Commercial guidance and toolkit

COMMERCIAL GUIDANCE AND TOOLKIT

Contents The commercial journey

Introduction

Overview » 2.1 What does commercial mean

Developing a commercial strategy

» 2.2 Ways in which commerciality can be used

Setting up a new commercial activity/ implementing change

Undertaking commercial reviews of services and activities

Implementing commercial change and evaluating success

Commercial activity – addressing issues raised in reviews

» 2.3 Services and/ or investments » 2.4 Creating the right foundations » 2A Capacity, skills and culture

» 3A Financing and funding

» 2B Legislation

» 3B Ongoing governance

» 4A Developing the case for change

» 3C Delivering social value » 3D Understanding risk

How we can help

Tool 1 – Readiness checklist

Tool 3 – Service planning workshop

Tool 2 – PESTLE analysis template

Tool 4 – Stakeholder assessment

Tool 9 – Developing a commercial culture

Tool 5 – Data book for service planning

Tool 11 – Commercial capability matrix

Tool 7 – Developing evaluation criteria

Tool 6 – Commercial project score card Tool 8 – Case for change template

Tool 10 – Evaluation and monitoring score card

Contents 1 Introduction 2 Overview

Introduction

3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

How to use the guidance and toolkit This guidance is intended to take councils through a structured and robust approach to considering commercial activity.

Following this introduction, there is an overview of key overarching considerations setting out what commercial means for councils and how this can be achieved.

The overview is followed by five stages representing a commercial journey. These cover the commercial lifecycle from developing a commercial strategy through to reviewing success and addressing issues that reviews may highlight.

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Below each of these main sections there is more detailed guidance providing additional information around subjects such as the skills, capability, culture and structure of your service/s.

The toolkit is intended to provide practical information. Included in the toolkit are links to other guidance as well as eleven specific tools that have been developed to guide you through the commercial review and planning process. These are focused on opportunities and changes at the service/operational level.

They are generic and adaptable so that they can be amended to be applied to the range of opportunities that will be relevant across different types of authority and a range of different service areas.

Purpose This guidance is intended to support councils when undertaking commercial activity irrespective of the end outcomes they are seeking to deliver. The key purpose is to maximise their chances of success.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

There are a range of common considerations, tools, and methodologies which councils can adopt in order to develop and effectively manage a programme of commercial activity.

There are also some common success factors such as being prudent, understanding what you want in terms of objectives, understanding the markets you are operating in, understanding and managing risks as well as understanding and managing costs.

Some councils have run into difficulties arising out of their commercial activity with a small number of councils exposing themselves

to significant risk. Whilst this is not the case across the whole sector, they do impact on the sector’s commercial reputation and on the reputation of the individual authority.

The reasons for these failures have been documented, with some high-profile cases having been the subject of Public Interest Reports by auditors. The findings of these reports provide useful information and lessons learned for all councils. Stakeholder consultation, robust business cases, alignment with corporate plans and prudent financial management were cited as essential for success – and are reflected in this guidance.

7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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Contents 1 Introduction 2 Overview

Overview

» 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2 A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

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2.1 WHAT DOES “COMMERCIAL” MEAN FOR LOCAL GOVERNMENT AND WHY IS IT NECESSARY? What does it mean to be commercial?

Most people who work in local government have a preconception of what “commercial” means to them based on their personal views and experience and based on the culture and approaches of the organisations they work for. For some councils it is about increasing revenue to balance the books, for others it is about looking towards a broader horizon, fostering an innovative culture or as a tool to assist in revitalising communities – there is no one size fits all approach but all councils have to undertake commercial activities to some degree. Ultimately every council’s approach to commercial activity will be determined by their own unique objectives and requirements.

For the purpose of this guidance, “commercial” means the ongoing management of resources, money or capital at financial risk in order to achieve a benefit. A commercial approach requires the ongoing management, governance and operation of the investment.

In its broadest sense being commercial involves bringing the principles of commercial operation to the management of public services – having access to and deploying commercial skills.

It also means adopting practices that reflect a commercial mindset, including a broad focus on achieving efficiency, effectiveness, and value for money. In practical terms this includes judging the cost of effort against reward, whether that reward be actual income or savings, or non-direct financial benefit such 5

Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2 A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes

as social value. This requires the use of sound commercial judgement and data to inform business cases and decision making.

A commercial approach to running services should not mean a dilution of the local authority or public sector values – they can operate hand in hand, complementary and integrated.

Although, like any major change, embarking on commercial projects should not be taken lightly; they can take time, investment and have both positive and negative consequences.

Each council needs to carefully consider what is appropriate to their unique local context – large scale or small scale, internal or external – using a model that makes the most of their circumstances, capabilities, and risk appetite.

Why is it considered necessary?

Over the last decade, led by the Localism Act of 2011 which gave local authorities greater powers to trade, there has been a significant increase in the scale of commercial activity in local government. This has been a key way of addressing the real-terms reduction in funding for local authorities. There remains a continuing pressure on the sector to act in a commercial way to provide services efficiently and to optimise the income that organisations generate.

What are commercial councils doing?

The wide-ranging commercial activities councils have undertaken include: `

c reating companies or directly investing in assets such as affordable housing, commercial property and renewable energy.

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stablishing commercial trading companies e in areas outside the typical range of services such as energy provision, care provision, recruitment, leisure, and culture

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perating core services through a Teckal o trading company, i.e. acting outside procurement regulations, enabling transfer of directly delivered services or in-sourcing of previously outsourced work

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t ransferring delivery of a non-statutory service to an arm’s length vehicle such as a social enterprise or trust

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s haring services via un-incorporated models such as the provision of back office, regulatory and transactional services through a service level agreement

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roviding services for commercial return to p other clients, either directly or via a company

All these options have provided opportunities for greater efficiency of service delivery

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Contents

» 2.4 Creating the right foundations

and/or income generation to support the overall financial position and to deliver wider benefits.

However, they have also brought a requirement for an additional level of due diligence for the set-up and scrutiny for their on-going operation to ensure that these models are fit for purpose.

In some cases, they have resulted in failures which have had the opposite effect on public finances, with bailouts required and trust being lost. This has also prompted the introduction of more restrictive borrowing rules for all.

» 2 A Capacity, skills and culture

In addition, councils have also embarked on internal commercial programmes involving

1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments

activities such as efficiency reviews and reviews of fees and charges.

Generating income through fees and charges or trading can be a viable way to maintain vital public services, but it can also be a way of supplying services that the market does not supply, services at risk of not being feasible or offering an affordable alternative for people if a lack of competition has inflated local prices. New, discretionary services can provide residents with more choice.

» 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

2.2 WAYS IN WHICH COMMERCIALITY CAN BE USED AS A TOOL FOR DELIVERING A COUNCIL’S OBJECTIVES Introduction Using a commercial approach to deliver wider objectives can be achieved in a number of ways – not just by delivering a profit.

A commercial approach can include:

7 Commercial activity – addressing issues raised in reviews

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c harging more for certain council services in order to generate a surplus

Endnotes

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c hanging the way services are delivered in-house to make them more sustainable and service the public better e.g. by digitisation

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c hanging the delivery model for services, for example by outsourcing to a third party,

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sharing services with another local authority, or creating an alternative delivery model such as a wholly owned or joint venture company for the provision of services which has the opportunity for additional revenue generation `

eveloping new market opportunities either d alone or through developing relationships with public, private or third sector partners

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i nvesting in real estate via an arm’s length company to generate profit for the council as a sole shareholder or in a joint venture with another partner 7

Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations

2.3 SERVICES AND/OR INVESTMENTS Approaches to commercial activity will vary depending on the nature of the activity.

There are differences dependent on whether the activity relates to the commercialisation of a service or whether is an activity relating to an investment.

In both cases, `

» 2 A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

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c ommercial skills will be needed to ensure that the company operates as it should, both within the owning authority and the company. The authority may need to recruit and/or appoint commercial officer(s). Tool 11 Commercial capability matrix, includes a matrix to assess capacity and capability i t is important to recognise that, unlike the private sector, local authorities have a duty to provide public services so any commercial activity must be balanced against that duty

5 Undertaking reviews of commercial services and activities

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6 Implementing commercial change and evaluating success

strong governance framework is essential a to ensure that the commercial activity’s risk is managed effectively

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t he financial health of the council may be compromised because commercial activity requires investment which may increase as the commercial activity progresses. Checks and balances and oversight by the Section 151 Officer (S151 Officer) are therefore critical

7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

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ngoing performance management will be o needed to monitor the commercial operation

and ensure that steps are taken at the earliest stage if there are issues.

To be successful, councils should ensure that the following are carried out: `

e clear on what commercialism means for b the council and create a commercial culture

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ecide where the council’s strengths are d and develop opportunities in these areas

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c arry out an options appraisal to determine the best option

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evelop a business case for the preferred d option

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nsure that there is a structure in place e for management of the commercial activity

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ave an exit strategy – what happens h if the agreed outputs are not delivered or is circumstances change?

There are different issues that will arise when implementing a commercial approach to services as opposed to investments.

These are outlined below:

Services Councils may decide to commercialise services where there is an opportunity to make them more efficient and/or generate income as noted in section 2.2 Ways in which commerciality can be used as a tool for delivering a council’s objectives, above.

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Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2 A Capacity, skills and culture

The proposed opportunity should be carefully assessed, following an options appraisal to determine the most suitable model using set criteria such as risk appetite and degree of control desired over the company. Following this exercise, a business case will be required in order to determine the viability of the company and the extent of support required by its shareholder(s).

Investments Local authorities may invest in real estate provided it meets basic investment guidance,

such as that it must be for economic regeneration purposes as well as for the generation of income. They typically use a special purpose vehicle such as a wholly owned company or a joint venture with a public, private or third sector partner.

This will also require a full exercise as noted above to determine the viability, taking into account borrowing that the owning authority may be required to make and ensuring that this meets Public Works Loan Board (PWLB) rules and is affordable.

» 2B Legislation 3 Developing a commercial strategy

2.4 CREATING THE RIGHT FOUNDATIONS

4 Setting up a new commercial activity/ implementing change

Starting point

5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

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There are a number of essential building blocks a council needs to put in place when embarking on a programme of commercial activity. These include:

Definition `

efining what “commercial” means to the d organisation and to relevant service areas

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c larifying objectives – why is the council doing this, what is it trying to achieve? What are the drivers: revenue, social factors, improved performance?

efining desired outcomes – financial and any d non-cashable benefits – these need to be realistic, taking account a natural characteristic of being over optimistic about outcomes and timescales (optimism bias)

Strategy `

stablishing a strategic fit with the ambitions e of the council – ensuring any commercial activity does not distract from or conflict with the council’s wider goals and statutory responsibilities

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eveloping a plan of action and the structure d to deliver it 9

Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments

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lanning how to identify and assess p commercial opportunities

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ssessing resourcing requirements a to deliver priorities

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etermining skills needed to achieve desired d outcomes

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nsuring the resources diverted from e non-commercial activities do not leave capacity gaps.

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i dentifying gaps and buying in technical expertise and advice (from interims, external consultants and other sources).

If this is unaffordable and the skills do not exist in house then it is prudent not to proceed further.

» 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

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5 Undertaking reviews of commercial services and activities

eveloping and delivering training and d raising awareness on commercial activity

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l earning from and collaborating with others including undertaking activities such as benchmarking with other councils

6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

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i dentifying impacts including on equality, staff, services and climate; along with how negative impacts are offset

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nsuring there is no negative financial e impact on other services and the approach will not undermine local private, voluntary or education sectors

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c larifying the council’s position regarding competition (e.g. is the council setting itself up in direct competition to local businesses or other public sector bodies or is it bringing something new to the market)?

