017
Ask Inspect to inspect the Council the accounts accounts
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? Ask inspect Ask Ask to to inspect Ask forfor aa Ask for a Council report in the thethe Council report in the public interest report accounts public Interest For more information visit ouraccounts website lada.debtresistance.uk public Interest
or get in touch: @DebtResistUK or lada@debtresistance.uk
4
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When can I exercise my rights? You can exercise your rights during the “inspection period” or the “period for the exercise of public rights”, which usually occurs in the summer after the local authority has finished preparing the draft accounts for the previous financial year that ends on the 31st of March. The exact dates vary for each local authority so consult your council’s website to know the exact dates. Below is an overview of how they vary by country.
In England
The inspection period lasts 30 working days and must be advertised by the council on their website. The inspection period must include a common period during which all local authority accounts are available for inspection (usually the first two weeks of June).
In Scotland
The inspection period lasts for 15 working days and must be advertised on the council’s website 14 days before it starts. The notice must appear on the 17th of June the latest, meaning the inspection period must begin by the 1st of July.
In Wales
The inspection period falls between end of March (when the financial year ends) and end of September (when the accounts must be ready), lasts for 20 working days and must be advertised at least 14 days before it starts. The Auditor General in Wales appoints the dates for each council and have not adopted a fixed timetable. However, for most councils this period will run during July.
In Northern Ireland
The inspection period lasts for 20 working days and is advertised 14 days before it starts. It usually happens in August and at the same time in all 11 councils.
COUNTRY
LENGTH
PERIOD
England
30 working days
Common 2 weeks period for all local authorities usually in June
Scotland
15 working days
Must begin by July 1st
Wales
20 working days
Usually in July
Northern Ireland
20 working days
Usually in August
5
What are the council’s accounts? Accounts are the financial statements that any public body must produce at the end of the financial year to show how money is received or borrowed and how it is spent. They are an extensive document that includes a balance sheet and summary of income and expenditure, along with supporting notes with more details. Councils must publish the draft version of the accounts after the closure of the financial year (31 March) and before the inspection period. The draft version must be made available on the council’s website and on request at the council’s offices. The final version of the accounts will be published after the inspection period and once the accounts have been approved by the external auditor and the council.
Who is the external auditor? The external auditor is responsible for checking and signing off the accounts, and for responding to residents’ questions and objections. In Scotland the external auditor is Audit Scotland, in Wales it is the Auditor General Wales (supported by the Wales Audit Office) and in Northern Ireland the Local Government Auditor, a staff member of the Northern Ireland Audit Office. In England, since the closure of the Audit Commission in 2015, the role of external auditor has been outsourced to private institutions, mainly the big four accountancy firms: KPMG, Deloitte, EY and PWC. Until 2018 the auditors were appointed by the Public Sector Audit Appointments Limited (PSAA). From 2018 onwards, Local Authorities may choose to appoint their own auditor, or opt-in to a collective scheme for which the PSAA remains responsible for the appointments. Closure of the Audit Commission in April 2015 created potential conflicts of interest in council audit in England, whereby external audit firms acting for local government also acted as advisory consultants on previous development projects that may be the subject of citizen objections, and may still audit the companies involved. For England, to find out who the external auditor of your council is and how to contact them you can either: • See if the information is available on your council’s website • Ask the council directly • Find the information on the PSAA website • Ask the PSSA directly via email at auditorappointments@psaa.co.uk or calling them at 02075435817 6
For the rest of the UK contact the relevant audit body or the council directly. If you are unhappy with how the external auditor has handled your question or objection you should make a formal complaint directly to the audit firm or to the body responsible for the overview of the audit procedures as indicated above .
Can I take action without being an expert? You don’t have to be a financial expert to inspect, question and object to accounts, but it can be intimidating for someone with no financial training. Don’t let this put you off. You as a resident or “interested party” have the right to obtain clear information from your council, irrespective of your level of financial knowledge. If you need it, there are various ways you can ask for support: • Ask the council and auditor to help. They have a duty to make information accessible and clear to any local resident. • Ask someone you trust for help. When inspecting, asking questions and objecting to the accounts, you can choose to be represented by someone else who is not necessarily a local resident. Your council might require you to notify them in advance if you ask someone to help you inspect the accounts. • At the end of this guide we have included examples from groups that have inspected and objected to council accounts as part of their campaigns. Feel free to use them as a template. Who can ...
Inspect
Ask a question
Object
Local elector
Yes
Yes
Yes
Representative of local elector
Yes
Yes
Yes
Interested person
Yes
No
No
Journalist/blogger
Yes
No
No
7
Inspect the accounts
Inspection rights are covered: • In England by Section 26 of Local Audit and Accountability Act 2014 and the Accounts and Audit Regulations 2015 • In Scotland by Section 101 of the Local Government (Scotland) Act 1973 and Section 9 of the Local Authority Accounts (Scotland) Regulations 2014 • In Wales by Sections 29 and 30 of the Public Audit (Wales) Act 2004 • In Northern Ireland by Articles 16 and 17 of the Local Government (Northern Ireland) Order 2005. • In England and Wales by chapter 25 of the Local Audit Public Access to Documents Act 2017 8
Who can inspect the accounts? Any ‘interested person’ can inspect the accounts and their related documents - in Northern Ireland, this is extended to all members of the public. An interested person is someone who has some connection with the local authority - for example they have a business for which they pay fees to the authority. Also journalists - including citizen journalists and bloggers - have recently been given this right in England and Wales under the Local Audit (Public Access to Documents) Act 2017. You can ask someone else to go with you to inspect the account, or someone to represent you and inspect the accounts for you. This person does not have to be a local resident, but your council may require you to notify them in advance if you are asking for outside help.
