Getting the balance right for local government commercialism

04-02-2019

by Joanne Pitt, CIPFA Policy Manager Local Government

Local government has seen a decade of austerity, where funding has fallen and demand has risen. When faced with that type of funding landscape it’s natural that any organisation will seek to explore new ways to improve delivery and efficiency. This often presents itself as an organisation becoming more ‘commercial’, but it is important to consider what that really means for local government. 

It is no surprise to local authorities by now that the government is increasingly concerned that some councils are developing strategies where they could become over-dependent on property investments to fund statutory services. In the summer we saw the publication of guidance intended to make authorities more cautious when investing, and the policy comments from Whitehall have repeated this line for some months. 

However there are two sides to every story, and the other side of this one is that local authorities are trying to balance their budgets and need to look for ways to do this. Options are limited. Local authorities have reduced the money spent on services, and on back office support. Where possible they are raising income through fees and charges. And of course, using reserves is not a long term strategy. So a rise in more commercial activity seems a natural progression. 

This was made possible through the introduction of the ‘general power of competence’ in the Localism Act 2011, which allows local authorities to take a more commercial approach to providing services. Through this legislation, authorities can choose to set up trading companies which are permitted to generate a profit through external trading, and charge for in-house discretionary service. 

These companies became popular by offering similar benefits to outsourcing, to which local authorities had become disillusioned, and through their utility in providing shared services. While not all these companies or shared services have been successful, the sector has benefited from the collaborations and cooperation introduced to the sector through these trading arrangements, which brought new skills and experience. 

Another form of this activity is found in ‘mutual to provide’ services. This is where organisations, often under employee control, provide services under contract to the local authority. It can be successful where organisations are looking to not only generate social gain, but also improve commercial activity. Although not huge income generators, these arrangements can often find favour with a sector that values local knowledge. 

The rise in commercialism has not been restricted to the creation of trading companies, as local authorities have explored news ways of working with the private sector, which has often developed into business partnering. Examples of this type of commercialism include joint ventures or local asset backed vehicles.

While this activity has been challenged, recent case law (Peters v LB Haringey and Lendlease) has strengthened the position of local authorities who wish to take a joint venture approach to development. In the High Court case in March 2018, the judge agreed that Haringey’s involvement in the development plans was primarily to obtain outcomes in the public good, and was consistent with its role as local authority. 

Staying with development, we could use the example of ‘earn back’ as another commercial approach, which is perhaps best illustrated successfully with Greater Manchester in the 2012 city deal, under which they could keep £300m worth of additional annual tax receipts after investing one £1.2bn in improving infrastructure. This allowed the council to create certainty for developers, and form a new funding stream, which was of benefit to long-term planning and led to an improved financial position.

All of these are examples of commercialism within the local government sector, and it is a continuing trend that builds and gains momentum on the experience gained by those involved. Local authorities are taking seriously the skills needed to develop commercially, and staff are now being trained to support this agenda, including improving their understanding of governance and accounting practice. 

It would be a huge loss to the sector both culturally and financially if the growth in commercial property investment throws a shadow across these other areas of commercial activity. Entrepreneurial local government, once seen as a paradox, should be open to thrive. But we must find the right balance for local government in this new wave of ‘commercialism’.

This article first appeared in Local Government Chronicle.

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