Capability, capacity and resources

» 2.4 Creating the right foundations » 2 A Capacity, skills and culture

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Risks and challenges `

r ecognising that commercial activity carries with it risks and moves the council away from its day-to-day business

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t aking account not just of financial risk exposure balanced against security of investment and rate of return but also political and reputational risks

Commercial return `

rioritising the best opportunities based p on return on investment, which should then be documented in a business case

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f ocusing on achieving full cost recovery for traded council services and financial transparency, including properly accounting for areas such as corporate overheads

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developing market knowledge

Culture change `

c reating the mindset and the right environment for success (for example by encouraging staff to be innovative, take managed risks and be flexible – within reasonable parameters allow people to make mistakes from more innovative approaches and learn from those mistakes) 10

Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used

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l eading from the top – setting expectations about commercial behaviour

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pplying a “commercial lens” to all aspects a of council activity

Align governance with strategy `

nsuring business plans are approved through e appropriate governance (which could include a corporate commercialisation board) and progress reported on a quarterly basis

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developing strong business cases

» 2.3 Services and/or investments » 2.4 Creating the right foundations » 2 A Capacity, skills and culture » 2B Legislation

to understand if it is right time to undertake a commercial activity and whether the right resources exist to consider it.

The simple checklist which identifies categories of information relating to service need, current performance, the market, strategic fit, relationship to other service areas, resources and skills available and how decisions will be made.

A readiness checklist (see Tool 1 Readiness checklist, below) can be a useful self-assessment

It is not necessary to have all of the information in the checklist available at the start of the process. Some may be required at later stages, for example to justify a change.

2A Capacity, skills and culture section

2B Legislation section

3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

Endnotes How we can help

Investigating commercial opportunities Tool 1 – Readiness checklist

This

document aims to provide a checklis Depending on t for services the scale not to understand all the requirem evidence or actions. their readiness ents will be needed for pursuing new , but this checklis t provides a starting or additional commercial opportu nities. point to reflect on the next steps in providing

Item

1. Understanding the need

1.1

Response

Is there a collectiv Version No: 1.0 e understanding needed of why a change ? From2023 Issue date: 23 December more than one is source?

Is there evidenc 1.2 e of potential return of a comme activity? rcial Has any learning 1.3 / research taken the potential of place to underst a commercial and activity?

If relevant, would it be more effective the market rather to withdraw from 1.4 than expand if there are others providing the service; partners hip arrangement outsourcing? or

Choose an item.

to change conside ring external 2. Knowing factors? the service

Choose an item.

1.5

2.1

Is the time right

Is the service

e.g. test with Choose an item.

Choose an item.

Choose an item.

2.2

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— Commercial guidance and toolkit

yes / actions

Choose an item.

on a sound foot?

Is the service ready to there other demand embark on something new, or are s within the service improve existing e.g. priority to standards?

Are there measur es in place 2.3 perform ance of the service to understand the in relation to the opportunity? commercial

Evidence of

Choose an item.

Choose an item.

authorities

e.g. option assessm ent e.g. conduct PESTLE

POLITICAL

Impact negativ e

P.1 P.2 P.3 P.4

VersionP.5 No: 1.0 Issue date: P.6 23 December 2023

SOCIAL

analysis

e.g. service plan in place with an understanding of the direction of travel for the service e.g. conduct SWOT

Tool 2 – PESTLE analysis template

E.1 E.2 E.3 E.4 E.5 E.6

survey with custome rs

with other local

Investigating commercial opportunities

ECONOMIC

other colleagu es

e.g. conduct a e.g. research

for no

Download Tool 2 – PESTLE analysis template

POLITICAL

7 Commercial activity – addressing issues raised in reviews

Download Tool 1 – Readiness checklist

POLITICAL

6 Implementing commercial change and evaluating success

S.1 S.2 S.3 S.4 S.5 S.6

POLITICAL

5 Undertaking reviews of commercial services and activities

high

medium

Impact negativ e high medium

low

Impact negativ e high medium

Impact positive

low

low

low

medium

high

Address the threat

Impact positive

low

medium

high

Address the threat

Impact positive

low

medium

high

Address the threat

Actions Take the opportun ity

Actions Take the opportun ity

Actions Take the opportun ity

assessment

e.g. instigate measures pre-cha nge to baseline performance

Local Partners hips

Local Partners hips

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2

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Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations

Download Tool 9 – Developing a commercial culture

Developing a commercial culture Tool 9

Establishing a commercially services. focused culture The challen is imperative ge that this represents for the succes should not sful comm Many service be undere ercialisation s already stimated. of charge and enhancing trade so scaling existing skills present a and capab real challen ilities. Howev the activity up may ge from not require er, for some services may more parts of the feel that chargi a skills, capability and cultura councillor organisation than ng for service and officer l point of view. it could s that were decision maker make chang Those deliver previously s may find es to wider ing free is not it difficult processes appropriate to remov that will allow and both Research a more entrep e traditional hierarc conducted hies and reneurial

by Allan Drexle culture to high perform develop. r, David Sibbet ance groups characterise successful. , and Russ a high-perform They devise Forrester focused on d a model ance team what makes that compr culture. These ises seven 1. Purpose are: stages to and help 2. Trust buildin vision g 3. Role and goal 4. Commitment clarification 5. Implem entation 6. High perform ance 7. Growth / renewal

Download Tool 11 – Commercial capability matrix

Commercial capability matrix Tool 11 – Guidance Note 2

Version No: 1.0 Issue date: 23 December 2023

Version No: 1.0 Issue date: 23 December 2023

Skill / role Market and

Purpose

CTION

Corporate requirement

supplier

Market understanding

The structu re of the model organisation resembles ’s arch of energy. When the path of a bounc often feel ing a greater sense of freedo in the stages of orienta ball and the model possibility. demonstrates tion and m which provid the es great opport renewal, organisation s unities for As an organi potential and will sation moves flexible. into the middle stages, there is more constr aint and goals are less

INTRODU

1.1

To help local commercial authorities assess the likely and trading commercial in this section activity a skills require authorities. . This can be adaptedetailed skills matrix This section has been d to support d to meet corporate developed the needs covers generi and operat and include of different c skills ional level. you may require It does not that are likely to be types and sizes of d if you had cover sector required at a development 1.2 or property specific skills (for the Approach example what company). to catego rising capab The types ility and use of skills are of matrix divided into three catego • Marke ries: t and supplie • Busine r ss and financ • Gover nance reporti ial ng and monito ring.