What can I inspect? You can inspect: • the accounts of the last financial year • all books, deeds, contracts, bills, vouchers and receipts relating to the accounts or an item in the accounts of that financial year. The authority has the right to expect you to act ‘reasonably’ - technically, this could mean they disagree with your request to see everything in the accounts if they consider it too much work. So it is a good idea to have a clearly defined request. The authority can also withhold or redact any personal information or refuse to release the documents (usually only a small sub-section) of the documents due to commercial confidentiality. The reason not to disclose information however must be set against a public interest test.
How? You can: • Check online if the council has published the unaudited accounts on their website. • Go to the council offices as indicated in the notice for the inspection period. You can make copies of the accounts and all related documents. • Ask the council to send you copies of the accounts and related documents. Inspecting the accounts is free of charge, but the council may charge you for making copies of documents. 9
Ask a question to the auditor
Asking questions to the auditor about the accounts is covered: • In England by Section 26 of the The Local Audit and Accountability Act 2014 and in Chapter 5 of the 2015 Code of Audit Practice; • In Scotland by Section 101 of the Local Government (Scotland) Act 1973 • In Wales by Section 30 of the Public Audit (Wales) Act 2004 • In Northern Ireland by Article 17 of the Local Government (Northern Ireland) Order 2005 and Part 5 of the Local Government (Accounts and Audit) Regulations (Northern Ireland) 2015. 10
Who can ask a question? As a local elector, you have the right to ask questions to both the council and the external auditor. However, the external auditor is not obliged by law to provide you with an answer if they consider the question outside their remit, better answered by another organisation or too costly (subject to a public interest test). Neither can they ask the authority questions on your behalf. The right to ask questions does not extend to interested persons or to journalists, but as a local elector you may ask someone to represent you.
What can I ask? You can only ask questions about items appearing in the accounts of the financial year being audited. The external auditor can only reply to questions about facts, not opinions - in other words, only “what” and “how” questions, not “why” questions.
How? It is best to put your question in writing. You can either email or send it by post to the external auditor. State in your question what item you’re referring to, indicating for example which articles it relates to in the accounts, and on which page.
11
Object to the accounts
Objecting to the accounts is covered: • In England by Section 27 and Schedule 7 of the The Local Audit and Accountability Act 2014 and chapter 5 the 2015 Code of Audit Practice • In Scotland by Section 101 of the Local Government (Scotland) Act 1973 • In Wales by Sections 22, 31 and 32 of the Public Audit (Wales) Act 2004 • In Northern Ireland by Article 18 of the Local Government (Northern Ireland) Order 2005 12
Who can object? To make an objection to an item you have found in the local authority’s accounts you must be on the electoral register in that area. The right to object does not extend to interested persons or journalists. If you prefer not to take action alone, you have the option to ask someone else to represent you. They do not have to be a local elector you just need to notify the auditor and provide the name and address of the person who will be acting on your behalf in future correspondence.
What can I object to? You can object to the accounts: • If you believe an item is unlawful (see the next page for what this means); • where there are issues relevant to the authority’s arrangements for securing value for money or that are referred to in an authority’s annual governance statement; • or where there are matters of wider concern arising from the authority’s finances. You can ask the external auditor to (either or both): • issue a report in the public interest • apply to the High Court for a declaration that an item in the accounts is unlawful
What is a public interest report? When the auditor produces a public interest report, the authority must publish it on their website and call a public meeting to consider the external auditor’s report and any recommendations in it. The authority must respond publicly within a short time frame, usually a month. The auditor can also send the report to the media and other local or national public bodies if they see fit. They must also send a copy to the relevant Secretary of State. For England previously published public interest reports are available on the Audit Commission’s archived website and the PSAA website.
13
What is a declaration that an item is unlawful? An unlawful item of accounts is spending or income that the council: • spent or received without powers to do so • took from or added to the wrong fund or account • spent on something that they had the power to spend on, but the decision to spend the money was wholly unreasonably or irrational - as in, no reasonable person would have made the decision. If the external auditor agrees that an item in the accounts may be unlawful, they can apply to the court for a judge to give a declaration to that effect. If the High Court agrees, it can order the authority to correct its accounts. The cost of going to court are high, so there needs to be a considerable public interest to justify the legal costs for the council.
How? You must send a written notice to the external auditor and a copy to the council either via email or post (see examples at the end of the report). There is no set format but the notice must include: • confirmation that you are an elector in the authority’s area (and details of your representative if you decide to use one); • details of the item in the accounts that you are objecting to; • why you are objecting to the accounts; • evidence, details and facts on which you rely; • what you would like the external auditor to do (issue a report in the public interest or apply to the High Court for a declaration that an item is unlawful) • Under which powers you are asking the auditor to act - in other words the powers available under the Local Audit and Accountability Act 2014 for England, the Local Government (Scotland) Act 1973 in Scotland, the Public Audit (Wales) Act 2004 in Wales and The Local Government (Northern Ireland) Order 2005 and The Local Government (Northern Ireland) Act 2014 in Northern Ireland. Filing an objection is free for a local elector, but the local authority will incur the cost of paying the external auditor for responding to your objection.
