Trading places

In the first of a series of three articles Rob Hann outlined the use of local authority charging powers in the current economic environment. This article examines the related topic of commercial trading, and outlines the powers and restrictions on such initiatives by local authorities.

Commercial Trading

The traditional view of trading by local authorities over the years as endorsed by both regulatory bodies (such as the Audit Commission) and the courts on vires challenge is along the lines that a local authority has a fiduciary duty to look after the funds entrusted to it and to ensure that the taxpayer's money is spent appropriately. The main purpose of raising council tax is not to enable a local authority to speculate in market ventures such as trading for profit. For those reasons, a local authority must carefully consider any trading venture that it embarks upon.

After 150 years of courts putting the brakes on municipal entrepreneurship (on the very sound grounds that if you want to risk money on trading make sure it is your own not the public’s money), Parliament enacted a specific provision giving the ‘Amber’ light to trading for profit. The restrictions on the choice of trading vehicle is a big factor for local authorities to consider before embarking on such ventures. To trade commercially using the section 95 powers the authority is first required to:

• Identify a function related activity it wishes to exploit commercially – i.e. the trading activity cannot be something for which the authority does not itself have powers to undertake
• Prepare and approve a business case – this is not in itself a major issue as a business case and business plan should be the first priority for any such venture whoever’s money is at risk
• Set up a company trading vehicle - No variation to this model is contemplated or permitted by the legislation. So for example, only traditional companies are permitted not Limited liability Companies which would assist the authority to maintain its favourable tax treatment and is the vehicle of choice for many professional trading partnerships outside the public sector.

A number of reasons were put forward by the then Government as to why a local authority is required to trade only through a company, namely that it:

• Ensures a level playing field between local authorities and private sector companies
• Means that local authorities do not receive the tax advantage they would otherwise have had over private sector companies;
• Results in greater transparency arising from the company law requirements. This is useful for the purposes of state aid and competition law
• Greater protection for the council tax payer and the monies paid to the public purse as a result of limited liability.

Some restrictions on which authorities could use the powers have now been removed so that the powers are available to all ‘best value’ authorities and now also extended to fire and rescue authorities. Care needs to be exercised however, some public bodies are not ‘best value authorities’ for the purposes of the trading powers (insert link to LACAP diagram) and so cannot utilize the powers to trade.

So why were these powers introduced and what were they meant to encourage?

The context for the introduction of trading powers was explained in the original guidance published by the department in 2003. Trading was expected to create “…a dynamic and entrepreneurial public sector that will increase diversity and choice in the delivery of public services.”

Research by the Local Government Association in November 2004, Loosening the Reins, found:

• A low level of use of the power with only 2% of councils using their new powers to trade
• a further 18%intending to use the powers
• 64% of authorities using, or planning to use, the power identified raising revenue as a key objective.

Research undertaken by INLOGOV (the Institute of Local Government Studies) forCLG in November 2007, Local Authority Trading: Research Report, also found little evidence of authorities using or planning to use their increased power to trade, though upper tier authorities were more likely than districts to indicate a plan for marginal increases in trading activity. The Report found:

• 72% of local authorities surveyed trade, with an annual average income of £3m (this figure includes trading under other powers)
• 29% of authorities trade in 2003 Act powers
• overall, 25% of local authorities aim to make surplus
• local authorities which did not trade cited the following as the main barriers to trading: cultural barriers; and non-trading authorities were more likely to perceive European regulations as restricting local authority trading than trading authorities.

Only now, some seven years after the introduction of the powers are there signs of local authorities exploring the use of commercial trading powers through the formation of companies. For example, the Royal Borough of Kensington and Chelsea has established Chelsea Care Limited, a company limited by shares wholly owned the council which provides domiciliary care (practical and personal care but not accommodation) and brokerage services (advice and support on personal budgets) and which commenced operations in 2009. Essex County Council (also in 2009) has set up Essex Cares Limited, a company limited by shares, wholly owned by the council to run all the council's adult social care services. This is a substantial undertaking with more than 850 council staff are said to have been transferred to the company.

Another example is the establishment by Neath Port Talbot Council of two enterprises relating to property, the first being NPT Home Inspection Services which provides services to individuals, firms and social landlords throughout the UK to provide energy efficient solutions for properties and the efficient use of domestic energy. Building on the success of this company the council has recently established another subsidiary which is a new estate agency and lettings service providing services for a fixed fee. The reaction from local estate agents though, who see the new company as unwelcome competition in a time of austerity for all concerned, has not been wholly positive (to put it mildly).

The type of trading activity in the examples above (ie trading with the public) does seem to be sort of undertaking the 2003 Act powers were designed to encourage. Despite the examples that are beginning to emerge, looked at nationally, municipal enterprise of this nature remains a relatively undeveloped area of activity.

Whilst powers to generate income from trading with the world at large may be attractive to some, what the vast majority of local authorities are seeking to do is to join up with other like-minded bodies to deliver functions more effectively or efficiently.

Indeed so called ‘municipal trading’ has always been at the heart of this matter and finding lawful ways to facilitate joining up by local government (and/or other parts of the public sector) to undertake activities formerly carried out by individual local authorities alone is the area where most grey matter is expended.

The next article will explore the options, possibilities and issues arising for so called ‘shared service’ initiatives by local authorities including the EU procurement issues recently clarified by the Supreme Court judgment of Brent London Borough Council and others (Harrow London Borough Council) v Risk Management Partners Limited [2011] UKSC 7

I have developed a diagram outlining the key legislative provisions which will be contained in my pending update of Guide to Local Government Charging Powers. The diagram is available in a poster format from the author’s web site at www.lacaponline.com.

The diagram includes the legislative distinctions between charging and commercial trading for ease of reference.

Rob Hann is revising and updating his 1995 book on Local Authority Charging Powers which is being published shortly. For more information see www.lacaponline.com