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How councils can match commercial risks with returns

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Falling funding levels are forcing councils to be more businesslike, but they need to change their culture, acquire the right skills and understand risk.

Participants:

  • Jonathan Branton, partner, head of public sector, DWF
  • Philip Cox, chief executive, Cheshire & Warrington Local Enterprise Partnership
  • Richard Dolan, innovation and technology manager, Tricuro
  • Martin Farrow, CEO, Optalis
  • Peter Fleming (Con), leader, Sevenoaks DC
  • Manjeet Gill, managing director, Chameleon Commercial & Business Improvement
  • Nick Golding, editor, LGC
  • Allen Graham, chief executive, Rushcliffe BC
  • Donald Graham, chief executive, Hertsmere BC
  • Colin Murray, partner, head of local government, DWF
  • David Neudegg, managing director, Publica Group
  • Mike O’Donnell, associate director of local government, Chartered Institute of Public Finance & Accountancy
  • Wendy Perera, assistant chief executive and director of strategy, Isle of Wight Council
  • Alison Waller managing director, Tricuro

“Our section 151 officer may well have pound signs rolling on his eyeballs, but for me the only way we can move forward is if we take a long, hard look at ourselves.”

In a single line Wendy Perera, assistant chief executive and director of strategy at Isle of Wight Council, summed up what many councils must feel as they prepare to commercialise.

The opportunity – indeed, necessity – to make savings and generate income is something that both officers and councillors are eager to seize on as austerity continues. The expectation from many is that commercial revenues will form more of council revenue budgets as time goes on.

It was this expectation that prompted LGC and DWF to convene a roundtable on the subject. “It’s the single biggest factor of change that we see in our public sector practice,” said Jonathan Branton, head of public sector at DWF.

“Councils can operate like businesses to raise money to ensure their services are still standing or ideally flourishing,” said Nick Golding, LGC editor and roundtable chair. In doing this, he added, some councils are doing “really exciting things”.

Surprisingly, given the interest, it is not straightforward to define what commercialisation means for councils. Manjeet Gill, managing director at Chameleon Commercial & Business Improvement and a former local authority chief executive, warned against defining it simply as income.

“One of the things we used to say at West Lindsey [DC, at which she was chief executive for seven years] was ‘what is not commercialisation?’,” she said. “Putting up the car parking charges for us was not commercialisation. That was taxation.”

By consensus, commercialisation is about a broader approach to running a local authority. Allen Graham, chief executive at Rushcliffe BC, noted three strands to his council’s approach: investment, arm’s length companies and income generation.

Investing income hinged on avoiding undue risk and having a clear strategy with clear governance, he said. Skills and governance are also vital in arm’s length companies, he added, while income generation contributes to making the council self-sufficient.

“That’s the broad approach to entrepreneurialism and commercialisation within the authority and ensuring it’s not just a buzzword or a fad,” he said. “It’s about growing it into a culture throughout an organisation that it’s acceptable to think commercially.”

David Neudegg, managing director of Publica Group, agreed, warning against defining commercialisation as “a collection of things”. “Commercial approach is different to commercial trading,” he said. “Both might be important, but I think the risk is that you narrow down the agenda and we lose sight of the why.”

He also warned that traditional, hierarchical structures “are deeply rooted in local government”. To some extent this even spills over to arm’s length companies.

“Putting up the car parking charges for us was not commercialisation. That was taxation.”

Manjeet Gill, managing director, Chameleon Commercial & Business Improvement

Richard Dolan, innovation and technology manager at social care firm Tricuro – an arm’s length company – said: “While we inherited a degree of legacy culture from the local authorities that we were formed from, we’ve also got freedom to bring in new blood.”

His colleague Alison Waller, managing director of Tricuro, said that in the three years the company has existed it had “seen a lot of cultural change” as it adopted a more commercial approach. “We’ve gone through two complete leadership changes in order to get the right commercial skills,” she said.

Martin Farrow, chief executive of care service Optalis, added that creating a sense of “togetherness” was key. “If you start linking accountability with blame in a culture it’s a real issue,” he said.

The interaction between councillors and those carrying out a commercial strategy – be they officers or staff at an arm’s length company – is key in defining how the commercial strategy will work out. Donald Graham, chief executive at Hertsmere BC, said: “Officers in my experience are more entrepreneurial than councillors because they’re liberated from the electoral cycle.”

One way in which this plays out is whether councillors sit on the board. The arrangement can vary, with some councillors insisting they sit on the board, others happy to be absent and some exercising governance through a shareholder panel.

“Where they’re on the board they bring their political agendas into the board,” Mr Graham said. “So you find instead of having an independent company, you have one with political considerations – especially leading up to an election – influencing those company decisions.”

He added that a board’s expertise can be bolstered by bringing in good non-executive directors (NEDs) without political affiliation. “That’s easier said than done,” he said. “It’s taken me three years to get five NEDs onto our creative business.”

The situation is different for local enterprise partnerships (LEPs). Philip Cox, chief executive at Cheshire & Warrington Local Enterprise Partnership, noted that his partnership had 12 private sector members and three unitary authorities, giving the board “a very commercial perspective”.

“I’ve got the advantage of having three unitary authorities on my patch. Some of my colleagues have to deal with 15 local authorities, which is really challenging,” he said. “But those three local authorities are seeing the opportunities of working through us.”

Peter Fleming (Con), leader of Sevenoaks DC, replied that he was “trying to keep calm” about Mr Graham’s comments about councillors, “as the only elected member in the room”.

“The fact is that I don’t believe members are the barrier; I don’t believe officers are the barrier. I think some members are a barrier and some officers are a barrier, and some of those barriers come from a lack of skills and a lack of knowledge,” he said.

He added that councillors can supply “huge amounts of commercial skills” that officers cannot, including his own members “who run companies”, “who understand business” and lawyers with experience of commercial projects.

”I don’t believe members are the barrier; I don’t believe officers are the barrier.”

Peter Fleming (Con), leader, Sevenoaks DC,

Colin Murray, head of local government at DWF, said that members had to be brought on board for commercial activity. “You’ve got to bring them with you in such a way that they’re on the right side of any governance, in terms of how they interact on a commercial level,” he said.

“Each authority is different. Some authorities are entirely right to have members on the board, because they have the skillset and they bring a lot to it. Whereas other authorities are much happier to take a backseat role and be reported to on an annual basis.”

Many authorities experience problems. Mike O’Donnell, associate director of local government at Chartered Institute of Public Finance & Accountancy, said: “Too often you see companies are being set up and there’s quite an immature relationship on both sides between the company and shareholder.”

He said that the company can want to be “completely arm’s length” and forget that the council is the investor, while councils can mishandle the shareholder function and get too involved in the detail. “These things get complex because they may be there as an investment for financial return but they’re also quite often providing key services in the community or to the council,” he said.

Mr O’Donnell added that within the governance of commercial projects risk must be “a key consideration”.

“That’s not about being risk averse, it’s about being risk aware and understanding what risks you are taking, what the scale of that risk is, and that mix of risks and how that fits into your overall financial strategy,” he said.

He added that councils’ awareness of risk was “variable” – his “diplomatic” view. “I think there are some councils who are very good at it,” he said. “There are some who perhaps a little more naïve and a little less thought-through on what the business case and business plan are for a particular venture.”

Mr Murray said: “The appetite for risk absolutely differs between different authorities, and some of them really do have an appetite for risk and others frankly shy away from what I’d consider to be the lowest risk.”

The day after the roundtable, James Brokenshire, the communities and housing secretary, suggested that central government might intervene in how councils are investing for commercial gain. Many at the roundtable referenced concerns around the property market, which has been a popular commercial target for councils.

Mr O’Donnell noted that if councils are looking at properties that private buyers are eschewing they should ask whether it is a good deal. This was backed up by Mr Cox. “Some local authorities march in, buy up a shopping centre at the same time as being very risk averse about something else,” he said.

However, Donald Graham argued: “We’re all very risk aware.” He said that officers had to measure the risk and point it out to elected members before the latter decide. “The duty of officers is to really point out whether it is a long-term risk, medium-term risk or a short-term risk,” he said.

Assessing risk will depend on the funding situation of a council or given service, as Cllr Fleming emphasised. “There are some services that absolutely are high risk services where you need low risk funding,” he said.

This was echoed by Ms Waller, who called risk “one of our biggest challenges, particularly when you’re dealing with people”. “Particularly in direct care delivery, it’s how do you take risk without putting people at risk,” she said.

“The appetite for risk absolutely differs between different authorities, and some of them really do have an appetite for risk.”

Colin Murray, partner, head of local government, DWF

However, Cllr Fleming was keen to note the fundamental relationship between risks and returns. “There is no return for no risk,” he said. “I think the biggest shift in my organisation was when members and officers realised the risk of doing nothing was greater than the risk of doing something. And most of the councils I’d argue should be at that state now. You’ve got to do something, because the money will run out.”

One less-discussed aspect of risk also emerged during the talks: whether councils may be creating problems by competing against each other. This could take the form of councils offering incentives to businesses to locate in their area. “Do we foresee a situation where that could be a self-defeating effect around the public sector marketplace or do we think that competition actually is a really good thing?” Mr Branton asked.

Some were in favour. “We do need competition but you can only have competition if central government gives you the levers and the powers to set corporation tax, business rates, income tax. All of this has some localised element that allows you to drive the economy in your local area,” Cllr Fleming said.

Mr Neudegg argued that other models were preferable. “You get all the benefits of competition through collaboration if you put your mind to it,” he said. “There’s nothing stopping councils collaborating, nothing at all – other than their own mindsets.”

Allen Graham said the property market had already provided an example of the dangers of collaboration, as councils competed for the same property. “That was actually an ill-conceived thought for the sector to think actually we can just outbid each other and we’re driving the yields down,” he said.

“Competition can be damaging if you’re not thinking through why you’re trying to compete. Equally it’s important you are able to collaborate and create competition and create alternatives.”

Despite the broad agreement that commercial activity carries risk, there was a consensus that because of local government finances the move towards it was inevitable. As Mr Farrow said: “I think what we can agree around the table is you can’t save your way to success. It just doesn’t happen.

“From our point of view there are only two things that really matter. The people we support and the people who provide it. They’re fundamentally what our organisation is about, and it’s driven by the customer.”

The debate ultimately turned to that age-old local government topic: devolution. As Mr Cox put it, the Ministry of Housing, Communities & Local Government will “decide where this is going”.

“If they are prepared to allow devolution and if they’re prepared to get that greater alignment of incentives between local authorities and the commercial sector, we can be more successful,” he said. “They’re struggling with that devolution agenda.”

Read LGC and DWF’s full report: Commercialisation: Safeguarding the future of local public service delivery

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