Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption.
For as many local authority vehicles that exist, there are reasons for creating them, and more. There are, though, some trends that develop:
- Legal compliance - where a local authority wishes to trade or do things for commercial purposes, it must do so through a company (under either the Section 95 trading power, or the general power of competence). This can mean a company dedicated to being “outward facing”, or taking advantage of the Teckal rules to create a company which is primarily focussed on delivery back to the local authority, but which can trade with third parties up to 20% of its activities, helping to revenue generate to a small degree.
- Shared service delivery - one way to enable delivery of shared services in a coordinated fashion is to create a joint Teckal vehicle which benefits from the exemption to procurement rules while enabling shared working and the efficiencies that brings.
- Risk management - a limited liability company can ring fence the risks of individual projects.
- The conduit for a relationship - corporate vehicles can be more reliable and clear-cut that contractual joint ventures, in the form of share companies or limited liability partnerships.
- Policy decisions - from the creation of Arms-Length Managemnt Organisations (ALMOs) using Teckal rules to deliver the Decent Homes programme, to the Cabinet Office’s support programme for the creation of public service mutuals, there have been a number of policy directives over the years leading to local authorities putting services out into separate vehicles.
- Group structures - where councils have created vehicles piecemeal previously in reaction to different needs, there comes a point at which it is sensible to rationalise these arrangements. Group structures, most commonly placing all council companies under a single holding company, can create more streamlined governance arrangements and enable the council and its companies to benefit from effective tax grouping.
Despite some of these drivers, the local authority company does have its critics. Those critics might say that a Teckal vehicle is simply a method by which to circumvent procurement rules. On the face of it, a Teckal vehicle has no innate purpose; part of the Teckal test is that the company must be run with a degree of control, which is similar to that which the local authority holds over its own departments. Given the restraints, the critics argue, why bother? Avoiding proper competition hardly demonstrates best value.
Those same critics might argue that a trading company, within which a local authority seeks to make a commercial return for the provision of services, is a misdirection of councils’ attention away from core service delivery, which will do nothing more but leave those core services under- resourced.
Both arguments lack depth and miss the fundamental point about the companies that local authorities set up. Rarely is the intent simply to be compliant with law or policy; where that is the case, the company may well be set up to fail. Frequently, though, there is a recognition that the real purpose behind setting up a local authority company is to impact cultural change:
- • To turn a failing council service into an innovative one that finds new ways to survive;
- • To take inefficient individual council services and combine them into a shared service that is both better value and better quality; and
- • To learn from private, third and other public sector partners and to impart wisdom in turn, to create an entity that is greater than the sum of its parts.
Of course in each case, councils need to consider governance and legal compliance – for example councils should be conscious of the need to make arrangements with their companies on an arm’s length basis to protect against the risks of appearing anti-competitive and attracting the attentions of the Competition and Markets Authority, or breaching State aid rules.
Whether it’s a Teckal vehicle, a trading company or a joint venture, local authority companies give opportunities for new ways of working; transformational changes which are difficult to replicate within an organisation. They can offer the chance for a dedicated focus on a service area; a new lease of life for a team demoralised by budget cuts; a chance for threats to become challenges to be met; and an injection of expertise and knowledge from outside the organisation. In short, they can offer much more than mere compliance with law and policy; they can offer real cultural change to the benefit of the entire public sector.
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