Five missed chances to spot problems at troubled Robin Hood Energy

loxley,house,nottingham,city,council
Loxley House, home to Nottingham City Council which owns Robin Hood Energy
By Kit Sandeman, Local Democracy Reporter

It comes as part of a detailed and highly-critical report into the council’s handling of the energy company.

Earlier this month, Nottingham City Council had to write off £24 million in debt from the firm, at a time when budget cuts are already planned due to the financial impact of COVID-19.

The report, known as a Public Interest Report (PIR), found there was ‘institutionalised blindness’ and frequent ‘overoptimism’ at the council.

It also lists several opportunities where the scale of the risk the council was facing could have been – but wasn’t – recognised.

Opportunity One: Reluctance to challenge political priorities

Setting up Robin Hood Energy was a political priority for Nottingham Labour, listed in its ‘5 key pledges’ in the 2015 manifesto.

Because of the political importance attached to the project, the report said there was a “general tendency…for legitimate challenge of political priorities to be viewed as inappropriate.”

The report found: “The period during which RHE has existed has been characterised by very strong (in its general sense) and ambitious leadership within the council, and this has enabled many successful policy initiatives to be driven through.

“However, in such a leadership model, it is vital that there are also sufficient checks and balances in place and in particular that risks are appropriately recognised and managed, that there is an effective scrutiny function and that challenge of political priorities by both members and officers is seen as a positive.

“This has not been the case in relation to RHE.

“We suggest therefore that the council uses this opportunity to consider whether its overall governance arrangements continue to serve it well.”

Opportunity Two: The Bristol Energy Report

Another key chance missed relates to the findings of a 2018 review which looked at a possible merger with Bristol Energy – a similar venture which was owned by Bristol City Council and is now in the process of being sold, after also posting large losses.

Despite this independent review highlighting the risks the council was facing, senior council officers were ‘completely unaware’ of its existence.

The PIR found: “One specific opportunity which occurred for the council to understand better, and mitigate, the risks it was taking occurred in the summer of 2018.

“Consultants, with significant energy sector experience, were commissioned…on behalf of RHE, Bristol Energy, Nottingham City Council and Bristol City Council.

“This work was to assess the benefits which could be gained from closer working, and possible merger, between RHE and Bristol Energy.

“The report was considered largely by the shareholder representative and officers from Bristol City Council.

“However, other senior council officers were completely unaware of the report or indeed of the possible merger, and none of the messages within the report were shared among other council officers.

“This is significant because the report, produced by industry specialists, included findings which echo our views.”

Opportunity Three: No shareholder meetings for nine months

Shareholder meetings, between the RHE board and senior council figures were designed to keep the council aware of what challenges RHE was facing.

But they ceased in early 2019, and were not replaced for nine months, and while other less formal discussions were taking place, an opportunity for scrutiny was missed, the report says.

The PIR stated: “These meetings ceased formally in March 2019 in anticipation of the new arrangements being put in place.

“But in the event the replacement member forum was not put into place properly for around nine months.”

“For many councils, shareholder meetings are the key means through which subsidiary companies are monitored and overseen, particularly given that … the inclusion of councillors directly on the boards of companies is not seen as good practice.”

Opportunity four: ‘Blurred’ communication

Another problem raised in the PIR surrounds the council’s nominated shareholder – a senior council officer – not being the main channel of communication.

They were appointed to be the council’s ‘eyes and ears’ in the company, and to highlight risks, but instead communication was ‘blurred’, meaning there was ‘no clear overall mechanism for holding the company to account’.

It states: “The shareholder representative role is ideally placed to be the council’s ‘eyes and ears’ in the strategic management of the company, and in particular to highlight emerging risks (to the council), referring these to other appropriate council officers… and ensuring that the company is addressing these risks.

“The scale of the financial risks which emerged in relation to RHE, and the speed at which they emerged, suggests that the shareholder representative role did not fulfil this purpose.

“Irrespective of the lack of clear definition of the shareholder representative role, we would expect any senior local government officer to recognise the very significant risks to public money which RHE came to represent, and to ensure that they were highlighted and to champion mitigation of those risks.

“We are not suggesting that the shareholder representative failed to identify the risks at all, but he appears to have not attached sufficient seriousness to them and to have prioritised instead the element of the role which was aimed at ensuring the success of the company in accordance with political priorities.”

Opportunity Five: Optimism bias

The PIR states that there was a tendency for financial information and forecasts provided by RHE to be clouded by misplaced optimism.

The PIR author said he had: “Experience of observing the unreliability and apparent ‘optimism bias’ within RHE’s financial reporting and forecasts.

“While we recognise that recent years, and particularly 2018/19, have been difficult for all energy companies, the rapid deterioration in RHE’s profit and loss and cashflow positions and the huge differences between predictions and outturn have been notable.

“Examples include:

– Within three weeks of being granted the additional £9.5m loan, RHE had to approach the council again to request a further loan, despite having provided assurance that no further lending would be needed.

“- The expected £3m profit for 2019/20 which RHE included in its presentation to the council in October 2019 had become an expected £10.5m loss by late January 2020 (with the interim management in place)

“- The cashflow forecast from October 2019 which predicted that the £9.5m loan could be repaid in full by 31 March 2020 was overoptimistic, as no principle repayments could actually be afforded within that timescale, although we note that the latter was foreseen in the ‘worst case’.

What does the council say?

The full details of the council’s response to the report are yet to be formally published.

However speaking shortly after the PIR was published, the leader of the council David Mellen said: “We accept the findings of this report which, despite our best intentions, reveal failures in the council’s governance of Robin Hood Energy over the several years following the formation of the company.

“The report makes a number of recommendations to review our current practice of company governance which we are fully committed to carrying out. Some of the recommendations have already started to be put into place while a review of future options for RHE will be completed shortly.

“We very much regret the past failings in the council’s governance of Robin Hood Energy. The change in leadership at both Nottingham City Council and Robin Hood Energy over the last year has seen changes in governance procedures and financial rigour.

“We now need to look forward and continue to make the necessary improvements including those recommended by the external auditor. We will continue to build on the work done so far but we fully accept there is much more to do over the coming months to address the findings of this report.”

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