14
What will the auditor do with the objection? First of all the external auditor will send you an acknowledgement of the receipt of the objection. If you do not receive this within a few days, contact the auditor asking to confirm they have recieved your objection. The external auditor will then check if the objection meets the statutory requirements by making sure that: • You are a local elector • The objection relates to an item of the accounts of that year Then the external auditor will decide the most appropriate and cost-effective way to proceed based on facts such as: • The significance of the matter and if there is a public interest in the issue raised • What information is already in the public domain and if further reporting is necessary • Which form of reporting would be more effective in helping the local authority understand and take appropriate action on the matter • If the local authority is already addressing the matter and taking appropriate action • The rights of you as an elector, of the authority, of the individual councillors and officers. Once evaluated your objection the auditor will contact you to inform you if they will proceed with the objection and what their next steps will be. There is no clear time limit to when you will recieve a final response to your objection - it could take over a year. In some cases the auditor will send you an interim report asking for your comments. Usually the response time for comments will be limited to a few weeks and there could be restrictions on who you can share the information with.
15
What happens if the external auditor does not agree that the item is unlawful? Even if the objection is eligible, the auditor has a broad discretion as to whether or not to accept it for consideration. You can only appeal if you have asked the external auditor to apply for a High Court declaration that an item of the accounts is unlawful, not if you have asked for a public interest report. You must file your appeal in the Administrative Court section of the High Court. The time limit for doing so is 21 days. You will have to take the matter to court yourself. An appeal can be expensive, so before filing the appeal you should get legal advice on the strengths of your case and the financial risk you are taking on. If your appeal is not upheld, you could have to pay all of the costs associated with the appeal, including the external auditor’s and council’s legal costs.
What else can the external auditor do? Should the external auditor decide that your objection is ineligible or that they do not believe there are sufficient grounds to treat your request as an objection, they may still decide to treat the issue as a “matter brought to their attention” and consider it when auditing the accounts. They may also: • Make a statutory recommendation which the council must consider and respond to publicly • Make non statutory recommendations, which the council can decide to consider or not • Issue an advisory notice which allows the authority to reconsider its action and seek professional advice. • Apply for a judicial review of the council’s actions • In Northern Ireland, the auditor also has the power to recover any amount not accounted for, a loss that has been incurred or a deficiency caused by the wilful misconduct of any person These actions are solely at the discretion of the auditor and it is not within your rights to ask them to undertake them.
16
Objection process
Council publishes their draft accounts
Council publishes notice for inspection period
Local elector can object to the accounts
Elector asks for a public interest report
Auditor accepts objection
Auditor can send report to other bodies and to the media
Auditor produces a public interest report
Elector asks for a High Court declaration
Auditor rejects objection
Auditor rejects objection
Auditor accepts objection
Elector cannot appeal
Elector can appeal
Auditor takes the objection to the High Court
Elector must file appeal in the High Court within 21 days
The High Court declares the item is unlawful
Council publishes report on their website
Council holds a public meeting to address the report Council must respond publicly within about a month
Auditor issues a statutory recommendation
The High Court tells the Council to act on their accounts Auditor can take a different action
Auditor issues a non statutory recommendation
Auditor issues an advisory notice
Auditor applies for a judicial review
17
Example objections
18
Community Reinvest Fossil fuel investment risk Website: www.communityreinvest.org.uk Twitter: @Comm_REinvest Community Reinvest is a social enterprise working with campaign groups, NGOs and local authorities to support divestment from fossil fuels, and to promote reinvestment in community owned renewable energy systems which democratise the way energy is produced and distributed. You can download their Reinvesting Pensions report here: https://communityreinvest.org.uk/wp-content/ uploads/2016/03/Reinvesting-Pensions.pdf Council pension funds across the UK have £14bn invested in fossil fuels (coal, oil and gas). These investments not only prop up corporations which are destroying our climate, but also expose pension fund members and taxpayers to financial risks. In order to meet the Paris agreement of 2 degrees warming, two thirds of known fossil fuel reserves must stay in the ground - meaning current share prices, which are calculated upon the ability to burn known fossil fuel reserves, are grossly overvalued, creating a “carbon bubble” that threatens to leave energy infrastructure redundant as “stranded assets” of a bygone oil age. Council pension funds have a fiduciary duty to manage financial risks, including carbon investment risk, yet many funds outsource responsibility to fund managers and have been slow to reduce fossil fuel exposure. Objecting to fossil fuel investment in council’s annual accounts will help to expose failures of process and prompt action.
