How can local authorities get more from their assets without selling off the family silver? Owen Willcox explains.
Sustained pressure on local authority budgets has seen councils become increasingly adventurous in their discussions about how to generate income or savings to help them maintain services.
Outsourcing and spin-outs have been more prevalent but there may be more that councils can do to “sweat” their assets while maintaining full control by using operating vehicles to generate a better return for example making use of Teckal entities.
There are some key vires and procurement considerations for local authorities considering using Teckal entities for the delivery of public services. There may also be state aid, employment/pensions, taxation and other legal issues to be addressed. This article focuses on the powers given to local authorities and the procurement issues.
Power to establish a company
Section 1 of the Localism Act 2011 (“the 2011 Act”) provides local authorities with a general power of competence to do anything that individuals generally can do. This power includes doing things for a “commercial purpose” which has been interpreted to include the power to make a profit. It is worth noting that Section 1 is subject to any relevant pre-existing legal restrictions.
Powers to trade
The 2011 Act gives local authorities the power to do things for a commercial purpose, which may include making a profit. Under these provisions, there is an obligation that trading must be done through a company or a community benefit society.
Local authorities also have the power to trade under section 95 of the 2003 Local Government Act, similar to the 2011 Act which requires local authorities to put together and approve a business case.
Although the power under the 2011 Act is much broader, it is best practice to put together a business case which contains:
- the objectives of the business;
- the investment and other resources required to achieve those objectives;
- any risks the business might face and how significant those risks are; and
- the expected financial results of the business, together with any other relevant outcomes the business is expected to achieve.
A detailed business plan building on the business case is also desirable to inform councillors of the input required from the council and the viability and potential risks of the company.
Power to charge
To deliver a shared services project, a Teckal entity could be established, and its services ‘traded’ with the partner councils using the powers described, but if the councils only require the Teckal entity to charge on a cost recovery basis then this is classed as “charging” and would be permitted using the general power of competence under section 1 the 2011 Act. This would, however, be subject to limits on charging which are detailed at section 3 of the 2011 Act. This section states that the service for which there is a charge must be one the council is not under a statutory obligation to provide to the person who is being charged; and the person must agree to the service being provided i.e. incurring the charge.
Power to purchase services
In circumstances where councils will purchase services from the Teckal entity, local authorities are enabled under section 111 of the 1972 Local Government Act to do anything which is intended to facilitate, or is conducive or incidental to, the discharge of any of their functions. This power enables a local authority to purchase services from the Teckal entity in order to discharge its related functions. This is, of course, subject to the public procurement regime.
The rationale behind the EU procurement rules and the implementing UK legislation (the Public Contracts Regulations 2015 (the “Regulations”)) is to promote the European single market by opening up public procurement to EU-wide competition.
Where a procurement exercise is subject to the Regulations, the public body awarding the contract is required to follow specified procedures for selecting candidates, assessing tenders and awarding a contract.
Provision of services from the Teckal entity to councils
The Regulations now expressly permit local authorities to directly award contracts to Teckal entities if the following conditions are met:
- the contracting authority exercises over the company a control which is similar to that it exercises over its own departments (i.e. the contracting authority must exercise a decisive influence over both strategic objectives and significant decisions of the company)
- more than 80 % of the activities of the company are carried out in the performance of tasks entrusted to it by the controlling contracting authority; and
- there is no private sector ownership of the company (with certain exceptions).
The Regulations make clear that the requisite level of control can be exercised jointly with other contracting authorities, meaning that the relevant councils taken together can jointly exercise sufficient control over the entity. For this to apply, it must be demonstrated that:
- all the councils are represented on the board of directors;
- those councils are able jointly to exert decisive influence over the strategic objectives and significant decisions of the company; and
- the company does not pursue any interests which are contrary to those of the controlling contracting authorities.
Provision of services from the councils to the Teckal entity
Depending on the project in question, it may be decided that the controlling councils will provide essential services to the entity, for example IT and related services. Although the Regulations permit the direct award of contracts by Teckal bodies to their controlling contracting authorities the specific provisions permitting this are not drafted in a manner which permits this where more than one contracting authority controls the Teckal entity. This point should be borne in mind when the structural delivery arrangements are being considered.