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The "Brave New World" of Local Authority Trading 24 December 2004 The boundary between public and private sectors is becoming increasingly
blurred. The process of change began around two decades ago with
the compulsory exposure of a range of public services to competition
from the private sector. More recent legislation is moving in the opposite direction however.
Perhaps ironically, the legal duty of Best Value is being used as
the basis for the removal of many of the trading restrictions imposed
upon local authorities, giving many authorities unprecedented powers
to engage in trading activities and compete with the private sector
for the provision of services to external customers. For instance, under powers provided under section 99(4) of the Local
Government Act 2003, the Government has issued the Local Government
(Best Value Authorities) (Power to Trade) (England) Order 2004 (SI
2004/1705) (the “Order”), which came into force on 29
July 2004. Under the Order, any local authority in England which
is classed as “excellent”, “good” or “fair” under
Best Value legislation (with some exceptions) is authorised to “do
for a commercial purpose anything which it is authorised to do for
the purpose of carrying on any of its ordinary functions”. This power is subject to a number of conditions however. Before
exercising the power, an authority must prepare a business case in
support of the power, and approve the business case. Also:
- the power may only be discharged through a company
- all costs must be recovered, and
- in the event of an authority ceasing to be classed as “excellent”, “good” or “fair” its
trading activities carried out under the powers provided under
the Order must be wound down over a period not exceeding two years
In the eyes of some commentators, these new powers will help to
create a dynamic and entrepreneurial local government sector that
will increase diversity and choice in the delivery of public services.
At the very least, the powers provided under the Order should create
a more balanced approach to the provision of Best Value. Earlier
legislation adopted a rather inward looking approach, requiring local
authorities to demonstrate by various means the achievement of Best
Value in respect of the discharge of their various functions, with
an emphasis on opening up services to increasing levels of competition.
The new legislation however, enables the better performing authorities
to come out from behind their defences and compete with the private
sector on neutral territory and on equal terms. The new powers to trade also open up interesting options for local
authorities to explore in respect of their relationship with private
sector partners with whom they have joined under initiatives such
as Building Schools for the Future. Far from having to give up their
service delivery functions to private sector providers, local authorities
can now explore potentially exciting opportunities for entering into
true partnerships in which service delivery is shared between the
authority and its private sector partner according to their respective
strengths and weaknesses. Profits from such trading activities might
also help individual authorities to counter some of the financial
effects of the Gershon review and help to avoid consequential cuts
in services or service quality. Embarking on forays into the harsh commercial world will not be
free of risk however. Apart from the more obvious commercial risks,
such as the very real danger of making a significant financial loss,
officers and members will need to familiarise themselves with and
become adept at dealing with a number of issues which are part of
the everyday life of private sector managers but may be quite alien
to public sector organisations. One of the more difficult issues for members and officers who are
given the responsibility for the management of the company formed
to take advantage of the new powers to trade is likely to be the
fact that, even if the authority retains control of the new company,
the local authority and the company will be two distinct legal entities.
When acting as directors of the company, members and officers of
the local authority must comply with the provisions of company law
applicable to directors. They will owe a fiduciary duty to the company
and must act in the best interests of the company, even if doing
so would conflict with the interests of the authority which has appointed
or nominated them. It would also be prudent for the directors of companies formed with
a view to taking advantage of the new powers to trade to keep a weather
eye on the provisions of the Competition Act 1998, which is likely
to be very unfamiliar territory for most local government managers. Those officers and members appointed as directors of the newly formed
company will therefore bear the burden of substantial increases in
personal responsibility and liability, and have every right to be
afforded the protection generally enjoyed by their counterparts in
the private sector. This is new and unfamiliar territory for most
public sector managers, and it is hardly surprising that the law
in this area appears to be little understood in the public sector.
Perhaps the worst trap for local authority employees to fall into
would be to take comfort from the passing of a resolution by their
authority agreeing to the provision of an indemnity for individual
officers appointed as directors of companies formed by the authority.
The passing of such a resolution is in itself unlikely to give sufficient
protection. Officers should ensure that, at the very least, appropriate
indemnities are incorporated into their contract of employment. It
would also appear prudent for indemnities to be covered by insurance. The powers of local authorities to provide such indemnities and
insurance has been the subject of some debate over the years. The
legal position, and the Government’s support for such an approach,
have now been clarified by the Local Authorities (Indemnities for
Members and Officers) Order 2004 (SI 2004/3082) which came into force
on 23 November 2004 and gives local authorities broadly similar powers
to provide indemnities as those available to private sector companies.
This includes a limited power to provide an indemnity in respect
of acts or omissions which are outside the legal powers of the authority
or the relevant member or officer, but where the person indemnified
reasonably believed that the matter in question was not outside those
powers, or where an untrue statement has been made as to the authority’s
powers, or as to the steps taken or requirements fulfilled, reasonably
believed that the statement was true when it was issued or authorised.
On the other hand, the provision of an indemnity in relation to criminal
acts, any other wrongdoing, fraud, recklessness or in relation to
the bringing of any action in defamation, is expressly prevented. For further information please contact: Catherine Burke
Partner, Head of Projects
catherine.burke@martineau-uk.com Martineau's publications are no substitute for taking advice
before reaching a decision on your individual problems. If you would
like any further information about any of the issues raised in our
publications please email us at lawyers@martineau-uk.com. |