19
To the external auditor/ whom it may concern, As an elector of [ADD NAME] Council, I wish to lodge an objection to the accounts prepared for public inspection by Council for the year 2016-2017. I request that the external auditor issue a report on these accounts in the public interest and transmit it to the Council. I wish you to prepare this report on the grounds that failure of the pension fund committee to discuss, manage and actively reduce the “carbon bubble risk1” posed by [ADD NAME] pension fund investments in fossil fuels (a financially material risk factor2 for residents and fund members), represents a breach of fiduciary duty and is potentially unlawful. The term ‘unlawful’ applies in this context, I believe, because the decision to maintain fossil fuel equity holdings in an energy market plagued by extended low oil prices and rising energy sector defaults3 is irrational - placing taxpayers, who ultimately underwrite fund members defined benefit pension fund obligations and liabilities, at unnecessary financial risk. The Council [ADD REFERENCE/LINK TO PENSION FUND VALUE WITH PAGE REFERENCE NUMBER] records a pension fund net liability of £[ADD AMOUNT] million, and on page [ADD PAGE], details investments of £[ADD AMOUNT] in equities, and £[ADD AMOUNT] in pooled investment vehicles. Detailed analysis of the [ADD NAME] pension fund fossil fuel investments for the 2013/14 financial year conducted by 350.org, Community Reinvest and Platform4 published on the Go Fossil Free website5 determined at least [ADD AMOUNT]% of [ADD NAME] pension assets were invested in fossil fuels. Maintaining investments of this magnitude in fossil fuel firms constitutes a significant financial risk to the ongoing viability of the [ADD NAME] fund, as borne out by recent stock prices declines suffered by Glencore and the bankruptcy of fossil fuel companies including Chesapeake Energy and Peabody coal. A report6 published by the European Systemic Risk Board in February 2016 warned of the ‘hard landing’ for the global economy that would occur if fossil fuels are not divested from in a timely manner. In this event, the consequent rapid devaluation in fossil fuels would substantially impact any entity holding investments in these companies, and thus any person with investments in that entity. This adds further weight to the need to withdraw investment in a sector that will inevitably shrink with the transition to a low-carbon economy. In October 2015, The Environment Agency Pension Fund (EAPF) committed to divest 90% of coal holdings, and 50% of holdings in oil and gas by 2020,7 adopting a clear leadership position in managing carbon investment risk among LGPS funds. Haringey8 has committed to divest from coal holdings, and along with Waltham Forest9 and Southwark10, commits to exit all fossil fuel investments. The EAPF will invest 15% of its fund in low-carbon energy, energy efficiency and other businesses that help tackle climate change by 2020 and has already moved its £280m of global share investments into a low-carbon index. The Environment Agency Pension Fund 11(“EAPF”) states in its Investment Strategy Statement (ISS) policy to address the impact of climate change that:
1
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html
2 https://shareaction.org/wp-content/uploads/2016/09/ClimateInvestmentDuties-InvestorReport.pdf 3
http://www.bloomberg.com/news/articles/2016-02-25/biggest-wave-yet-of-u-s-oil-defaults-looms-as-bust-intensifies
4
https://docs.google.com/spreadsheets/d/1TqK5N8jHJulk0ohpAMgLEogS_4uDS_1tdWaapnFwUsU/edit#gid=1848407477
5 http://gofossilfree.org/uk/pensions/
7 5
https://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_6_1602.pdf
6
http://www.theguardian.com/environment/2015/oct/19/uk-environment-agency-divests-landmark-move-help-meet-2c-limit https://gofossilfree.org/uk/press-release/haringey-council-divests-from-coal-and-moves-200-million-into-low-carbon-fund
9 https://gofossilfree.org/uk/press-release/waltham-forest/
8
https://gofossilfree.org/uk/press-release/southwark/
9
https://www.theguardian.com/environment/2015/oct/19/uk-environment-agency-divests-landmark-move-help-meet-2c-limit
20
“The Fund’s fiduciary duty is to act in the best long-term interest of our members and to do so requires us to recognise that environmental and social governance [ESG] issues can adversely impact on the Fund’s financial performance and should be taken into account in the funding and investment strategies and throughout the funding and investment decision making process”. Mark Mansley, EAPF’s chief investment officer, said12 the new policy was not a “knee-jerk reaction - but followed over a decade’s analysis of the financial risks posed by climate change.” A referral submitted to The Pensions Regulator13 by Share Action and Client Earth in February 2017 identified a range of common misconceptions and assumptions, resulting in potential breaches of fiduciary duty made by LGPS funds including the false assumptions: • Climate change does not pose financial risks • Delegation to investment managers is sufficient • Delegation of stewardship to LAPFF is sufficient • Climate risk will all be dealt with at pool level from now on • Taxpayers (not scheme members) bear the risk Mark Carney in his ‘Tragedy of the Horizons’ speech at Lloyd’s said: “once climate change becomes a defining issue for financial stability, it may already be too late.14” Failure to adequately manage climate/carbon risks poses significant financial risks to LGPS fund members and local taxpayers. I would therefore be grateful if you considered this request to issue a public interest report on [ADD NAME] pension funds fossil fuel investments and discharge of fiduciary duty regarding the management of carbon investment risk for the 2016-2017 financial year. Yours sincerely, [NAME OF OBJECTOR]
10
https://www.theguardian.com/environment/2015/oct/19/uk-environment-agency-divests-landmark-move-help-meet-2c-limit
13
https://shareaction.org/wp-content/uploads/2017/04/TPRReferral.pdf
14
http://www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx
21
Debt Resistance UK Lender Option Borrower Option (LOBO) loans Website: lada.debtresistance.uk Twitter: @DebtResistUK Debt Resistance UK is a group of activists, campaigners and researchers set up to challenge the narrative of debt as inevitable and apolitical. They focus on the role of debt in upholding the current economic system and its inequalities, and are currently working on a local authority debt audit to reclaim local democracy and to challenge the illegitimate lending practices of banks. Debt Resistance UK has supported residents in more than 20 local authorities across England to object to their councils’ borrowing from private banks in the form of LOBO loans. LOBO (Lender Option Borrower Option) loans are very long-term bank loans that have been sold to local authorities. Usually with a low “teaser rate” or taken out as result of conflicted advice, they give the lender (bank) the option to change the interest rate, at which point the borrower can choose to accept it or pay the loan back in full. If the bank does not exercise their option, but the council wants to repay the loan in full, they face exorbitant breakage costs, typically 90% of the value of loan. In the current low interest rate environment, councils are paying up to three times the interest they could be charged if they had borrowed from the central government via the Public Works Loan Board, and are locked into the contracts for decades. Following is an example of an objection letter regarding LOBO loans.
