To provide an update on the current position from the Shareholder’s Representative on the County Council’s assessment of performance of Advance Northumberland, the County Council’s wholly owned subsidiary.
Minutes:
RESOLVED that the report be noted and the committee endorse the following recommendations:
1) That the Shareholder has identified a number of continuing weaknesses in governance arrangements regarding Advance Northumberland which must be improved, to ensure that the aims and interests of the County Council as Shareholder are met and that all entities are operating legally and appropriately.
2) That there are some areas of immediate and significant concern which must be
addressed, including:
a) The poor financial performance of Advance Northumberland currently and
prognosis for the future, and the resulting impact on the County Council as
shareholder.
b) The nature of the Board constitution and the extent to which this allows the
Council’s interests to be suitably represented and safeguarded.
c) The adequacy of planning and performance management arrangements within the Group, including concerns regarding Advance Northumberland’s proposed Business Plan and the Operating Agreement.
d) The adequacy over the wider governance framework in place within the Group.
e) The roles undertaken by officers and members within the arrangements established, which do not enforce sufficient separation of duties and in some cases do not safeguard against a potential conflict of interest in the roles being discharged.
3) The Shareholder representative has sought the view of an interim consultant who was appointed by the Council due to the concerns of a number of the Council’s management team and some members about the lack of progress by Advance in relation to a number of outstanding concerns. These concerns were expressed in writing to the Advance Chairman and Board over a twelve month period commencing in 2019. Due to very limited progress The Shareholder representative and other members of the Council’s management team the following actions are to be instigated.
4) The Committee is asked to note that as a result, the Shareholder will (following Cabinet and Council approval) move immediately to introduce the following actions:
Governance and Legal Matters
a) The Shareholder representative has advised the Leader of the Council that the
role of Chairman of Advance Northumberland, should be made separate from the
role of Cabinet Member for Economy and Regeneration. This is necessary to
introduce a sufficient separation of duties, which will be in the interests of the holders of each role and the County Council as shareholder. Consideration is being given by the Shareholder Representative about the arrangements for the appointment of the new Chairman of Advance.
b) The County Council will work further with Advance Northumberland regarding its draft short term Business Plan, to determine whether the Business Plan can be made fit for purpose and whether this can provide sufficient assurance to the Shareholder that the County Council’s interests can be safeguarded;
c) The Operating Agreement will be fundamentally reviewed to determine whether
this can be made fit for purpose to protect the County Council, with suitable
external expertise sourced to undertake this review. This will allow clarity on what
the Shareholder requires as the purpose of Advance Northumberland, and seek
to change some current processes (e.g. last minute and pressurised decision
making) which are not in the interests of the County Council and its own decision
making;
d) The Board of Advance Northumberland will be reconstituted. It is essential that the interests of the Council are protected. At present the impact of discussions the Council is having, or requests made to the Chairman/Board are not suitably addressed. The Executive Director of Regeneration, Commercial and Economy has commented that the current observer status is far too weak to protect the County Council as Shareholder. This will facilitate a mechanism (to be contained in the Memorandum and Articles) to ensure that the company operates under the direction of the Shareholder, with suitable safeguards over reserved matters;
e) The constitution of, terms of reference of and attendance at the Shareholder
Assurance Group will be revised to enhance the important governance role that
this Group undertakes. In terms of membership, this will become an officer group
and elected members will not attend. Suitable legal advice has been and will
continue to be sought on this matter;
f) The County Council’s Audit Committee, acting as Group Audit Committee for all
group entities, including Advance Northumberland, will be recommended to
include within its new role a focus on progress made within the company as
regards internal and external audit recommendations and group governance more
generally, in line with the Terms of Reference agreed by County Council in
November 2020; specifically, the Group Audit Committee will be provided with
detailed assurance information regarding the status of a major potential liability
claim, originating in 2019/20, which is of a value that may impact the company’s
‘going concern’ status.
g) Advance Northumberland will be requested to work closely with the County
Council’s Finance Service to ensure that there is greater visibility over all
accounting systems and processes.
h) The Shareholder will require a plan to allow greater integration of processes
between the County Council and Advance Northumberland, including investment,
monitoring, risk management, audit, evaluation and reporting, which will be
reflected in any revised Operating Agreement and form the basis of future
performance clinics;
i) Teckal arrangements will be established with the approval of the Council’s Head
of Procurement
Finance Matters
j) The company has been significantly impacted by covid-19 and is forecasting
financial losses over the short to medium term and deteriorating cash flow
projections. Asset values have also been affected as reported in the Accounts
2019-20.
k) Financial support from the parent is likely to be required to ensure the financial
sustainability of the company in the short-term, and to prevent an unmanaged
collapse, whilst any reviews and changes are implemented.
l) Risks in the assumptions included in the financial forecasts provided by the
company may mean that the financial position is worse forecast. Further
deterioration during extended national covid-19 restrictions can be expected.
m) The NEP 1 project represents a significant financial risk to Advance and the shareholder. The company has to date requested up to £1.2m financial support from the Council for professional fees in relation to addressing the claims that have been made by the contractor. These fees are out with any settlement figure and associated legal fees. Significant additional costs are anticipated c£3.4m in addition to further legal costs yet unquantified as worst case to be required in order to settle the claim with the contractor. This will require the company to seek further, unbudgeted, financial support from the Council in the current financial year. In additional to the funding for the claim as stated above Advance are now seeking up to £6m working capital facility which is also currently unbudgeted. These adhoc requests present further significant risks to the Council.
n) As part of any strategic review of Advance, consideration needs to be given to the loan arrangements between NCC and its subsidiary. The company has significant loans from the Council of c£28m. Much of this has been historically provided on an interest only loans basis, unsecured and over a significant load term of 30 years to 40 years. It is not clear what the long-term financial strategy is of Advance in relation to repayment of these loans; once due for repayment, will Advance have the cash available to repay the loans, or assets with sufficient value to sell, or be able to afford to refinance the loans at the prevailing interest rates at that time.
HR / OD Matters
o) The organisation’s aims and objectives for staff will be aligned to the relevant
principles of public service, most notably that the Nolan principles and political
restriction.
p) The operating agreement and individual employment contracts should recognise that in times of emergency or critical civil contingency that the workforce of Advance Northumberland can be immediately redeployed to support the Council’s role as Category 1 responder of the Civil Contingencies Act.
q) That the employment policies and procedures of the company are in line with best practice and receive full assurance from internal audit.
r) That the HR/OD staff work closely with the Council to demonstrate similar
professional standards which reflect the needs of the company.
s) That the Health and Safety of all staff is managed overall by the Council’s
Corporate Health and Safety Committee to reflect assurance to the Council
through the Council’s Group Structure.
t) The HR/OD Strategy for the company is aligned to the County Council’s HR/OD
strategy to reflect the Council’s approach to being a good employer
u) The Council ‘s Workforce Committee will have a representative from Advance
Northumberland as a standing member to ensure that the company has oversight
of the Council’s approach and best practice in relation to its staff.
v) The Council will request that they have either an observer or full member (to be
determined) representing the Shareholder on the company’s Nominations and
Remuneration Committee to ensure greater visibility to the Council relating to
Director level responsibilities and salaries.
Communications
w) That the Council has oversight of all internal and external communications for the company, particularly those which impact upon or rely on the Council’s expenditure or investment.