Council failed to comply with procurement law, external auditors say

Middlesbrough Council's approach to awarding a series of contracts worth more than £4m "failed to comply" with procurement law, the local authority's external auditors have said.

The finding was detailed in a comprehensive interim value for money report authored by Ernst & Young (EY), which also highlighted risks to the council concerning member and senior officer relationships, asset acquisitions, and oversight of a development company.

Responding to the report, which concerns the 2021/22 and 2022/23 financial years, Middlesbrough Council said significant work has been undertaken to improve its governance, culture and financial sustainability since 2023.

On procurement, the report raised concerns that £4m worth of children's services contracts awarded between 2021/22 and 2022/23 may not have complied with procurement law.

The council awarded the first contract in February 2020 as a direct award to the supplier under the permitted exemption within the council's Financial and Contract Procedure Rules for "social care services under the National Health Services and Community Care Act, 1990 or the Children Act, 1989".

According to the report, the contracted services were assessed by the council's procurement team as falling within the definition, but the legal department did not confirm this.

In July 2020, a second contract was awarded directly to the same supplier, with the rationale for the decision claiming there was a permitted exemption under the Financial and Contract Procedure Rules "for work, supplies and services which are patented or of a proprietary or special character and for which it is not possible or desirable to obtain competitive prices".

A third contract was awarded in November 2020 through the so-called 'gold command' process in place during the Covid-19 pandemic.

However, EY said it could not find a reference to the decision in relevant minutes from that period.

"We have also been unable to establish the basis on which the contract was deemed exempt and directly awarded to the supplier," the report said.

"This contract was also subsequently extended, however no formal approval for this extension was documented."

A further contract was awarded to the supplier in August 2022, but no formal approvals or exemptions were sought prior to entering into the agreement.

Concerns about the awarding of this contract were raised by the council's procurement team, with a subsequent council investigation confirming that the local authority's policies and procedures had not been followed in the awarding of the contract, the report said.

The council extended three of the four contracts as late as May 2023.

EY's report said: "The Council estimates that total expenditure under these four contracts to May 2023 was £4.3 million.

"This significantly exceeds the thresholds under which direct award of contracts is permitted under both the Council's Financial and Contract Procedure Rules and The Public Contracts Regulations 2015.

"Whilst this amount relates to the four contracts in aggregate, three of these contracts individually exceed the £663,540 threshold at which the council is required undertake a competitive tendering exercise under The Public Contracts Regulations 2015.

"It is therefore our view that in addition to failing to comply with its own Financial and Contract Procedure Rules, the Council has failed to comply with applicable procurement law in the awarding of these contracts."

A further review of other contracts the council awarded between April 2021 and March 2022 found that 7 out of 12 sampled had been awarded using some form of exemption.

EY noted that in each case, the exemption had been approved by the Service Head and Head of Commissioning and Procurement. However, there was no further documented approval.

The report noted that under the council's Financial and Contract Procedure Rules, all exemptions require approval by the section 151 officer.

The Financial and Contract Procedure Rules also require that exemptions be approved by the council's monitoring officer except in a limited number of specified circumstances.

"There is no requirement under the Financial and Contract Procedure Rules for exemptions to be approved by the Head of Commissioning and Procurement," it said.

It added: "It is evident to us that the council has a well established informal and undocumented practice when it comes to application of procurement exemptions which is neither compliant with the requirements of the Financial and Contract Procedure Rules or as robust.

"Whilst the procurement of the four social care contracts, or at least aspects of them, appear to have also occurred outside of this informal practice, the widespread non-adherence to the Council's formal policies and procedures is likely to have been a contributory factor as to why this occurred."

In EY's view, non-adherence to the council's Financial and Contract Procedure Rules "was pervasive" during both 2021/22 and 2022/23 and significantly increased the risk that exemptions were "applied inappropriately and that the Council is not able to demonstrate that it was securing value for money in its procurements".

To tackle what the report characterised as a "significant weakness" in the council's arrangements to secure value for money, EY recommended:

• The council conclude its review of its Financial and Contract Procedure Rules to ensure that they reflect the needs of the council and the expectations of members and implement the revised rules without delay. "This should include being explicit on how contract modifications should be assessed and managed, as the Financial and Contract Procedure Rules do not currently address contract extensions."
• That, once the Financial and Contract Procedure Rules are finalised, training is provided to all officers involved in contracting, procurement or financial decision making to ensure that the requirements of the Financial and Contract Procedure Rules are understood and adhered to.
• That the council complete its review of all ongoing contracts which were initially awarded under an exemption but have been subject to subsequent amendment (including extension) to identify whether they are compliant with The Public Contracts Regulations 2015.

Elsewhere in the report, EY highlighted a "pervasive lack of trust" within the council between officers and elected members, as well as between elected members.

The lack of trust "was having a significant impact on the governance of the council and was a contributing factor to the respective roles and responsibilities of officers and members not being adhered to," the report noted.

EY concluded that member and senior officer relationships was a significant weakness in the council's arrangements during both 2021/22 and 2022/23.

It drew attention to problems with the constitution in effect during 2021/22 and 2022/23, including multiple references within the constitution to job titles or grades that were not used by the council.

Governance issues were also found in relation to the council's interest in purchasing a pub in the town centre.

In December 2021, the council contacted the owners of the Crown Pub, a prominent vacant building in the town centre, about pursuing a compulsory purchase of the property.

According to the report, the council's chief executive met with the owners in a meeting that was not minuted.

Later, the property owners emailed the chief executive to confirm an interest in selling the pub for £750,000, which was then approved by the council's executive.

The purchase, which was made despite the council valuing the property at just £460,000, was not supported by a meaningful business case, according to the report.

It was also unclear why the property was of interest to the council as it had not been included on lists of priority' eyesore' sites.

"In our view, there are clear indicators that the cultural and governance weaknesses at the Council were evident in the way the purchase of the Crown Pub was Completed," the report said.

"There are however also further clear indicators of weaknesses in the Council's processes in support of asset acquisitions which we consider to demonstrate a separate significant weakness in the Council's arrangements during 2022/23."

As a result of its analysis of the purchase, EY recommended that the council:

• Management develop an action plan to address each of the recommendations raised by internal audit in their report into the acquisition of the Crown Pub.
• Management review the processes for identifying and communicating where the facts or conditions set out in committee papers change between the date on which papers are published and the date on which the committee meeting is held, to ensure that where there are changes in circumstances relevant to decisions being made this is shared with decision makers prior to decisions being taken.

The purchase was also criticised in a separate report from Veritau, released in March 2024.

A spokesperson for Middlesbrough Council said: “Recommendations made in Ernst & Young’s interim Value for Money report relate to the 2021/22 and 2022/23 financial years, and therefore do not reflect the impact of significant work undertaken to improve Middlesbrough Council’s governance, culture and financial sustainability since March last year.

“The auditors’ report will be considered by members of the Council’s Audit Committee at a public meeting on Thursday.”

Adam Carey