• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • LGA calls for government support as regulators face staffing issues

    May 19, 2022

  • WMCA signs £4bn investment agreement with L&G

    May 18, 2022

  • Bill will give UK Infrastructure Bank power to lend directly to councils

    May 18, 2022

  • £400bn pension group collaborates on climate transition initiative

    May 17, 2022

  • CIPFA rejects proposal for vote on publication of fraud hub report

    May 17, 2022

  • John Turnbull elected president of the SLT

    May 12, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Don’t let council-owned companies spin out of control

0
  • by Guest
  • in Blogs · Resources
  • — 30 Jun, 2021

Photo by Glenn Carstens-Peters on Unsplash

A small collection of failures has prompted many questions about council-owned companies. Helen Randall navigates the pitfalls and the safety mechanisms.

In the aftermath of the Liverpool, Croydon and Nottingham debacles, many local authorities are nervous about owning or creating companies and CIPFA is promising new guidance on council-owned spin-outs. This is unsurprising given some of the toe-curling commentary in the reports:

“The council has managed some of these initiatives …extremely poorly.” “They have pursued a policy of ‘commercialisation’…without much understanding of either the volatility or quality of these streams creating a risk issue in setting the budget.” “No-one within the Council was tasked with overseeing the contractual loan documents made with investment companies.”

There are many more.

Below are some of the flaws mentioned in the reports. Do they ring a bell? If so, it may not be too late to restructure the company and get it on the road to recovery before your authority becomes next week’s headline.

  • Non-executive directors (NEDs) on the board who have insufficient industry experience;
  • No or minimal training before directors are appointed, so they are unaware of the personal risks they are running;
  • No consistent or detailed approach to cash flow forecasting, with the company funded on an “as and when needed” basis by the council;
  • Infrequent board meetings. These should be six-weekly (or monthly during the pandemic);
  • Company’s managers have no say in who is appointed to the board or on churn of board members;
  • No watching brief by the council as shareholder to ensure its investment and policy objectives are being delivered by the company, just a reporting brief;
  • Insufficient understanding of the company’s competitive environment or meaningful operational business risks beyond the company risk register;
  • No formal contract between the council and the company;
  • No competitive benchmarking of the fees the company charges the council (thus breaching Best Value legislation);
  • Out of date business plan;
  • Council’s funding to the company breached state aid/public subsidy control rules.

Duty

So, is it still a good idea to have a corporate vehicle and what lessons can be learnt from those reports? The answer depends what a council wants to do. Croydon’s companies, Brick by Brick and Croydon Park Hotel, were intended to produce commercial income but had not generated dividends or even repaid some council loans. Nottingham established Robin Hood Energy to avoid council redundancy costs and secure income from supplying cheaper tariff energy but it made losses. In both authorities’ cases, the companies appear not to have succeeded because of lack of understanding of the market at board level.

It is the personal legal duty of a company director to act in the best interests of the company with reasonable skill and care.

Moreover, company success will depend on whether elected members are willing to allow the company to be managed by directors with specific experience and detailed sector knowledge of the relevant business and understanding of prevailing trading conditions. As the Nottingham report noted:

“Being a brilliant ward councillor or an effective political leader are not necessarily the skills you need in assessing a business…. Being a company director needs specific skills and experiences, either in the industry itself or the wider business environment. … not many appointees were able to contribute and …too often, they were not on the board long enough to gain understanding.

“If the Council is to continue to be involved with a company structure in the future it needs to appraise the roles and skill sets required for specific companies and ensure they appoint the best match, even if this means the individual appointed is not a councillor”.

The council must allow sufficient resource and put in place administrative machinery for financial forecasting and holding the company to account. Otherwise, the council is in breach of its legal duty to obtain value for money. If you have not done this already it is never too late to start.

Resources

You should start by defining the key success measures for the company. Then scope the respective roles of: shareholder representative; council commissioner; and who will be running the company.

To prevent bias and conflict of interest, these roles should be kept distinct and no one should be twin-hatted. What are the skills, time, administrative and financial resources needed to perform each of these roles properly?

Document all of this in the company’s constitutional documents (articles of association and shareholder agreement), the business plan, the council’s scheme of delegation and the contract and funding agreements between the company and the council, and only then, decide which individuals should perform each role. You may also need to advertise to recruit externally.

It can be prudent for a council to have a company as long as it is run by directors who are appropriately skilled and experienced and the documents, administrative machinery and resources are there to enable the council to hold the company to account properly.

If these are lacking then the company will not have solid foundations and is less likely to survive. Although legally a shareholder’s liability for a company will usually be limited to the amount of its investment, in reality, few local authorities will wish to allow their company to fail so it is vital to define what factors mean success or failure at the outset.

It is possible to restructure existing companies to put them on a sounder footing. Alternatively, prudence may dictate repurposing, selling or closing a company if for example, market conditions are not as predicted.

However, a council has a legal fiduciary duty to make decisions with its business brains rather than its political brain. That way, it will avoid a Croydon, Nottingham or Liverpool scenario arising on its front doorstep.

