The Art Of The Possible

Mike Read, head of energy and environment, Grant Thornton UK LLP, looks at alternate delivery models for council waste services – such as establishing an arm’s length company, for example, as has been the case for an increasing number of local authorities…

During this period of ongoing austerity, local authorities are continuing to explore ways to reduce service delivery costs. One alternative to working with a private sector partner, is to set up some form of arm’s length delivery vehicle. There are many reasons why a local authority might consider doing this:

  • Potential flexibility to reduce staff terms and conditions to more commercial operator levels, however this would not appeal to many authorities
  • Opportunities to generate income from trade operations. This requires the right appetite, structure and management capability to be able to deliver
  • Improve decision making efficiency and avoid being encumbered with the slow moving process of democratic governance. An arm’s length entity still needs appropriate governance and oversight but as long as it operates within its required parameters, day to day operational decisions can be made more efficiently
  • Flexibility to alter scope and nature of services compared to procuring private sector contractors. This has been one of the failings of the long term PFI / PPP style contracts. These contracts don’t deal with significant change easily and payments are often relatively fixed leaving limited room for maneuvers.

Our clients regularly ask us to explore the ‘art of the possible’ with them, whether that be in delivering more efficient services, allowing for easier decision making or in developing new income streams.

Each individual authority should have already established its own priorities and objectives to help drive their strategy forward. For example, more “paternalistic” political administrations often prefer to retain employees within the authority, even though this may not address staffing costs as effectively as other models.

When determining which model, if any, would be right for them, councils need to ensure they have established a clear rationale of what they want to achieve and have undertaken a considered SWOT analysis.

Most solutions typically fall into one of the following models: local authority trading companies (LATCs), joint ventures (JVs) or community interest companies (CICs).

LATCs – are wholly owned by the council and allow it to partake in profits due to their role as the sole shareholder. A subset of this is an LATC with a Teckal exemption. This enables an LATC to trade directly with their host authority without following competitive procurement procedures and allows up to 20% of its turnover to be traded commercially.

It can however take at least two to three years before such returns are likely to be delivered, due to the limited commercial skills normally found within the council and the tendency to TUPE employees.

JVs – are commercial companies created by partnering with an experienced provider. This may be a wholly commercial entity or one that is, in itself, spun-out from a local authority and looking to expand into the public sector through a JV model. As the infrastructure is already in place, this model tends to avoid incurring set up costs and returns can be realised earlier, due to the guiding experience of the commercial partner. However, in this form the authority does not retain full control.

CICs – are not for profit entities and, as such, would not deliver any savings back to the host council; it would instead be retained within the company and used for community benefit. These tend to have a similar lead-time to LATCs in providing improvement in efficiency due to the lack of commercial input, but have the advantage of being more politically attractive to some local authorities.

When determining which model, if any, would be right for them, councils need to ensure they have established a clear rationale of what they want to achieve and have undertaken a considered SWOT analysis. Not surprisingly, there is no one size fits all and there is definitely no panacea for solving financial constraints.

If commercial opportunities are a key goal, the absence of a local market, or a local market that is already saturated, will make developing a successful business challenging. Even if there were opportunities, it still needs to have a universal selling point to make it successful – is this quality or price? The latter would be difficult or near impossible to offer without a competitive cost base.

Employees often make up a high proportion of costs so considering the make-up of their T&Cs is important. It would be a lot harder to deliver savings if the staff were transferring from within the Council, rather than from an external provider, due to the TUPE implications.

If the differentiator is quality, then the service delivery needs to be unique. It should look to provide something not currently offered, or at least not easily copied, in order to expect a meaningful return.

To ensure a successful venture councils need to first ensure that they have a solid understanding of; their current services, their shortfalls and strengths and their internal and external need. Without this, a venture is unlikely to deliver the aspirational savings, improved income generation and heightened performance desired.

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