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Notice of Formal Objection: RE: [NAME] Council’s 2016/17 Annual Accounts on LOBO Loan borrowing As an elector of [NAME] Council, I wish to lodge an objection to the accounts prepared for public inspection by the Council for the year 2016-20171. I request that you prepare a public interest report and apply to the courts for a declaration that items of the accounts, namely “Lender Option, Borrower Option” (LOBO) loan borrowing, are unlawful.2 The term ‘unlawful’ applies in this context, I believe, because the decision to sign up to [ADD NUMBER OF LOANS]3 LOBO loans was unreasonable and irrational on the part of those in various positions of public duty. LOBO loans contain derivatives, which in some cases have similar properties to interest rate swaps declared ultra-vires or illegal for use by UK local government following the landmark 1989 Hammersmith and Fulham case4. The legality of LOBO loans remains untested in a court of law. In July 2015, LOBO loan borrowing was subject to a Channel 4 Dispatches documentary: “How Councils Blow Your Millions”5 , and was the subject of a Parliamentary Inquiry by the Communities and Local Government Committee6. The potential costs and derivatives risks of the LOBO loan contracts were not, and could not, be fully understood by council officers, and the type and volume of borrowing carries such a high risk as to be prejudicial to the interests of [NAME] Council taxpayers. Due to the complexity and “optionality” of the contracts, the overall interest rate and costs of the loans would have been impossible to price over the long term , without Local Authorities do not have direct access to.
sophisticated pricing tools
7
that the majority of
[NAME] Council borrowed approximately £ [ADD TOTAL AMOUNT] million in LOBO loans from [ADD NAME OF BANKS]8. Making such a borrowing commitment under the conditions which the banks imposed, without benchmarking and recording the decisions against comparable PWLB loans amounts to “irrational” conduct. LOBO (Lender Option Borrower Option) loans are typically very long-term loans - [ADD RANGE]9 years in the case of [NAME] Council. The initial interest rate is usually a fixed “teaser” rate, but the lender has the “option” to propose or impose, on predetermined future dates a new fixed rate. The borrower has the only ”option” to either accept the new rate or repay the entire loan. In the case of [NAME] Council option dates for LOBOs vary from [ADD NUMBER] months, to [ADD NUMBER] years10. In the current low interest rate climate, it is very unlikely that the lender will call it’s “option” as it would be disadvantageous to them. The Council is now locked into expensive loans with high ([ADD INTEREST RATE RANGE]11) interest rates and high “breakage costs”, in a climate where they could be borrowing at much lower rates. [USE ONLY IN THE CASE OF INVERSE FLOATERS] The LOBO loan from RBS is particularly problematic as it contains an inverse floater12, which was effectively a one-way bet on interest rates going up from 2009/10, designed 1
[ADD LINK TO COUNCIL ACCOUNTS]
2
[ADD NOTE OF THE ACCOUNTS WHERE LOBOS ARE MENTIONED]
3
[ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com]
4
http://www.nytimes.com/1989/11/06/business/british-court-invalidates-some-financial-swaps.html
5
http://www.channel4.com/info/press/news/how-councils-blow-your-millions-channel-4-dispatches
6 https://www.parliament.uk/business/committees/committees-a-z/commons-select/communities-and-local-government-committee/inquiries/parliament-2015/ local-council-bank-loans/ 7
http://www.ianfraser.org/how-city-banks-and-brokers-stitched-up-local-authorities-with-lobo-loans/
8
[ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com]
9
[ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com]
10 [ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com] 11 [ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com] 12 http://www.ft.com/cms/s/0/3228336c-e6bf-11e5-a09b-1f8b0d268c39.html#axzz4GG0rSOof
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to inversely reflect interest rates and is resulting in a staggering [ADD RATE]13 interest rate being paid by the Council. [USE ONLY IN THE CASE OF INVERSE FLOATERS] With the current contracts, should the local authority choose to repay the loan (for example to access a cheaper rate loans elsewhere) without waiting for the lender to exercise their “option”, it would need to pay a “break penalty” to exit the loan, which given the pricing of derivatives in the contracts can cost multiples of the original loan principal. This is partially reflected in the fair value of the loans indicated as [ADD AMOUNT] in note [ADD NOTE NUMBER] of the accounts, but cannot be defined precisely, as the final “break cost” would be determined through a negotiation process with the bank. The decision to sign these contracts was a gamble and an irrational and unlawful decision by the Council. I would therefore be grateful for you, under the Local Audit and Accountability Act 2014, to apply to the courts for a declaration that [NAME] Council’s LOBO loan borrowing as referenced in the 2016-2017 accounts is unlawful, and request that you prepare a public interest report on this matter. I trust that you will continue to act in the public interest by fulfilling the recommendations made above and will await your formal response regarding the forthcoming court application based on the clear evidence supplied. Regards, [NAME OF OBJECTOR]
13 [ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com]
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People’s Audit of Lambeth Poor local governance Website: http://www.thepeoplesaudit.info/ Twitter: @PeoplesAudit People’s Audit is a group of concerned citizens and finance professionals in the London Borough of Lambeth. They got together to audit their council’s accounts because of concerns regarding poor governance and lack of due diligence. For the last year, they have been making extensive use of their rights to map their council’s governance practices and finances, including staff costs and spending on housing, libraries and the new Town Hall. They are encouraging others around the country to do the same. Following is an example of an objection People’s Audit made last year. It concerns the refurbishment of an estate and generally the poor management of resources and contracts.