Helen Randall is a partner at law firm Trowers & Hamlins LLP.

 

Share

You may also like...

  • MPs demand “urgent” action to repair local government audit 15th Jul, 2021
  • ‘We need to shift the focus of local authority accounting’ 20th Apr, 2022
  • Stephen Sheen: Audit predictions 2021 27th Jan, 2021
  • Andrew Hardingham: Holidays await but the ‘in’ box is brimming over 17th Aug, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 19 hours ago

    Treasury to restrict PWLB loans to councils at risk of non-repayment: The Treasury has released new guidance that restricts local authorities’ access to Public Works Loan Board (PWLB) advances if there is a “more than negligible risk” of a council’s… dlvr.it/SQhLTV pic.twitter.com/vBsS7xMJdb

    Room151 19 hours ago

    Mixed reaction to proposed government intervention powers: There has been a mixed reaction to the government’s legislative plans to strengthen its intervention powers over local authority finances. The Levelling Up and Regeneration Bill has proposed… dlvr.it/SQhLMB pic.twitter.com/50foWxpPGs

    Room151 20 hours ago

    Post-Brexit struggles for national and local government regulators. @LGAcomms @NAOorguk Click the link below to read 🔻🔻 room151.co.uk/brief/lga-call… #Brexit #government pic.twitter.com/s3c8ySGy5G

    Room151 1 day ago

    CIPFA: a question of transparency: Roman Haluszczak’s campaign for publication of the independent report into the collapse of CIPFA’s London Counter Fraud Hub has been rejected again by the institute. He is now calling for[...] dlvr.it/SQgC5V pic.twitter.com/08fWsHFF4g

    Room151 2 days ago

    Back to the future for the PWLB: The Public Works Loan Board is tightening its lending criteria to ensure that loans will be repaid by local government borrowers. But, asks Peter Findlay, shouldn’t they have been doing[...] dlvr.it/SQcmmm pic.twitter.com/bVv4fe0Xlv

    Room151 2 days ago

    Great piece from Peter Findlay on the PWLB’s tightening of its lending criteria. He raises some pointed questions for the Treasury and explains why the ‘casino council’ characterisation was simplistic and inaccurate. #PWLB #localgov room151.co.uk/treasury/back-…

    Room151 2 days ago

    The Queen's speech highlighted the need for accelerating UK infrastructure investment into levelling up projects and cutting emissions. @UKInfraBank #QueensSpeech #ClimateAction #emissions Click the link below to read 🔻🔻 room151.co.uk/brief/bill-wil… pic.twitter.com/hFmF2veVIa

    Room151 2 days ago

    Huge funding heading to the @WestMids_CA from @landg. @andy4wm #LevellingUp #netzero #regeneration Click the link below to read 🔻🔻 room151.co.uk/brief/wmca-sig… pic.twitter.com/ajhZhia6mx

    Room151 2 days ago

    LGPS governance, Cagney and Lacey style: What regulatory response can be expected following the publication of the Good Governance project’s Phase 3 report and the closure of the Single Code of Practice consultation? Susan Black offers[...] dlvr.it/SQbfXf pic.twitter.com/xwqHOEu2AP

    Room151 3 days ago

    More evidence of the importance of emerging markets in the journey to net-zero. @BordertoCoast @BrunelPP @northernlgps @EAPensionFund @WYPF_LGPS Click the link below to read 🔻🔻 #LGPS #NetZero #NetZeroCarbon #EmergingMarkets room151.co.uk/brief/400bn-pe… pic.twitter.com/qCm0EGxzLn

    Room151 1 week ago

    ‘Urgent consultation’ issued in response to continuing audit delays: CIPFA and the Local Authority Scotland Accounts Advisory Committee (LASAAC) have announced another “urgent consultation” to consider proposals to address the latest issue that has led… dlvr.it/SQJ0kV pic.twitter.com/s6vw0bnGXO

    Room151 1 week ago

    Bags of capacity – now to housing delivery: HRAs have been freed up and councils are starting to invest, but some remain cautious, writes Steve Partridge. He suggests that a minimum of £10bn of additional borrowing could be[...] dlvr.it/SQDvxk pic.twitter.com/yZmoWzHv6U

    Room151 1 week ago

    Bags of capacity – now to housing delivery room151.co.uk/treasury/bags-…

  • Categories

    • 151 News
    • Agent 151
    • Audit
    • Blogs
    • Business rates
    • Chris Buss
    • Cllr John Clancy
    • Council tax
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Education
    • Forum
    • Funding
    • Governance
    • Graham Liddell
    • Housing
    • Ian O'Donnell
    • Infrastructure
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • Levelling up
    • LGPS
    • Mark Finnegan
    • Net Zero
    • Private markets
    • Recent Posts
    • Regulation
    • Resources
    • Responsible investing
    • Richard Harbord
    • Risk management
    • Social care
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Transport
    • Treasury
    • Uncategorized
    • William Bourne
  • Archives

    • 2022
    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Inflation spike creates watching brief for treasury officers
  • Next story Impact Awards: The winners are revealed

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares