Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption.
As a local authority, your strategic plan should show how you plan to fund and deliver core services.
Wholesale outsourcing of delivery to one organisation has sometimes left many local authorities with no control, no money and few options. Conversely, providing services from within the council has often led to difficulties in recruiting the right management and leadership talent, together with certain service issues becoming politicised where this has acted as a blocker to improvement and efficiency.
Many local authorities have assessed that a trading subsidiary or trading structure could be beneficial as part of generating income or the service delivery matrix. However, it is often difficult to know where to start on implementation. Setting up a few wholly owned companies is relatively simple, but there is a whole raft of decisions which need to be taken during that process which must align with the strategic purposes of the companies. If the council gets this wrong, the trading subsidiaries will be nothing more than distractions which cause problems. If the set up supports the outcomes you are seeking, successful delivery is just around the corner!
Taking early decisions on pensions, procurement, employment terms and conditions, State aid and the service requirements which need to be delivered by the subsidiary are key. Ensuring that all these decisions support the outcomes you are expecting as an authority are fundamental. For example, the table below sets out the considerations you need to make for two very different types of subsidiary, one dealing with primarily Council service delivery, and the other with commercial delivery which drives income for the Council. Often the best strategy is to have both vehicles in your structure to maximise flexibility.
|Example Topics||Commercial Subsidiary||Service Delivery Subsidiary|
|Outcomes||Delivering income into the General Fund.||Delivering council services with greater focus and efficiency.|
|Service Contract with council||None – all activity should be external if possible.||Consider how this should be structured to ensure financial sustainability and accountability is adequately balanced.|
|Governance arrangements||Approval of business plan – with the ability to operate outside usual council restrictions.||Tighter controls? Business plan approval, control over significant decisions with capital or revenue implications?|
|Procurement||Could be outside the scope of the EU rules, if it is purely commercial. Scope for intra group trading.||Will be subject to the rules, and should be structured to be a “Teckal” subsidiary. Even here, however, flexibilities can be worked in to enable “commercial” operation.|
|State aid||Broadly, the subsidiary must be dealt with as an arm’s length body with all support provide on a commercial basis.||If services are only provided back to the council, there are no State aid concerns.|
||Often LGPS initially but long term?||LGPS is likely to be continued, but, again, long term?|
For more information
There is support available to navigate this complexity. We are always willing to offer a view using our experience to inform the matters which would need to be addressed in outline business cases and have set up numerous structures. Please contact Richard Brooks.
We have been supporting a number of trading companies to create the not-for-profit National Federation of Local Authority Trading Companies – or the LATCo Network. The inaugural event where local authorities and existing trading companies can meet to network and exchange ideas, takes place on 11 July 2019 in London – click here to get your ticket.
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