The tables distinguish as opposed between the capability challenge to service teams. At and the corpor required within the understandin leadership eleme ate council’s corpor nts as oppos level the capability g. is more focuse ate team ed to service delivery and d on Although detailed markethe gaps in both capability t areas could can be deliver be filled by ed in a numbe making new appointments r of ways: • By using , commercial skills alread • By trainin y available • By appoing staff and members within the council ting new • By bringin members of staff with g in expert specific skills s to provid e advice.

The tables below identif assessment. y capability in a way that well as instil The challenge for could form the a culture the basis encouraging council will be to develo of a “comp commercial p the full range etency” 1.3 innovation Market and of skills and entrep supplier reneurship. as capability

• Strateg ic level unders • Public tanding and private • Region understanding al geogra phy unders • Ability tanding to challen ge and test level plans, service performancetargets and • Ability to provide council with assurance around all market activitie commercial / s

Service level requirement • • •

Service specific understanding Knowledge of market drivers policy, regulatory, - local and Opportunity regional and regiona horizon scanning (local, l)

Local Partne rships

Local Partne rships

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» 2A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes

2A CAPACITY, SKILLS AND CULTURE Capacity and skills – introduction Councils have not always had as much of a focus on commercial activity as they do now and, for many, resources have not been sufficiently trained or pivoted in alignment with the commercial direction the council has moved in. This has resulted in some skills and capacity deficits, compounded by budget reductions and some recruitment and retention challenges in relation to key areas of commercial activity.

There are two related risks if there is a gap between the available commercial skills and commercial ambition: The commercial strategy is capability-limited with potential opportunities missed Ambition may, in places, exceed the resources available – increasing risk to the council of failed projects

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Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

Probably the first requirement for a council engaging in commercial activity is a strong sense of self-awareness, including understanding the council’s internal capacity and an appreciation of the environment in which it works and is proposing to work.

Leadership and support from the top is vital from both an officer and member point of view.

Commercial activity should be based on a clear and sustainable political and organisational vision, including clarity over what it is intended to achieve. As well as providing direction, leaders will help to make sure that the necessary resources are available and that the risks described above are mitigated.

Local government staff have considerable skills to the table but may not necessarily have commercial skills as these have not been required in traditional roles. For example, commercial management can require different

Business and financial

 Business planning  Risk management  Investment planning  Business case development

skillsets to those required to manage services without a commercial focus. In addition, traditional public sector financial accounting skills may, for example, not be suitable for the type of financial analysis and modelling required. Similarly, marketing and business development are often key enablers to commercial success but are not necessarily core public sector skills.

It is good practice to involve staff in any exploration around skills. This could be anything from new ICT skills if you are introducing new systems for payments or upskilling to new roles such as sales or business relationship management. Involving staff with the skills needs assessments may help to build enthusiasm for the new venture and ensure that staff understand the benefits of the new approach for both themselves and the service users.

Market and suppliers

 Market understanding  Market engagement  Supply chain engagement  Marketing

7 Commercial activity – addressing issues raised in reviews

 Performance management

 Client management

 Budgeting and cost

 Pricing

Endnotes

 Sourcing and procurement

How we can help

 Data analysis/reporting

management

 Product development

 Contract management

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Figure 1 – Commercial skills likely to be required to support council commercial activity

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Contents 1 Introduction 2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

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Even at the planning stages it is important to have the right people in place to explore options. The amount of time required to fully explore different models should not be underestimated. Cross-disciplinary teams with the time available to focus on the task are required including HR, finance, legal and service/investment specific knowledge.

Utilising external advice and support It may be useful to consider bringing in new/specialist skills and knowledge on a temporary basis if there is not a long-term need for those skills across the organisation.

Most councils rely on external experts to address capacity and skills deficits and sometimes to transfer delivery risk to advisors.

External advisors can be particularly useful in providing specialist and investment management skills where councils hold significant portfolios, including using ongoing outsourced management to continue the transfer of risk and to advise when to invest, divest or diversify.

More generally, it is recommended that councils utilise external support and welcome scrutiny to challenge internal “groupthink” and to ensure a counter view is considered. This can assist not only with initial decision-making from the initial options appraisal and business case, but also with the ongoing management of commercial

activity and determining when it is appropriate to make changes to any investment, and in the case of service delivery ensuring that robust contracts and business plans are delivered.

However, when using external support and advisors, councils need to take time to adequately frame requirements and put sufficient resources into ensuring that they have appropriately skilled officers to enable them to provide a strong client function with advisors. This may require training.

Another area where external input can be useful relates to using independent nonexecutive directors to strengthen governance arrangements on council trading company boards and ensuring board members have commercial, risk management and specialist skills relating to the market in which the company operates.

Skills required to support commercial activities To help local authorities assess the likely commercial skills required to support commercial and trading activity, a detailed skills matrix has been developed, to be adapted to meet the needs of different types and sizes of authorities. It covers generic skills that are likely to be required at the corporate and operational level. Sector specific skills (for example what may be required for a development or property company) are not covered.

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Contents 1 Introduction 2 Overview

The types of skills are divided into three categories: 1 Market and supplier

» 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

The tables distinguish between the capability required within the council’s corporate team as opposed to service teams. At the corporate level the capability is more focused on the challenge and leadership elements as opposed to service delivery and detailed market understanding.

Although gaps in both areas could be filled by making new appointments, commercial capability can be delivered by: `

using skills already available within the council

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training staff and members

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ringing in experts on a temporary basis b to provide advice.

Download Tool 11 – Commercial capability matrix

Tool 11 – Guidance Note 2

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Purpose

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l ack of public sector competitiveness when compared with private sector pay (particularly small councils being less competitive)

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roximity to London (or other major cities) p with a highly competitive marketplace for commercial skills

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eographic isolation/cost of travelling g to the area

CTION

To help local commercial authorities assess the likely and trading commercial in this section activity a skills require authorities. . This can be adaptedetailed skills matrix This section has been d to support d to meet corporate developed the needs covers generi and operat and include of different c skills ional level. you may require It does not that are likely to be types and sizes of d if you had cover sector required at a development 1.2 or property specific skills (for the Approach example what company). to catego rising capab The types ility and use of skills are of matrix divided into three catego • Marke ries: t and supplie • Busine r ss and financ • Gover nance reporti ial ng and monito ring.

The tables distinguish as opposed between the capability challenge to service teams. At and the corpor required within the understandin leadership eleme ate council’s corpor nts as oppos level the capability g. is more focuse ate team ed to service delivery and d on Although detailed markethe gaps in both capability t areas could can be deliver be ed in a numbefilled by making new appointments r of ways: • By using , commercial skills alread • By trainin y available • By appoing staff and members within the council • By bringin ting new members of staff with g in expert specific skills s to provid e advice The tables . below identif assessment. y capability in a way that well as instil The challenge for could form the a culture the basis encouraging council will be to develo of a “comp commercial p the full range etency” 1.3 innovation Market and of skills and entrep supplier reneurship. as capability Skill / role Market and

Some councils experience difficulties with recruiting skilled and experienced staff with appropriate commercial skills. Factors that can affect a council’s ability to recruit and retain staff include:

INTRODU

1.1

Version No: 1.0 Issue date: 23 December 2023

Attracting talent with commercial experience

I n addressing these issues councils have adopted a number of approaches including:

Commercial capability matrix

Endnotes How we can help

3 Governance reporting and monitoring

2 Business and finance

This approach could be used to ensure that the right mix of skills has been achieved, through the development of a “competency” assessment.

The challenge for a council is to develop the full range of skills as well as instilling a culture which encourages a commercial mindset.

Corporate requirement

supplier

Market understanding

• Strateg ic level unders • Public tanding and private • Region understanding al geogra phy unders • Ability tanding to challen ge and test level plans, service performancetargets and • Ability to provide council with assurance around all market activitie commercial / s

Service level requirement • • •

Service specific understanding Knowledge of market drivers policy, regulatory, - local and Opportunity regional and regiona horizon scanning (local, l)

Local Partne rships

2

`

orking regionally with neighbouring w authorities to pool talent

`

sing consultants on an ad hoc basis u to support specific commercial projects as required. This approach is particularly relevant for some smaller councils with less need for permanent commercial team 15

Contents 1 Introduction

`

2 Overview » 2.1 What does commercial mean » 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

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s trongly promoting the positive aspects of working in local government. For example, the wide range of opportunities that local government offers for commercial professionals to apply their expertise to initiatives and schemes, such as carbon reduction projects or others with wider social, environmental, or economic impacts, can prove attractive to some professionals ttracting experienced private sector a commercial staff towards the end of their working life who can mentor less experienced employees

Training and development Unless a commercial approach is time limited, the council will need to build and replenish its skills to ensure that the commercial strategy is sustainable. There have been examples where key individuals, in particular key leaders, have left an organisation only for the commercial strategy to falter.

It is recommended that councils who are involved in commercial activity should provide tailored training for managers and members to strengthen their commercial skills and ability to critically evaluate and manage commercial investments.

There should also be periodic board member training for wholly or partly owned companies, to ensure board members’ knowledge is up-to-date, and any new members are clear about their responsibilities.

Culture Establishing a commercially focused culture is imperative for the successful commercialisation of services. However, the challenge this represents should not be underestimated.

A commercial culture should be one in which opportunities are assessed against the authority’s criteria, managing risk based on an understanding of the market, risk and return, followed by ongoing management and variation of the portfolio as the operating environment changes.

Many local government services already operate on a commercial basis so scaling the activity up may not require more than enhancing existing skills and capabilities.

Both member and officer decision makers may find it difficult to remove traditional hierarchies whereby only those at senior levels can put forward commercial ideas. However, in order to ensure that to promote innovation, a corporate-wide inclusive approach is needed to ensure that commercialism is embedded throughout the organisation.

Councils may wish to establish an ongoing commercial culture and leadership programme which covers all areas of the council and which, for example, promotes value for money in everything it does, sets clear expectations about commercial behaviour and shows how this aligns with the council’s objectives.

16

Contents 2 Overview

2B LEGISLATION – CHARGING, TRADING, AND USING OTHER VEHICLES

» 2.1 What does commercial mean

Introduction

1 Introduction

» 2.2 Ways in which commerciality can be used » 2.3 Services and/or investments » 2.4 Creating the right foundations » 2 A Capacity, skills and culture » 2B Legislation 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Councils have long held powers to engage in commercial activity, but these have increased in more recent times. The Local Authorities (Goods and Services) Act 1970 allowed councils to trade with each other as well as other public bodies but not with private businesses or individuals. This became permitted by the Local Government Act 2003 subject to the traded activity being related to their function as a local authority. The Localism Act 2011 gave local authorities further freedoms and flexibility by giving them the power to do anything that an individual person can do that is not specifically prohibited. This is referred to as the “general power of competence” (GPC) and it enabled councils to become involved in a wider range of commercial activity. This is because successful commercial activities can lead to direct financial and other benefits such as reducing delivery costs, allowing growth and increased income to be reinvested locally, contributing to the local economy and safeguarding and/or creating local jobs.

Although conflated as a term, there is a distinct difference between trading and charging.

Charging covers those services and activities which fall within the discretionary scope of a council’s function i.e. those which they have a power but not a duty to provide such as,

for example, pest control. In the cases of such services, the charges must be limited to the recovery of cost, whereas trading activity can be undertaken for a profit for example providing estate management services to public sector partners.

The following link also provides useful guidance on charging for discretionary services: General power for best value authorities to charge for discretionary services – GOV.UK Whilst this is a general guide to the relevant legislation, councils should always take their own legal advice before embarking on commercial activity.

For more detailed guidance on charging, trading and trading companies/vehicles – Download the Guidance Note 1.

Download the Guidance Note 1 for further detail

Charging, trading and trading vehicles Guidance Note 1 – Commercial Toolkit

Version No: 1.0 Issue date: 23 December 2023

Charging,

trading, and

trading vehi

cles

1.1 Why / when to trade?

Trading covers a broad range establishing of arrangement to achieve new companies. The but if you model used s from shared service are to do this will be depen s to via a compa pursuing a “comm dent on what councils, ercial ny. While the you are trying shared service purpose” then have becom establishment of new s are a familia the law require e increasingly compa s councils r arrangement popular over nies to trade to for most the public recent years.

