• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • 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

Helen Randall: Spin-outs and the legal lessons for success

0
  • by Guest
  • in Blogs · Technical
  • — 5 Jul, 2017

In the swim. Leisure centres are among the services spun out of councils. Photo: Pixabay

Spin-outs have become a popular option for councils looking to cut costs and boost income. Helen Randall explains that care needs to be taken to avoid legal pitfalls.

Most public authorities are considering spin-outs, to generate revenue and make savings. A warning: whilst every politician likes success, the media are quick to criticise when the public sector has to bail out a failing enterprise using taxpayers’ money.

A  spin-out is where an organisation decides to externalise part of its operations into a separate legal entity to make profits from services and insulate itself from risk.

Although local authority spin-outs began in the nineteenth century, they re-emerged in the 1980s to address compulsory competitive tendering and then the austerity drive. Abolition of revenue support grant gave them fresh impetus as an option to generate income and save money.

An enormous range of services have been transferred into spin outs including adult social care (Tricuro and Optalis); leisure (Greenwich Leisure trading as Better); education (3BM, EPIC and Octavo), property development and housing (Breckland Bridge and Red Door); regulatory services (Broste Rivers); regeneration (RE Limited). Some long established spin-outs like Capita, Prospects Services and QinetiQ are now major companies.

Minimise failure

As public sector spin-outs are not a new phenomenon, there are some useful lessons to apply to maximise success and minimise the possibility of failure.

When designing a spin-out, do consider upfront what return on investment (ROI) you want. From a legal perspective, this is an essential Wednesbury consideration and informs what type of entity to establish.

The ROI is influenced by the funding source. This should be detailed in the business case forming the basis underlying the decision to spin out.

If the authority intends to invest its own funds, or use PWLB funding, then it must stay within state aid rules to prevent legal challenge resulting in a fine for the local authority and mandatory clawback of the aid with interest potentially resulting in insolvency.  Do consider state aid at the outset of funding options to deploy any exemptions to their full advantage.

If the spin-out is to have free rein outside the procurement rules, then it should be carefully constituted and operated to have an entirely commercial character.  If the spin-out is a body governed by public law, it will need to comply with the procurement rules when purchasing.  The spin-out can benefit from the Teckal exemption so it does not have to tender for work from its shareholding parent authority.

Although the Teckal turnover threshold on trading with external customers is below 20%, it is a mistake to let the “Teckal tail wag the spin-out dog”.  The spin out should be a viable business proposition without having to rely totally on dowry contracts from its shareholding authorities.

Although many public sector spin-out models trade under the Teckal exemption do not be complacent.  Soon an over-confident public sector trading company will be challenged for flouting the procurement or state aid rules and you do not want to be the test case.

There are now clear powers for local authorities to form companies and to invest.  Powers to form other vehicles such as limited liability partnerships are less clear, albeit there are potential tax advantages. Getting the power right will give the spin out a solid legal foundation able to withstand an investor’s or customer’s due diligence

There are numerous types of entity for a spin out: companies limited by shares or guarantee, community interest companies, community benefit societies, mutuals, charitable incorporated organisations, trusts, LLPs, limited partnerships and unincorporated associations.

People can understandably be attracted by names but each vehicle has distinct legal and operational constraints. So, do think about function including the business plan and desired ROI, before choosing the form. An unsuitable legal structure will frustrate your objectives and hamper future growth. It is tricky to dissolve a company limited by guarantee and re-establish as a company limited by shares.

Boardroom

Before deciding who should be on the board, the individuals should understand the full extent of their personal legal and operational responsibilities.

How will they reconcile potential conflicts of interest between the duty to their authority and their duty to act in the interests of the company and all its shareholders (or its creditors should the company get into financial difficulties)? As directors they will need to keep abreast of the spin out’s financial status and its operations including compliance with health and safety, environmental, employment and other legislation and how business risks are being managed. Board training can be invaluable.

Staff motivation is key to a spin-out’s future success but even if TUPE applies, modernising terms may help profitability and safeguard their future. If so, ensure the business case does not inadvertently provoke employee claims. Assess the pensions liability early to consider appropriate risk-sharing.

You can protect the business through registering intellectual property rights but an insufficient trademark will not work so get expert advice.

But the good news is that many spin-outs from the public sector have been very successful because the set-up was sound, the management was astute and the staff passionate about keeping customers happy. It can be done.

Helen Randall

Helen Randall is a partner at Trowers & Hamlins LLP.

Share

You may also like...

  • Scottish councils fail to explain budget variations Scottish councils fail to explain budget variations 9 Jan, 2020
  • Graham Liddell: How to make a great shared service Graham Liddell: How to make a great shared service 2 May, 2018
  • Energy: the next great opportunity for local government Energy: the next great opportunity for local government 27 Jul, 2017
  • LGPS valuations place employer contributions under scrutiny LGPS valuations place employer contributions under scrutiny 9 Jun, 2016

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 17 hours ago

    ‘Chasing yield’ not the best strategy as negative rates loom: Recent speculation that the UK may be heading toward negative interest rates prompts questions for treasury officers managing local authority funds at LATIF. Speculation is rife that the UK… dlvr.it/Rr3Mrj pic.twitter.com/wtxYAB20PO

    Room151 3 days ago

    Will new public procurement rules offer the best commercial results?: The government has issued a green paper on reforming procurement rules. Helen Randall and Rebecca Rees examine the proposals and argue they may not go far enough. The Cabinet… dlvr.it/Rqtw6T pic.twitter.com/9GiVTkL08U

    Room151 1 week ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 1 week ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 1 week ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 1 week ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 1 week ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 1 week ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 1 week ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 1 week ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 2 weeks ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 2 weeks ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 2 weeks ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 1 month ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

    Room151 1 month ago

    Room151’s top stories from a momentous year: 2020 was the year in which local government grappled with Covid-19, funding strains, controversy over borrowing rules and the threat of financial collapse. It has been an exhausting and historic[...] dlvr.it/RnlpZg pic.twitter.com/g3myNyox6J

    Room151 1 month ago

    Tracy Bingham: 2020, a year best forgotten but also one of learning: Many will rush to erase 2020 from their memories but, writes Tracy Bingham, there were also many lessons about finance teams, strategic planning and leadership. 2020: A year we’d… dlvr.it/RnlpY2 pic.twitter.com/m7G1krrtCu

    Room151 1 month ago

    Settlement must address ‘precarious’ local government finances: Dan Bates crosses his fingers for “no nasty surprises” in this week’s funding settlement but argues the “bigger prize” is post-Covid financial certainty. Thursday (17 December) should be the… dlvr.it/Rnj9dG pic.twitter.com/KLKjjuBqJE

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Lord Porter: ‘We don’t want any new duties’ for business rates retention
  • Next story DCLG permanent secretary Melanie Dawes leads speakers at FD’s Summit

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK