How to successfully set up a Local Authority Trading Company

Vivien Holland, Associate Director, Local Government Advisory, Grant Thornton UK LLP.

Oxford City Council had been successfully running environmental services in house as Oxford Direct Services for a number of years but had reached a point where it needed to decide how to take the business forward.

In addition to delivering Council services, it was growing its revenue through external contracts with third parties.

Should it continue to operate in the same vein, but restrict its external growth in line with the restrictions around trading, or should it set up a trading company to capitalise on the wider opportunities that the market was offering?

The Council saw this as an opportunity to really review the market and identify the whole breadth of opportunities out there in relation to waste, environmental services and building projects. 

To make that decision, the Council’s senior leadership team set out clear ambitions relating to the business and carried out an options appraisal to consider the advantages and disadvantages of staying in-house versus transferring out into a Local Authority Trading Company (LATC).

For example, would any profits be negated by corporation tax and VAT in the LATC model? Would the pensions liability caused by moving over 700 people into the company create an insolvency on day one of trading? Appraising the different options based on the Council’s key criteria such as generating income, level of risk appetite and the impact on the local economy led to a decision to go forward with the idea of setting up a company.

The structure of the company then had to be agreed. Going into a joint venture with another authority or commercial entity was rejected, as the Council already had a successful business in place and knew that it had both the capability and a strong pipeline of work. Therefore, it would be a single ownership company. A two-sister company structure was devised, allowing a Teckal arm and a trading arm. This meant it could trade back to the Council directly without competition under the rules of this exemption, and the sister company would have the freedom to bid for work without the limitations imposed by Teckal.

Next, a business case was developed. This followed the Treasury Five Case Model, which is recommended for all such projects, and included a detailed financial model setting out growth forecasts for the next ten years, with sensitivities to account for all likely eventualities. They also had to make sure that the right governance arrangements had been considered – such as who should sit on the board and how the Council would ensure it could provide the right level of oversight without interfering with the company on a day to day basis. This was resolved by using a shareholder committee, acting as a conduit between company and Council.

Oxford Direct Services remained as the name of the company as it is a brand that is already established and trusted locally. However, the company is reviewing its positioning for more commercial activity. Oxford Direct Services now has plans to expand into new markets, such as transport infrastructure projects, and to extend its reach into other counties, potentially using the joint venture model at this point as a means of achieving this ambition.

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