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Dear [INSERT AUDITOR], I am an elector in the London Borough of Lambeth. In accordance with Section 27 of the Local Audit and Accountability Act 2014, I am writing to you to make a formal objection to Lambeth’s draft annual statement of accounts for 2015/2016. My objection falls into two parts: • Payments to contractors which are not in accordance with the contract and are therefore unlawful. • Items regarding poor management of contracts which should be the subject of a Public Interest Report. Some of the issues are quite complex to explain, so I would appreciate if we could talk on the phone or meet prior to you taking further action. Payments to contractors which are not in accordance with the contract I attach an extract from a payment that was made to one of the council’s contractors, using an NEC target cost contract. The issues with this payment are as follows: Payment has been made for Defined Costs in the depot. Unless it is specifically written into the contract that the Working Area includes the depot (which does sometimes happen but would not be normal practice), all costs related to the depot are disallowed in accordance with the contract as they are deemed to be included within the contractor’s fee. Even if the Working Area did include the depot, there are several items (marked with an x) which would definitely be disallowed as they do not form part of the Schedule of Cost Components and are therefore deemed to be included within the contractor’s fee. This amounts to over 50% of the depot costs. It is clear that the contract is not being administered properly and that if such errors are replicated across the council’s portfolio of work it would amount to a substantial amount of money. With regards to [INSERT NAME] contract, I enclose a copy of the final account. There is a variation section on each tab of the final account. There is no corresponding instruction against any of the variations that have been paid. Variations have been paid without instructions, which the council do not have the power to do under the contract. There is also potentially fraudulent activity with regard to the concrete repairs. You will note that the number of concrete repairs is identical for the blocks. It is clearly inconceivable that each block would have an identical number of repairs carried out. This is further evidenced by the attached measure of concrete repairs which a leaseholder passed to me which had been sent by the council as proof of works being carried out. The measure shows 107 Nr repairs being carried out, whereas 225 Nr have been charged by the contractor (and paid by the council). Public Interest Report My final objection is with regards to items that I would like you to investigate and issue a Public Interest Report. These are as follows: • Even if you are not minded to declare that payments have been made to the contractors (noted above) which are not in accordance with their contracts, I would like you to make a declaration regarding the poor contract management of these works. • Given my concern about the works noted above, I asked to see quite a large sample of invoices for these contractors. The council have been unable to locate any invoices in relation to mechanical and electrical works carried out on repairs and maintenance works. This equates to over £8M of expenditure, which is deeply concerning. This suggests some serious flaws in not only the council’s financial and contract management systems but also in the audit regimes. • Of the initial batch of invoices I received, 3 out of 48 had been paid on the basis of an assessment rather than an invoice and none displayed evidence of any authorising signatures. Indeed, in some instances there was a space for signature but it had been left blank. This is clearly poor governance. • I attach a spreadsheet which shows the number of instances where waivers to the council’s Standing Orders have been issued to extend existing contracts. NB This list only represents waivers I have been able to find-there may well be more. Such waivers should generally only be issued in exceptional circumstances or where it can be demonstrated that it is in the council’s best interests. However, it is clear that there is a wholesale disregard by the council for their own Standing Orders. In many cases extensions have been issued merely because nobody has put a replacement contract in place. In other cases the waiver is in breach of EU procurement thresholds. This is yet another example of poor contract management. • The council previously announced that the construction of the new town hall would save the taxpayer money. In the space of a few months this year the budget has increased by over £8M. As this is an enormous increase can you please issue a Public Interest Report stating how this shortfall will be funded by the council. If you wish to discuss further, please do not hesitate to contact me. Yours faithfully, [OBJECTORS NAME]
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PEOPLE vs PFI A People’s Safety Audit of Public Buildings Constructed under PFI Website: www.peoplevspfi.org.uk Twitter: @PPLvsPFI People vs PFI is a grassroots movement made up of patients, students, public sector workers and residents living and working with and paying taxes for PFI. Their campaign aims to expose how unaffordable, unaccountable and unsafe PFI is and to end this scandal of institutionalised theft which has left us owing £300bn in PFI debts in return for lower quality public buildings and public services. Private Finance Initiative is a means by which governments transfer public money to corporate investors, in the form of high-profit, low-risk investment returns in order to finance infrastructure projects. There are more than 800 PFI contracts across the UK, covering thousands of public buildings, nearly 60% of which are hospitals and schools and costing £10bn in repayments each year. There is growing evidence to show that buildings constructed ‘for profit’ are at greater risk of serious structural and fire safety defects due to over reliance on self certification and cutting corners to finish construction on time. The Local Audit and Accountability Act is a chance for citizens to demand direct answers to direct questions about public safety and to challenge payments to the private sector. Following is an example of an objection letter regarding PFI schemes. There are two versions of this objection, one for authorities who have responded to PEOPLEvsPFI FOI requests and have demonstrated a lack of sufficient monitoring and inspection to assure the public of their safety and secondly an objection for those authorities who have refused to respond at all. Also note the attention given to the conflict of interest of the auditor. An example of audit conflict is KPMG in regard to Camden Council and Chalcots Estate PFI Housing Refurbishment, where residents were evacuated (due to fire risk) in June 2017. KPMG audit(ed) and or consulted for all parties to the PFI contract, namely: • HBOS bank which financed the Chalcots Estate PFI and collapsed in 2008 • Camden Council • Rydon Group who managed the Chalcots Estate construction work • PFIC Ltd the PFI Consortium running the Chalcots Estate KPMG are under investigation by the Financial Reporting Council for their failed audits of HBOS Bank.
