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Commercial activity is risky business, but councils lack alternatives

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LGC’s essential daily briefing

When Theresa May announced that austerity was over last October many in local government were justifiably sceptical. Central financial support for councils is fast disappearing, demand for social care is on the rise and nobody appears to be coming to the rescue.

LGC’s latest report on commercialisation, written in conjunction with DWF, shows many in local government decided to take matters into their own hands some time ago by seeking to generate income through commercial activity, with a majority of these intent on expanding their efforts.

Our survey reported that two-thirds of senior council officers expect commercial revenue will be up 0-25% in the next three years – though for some this will be from a low base.

In several categories more than 50% of respondents expected revenue growth, including council-owned trading companies, property sales, car parking and rental income. New trading services are expected in sectors as diverse as energy (21% of respondents), commercial waste (14%) and education services (12%).

All of this will plug holes in council finances, which are expected to grow precarious for more councils in 2019. Some money can be clawed back through efficiency savings, and councils may also receive dividends from profitable services. In some cases profits are ringfenced and put straight back into the service that generated them.

But commercialisation is not merely about money. Eric Robinson, chief executive of Wirral MBC, speaks for many when he says the aim was “not just earning money but being able to find ways in which people who are excluded or more vulnerable are able to benefit”.

Most of those spoken to in compiling the report emphasised the need for a clear strategy before commercial projects are embarked on, and this means thinking beyond the bottom line and doing the research before work begins, considering wider economic and social impact.

Plymouth City Council, which is looking to grow its population from 264,000 to 300,000 by 2032, pursues property projects with an eye on how it will affect housing and local jobs. Plenty of commercial projects also make use of local suppliers.

In all this governance is key, and the involvement of councillors somewhat controversial. A mix of models exists: some arm’s length company boards have members sitting on them, while some do not, relying instead on supervisory panels. This is contingent on councillors’ experience as well as their preferences.

Donald Graham, chief executive at Hertsmere BC, says: “Officers in my experience are more entrepreneurial than councillors because they’re liberated from the electoral cycle.”

But Peter Fleming (Con), leader at Sevenoaks DC, argues that both councillors and officers can be a hindrance or a boon. The debate will roll on.

What is not being debated is that getting the right skills for commercial projects is essential. Some councils, including Plymouth, have built expertise from an initial base in their property holdings. Meanwhile, Sevenoaks has looked externally for help. Many variations exist between these two models.

The risk of commercial projects is naturally at the heart of this search for skills.

As Cllr Fleming argues: “There is no return for no risk.” Given the jeopardy of some council’s finances, finding new funding sources is imperative for many. But some projects will inevitably fail, as with all business endeavours, and councils must assess risk within the context of their overall finances.

Whether central government will intervene if they feel a council’s situation is too risky, as housing and communities secretary James Brokenshire suggested in December 2018, remains to be seen.

It is traditional to end commentaries like this with reference to geopolitical uncertainty, and the UK’s efforts to extricate itself from a local trading bloc. Given the speed of developments, speculation is itself risky. What is not in doubt is that it will have implications for local government finances.

Optimists may continue waiting for Ms May to make good on her promise to end austerity, in which case the need for commercial projects will dwindle, at least relative to funding. But in this case the maxim to hope for the best and prepare for the worst seems particularly apt.

Many councils are showing they are adept at using their local knowledge to plug gaps in existing commercial supply. Local government commercialisation is here to stay.

Jimmy Nicholls, features editor

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

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