CCN Blogs | 26 September 2018
Austerity and the rising demand for services have driven local authorities to consider different ways of working. However, this isn’t just about cutting costs – the generation of revenue must also play its part. One option to help local authorities achieve financial sustainability is to continue their drive to be more commercial. As a result, through a combination of the 2011 Localism Act (which gave councils new powers to trade) and the decline in the popularity of outsourcing, there has been a surge in the creation of local authority trading companies (LATCs). We have seen this trend across all types of authority, with investment companies being more prevalent in districts, whereas both counties and districts have created companies for the delivery of a wide range of services. It is the latter that is the focus of our latest report.
Outsourcing has traditionally been a common means of delivering services but with a number of very public failures in recent times this has fallen out of favour. LATCs offer some clear advantages over outsourcing– they mean councils can keep direct control of their providers as well as allowing any profits to come back into the authority. Equally, the change to local authority terms and conditions, particularly with regard to pensions, can often bring significant reductions in the cost base of the service. Creating a separate company also enables the service or activity to move away from being constrained by the council’s decision-making processes and be more agile and responsive to changes in demand or funding. In addition, the wider powers to trade that are available through the Localism Act provide LATCs with the opportunity to win contracts elsewhere. This is key: it is a serious undertaking to set up a company and therefore the gains should be more than incremental. But perhaps most importantly of all, it is the move away from long term, rigid contracts exemplified by the outsourced approach and towards a flexible, collaborative style partnership that makes it an attractive option for many.
Although many local authority trading companies are successful, there have been some failures with companies being wound up and services brought back in house. The reasons for these are often in relation to the inappropriate governance of the company rather than the commercial idea being flawed – it is easy for the owning authority to become too involved in the day-to-day running of the company. This is a big mistake because the company needs its freedom to operate in the commercial world, making decisions that it sees fit. This situation is further exacerbated when elected members have seats on the boards of these companies – this not only stifles innovation and growth but can mean serious conflicts of interest that pose a risk for members.
Having reviewed many of these companies, I believe there are several critical steps that must be taken to ensure they operate effectively, including: having a clear strategy; getting the right culture; good governance; investing in technology; and being realistic with returns on investment. No LATC is a quick fix – transferring a service into a company either from an outsourced provider or from the authority itself will not automatically create efficiencies and time is needed to shift the culture of the trading company to one in which commercial behaviours become second nature.
And, as with any commercial organisation, LATCs need to adapt to developments in the external market – including possible changes to public procurement rules and structural changes that may arise as a result of local government re-organisation. They also need to respond to an increasingly competitive market as it becomes more crowded. This could mean more mergers and insolvencies as it becomes a situation of ‘survival of the fittest’. And it must always be remembered that in instances where trading companies do fail, any affected council will always be the provider of last resort. This is particularly important in relation to high profile services such as social care, which is heavily regulated.
Despite the challenges, I believe that LATCs are here to stay, even if austerity ends tomorrow. There is still plenty of growth potential for existing and new companies to tap into if they adopt the right strategies – including further public sector collaboration and looking beyond local boundaries. There is an opportunity to grow into the gap created by the decline of outsourced contracts, taking advantage of the Teckal exemption to enter into contracts without having the cost and resource considerations for a procurement exercise. It is therefore important to understand what makes them work well and draw on current experiences to help shape the future not only for the benefit of local authorities themselves and the companies involved but also for the people they seek to serve. If, as I predict, this particular brand of delivery does grow, it will be important given the lack of market testing that this approach really does represent value for money for our public services.
For more information download our new report: In good company – Latest trends in local authority trading companies
Associate Director – Local Government Advisory
Grant Thornton UK LLP