In a recent report the think tank Localis wrote that council commercial activity has come to be viewed by many as “inherently risky”. Richard Harbord argues that councils have a long history of successful commercial risk taking.
It is unfortunate that current circumstances mean that innovation and experimentation in local authorities has become a risky business. A quick look at the history of local authorities would throw up a number of examples of innovation and commercialisation that would be difficult or impossible to replicate today.
To cite but two examples: In 1902 Hull Corporation was granted its first licence to operate telephone services in the Kingston Upon Hull area. And in 1916, despite opposition from banks Birmingham City Council opened a municipal savings bank.
In 1987 the Hull City Telephone Department became Kingston Communications (Hull) plc. The council retained a 100% share holding and in 1999 Kingston Communications made its debut on the London Stock Exchange and the authority retained a 44.9% stake in the company.
An Act in 1919 saw an act of parliament change changed the name of Birmingham council’s bank to Birmingham Municipal Bank. It ceased to be a council department in 1976 becoming a trustee savings bank.
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Unease
Over the years local authorities have been encouraged to take a “commercial” approach to their services. Arguably, the line taken in legislation around compulsory competitive tendering can be said to be indicative of commercialism.
Arm’s length companies were formalised in the Local Government and Housing Act 1989 and the way these have flourished and spread is partly the cause of the current unease about the way local authorities have operate.
The Treasury particularly has always been very cautious and risk adverse. An attempt by 92 local authorities to commercialise their money market dealings famously and publicly failed when in the late 1980’s the courts described interest rate swaps as “little better than gambling”.
The Treasury wasted no time in lecturing local authorities in the fact that they were not there to take any risk and promptly refused to assist with any rescue package. In fact in all the meetings with the Treasury it was emphasised that authorities should aim for safe but low returns on investment.
Over the last decade there has been a considerable growth in the setting up of arms length companies. Initially there was a feeling they offered an easier and safer route to embracing private sector values and maintaining some local authority control other than by forming a trust.
Companies could have a number of elected members and some powers could be reserved to the authority in a way that was not possible with alternative delivery models. There was clear encouragement from central government to consider them because they allowed local authorities access to commercial opportunities otherwise not available.
Governance
It was inevitable that when austerity came, elected members would wish to retain as many services as possible and this led to a self fulfilling prophecy of seeking safe returns to supplement the budget. This has led to an increase in the use of arms-length companies and in commercial investment.
Providing there is an understanding of what you are getting into there is nothing wrong with that. In the case of interest rate swaps it was obvious with hindsight that many authorities lacked the skill and understanding to stay secure.
In all cases there is a clear need for effective governance and there have been cases cited where this governance has fallen short in running successful arms length companies. The very nature of using alternative delivery models means that high standards of transparency and reporting are essential.
Clearly Councillors appointed to a company have to be properly advised and key to that is their first duty is to the company and not the council. There is even greater need to ensure that conflicts of interest are properly understood and declared.
There needs to be separate reporting arrangements for the council as a customer and as a shareholder. The roles of non-executive directors also need to be carefully set out. In some cases the authority has appointed a senior officer as a non-executive and not been represented by an elected member.
There needs to be proper reporting arrangements but this is not always straightforward as the company must be free to determine it’s own policies and way of working.
However, certain major decisions and commitments, such as entering into major contracts, are normally matters reserved to the council as shareholder.
There needs to be absolute clarity on the financial relationship between the company and the council, particularly on issues such as the determination of the contract sums, paying over of relevant grants and whether or not there are any arrangements for funding annual deficits.
Clarity and openness is the key to a successful relationship.
Richard Harbord is former chief executive at Boston Borough Council.
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