Trading up

Partnership iStock 000006695073XSmall 146x219Rob Hann explores how local authorities considering trading can get started on the right track and stay there, and reports on a new pilot scheme from Local Partnerships.

In these financially constrained times, many local authorities are exploring ways to generate additional income through trading ventures. Taking this approach can be highly successful - but it is no panacea. Options need to be considered in the round to ensure that they offer best value and are the right solutions for the right forms of trading activity. There are a number of technical, legal and financial considerations that need to be fully addressed before proceeding to set up a company for trading purposes.

New skills and business approaches are required to give these new ventures the best possible chance of success. There are many different forms of trading, for example:

  • inter-authority trading by and between local authorities/public bodies through an "in-house" Teckal company or by agreement (1970 Act);
  • trading with the world at large through a bespoke trading company;
  • trading for specific statutory purposes e.g. leisure trusts;
  • trading to explore "arms length" approaches to service delivery through mutuals or social or community enterprises which are designed to come out of local authority control.

As a result, choosing between options is often difficult, requiring consideration of multiple factors, not least of which are the legal aspects, ensuring that authorities continue to act within the law. Often tax, VAT and NNDR considerations will also impact on the type of trading enterprise required.

Sometimes conflicts of interest can arise between those of the authority that originally set the company up and the company itself. At the heart of such conflicts often lurk misconceptions about the drivers behind the establishment of such entities and what they were meant to achieve. For example:

  • is the new trading entity meant to be and remain wholly within the control or influence of the local authority? or, alternatively
  • is the new entity meant to be operating outside of local authority influence and control i.e. at arm’s length of the authority and for independent objectives?

It is possible, of course, for local authority influence and control to be loosened over time, once, say, the authority has survived the early years of trading and has built up a track record and is able and confident enough to go its own way. Equally, a successful, profitable trading venture may be a disincentive to the authority ‘letting go’, especially if it sees the company as a ‘cash cow’ in financially constrained times. Such a business may eventually come to regard its main sponsor or client as more of a burden than a benefit if it is seeking to spread its wings, take more risk and diversify into other markets and business ventures.

And what about branding? Apart from legal requirements, is it appropriate, attractive or else could it be disadvantageous to a new trading company to demonstrate links or connections with the relevant local authority? How would a name that includes or references the local authority itself be regarded outside of that locality? How would that look if the trading entity seeks new business outside of its immediate area?

Many local authorities are now exploring or have established trading enterprises. I work for Local Partnerships, an organisation owned by HM Treasury and the Local Government Association to provide expertise and support to help the public sector deliver locally. We believe there is much to be gained by spreading knowhow generated to date about the approach to establishing a new start up trading venture and how to maintain that success through the life of the new company.

This autumn, Local Partnerships is piloting health check reviews with diverse trading proposals covering both operational companies and the projects designed to set them up. We recognise that there are different things that need to be considered during the life-cycle of a trading venture – from initial thinking / inception, through business planning, to readiness for live running. We also believe that there is a need to test whether established trading ventures are delivering the expected outcomes and benefits. We are therefore planning separate pilots for each of these before offering the health checks on a wider basis. Throughout the development process and subsequent roll-out we will also share generic lessons across the local authority community as a whole. (More information can be found on the Local Partnerships website)

Undertaking this work draws on experts from within Local Partnerships and beyond.

Conclusion

If your authority is thinking of setting up a trading vehicle, or has an existing trading venture and you would be interested in exploring independent assurance of the approach, please This email address is being protected from spambots. You need JavaScript enabled to view it. or my colleague, This email address is being protected from spambots. You need JavaScript enabled to view it. (who is Programme Director, Assurance at LP).

Rob Hann is Director, Legal Services at Local Partnerships LLP. He can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it.. Rob is also the author of Local Authority Companies and Partnerships (LACAP) and Local Authority Charging and Trading Guide (LACAT) both published on line by LexisNexis.