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LGA: Commercial Skills for Officers Alumni14 October 2019

Commercial surgery

– A legal perspective

Judith Barnes

Partner Bevan Brittan LLP

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Overview

• What is

• Commercialism?

• Examples of Charging and Trading Powers

• Land and Property and Investment Powers

• Options for structures

• Governance and other implications

• Questions and discussion

• What do you want to do – where next?

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Defining our terms –

• Commercialism

• Councils operating in a more commercial way (e.g. internal trading, incentivised performance)

• Councils setting up corporate structures (can be for trading or other reasons)

• Councils selling services commercially (to the public sector or more widely)

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Commercialisation: Income Generation, Trading and Investment

Key questions:

• What do you want to do?

• Why?

• What is the best way to achieve it?

…there is usually more than one way to achieve your objectives

& the audit trail needs to stack up!

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Income Generation, Trading and Investment

• How would you define:• Charging?

• Trading?

• Investment?

• What are your purposes/motives?

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Examples of Charging/Trading Powers

Local Authorities (Goods and Services) Act 1970

• Provision of goods & materials; administrative professional or technical services; vehicles, plant & apparatus (including staff); works of maintenance; and supplies

• To “public bodies”

• On “such terms as to payment or otherwise as the parties consider appropriate”

• Separate account

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Examples of Charging/Trading Powers

• Section 139 LGA 1972 Acceptance of gifts (real and personal property) and incidental works

• Commercial and industrial waste

• Surplus computer capacity

• Entertainments and leisure

• Private rented housing

• Electricity/renewables

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Examples of Charging/Trading Powers

• Staff secondment s113 Local Government Act 1972

• Civic Restaurants Act 1947

• Section 45 Road Traffic Act 1988

(MoT testing)

• Section 97 Building Act 1984 (works)

• Section 32 Local Government (Miscellaneous Provisions) Act 1976

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Land and Property Powers

• Buy & sell land including:

• s120 – 123 Local Government Act 1972;

• Town & Country Planning Act 1990;

• Housing Act 1985

• Local Authorities (Land) Act 1963 (development)

• Sections 24-26 Local Government Act 1988 (privately let housing)

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Land and Property

• Powers to Invest:

• s12 Local Government Act 2003• Functions

• Includes acquisition and development of assets

• Treasury management

• CIPFA Prudential Framework • Government Guidance updated April 2018

• Borrowing to invest/borrowing in advance of need

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Charging for discretionary services s93 Local Government Act 2003

• Limitation to cost recovery in s93, but flexibility• Definition of “each kind of service”

• Time period for calculation “taking one year with another”

• Corporate and Democratic Core included & other overheads

• Charging discretion/Differential charging

• Guidance

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Commercial trading through a company –Section 95 Local Government Act 2003

• Doing for a “commercial purpose” …ordinary functions

• Not where “required” to do something i.e. duty

• Not where existing commercial activity

• Must be through a company or community benefit society

• Trading Guidance

• Trading Order

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Developing a Business Case

Local Government (Best Value Authorities) (Power to Trade) Order 2009 (Wales 2006)

Business Case must contain:

• Objectives of the business

• Investment and other resources needed

• Risks and how significant these are

• Expected financial results and other outcomes expected to achieve

No subsidy – Council to recover staff and other costs

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Section 1 Localism Act 2011: General Power of Competence

“Power to do anything that individuals generally may do” including things “unlike anything” that public bodies do

Power may be exercised in any way whatever:

• Anywhere in United Kingdom or abroad

• For a commercial purpose or otherwise, for a charge or without charge

• For the benefit of the authority and its area of persons resident/present or otherwise

Power to charge (s3) limited to cost recovery

Power to trade for a commercial purpose (s4) through a company/community benefit society like s95

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Boundaries and Limits

• Not limited by powers that overlap… but must observe existing limitations and requirements

• No wider powers to delegate functions

• Secretary of State may amend, repeal or revoke legislation which restricts the exercise of the general power

• Secretary of State may constrain by regulations

• Still retain ultra vires rule – must exercise powers properly, having regard to relevant considerations business case, market, risks and likely rewards etc.

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Conclusions on powers

• Explore all avenues and fit powers with purposes

• General Power of competence is additional to Local Government Act 2003 & additional to wide ranging existing powers

• Incremental approach

• Form follows function:

• Not “I want one of those”

• LLP available where not “all about the money”

• Exercise powers properly – effective audit trail

• Transparency, responsibility and accountability

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Options for Structures• Division or department of the Council

• Joint Committee (no separate legal status)

• Partnership/Unincorporated Association

• Company limited by shares

• Company limited by guarantee

• Community Interest Company

• Community Benefit Society (were IPSs)

• Limited Partnership

• Limited Liability Partnership

• Charitable Incorporated Organisation

• Trust or registered Charity

Advantages and disadvantages of corporate status

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Why set up a corporate body?

