Stephen Sheen: Special purpose companies, geese and golden eggs

In my previous article, LOBOs and the confessions of an ex-auditor,  I advised in this time of austerity to be sceptical of any offerings that look too good to be true.  Put crudely, if a goose were to waddle into your office with a clutch of golden eggs, would you accept her word about their provenance because she obviously knew a lot more than you about ovipositing?  Or, would you pause for thought before writing a handsome cheque for the right to whatever was to emerge next from her nether regions?

This advice was brought to mind when reading the news story about an authority’s plan to transfer property into a special purpose company to reduce the revenue impact of its pension fund liabilities.

Whether the plans are chimera or cash cow I cannot say.  There is insufficient detail in the public reports to understand how the proposal is intended to work, so nothing that follows is any sort of robust view on the viability of the plans themselves.  My comments use the incomplete public information to illustrate how I would recommend an authority reacts to similarly promising, but uncertain, opportunities being offered.

Of course, lack of detail is, in itself, often the first sign that scepticism is warranted.  If a consultant is pitching an innovative scheme it is common practice to bind a potential client to secrecy about its mechanics.

Whilst this might be a legitimate business tactic to protect commercial advantage, it can severely limit the scrutiny given to a scheme and raise the risk that crucial questions go unasked.  Be wary of any plan that requires the donning of a cloak and the carrying of a dagger.

Private sector
The second sceptics’ sign is that the proposal is being imported from the private sector.  There are a number of precedents of companies successfully transferring property to special purpose vehicles owned by their pension schemes in lieu of direct cash contributions.

The Local Government Pension Scheme is, though, a peculiar statutory construct.  Although complex in many areas, it is relatively straightforward in its expectations for funding through regular employers’ contributions and the pooling of investment assets for the joint benefit of all participating bodies and has minimal scope for improvisation.

Portability from the private sector is therefore likely to be a big issue and, in situations such as these, progress should always be founded on confidence that the consultant understands the local government legal constraints.

These constraints extend beyond the search for legal powers to justify particular actions.  A long history of precedents confirms that in public administration it is not sufficient for a legal power to be available, but that the power be exercised reasonably in taking action.

Even with a general power of competence, the Wednesbury principles stalk the steps of local authority decision makers.  No matter how expert advice looks that something can be done, the authority has a duty to confirm that it should be done.

There are also precedents suggesting that it is not permissible to exercise a power solely for the purpose of avoiding expenditure constraints.

Operational sense
In the instance of the property transfer proposals, there is no indication yet of any benefits arising other than managing the authority’s annual contributions to the pension fund.

Perhaps there are aspects to the plan that will, for instance, encourage more effective property management.  But without them an authority may be taking on a substantial risk in turning itself from a freeholder into a contracted tenant and possibly limiting its flexibility to react to changing accommodation needs.  The onus will be on the authority to show that the plan makes operational sense, irrespective of the impact on revenue.

A further complication in this instance is that the consultants promoting these proposals are themselves local audit firms.  From my own experience as an auditor, it cannot be taken for granted that the proposals will have been okayed by the firms’ local government finance experts.  But even if they have, this should be cause only to carry on being as sceptical as you planned to be, and raise your eyebrows higher if not.

There is a danger in all this of slipping from scepticism into cynicism.  Doubt expressed without good intentions can be obstructive.  But where there are big stakes there is a vital role for someone to be asking the right questions about why and how an authority is planning to act and to keep on asking those questions until reliable answers are given.

Fare well and honk! honk!