Ensuring a commercial hit

By Heather Jameson | 12 February 2020

Austerity may be over, but Brexit is here and local government is unlikely to see pressures on budgets lifting significantly in the near future. In the past decade, local government has seen culture shift towards more self-sufficiency to make ends meet – but the potential for service failure still keeps some senior officers awake at night.

When it comes to choosing the right commercial vehicle to deliver services, it can be a minefield. Those budget pressures can lead to big decisions being made quickly, without taking time to think them through.

At a recent The MJ/Penna round table of local government lawyers, we discussed some of the issues – and one of the major problems is that the lawyers are just not called in early enough. But that is just the start.

‘The lesson we repeatedly learn is: do you have the expertise?’ one of our debaters suggested. Local authorities can choose to insource or set up commercial firms for a number of reasons – due to outsourcing failures or the personal preferences of the political or managerial leadership – but capacity can be a real problem.

If local authorities are going down the commercial route, the key thing to ensure is there is a strong business case and clarity over why they are taking that route – and due diligence is done before making the first move.

One of our experts commented: ‘When a local authority embarks on a joint venture, the powers have to follow the function.’ But sometimes it is the reasoning that is wrong or badly thought through. It can be a case of following in the footsteps of others. As one lawyer put it: ‘Sometimes it’s a case of “I want one of those because they have one”.’

On other occasions, commercial ventures can start with a political idea with all the decisions made ‘behind closed doors’ before the lawyers are brought in, giving little flexibility to explore the best option.

Alternatively, the politics come into play later.

One of our lawyers suggested: ‘In order to get it through the chamber they [the members] start tinkering with things, so it’s neither fish nor fowl. Then you find your policy discussions led by what is in the local paper rather than the policy papers.’ You have to get members into the ‘right zone’ to take strong decisions.

Making sure you have a good relationship with councillors from the start, that you can give advice to openly, is the best way to mitigate problems further down the line.

Sometimes, we are told, setting up a commercial venture is an attempt by an authority to change the culture, to put staff into a different and more commercial mindset or to ‘create a culture that is less reliant on members’.

Being honest with your legal advisers about why you want to set up a commercial vehicle is absolutely essential if you are going to get the right advice. And so is the preparation.

A debater suggested: ‘We are often asked about powers and we are sometimes shown the business case – and the business case sometimes lacks depth.’

But another participant warns: ‘If the concept is wrong there is nothing you can do to put it right. You can’t give an alternative if the premise is fundamentally flawed.’

The split between officer and political management is also an issue, when it comes to who sits on the board of a commercial arm of your authority. ‘If it is running a service, then why shouldn’t it be officers?’ a debater asked before adding: ‘We try to steer clear of the statutory officers, the section 151 and the monitoring officer. You need to protect the council in case something goes wrong with the company.’

Non-executive directors (NEDs) can also be a good way of bringing in experience and expertise to an organisation. But be warned, local authorities can be very different to the environment private sector NEDs may be used to: ‘You sometimes need to have a massive education programme for the NED on the reasons the council does things the way they do,’ claimed a participant.

There is much debate about the motivation for commercial activity – whether it is to save money, to bring failing outsourced services back in-house or for political reasons.

One of our round table guests said: ‘I’ve set up four housing companies. Half the councillors want it to be a ‘Shangri-La’ housing association creating wonderful housing. The other half want it to produce lots of money for the local authority. It’s nothing to do with the law, it is about people. They have to be grown up and understand it can’t be both.’

Often creating a company will add corporation tax and VAT, with little added advantage.

As well as the clarity over what you want and how it will function, our lawyers warned you will also need to be very clear about the risks involved. Given growing attention being paid to governance standards, it is critical to get things right – not to mention the political and reputational damage when things go wrong.

‘We all know there is a correlation between lack of good governance and service failure,’ one of our lawyers states. ‘There is also an issue about getting the right people in.’ Local authorities often can’t pay the same salaries as their private sector counterparts, but you need a commercial operation.

One lawyer suggests they are brought in to set up partnerships and joint ventures and brought back to sort it out when they fall apart. But the advice is: ‘When things go wrong, just stop. Fail often and fail quickly.’

It is important to consider all the available vehicles and consider the best options, as a debater concludes: ‘As local authorities, we often rush into it – or alternatively, we spend forever going round in circles and never getting it done.’

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