CABINET 21 July East Hampshire Trading Company - Incorporation Proposal Report by the Director, RegenCo

Transcription

1 EAST HAMPSHIRE DISTRICT COUNCIL CABINET 21 July 2016 East Hampshire Trading Company - Incorporation Proposal Report by the Director, RegenCo FOR DECISION Portfolio Holder (EHDC): Cllr Richard Millard Key Decision: Yes/No Yes 1.0 Purpose of Report 1.1 To seek support from Cabinet to register a Local Authority Trading Company with Companies house to enable the Council to sell services to the private sector which it cannot presently do. Options and issues associated with this proposal are contained within the report. 2.0 Recommendation 2.1 To approve the establishment of East Hampshire Trading Company (or similar) to enable the Council s trading operations, including RegenCo to work with the private sector. 2.2 To authorise the Executive Director for Commercial Services, in liaison with the Portfolio Holder for Commercial Contracts, to undertake all actions required to incorporate East Hampshire Trading Company in accordance with the principles contained within this report. 2.3 Initially EHDC staff will be seconded to the trading company to deliver specific private sector contracts across a range of services. As the commercial offer matures and the level of business increases it may be appropriate to transfer staff permanently. This would be subject to the development and approval of a robust business case. 3.0 Background 3.1 East Hampshire District Council has a corporate objective of becoming free of government funding by In furtherance of this objective the council is pursuing a number of income generating initiatives. One of these is RegenCo, which has been operating successfully as a shadow company within the Council. The Planning Service is developing a similar offer along with a number of other business units.

2 3.2 The business case for the RegenCo consultancy offer was approved by the Executive Board and Cabinet in late 2014/15 and during 2015/16 and 2016/17 the offer has developed with a number of contracts being secured and delivered (and 90K net additional income generated for the Council in 2015/16). 3.3 Currently RegenCo operates in accordance with the provisions of S113 of the Local Government Act which allows the local authority to enter into agreements with other local authorities for placing its staff at their disposal for purposes of the latter s functions, on such terms as may be agreed. 3.4 Although s.113 arrangements have proved attractive for business development and contracted work with public sector clients (not least because they bring tax, procurement and reputational advantages) - and will be maintained for these public-public relationships - it is not a suitable arrangement to utilise to engage commercially with private sector players within the industry. 3.5 The objective is therefore to establish a legal structure that enables the Council - as RegenCo or any other consultancy or similar service - to trade freely and legally with private sector commercial entities alongside the work we already do with the public sector. Equally, it will be important to limit the Council s liabilities and those of officers associated with it. 3.6 Following investigation into options and advice from legal and other colleagues within the council it is proposed to establish a Local Authority Trading Company, within which consultancy and other services can undertake its private sector work only, under the provisions of the Local Government Act of 2003 and the Localism Act of 2011 which allow the council to do anything an individual or company may do, as long as other legislation does not prohibit it. Work with the public sector will carry on as now. 3.7 The options for and issues associated with this proposal are referred to in later sections of this report. 4.0 Subject of Report Context 4.1 RegenCo was developed from the successful work that was undertaken by the Whitehill & Bordon project team. In part, it was created as a succession strategy for members of that team as aspects of the Whitehill & Bordon project work begins to tail off. A wider review of the work of the team will be conducted later in the year but an opportunity to capitalise on work with the private sector has necessitated examination of trading structures now. 4.2 RegenCo has a pipeline of potential projects valued at over 1M with the potential to generate net additional income to the Council of c 350K in 2016/17. This is a very healthy position to be in, just one quarter of the way through the year. Within the pipeline there are potential contracts with 4 different private sector clients for the delivery of regeneration consultancy and advisory services.

3 Potential commissions relate to assistance with fund-raising, project management, project delivery and product development. The value of these commissions totals in excess of 200,000 together with potential bonus and success fees of considerably more than that. The commissions have the potential to generate net income over 100,000 in 2016/17. There are also other potential opportunities for other parts of the Council to contract with the private sector - in the energy sector and other areas. Company Options 4.3 RegenCo presently operates, informally, under the umbrella of East Hampshire District Council and is not able to take advantage of these opportunities. There are no other constituted bodies within the Council that can take on this function. 4.4 There are 3 general legal structures that consultancy and delivery services can adopt: Operate from within the local authority under the provisions of S113 of the Local Government Act which allows the local authority to enter into agreements with other local authorities for placing its staff at their disposal for purposes of the latter s functions, on such terms as may be agreed This structure enables the Council to trade directly with other local authority and public bodies without the need to tender competitively for this work (within the requirements of the Contract Standing Orders of the client authority) and to do so on terms as agreed by the local authority (ie, possibly at a premium). The income is also free of tax because of the local authority nil rate tax status and there are no set-up costs other than in-house management arrangements. Operate as a Local Authority Trading Company under the provisions of the Local Government Act of 2003 and the Localism Act of 2011 which allow the council to do anything an individual or company may do, as long as other legislation does not prohibit it, with a Teckal exemption, enabling it to provide services to the council without complying with Public Works and related contract tendering requirements - so long as at least 80% of the companies business is with the Council. This structure enables a local authority-owned company to trade with what are in effect in-house private operating companies exempt from usual Public Works Contract tendering requirements. To utilise such a structure, at least 80% of its activities must be for the host authority. There are minimal set-up costs and similar costs associated with on-going management and reporting requirements. Operate as a Local Authority Trading Company under the provisions of the Local Government Act of 2003 and the Localism Act of 2011 which allow the