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Notice of Formal Objection: RE: [NAME] Council’s 2016/17 Annual Accounts on Public Building Safety As an elector of [NAME] Council, I wish to lodge an objection to the accounts prepared for public inspection by the Council for the year 2016-20171. I request that you prepare a public interest report and apply to the courts for a declaration that items of the accounts, namely “Unitary Charge Payments on the following PFI schemes” are ‘unlawful’2. The term ‘unlawful’ applies in this context, I believe, because the decision has been made to continue making monthly unitary charge payments for [ADD THE NUMBER AND TYPE OF PFI SCHEME] without adequate assurance that the contractor is now or has ever been meeting service standards in terms of having constructed buildings that are safe for use and therefore fit for purpose. The Local Audit and Accountability Act 2014 sets out in Schedule 5, 13 (4) (d) “The inspection must be conducted by persons who “do not have any interests likely to conflict with the proper conduct of the inspection.” Given that NAME OF EXTERNAL AUDITOR has also acted for/acts as auditor for NAME THE RELEVANT COMPANIES AND AT WHAT STAGE THEY HAVE BEEN INVOLVED WITH PARTICULAR PFI SCHEMES] This is a clear conflict of interest. We would expect you to set out how you propose to manage this conflict so that the public can have confidence in any decisions and actions that are made in relation to this objection. In January 2016, 9 tonnes of masonry on the exterior of a PFI built primary school in Edinburgh collapsed in an area where, a few hours later children could have been playing before school. The incident led to the closure and investigations of 17 schools across the city. The subsequent Inquiry3 found that the walls had not been properly constructed, this despite the buildings having been inspected and signed off by the contractor’s Independent Certifier. Inspections that followed across other Scottish authorities found structural and fire safety defects in more than 30% of schools built under the PFI model. The report highlighted a lack of local authority resourcing in monitoring the contract and an over reliance on selfcertification that is typical of PFI design and build: “it is insufficient for public sector clients with Section 10 – Remit Item 4: Quality Assurance Processes 165 a responsibility to protect the safety of the communities they serve, to rely solely on the quality assurance processes of contractors for confirmation that key aspects of the construction of buildings, impacting on the safety of users, have been properly constructed” (p. 164, 10.1.20) This included a complete delegation to private contractors of responsibility for building inspections, a failure to receive completion certificates before buildings were used and payments began. Self regulation in fact meant that construction defects were not reported both at the time and after they were discovered. Cole pointed to the failure of the Council “in common with probably a significant majority of public sector clients undertaking PPP projects” to appoint a genuinely independent and qualified inspector (Clerk of Works or equivalent) to provide on site inspections during construction. The report also underlined the far reaching implications of its findings which it claimed were neither limited to a particular authority nor a particular sector. The report drew attention to “relatively widespread knowledge within the PFI industry that defective fire-stopping had been discovered to be a potentially problematic issue in PPP schools and hospitals” (p.15, 3.4.29) The issue of fire-stopping defects, defects relating to fire compartmentation which would ordinarily contain the fire in one section of a building, were the subject of a BBC File on Four investigation, ‘The Price of PFI’4 looked at significant fire safety defects in Peterborough City Hospital and Central Manchester University Hospitals NHS Trust. A report published by the European Services Strategy Unit5 last year drew attention not only to the significant fire safety failings in Peterborough and Manchester but also in Knowsley Schools PFI, Coventry Hospital and Cumberland Infirmary. National Officer of the Fire Brigades Union, David Green made the following comment on safety in PFI hospitals and schools: “The FBU are extremely concerned about the risks posed by poor fire safety in hospitals and schools built ‘for profit’, which seems to go in tandem with an astonishing lack of care both for those who use these facilities and the fire-fighters who are called to the scene when things go wrong...there can’t be short cuts when it comes to safety. The FBU would like to see the introduction of independent inspections of all public buildings before they are used. The current system where such checks can be carried out by the builders themselves is clearly unsafe.” 1 [ADD LINK TO COUNCIL ACCOUNTS] 2 [ADD NOTE OF THE ACCOUNTS WHERE PFI SCHEMES ARE MENTIONED[ 3 http://www.edinburgh.gov.uk/news/article/2245/independent_report_into_school_closures_published 4 http://www.bbc.co.uk/programmes/b07j537j 5 https://www.european-services-strategy.org.uk/publications/essu-research-reports/pfippp-buyouts-bailouts-terminations-and-major
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In an attempt to seek reassurance about the buildings built under PFI in [NAME OF COUNCIL] ,a recent information request6 asked for information relating to (i) institutional response to the findings in the Edinburgh Schools report (ii) resourcing and make-up of the PFI monitoring team during and after construction (iii) appointment and on-site presence of a Clerk of Works or other equivalent independent inspector during construction (iv) evidence of fire safety investigations and reports and (v) any deductions made from monthly unitary charge payments to the PFI consortium as a result of structural or fire safety issues. In response to a recent FOI request asking for details of the construction and performance monitoring of these contracts I was concerned by [INSERT DETAILS HERE RELATING TO THE FOI RESPONSE/LACK OF IT] [PROVIDE ANY LOCAL DETAILS ABOUT ANY OR ALL PFI SCHEMES, INCLUDING NUMBERS USING BUILDINGS, LINKS TO ANY LOCAL NEWS STORIES]7 [NAME] Council entered into the following PFI Contracts: [LIST PFI CONTRACTS – HM TREASURY NUMBER, NAME OF PROJECT, LENGTH OF CONTRACT, and have paid TOTAL NUMBER OF UNITARY CHARGE PAYMENTS, to the SPV NAME since DATE OF FIRST UNITARY CHARGE PAYMENTS] The estimated payment for the most recent financial year was [INSERT ESTIMATED UNITARY CHARGE FIGURE HERE] In light of the above [RESPONSE/LACK OF RESPONSE] I do not believe that [NAME OF COUNCIL] has put in place adequate arrangements to ensure value for money in relation to [NAMES OF RELEVANT PFI SCHEMES] and has therefore exposed both the authority and the public to unnecessary risk. The decision to accept the self certification and sign off that these buildings were safe, the decision to begin and continue to make payments for these services was an irrational and unlawful decision by the Council. I would therefore be grateful for you, under the [Local Audit and Accountability Act 2014 ENGLAND/WALES OR Local Authority Accounts (Scotland) Regulations 2014 SCOTLAND] to apply to the courts for a declaration that [NAME] Council’s [NAME PFI SCHEME] payments as referenced in the 2016-2017 accounts is unlawful, and request that you prepare a public interest report on this matter. I understand that in making a decision to prepare a public interest report you must consider a range of issues including: • The significance of the matter or weakness in arrangements [ADD DETAILS FROM LOCAL SCHEME & COUNCIL RESPONSE] • Whether the body already recognises the need to address the matter and is taking appropriate action [CITE RESPONSE OR LACK OF IT TO FOI REQUEST] • What information is already in the public domain and whether further reporting to bring the matter to the attention of the public is appropriate [ADD LOCAL SPECIFIC DETAILS/RESPONSE] [USE FOR COUNCIL’S WHERE THERE IS A CONFLICT OF INTEREST WITH THE EXTERNAL AUDITORS MAKING A DECISION ABOUT WHETHER TO CARRY OUT A PUBLIC INTEREST REPORT] I would like to make a separate point relating to the fitness of the external auditor to make an impartial decision about whether to conduct a public interest report in relation to the authorities PFI projects. The Local Audit and Accountability Act 2014 sets out in Schedule 5, 13 (4) (d) “The inspection must be conducted by persons who - do not have any interests likely to conflict with the proper conduct of the inspection.” Given that NAME OF EXTERNAL AUDITOR has also acted for/acts as auditor for NAME THE RELEVANT COMPANIES AND AT WHAT STAGE THEY HAVE BEEN INVOLVED WITH PARTICULAR PFI SCHEMES8] This is a clear conflict of interest. I trust that you will continue to act in the public interest by fulfilling the recommendations made above and will await your formal response regarding the forthcoming court application based on the clear evidence supplied. Regards, [NAME OF OBJECTOR] 6
[ADD LINK TO RELEVANT FOI RESPONSE VIA www.whatdotheyknow.com]
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[ADD LINK TO RELEVANT LOCAL PRESS]
8
[ADD LINK TO MOST RECENT ANNUAL ACCOUNTS OF PFI COMPANY]
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Resources
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Legislation England Local Audit (Public Access to Documents) Act 2017 http://www.legislation.gov.uk/ukpga/2017/25/contents/enacted Accounts and Audit Regulations 2015 www.legislation.gov.uk/uksi/2015/234/pdfs/uksi_20150234_en.pdf 2015 Code of Audit Practice https://www.nao.org.uk/code-audit-practice/wp-content/uploads/ sites/29/2015/03/Final-Code-of-Audit-Practice.pdf Local Audit and Accountability Act 2014 http://www.legislation.gov.uk/ukpga/2014/2/contents/enacted
Scotland Local Authority Accounts (Scotland) Regulations 2014 http://www.legislation.gov.uk/ssi/2014/200/pdfs/ssi_20140200_en.pdf Local Government (Scotland) Act 1973 http://www.legislation.gov.uk/ukpga/1973/65/data.pdf
Wales Accounts and Audit (Wales) Regulations 2005 http://www.legislation.gov.uk/wsi/2005/368/pdfs/wsi_20050368_mi.pdf Public Audit (Wales) Act 2004 http://www.legislation.gov.uk/ukpga/2004/23/contents
Northern Ireland Local Government (Accounts and Audit) Regulations (Northern Ireland) 2015 http://www.legislation.gov.uk/nisr/2015/106/part/5/made Local Government Act (Northern Ireland) 2014 http://www.legislation.gov.uk/nia/2014/8/contents Local Government (Northern Ireland) Order 2005 http://www.legislation.gov.uk/nisi/2005/1968/made 31
Audit bodies National Audit Office https://www.nao.org.uk/ Public Sector Audit Appointments Limited (PSAA) http://www.psaa.co.uk Audit Scotland http://www.audit-scotland.gov.uk/ Auditor General Wales & Wales Audit Office http://www.audit.wales/about-us/auditor-general-wales Northern Ireland Audit Office https://www.niauditoffice.gov.uk/
Resources National Audit Office guide https://www.nao.org.uk/code-audit-practice/wp-content/uploads/ sites/29/2015/03/Council-accounts-a-guide-to-your-rights.pdf Audit Wales guide http://www.audit.wales/sites/default/files/download_documents/council_ accounts_your_rights_english.pdf
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About the guide This guide has been produced by Research for Action to support anyone who wants to use their democratic rights to have a closer look at how local authorities manage taxpayers’ money. It will explain how you can inspect your council’s financial accounts, ask questions about them and object to spending you believe is not in the public interest. A special thanks to the following groups for their contribution to this guide: Community Re-invest for UK Debt Resistance People’s Audit of Lambeth PPL vs PFI
RA
Research for Action
@Research_Act www.researchforaction.uk info@researchforaction.uk
Research for Action is a workers’ co-operative that produces research to support social, economic and environmental justice issues and campaigns. Through in-depth investigations into vested interests and corporate power as well as researching alternative economic and democratic models, Research for Action produces informative, reliable and accessible material for the general public, the media, civil society and grassroots organisations to help strengthen their activities in bringing about long lasting change. Authors Ludovica Rogers Fanny Malinen Joel Benjamin
@ldvcrgrs @fannymalinen @Gian_TCatt