It is import sector and ant beyond creates value. to understand the different option s available to establish There are a model that many benefi there can ts to establ be and increa direct financial benefiishing trading arrang sed incom ement ts such as s. When e to and safegu arding and/or be reinvested locallyreducing delivery costs, successful, , contributing creating local allowing growth to the local jobs. economy 1.1 Establishing a local autho rity tradin g company A trading venture can achieve as benefit from a council a level of different purpos or public sector freedom and flexibil trading compa e; with fewer service body because both organi ity that is harder to nies can reduce s to deliver sations have up decisio and differe hierarchies, n making. a very nt levels All of this service users. of risk, counc can improv increase autonomy il e the quality amongst staff of service Key feature s and outcomand speed s of a trading es for venture include : • Differe nt models to choose • Greate from r scope for income genera • Less contro tion l for the counc • Greate il than in-hou r control than se deliver • Greate y r opportunity an outsourcing model • More to innovate complexity and cost for set up Trading as a to fully explor separate company should not e and then evidence be treated implement base management and robust model a new model. With as a quick win as it will take ling pre and risk . post decisio involved, developing time n is vital, a strong You need as is good to change have a direct be clear about your drivers conse and what quence on be neede you are trying d depending the market, increa to achieve on whether type of model that you adopt. as this will you are trying se quality important Differe or grow; to reduce to your costs, nt approaches will services if consider other optionand these drivers are fill a gap another provid s available, not mutua lly exclusive. in the for examp er can meet le, stopping It is still the outcom As part of the direct e or if there the explor delivery of is no longer ation stage demand. you should consider the scope of service s involved Local Partne in the rships

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Contents

Developing a commercial strategy

1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Ideally individual commercial and trading activities taking place within an authority will be carried out within the context of an overall commercial strategy or common set of policies.

This should enable the following: `

lignment of the activity with the council’s a plan and medium term financial strategy

`

nsure a consistent approach to activities e across the authority – including making investments and setting targets

`

nsure that the activities are making e the expected contribution to corporate objectives and finances

`

t hat individual or cumulative risk is being managed in line with the corporate risk strategy

Endnotes How we can help

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t hat the authority has the necessary governance for its commercial activity and can get the necessary level of assurance from different activities.

Although historically local authority commercial and trading activities have developed over many decades in response to local and national requirements and opportunities, developing an overarching strategy is a useful corporate approach – as well as setting clear expectations for service areas and operational teams.

As Figure 2 below identifies, some commercial opportunities are best delivered at the service level, issues such as culture are best driven by the corporate leadership.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value

Strategic

Operational

Tactical

High level activities that help the organisation to operate more commercially

Opportunities that can be implemented by services with little or no resource

Large scale activities with a large financial benefit, or commercial opportunities that require a reasonable amount of resource to implement

» 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Figure 2 – Types of commercial interventions While councils face increased pressures, it is tempting to view commercialism as a “silver bullet” which will allow everything else to remain the same and address all current challenges painlessly. But difficult decisions will still need to be made about the services delivered and how they are delivered.

Delivering efficiencies, helping communities to become more independent, managing demand and changing ways of working remain part of the overall solution and should influence the commercial opportunities being considered. In fact, efficient, customer driven, agile practices become even more important when operating in a commercial arena.

As with any major change, it is important that the council is clear about what it is trying to achieve in the short, medium, and long term. This, along with the local context and starting point, will be different for each council and means that there is no one-sizefits all solution that can be easily applied.

Developing a commercial strategy is important to ensure that all activity is consistent with the council’s overarching aspirations and priorities.

The questions contained in the boxes below can be used to scope the contents and structure of a commercial strategy.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value

Commercial strategy questions Strategic questions Q

I s there a political driver for commercial activity?

Q

hat is the current situation for the W service/s?

Q

I s the necessary political and managerial leadership in place and is it effective?

Q

hat are the options for commercialising W the service/s?

Q

hat is your organisation’s overarching W strategy and how does it link to becoming more “commercial”?

Q

hat will be the impact from both W a financial and quality perspective?

Q

hat do your customers/service users W want/need?

Q

hat are the risks associated with changes W in service delivery?

Q

I s there clarity on the operational options available to the service?

Q

» 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

ow will commercial activity be delivered H alongside the council’s other duties and responsibilities?

Q

What are the key drivers for change?

Q

I s your organisation’s culture receptive to being more commercial?

Q

I s there a commercial capability within your organisation?

Q

I s there the capacity within your organisation to undertake commercial activity?

Q

What is your organisation’s risk appetite?

Q

I s there clarity on how you will prioritise commercial opportunities?

Q

oes your organisation have an Outcomes D Framework in place with clear priority outcomes for delivery?

Endnotes How we can help

Operational questions

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Setting up trading companies or investments is often removed from the core purpose of a council. It can bring additional revenue back into the council and into the area – when the activity involves trading at a regional or national level.

The decisions made about commercial activity and what options to pursue should be informed and driven by the aims and objectives for the council and the outcomes it wants to deliver.

These are likely to include support for the local economy so the strategy should consider how potential commercial activity will impact on the local economy. Councils typically want to support local businesses so can feel tension when trading.

Q

I s the council comfortable competing against local businesses?

Q

I s it comfortable competing against public sector organisations?

Q

oes the council have the capacity D to pursue commercial activities without affecting its other activities?

Q

ill the activity involve the council W operating in your locale or will it operate outside of your boundaries?

Operating within the council’s boundaries and providing services where there is a gap in provision is relatively straight forward but if it is decided to trade outside the council’s geographical boundaries, this can create more complex issues.

Q

ill investing in other geographical areas W create conflict?

Q

ill going for business in different areas W create issues or tensions for partnerships or with neighbouring authorities?

Q

ill operating in other areas in a competitive W way be politically acceptable?

Q

ill the council be in direct competition W with other public or private sector suppliers or will the authority be bringing something new to the market?