• Because you have to in order to trade with desired client/customer base (e.g. mainly private sector), regulatory requirements, PRS; and/or other constraints s95/s4; or

• Because you want to in order to:• Operate more commercially• Employ people more flexibly• Get away from political influence• Provide a platform for shared services or a

joint venture• Firewall against risk and liability

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Constraints on new models

Strength of business

case

Skills and capacity

Council support

Powers and legal

issues

(not usually the problem)

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Business Case and Business Plan

• Business Case – a document setting out the rationale for the creation of the business or proposal for a new model and why it should be supported

• Business Plan – a road map for the operation of the business/new model including market analysis, SWOT of the business, finances (income, expenditure, borrowing, cash flow, reserves etc) and marketing plan.

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Business Plan (for a trading company)

• Detailed market analysis – demand?

• How do you price to compete (NB state aid)?

• What skills are required to deliver the plan?

• What resources are required?

• Do you need to change working practices?

• Impact on the rest of Council • Unit cost issue and ever reducing core• Service Integration and management

• Who is best to deliver: be honest

• Risks – Are you prepared to see failure?

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Capturing roles and responsibilities

Roles of the council Documentation

Owner of the business Articles of the company

Members’ Agreement

Reserved matters

Guarantor/funder of the business “Parent company” guarantee

Loan or revolving credit agreement

Client/customer of the business Strategic contract

Service contracts

Client management arrangements

Provider of services to the

business

Service level agreements (e.g. ICT, HR, FM)

Provider of premises and assets Lease or licences for premises, ICT

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Governance issues: directors

• Statutory duties

• Fraudulent and wrongful trading

• Conflicts

• who sits where? Members and officers.

• Possible liabilities

• General duties in law

• Will the Council protect its directors (and how)?

• Indemnities and the 2004 Order

• Insurance

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Other considerations include:

• Regulation under Part V LGHA 1989

• Tax and VAT

• State aid

• Transfer of data & use of ICT

• FOIA/EIR – Companies owned by the “wider public sector”

• What happens on exit e.g. Assets?

• Transparency vs. commercial confidentiality

• Consolidation of accounts?

• Monitoring and accountability

• Role of scrutiny

• Remuneration?

• Public interest report – City of York Trading Ltd

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Regulation 12 re Teckal companiesPublic Contracts Regulations 2015

More than 80% of activities must be performed for the controlling local authorities

LAs exercise decisive influence over strategic objectives and

significant decisions

Cannot be any private sector ownership

Primary purpose is not commercially orientated

Teckal

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Regulation 12 re shared servicesPublic Contracts Regulations 2015

Contracts for co-operation between contracting authorities are exempt from procurement

regulations

Public services must be provided with a view to

achieving common objectives

Implementation of co-operation must be governed solely by

considerations relating to the public interest

The authorities must perform less than 20% of the activities concerned by the co-operation

on the open market

Hamburg

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Teckal & Trading

LA

Trade CoTeckal Co

100%

ownership

Services back

Services to

customers

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Housing Delivery Vehicles

• Why are they used?• Market sale – to generate capital receipts• PRS – to generate short/medium term revenue

stream and long-term capital receipt• Housing duties – proactive role in provision of

temporary accommodation; avoid B&B• Economic policy – attracting new residents and

through that new businesses• More commercial operation• Ring-fencing risks

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Hypothetical Case study

LA

HDV

100% ownership

• Articles of association

• Shareholder’s agreement

• Strategic/partnering agreement

PRS Units (AST)

Temporary

Accommodation

Potential for

affordable housingTenants

Funding – capital

and revenue

Support services

Debt repayment

Dividends (from

revenue or capital

receipts)

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Joint Venture – Model Option - LABV

JV

LA PSP

Site

1

etc.Site

3

Site

2

Lender

Property

Assets

Working

Capital

e.g. Croydon, Torbay, Slough, Portsmouth,

Bournemouth, Luton, Wirral, Powys, Surrey

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Local Asset Backed Vehicle (LABV) – features

• Limited liability vehicle – LLP/company• 50/50 shareholding and deadlock • Equity stakes • Finance• JV control over development and delivery• Authority protection• No exclusivity but 15/20 year arrangement• Working capital as and when required• Risk shared – private sector manages

development

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Option: LAs and RPs

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How will vehicle be resourced?

• “Thin” – primarily a legal/accounting vehicle

• Funding

• Support services

• Assets/ IP Issues

• Premises

• Staff

• “Thick” – substantive entity with own assets/employees

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Emerging Models

• Teckal v Trading – or both

• Outsourcing/insourcing/joint ventures

• Shared services – the next generation

• Property and housing vehicles

• Legal ABSs/Building control companies

• Social enterprises/mutual including CICs

• Social investment/social impact bonds

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Questions/discussion/opportunities where next?

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Thank you