4 council to do anything an individual or company may do, as long as other legislation does not prohibit it. This structure enables a local authority-owned company to trade with private sector companies and generate a profit. There is a less onerous legal framework for procurement to comply with. The company will be liable for tax on any profits, though the charging arrangements between the Council (for its staff) and RegenCo can help to limit this. There are minimal set-up costs and similar costs associated with on-going management and reporting requirements. 4.5 The Council has established a Trading Company (East Hampshire Commercial Services), with a teckal exemption, which is the vehicle that oversees and manages contracts associated with the Litter Enforcement service. There are 2 Directors of this company. 4.6 The Council already provides services to other local authority and similar public sector clients through secondment and consultancy arrangements under the provisions of S113 of the Local Government Act, as described above. This is where income is primarily generated at present. 4.7 In order to contract with the private sector, the council needs to operate under the umbrella of a Local Authority Trading Company as described in the third bullet of para 4.4 above. Proposal 4.8 It is proposed that: a Local Authority Trading Company (to be called East Hampshire Trading Company or similar) be established that the company be generic in nature enabling the council to use it for all its trading with commercial entities, separate and in addition to its on-going activities with the public sector the Council fully own the company, in the first instance, though this could change over time it be constituted as a Company Limited by Shares Company directors (expected to be 2 in the first instance) be appointed from senior executives of the authority governance arrangements require the company directors to report on progress and performance to, for instance, a shareholders committee or share-holder/stakeholder board whose remit is to ensure a commercial focus and delivery of EHDC s policy framework (to be reported to at least once a year), which itself would report to Cabinet. 4.9 East Hampshire Trading Company would be the legal entity under which all commercial activities with the private sector are conducted. This would not

5 prevent RegenCo activity continuing to be branded as RegenCo. Nor would it prevent any other consultancy services or similar developed elsewhere within the Council trading with the private sector under their own brand as appropriate It is proposed that all staff will remain on EHDC contracts and hours worked for private sector clients will be billed through the trading company. A service supply agreement will be signed between the council and the trading company; this will specify the rates (with overheads) that will be paid by the company for the services provided by EHDC staff. It is expected that in the future, as a result of a review of the Whitehill & Bordon project team, options will be presented to the Executive Board for some of these staff to transfer to the East Hampshire Trading Company. Where future transfers of staff become desirable and advantageous (for the Council; and the staff) full implications can be considered at that time. It is proposed that the Executive Director for Commercial Services, in liaison with the Portfolio Holder, be authorised, following full consideration of financial, legal and HR implications, to do so where it could be demonstrated it would result in no unacceptable additional cost or liability to the Council The overall profit and loss account for RegenCo (and other consultancy services) could be operated across both the retained in-house public sector consultancy service and the East Hampshire Trading Company element, enabling ease of understanding of overall RegenCo accounts and surpluses. Benefits 4.12 Such an arrangement would bring the following benefits: strategic fit with the council s goal of becoming independent of government funding limited shareholder liability due to the companies separate legal status potential cost reductions and efficiency of service delivery unrestricted commercial freedom through opening avenues for new business, joint working and partnerships potential alternative options for raising finance a window for direct entry into the private commercial sector responds to changes in the markets for services that the council provides and the ways councils will be commissioning services in the future potential improvements in service quality and competitiveness. Disbenefits 4.13 There are also some (potential) disbenefits: staff costs (though this is unlikely to be additional to those already incurred by the existing RegenCo and other in-house consultancy services) regulatory, reporting and tax burden reduced direct control and influence over business operations

6 Risks increased business risk exposure as the council will be free to trade with entities in the commercial sector. The latter two can be mitigated through the operating procedures agreed for the company, which can be developed in the first few weeks of operation The following risks have been identified: Financial risk - the business makes insufficient income to cover costs. The set-up costs are minimal and staff costs are already met by approved Council budgets. The RegenCo pipeline includes at least 3 projects that have the potential to generate profits in excess of 100,000 in the next months. Other consultancy services will not progress unless their business case has been approved Business risk - failure in some other area This risk will be mitigated, in part, through the limited liability status and through Professional Indemnity and Fidelity Guarantee Insurance Reputational - potential for the Council to be perceived as no longer prioritising public service This risk will be mitigated by an open and transparent description of the use to which the profits are put - ie, supporting continued and enhanced public service excellence. 5.0 Implications 5.1 Resources: Staff time will be required to establish the company. This is allowed for in the business plans of the business units, including RegenCo, New Ventures, legal and financial, most likely to contribute to this work. There will be minimal costs associated with the establishment of East Hampshire Trading Company which can be met, on a proportionate basis, by those consultancy services expecting to utilise and benefit from the company. There will also be minimal costs associated with the management and reporting requirements of the company. These will be paid for out of the profit generated. Staffing and other costs will be met from within the approved business case of each individual consultancy service. 5.2 Strategy: The establishment of a Local Authority Trading Company is essential if the Council is to work with the private sector which itself will make a significant contribution to the Council s corporate strategy of becoming independent of government funding 5.3 Risks: See para 4.14

7 5.4 Communications: A communications plan will need to be prepared that demonstrates the specific benefits this approach will bring to the delivery of high quality services to the communities of East Hampshire 5.5 For the Community: As above 5.6 The Integrated Impact Assessment (IIA): As above 6.0 Consultation Background Papers: to follow Agreed and signed off by: Head of Legal Services: Abe Ezekiel Head of Finance: Stuart McGregor Relevant Executive Director: Gill Kneller Portfolio Holder: Richard Millard Contact Officer: Job Title: Steve Pearce Director, RegenCo Telephone: steve.pearce@easthants.gov.uk