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3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Carrying out a PESTLE analysis is a good starting point to get to understand a current service area, identify the wider operating environment, consider how this may change and therefore what opportunities may exist now or in the future.

The link above opens a template which can be used to work through the PESTLE areas.

It includes both a diagram scoping the different issues that might be relevant under the political, economic, social, technological, legal and, environmental categories. It also provides a table template with dropdown menus to note down thoughts and ideas.

Download Tool 2 – PESTLE analysis template

Investigating commercial opportunities Tool 2 – PESTLE analysis template

POLITICAL

Impact negativ e

P.1 P.2 P.3 P.4

high

POLITICAL

2 Overview

Commercial opportunities frequently arise from the nature or quality of a service that a council is already providing (that may provide a competitive or quality advantage), an external change driver such as a change in legislation, or a corporate requirement, such as a change in policy or requirement to generate income.

VersionP.5 No: 1.0 Issue date: P.6 23 December 2023

ECONOMIC E.1 E.2 E.3 E.4 E.5 E.6

SOCIAL S.1 S.2 S.3 S.4 S.5 S.6

medium

Impact positive

low

low

Impact negativ e

POLITICAL

1 Introduction

high

medium

low

Impact negativ e

POLITICAL

Contents

high

medium

low

medium

high

Address the threat

Impact positive

low

medium

high

Address the threat

Impact positive

low

medium

high

Address the threat

Actions Take the opportun ity

Actions Take the opportun ity

Actions Take the opportun ity

Local Partners hips

2

Links to other sections As the core document setting out the council’s overall commercial approach there will need to be a clear link to the council’s approach to finance and funding, governance, risk as well as approach to delivering wider benefit.

3A Financing and funding commercial activity section

3C Delivering social value through commercial activity section

3B Ongoing governance of commercial activity section

3D Understanding risk section

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

3A FINANCING AND FUNDING COMMERCIAL ACTIVITY Introduction The type of financing that a commercial venture will need will depend upon the point in time in its lifecycle, the nature of activity being undertaken and the scale and nature of cash support required.

For example, activity being undertaken through an arm’s length entity is likely to require some level of financing, whether that be to enable acquisitions to be made or simply provide cash, as working capital, to ensure operating commitments can be met.

This section highlights the main issues and supporting guidance, noting that it is based upon our current understanding and interpretation of applicable rules and regulations.

Nature of finance Finance is cash that needs to be repaid and can be provided to an entity in a variety of forms dependent upon what it is being used for all entities need to manage their cash flow and hold a cash balance given that expenditure commitments often fall due in advance of corresponding income receipts. This is referred to as working capital and is typically, during the early phase of operation, financed through the sale of shares i.e. equity, or via a short-term loan facility. There will be some entities, due to the

nature of their activity, that will need finance to acquire assets and, again, the cash could either be provided via equity or loans. However, the distinction between the capital and revenue nature of activities for which the cash will be used is key to how a council accounts for and sources the cash extended to the entity and, consequently, how the entity is structured.

Capital accounting If the entity is using council cash on activity that is defined as capital, as defined by the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003, it enables the council to classify the relevant loan sources as capital which opens up the opportunity for the council to borrow and onward lend. If the entity is using the council cash on activity that does not constitute capital spend, the council would need to classify its lending as revenue expenditure for which it could not borrow to fund. For the avoidance of doubt, purchase of equity is considered as capital spend, for which a council could borrow to fund.

Financial structuring The well-known principle that form follows function applies to the corporate structuring of the entity with the nature of activity dictating the type of finance and the way that should be provided.

23

Contents 1 Introduction 2 Overview

We have set out, below, a decision tree with associated detail in Boxes 1-8 which highlight the main issues to consider and the implications for the financial structure of the entity.

3 Developing a commercial strategy

Financial structuring decision tree

» 3A Financing and funding

What will the cash be used for?

» 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk

Land and property

4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Does this meet the definition of capital?

Is this supporting a trading activity?1

Can this be covered by new income or surplus receipts?

Yes

See Box 1

No

See Box 2

Yes

See Box 3

No

See Box 4

Yes

See Box 5

No

See Box 6

Yes

See Box 7

No

See Box 8

Yes

Yes Plant and equipment

No

One-off, set up costs2

Endnotes

Yes

No

How we can help

Operating costs

No

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

24

Contents 1 Introduction 2 Overview

Financial structuring decision tree box detail (click through the different box numbers) Box

1

2

3

4

5

6

7

8

3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance

Nature of corporate entity

The Local Government Act 2003 dictates that commercial trading activity i.e. for a profit, must be undertaken through a company.

Finance options

Un-earmarked, un-restricted capital receipts which could be injected as either debt or equity into the company.

Implications

Need to be mindful of transfer pricing legislation and thin capitalisation issues. The finance structure should mirror that achievable by a stand-alone entity operating in the same market seeking funding from third parties.

» 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Points to note

The level of interest rate charged on a loan should adhere to the Commercial Market Operator principle per the UK subsidy control regime. A loan made at a less than competitive rate would also need to be assessed against financial instrument accounting rules.

Loans and equity should be subject to annual impairment testing.

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— Commercial guidance and toolkit

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Council borrowing sources Councils have ready access to a low cost, flexible borrowing facility provided by HM Treasury called the Public Works Loan Board (PWLB). They are not obliged to borrow from the PWLB but given the ease of access and the rates it charges4, it is the favoured source of finance.

There is no prescribed limit to the amount of money that may be borrowed from the PWLB. The overall amount that it lends to the sector is capped (currently at £95bn) but, within that, any council may borrow as much as it wants as long as: `

it can fund the repayments i.e. it is affordable

`

the money is used for capital purposes

`

t he activity being financed relates to the functions of the local authority

These criteria form part of the Prudential Framework which consists of legislation and statutory codes that must be followed5. It is the responsibility of a council’s chief finance officer i.e. S151 Officer, to ensure compliance with legislation and codes.

Further detail on each of these criteria and how they impact commercial activity is provided below.

