Local Authority Trading Companies- Adapt to Thrive
EELGA recently held a successful Commercial Masterclass webinar covering councils’ approach to collaboration for commercial benefit, reviewing commercial strategy in a post-Covid world and local authority trading company developments – copies of the event presentations can be found here.
Colin Taylor and Dave Fergus are EELGA Talent Bank Associates who specialise in the creation, governance, management and commercial development of local authority trading companies– in this article, they share their thoughts on critical recent developments in this area.
The General Power of Competence, enshrined in the 2011 Localism Act, significantly extended councils’ powers to trade. As a result, there was a noticeable surge in the setting up of local authority trading companies (LATCos). Many councils used this opportunity to commercialise services in order to free them from local authority constraint, and others took the chance to invest in property, often primarily for yield and, sometimes, outside their home territory.
We have also seen an increasing trend of LATCos being used to deliver the insourcing of services previously outsourced to the market.
However, recent reports in the public interest (Nottingham, Bristol, Croydon) highlighted fundamental shortcomings in both commercial decision-making and governance arrangements – and there are valuable lessons to be taken from such failures.
Questions have also been raised over the use of funds borrowed from the Public Works Loan Board (PWLB). In response, the government undertook a consultation exercise and CIPFA subsequently issued guidance to restrict access to finance from the PWLB – primarily to address concerns about the capital framework being over-stretched in the case of some councils.
At the same time, COVID has had a significant impact on a wide range of business sectors, many of which are core activities for LATCos – from leisure services and parking to trade waste and property management. However, as the pandemic is bought under increasing control and the focus shifts to recovery, the question is, how can councils give their LATCos the best chance of survival and success?
During the past twelve months, we have supported a number of councils to undertake reviews of key service areas where a LATCo is the current delivery model, or this is being considered for the future. This work has highlighted some common themes that all councils should consider when looking at their future commercial activities.
New PWLB rules
The key changes in terms of accessing PWLB funding are that any application must include a three-year capital plan and be supported by a declaration by the S151 officer (or equivalent) that funding is not being sought in advance of need nor to buy investment assets primarily for yield.
Non-compliance with these provisions could result in the authority being barred from PWLB borrowing or having to repay them.
Does this mean an end to local authority investment in commercial property utilising PWLB borrowings? – the answer is not necessarily. Purchasing investment property within an area for long term strategic purposes, regeneration, housing or other functions is clearly within the powers of the authority and so in principle eligible for PWLB borrowing. However, there are many graduations between that and (for example) the purchase out of area for yield with no relevance to authority functions, which would clearly fall outside the new PWLB borrowing criteria – acquisition purpose is the key determinant in terms of accessing PWLB funding.
PWLB is not the only funding source – a number of investors are keen to lend to local authorities, and there is an increasing number of alternative funding sources in the market that compete with, and in some cases offer advantages to, PWLB. For example, issue of a public bond or private placement, approaching the Municipal Bonds Agency/other aggregator or more traditional loans from banks/other lenders.
Follow the evidence
Any proposal to establish a new trading vehicle requires a robust evidence-based analysis of its commercial rationale, and all LATCos should be subject to systematic and regular review. The commercial discipline this process imposes means that realistic expectations will be set, particularly in terms of sales projections, cost/efficiency expectations and profit aspirations.
Our experience tells us that, even when this work is informed by external advisors such as EELGA Talent Bank Associates, it is essential that the council’s own stakeholders buy-in to the vision. We consistently work in tandem with colleagues in Finance, Legal, Operations and Procurement to ensure that the people who will be involved on an ongoing basis understand what the LATCo is intended to achieve and how it does this.
Asking the right questions
The flow of information between a council and its trading companies offers an essential level of protection. Officers and Members need to make sure that they understand the LATCo’s business and have the mechanisms in place to regularly evaluate if the company is on track and performing in line with expectations. At the same time, this level of engagement means that problems can be spotted at an early stage and corrective actions are taken.
The support that EELGA provides to councils and their trading companies always includes a review of governance arrangements – not just those within the LATCo, but the interaction between the company and the council. This is a particularly important theme as the government has announced (May 2021) that has asked CIPFA to formulate proposals to regulate LATCo governance.
CIPFA CEO, Rob Whiteman, has said ‘While not a formal code of practice, this guidance will build on the best examples the sector has to offer to develop greater trust in public financial management and reduce the financial and reputational risks for councils who own companies.’
We anticipate that many councils with trading companies, or those considering establishing one, will wish to draw on the expertise and experience that an organisation such as EELGA can provide in this area. We have supported many councils to successfully develop trading activities and operate LATCos in many service areas. As a local government membership organisation, EELGA is ideally positioned to ensure that the need for councils to develop their commercial, income-generating activities is undertaken in a balanced way. As a recent client said of the business case we produced to support the insourcing of services:
‘This is a quite exceptional report…The benefits of diversity in dividing these services by taking some in house, some by the LATCO and some by third party contracts cannot be overemphasised as a limiting risk factor in my view. The project ticks just about every financial sustainability box that it could.’