Affordable LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

If the local authority is embarking on new activity that increases its borrowing requirement

beyond what it would otherwise be, it must ensure that the costs of that additional borrowing can be covered i.e. it can be afforded. This typically means, in order to avoid cuts or absorbing savings elsewhere, that new commercial activity must either generate sufficient surplus or savings to cover the annual provision that is made to repay the finance it has required (minimum revenue provision (MRP6)) as well as the interest payments.

Capital purposes The distinction between capital and revenue spending is a very important part of the financial controls governing local government. Only one-off expenditure that meets the definition of capital can be financed through borrowing.

The definition is set out in legislation7 but, as highlighted above, it has implications for how arms-length commercial ventures are financed.

Function Local authorities may only participate in activity that they have been given the legal power to undertake. The 2011 Localism Act along with the decline in mainstream funding, prompted more widespread engagement by local authorities in various types of commercial activity, not necessarily restricted to its operating boundary.

For commercial activity requiring finance, the Prudential Code defines activity that it does not consider prudent to support through borrowing which includes, at para 50, “making 26

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk

any investment or spending decision that… may lead to new borrowing, unless directly and primarily related to the functions of the authority”. The functions of an individual local authority will be geographically limited to within its boundaries, albeit it does have influence and interest in the wider economic area that it is part of as well as wider housing and labour markets.

The issue of “out of area” activity has been a contentious matter as a result of some local authorities borrowing money to purchase investments, mainly commercial land and property, in other local authority areas.

The updated Prudential Code8 clarified that purchasing assets with the primary purpose of exploiting the difference between asset yield and the cost of finance does not comply with the Prudential Code. This does not mean local authorities cannot borrow to purchase income generating property, but the purchase must be primarily for economic development or regeneration rather than financial return.

Helpful examples of what HM Treasury consider as permissible applications of debt are given in their PWLB Guidance for Applicants document9.

4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

3B ONGOING GOVERNANCE OF COMMERCIAL ACTIVITY Key governance principles Governance is the process by which organisations ensure they make good decisions and follow through on those plans. When public money is involved, the onus needs to be on being as transparent as possible so that councils and individuals can be held accountable for outcomes. The purpose of good governance is to enable council to fully understand the performance of their activities, ensure that the councils core objectives are being met, to enable robust and transparent decision

making – particularly if an intervention or change in activity is required. Whilst good governance is underpinned by robust and clear structures and policies, having the structures and policies in place is not the end in itself.

Governance of commercial activity involves the following core elements:

Statutory roles Councils have officers, known as the “Golden Triangle” with specific statutory responsibilities for finance and spending (S151 Officer), lawful behaviour (Monitoring Officer) and the overall 27

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

functioning of the organisation (Head of Paid Service/Chief Executive). These officers have statutory mechanisms for bringing any concerns to the attention of their council, and to ensure that there is appropriate transparency of decision-making.

Internal checks and balances These include arrangements for risk management, internal audit and whistleblowing.

Elected Members’ oversight of these arrangements (independent of the executive political leadership) is by an audit committee or equivalent. Members scrutinise policy decisions through committee arrangements or overview and scrutiny functions. Members taking decisions must understand the implications of those decisions and satisfy themselves that the risk levels are appropriate. Therefore, Members should be on all relevant boards or committees to approve investment decisions and be sufficiently briefed to ensure they are able to determine the best course of action.

External checks and balances External auditors provide an opinion on the annual accounts and a conclusion on the council’s arrangements for securing value for money.

Company roles (where relevant) LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Directors appointed to the board of council owned companies have responsibility for the stewardship of the company and must act

in its best interests. The company will also be subject to external audit. It is also advisable to follow the standard good practice guidance set out for companies including the Corporate Governance Institute’s code of practice which assists in ensuring compliance with board composition, ethics and other key matters. This is covered in the Local Partnerships’ publication Local Authority Company Review Guidance.

The relative effectiveness of these checks and balances should be considered as part of the council’s regular reviews of the effectiveness of its governance, for example in some cases the internal audit function is not able to provide an appropriate level of scrutiny on commercial activities as this is not a typical skillset required within the audit team.

Governance of commercial activity Once a commercial project or investment is set up, the ongoing governance is critical.

For a service which is operating in a commercial environment, in addition to the conventional reporting into council committees and oversight bodies, governance will need to include reporting structures and cycles which reflect the operating market and supply chain and how quickly the environment changes and decisions need to be made. This is likely to require more frequent reporting processes as well as the council having access to the necessary skills and expertise.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change

For activities where the council is using a council owned company to deliver activity, the council will need to oversee its ownership role through a dedicated “shareholder” committee. As with company boards this is likely to require the input of committee members with specific market/ technical based skills. For high profile or high risk companies a dedicated owner group may be required.

Member engagement in commercial activity can be considered in a similar way to delegation.

Activity with a low financial or reputational risk can often be managed and reported at the officer level. Other activity will need to involve members on a pre-agreed basis.

7 Commercial activity – addressing issues raised in reviews

The commercial activity may be directly managed by the council or via an arm’s length company. Each has different governance requirements, but the following should exist for all types of commercial activities involving third party suppliers, external customers, council investment and assumptions regarding income, cost or savings based on the performance of the activity:

Endnotes

`

c ouncils should have up to date commercial strategies which align to their corporate plan and other strategies such as their asset management strategy and sustainability strategy

`

bjectives of commercial projects should o be clearly defined and documented, and regularly reviewed to ensure that they

5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

How we can help

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

continue to support council policy and strategy, including periodically reviewing business cases to ensure they are still valid `

t here should be evidence of ongoing assessment of Value for Money (VfM) and quality offered by commercial projects through an adequately resourced monitoring function

`

c ouncils should ensure, for the sake of transparency, that reviews of commercial projects by committee or executive can be viewed by the public wherever feasible.

The exception of “commercial confidentiality” should be used sparingly and applied to the relevant parts of review reports, and not to reports as a whole.

`

t he governance arrangements for commercial activities should be established at the outset, as “retrofitting” good governance is always more difficult. There should be periodic governance reviews to ensure that the governance structure remains fir for purpose and regular reviews of Public Interest Reports to understand the lessons learned from commercial failures Reviews should cover specific companies reviews (see LATCo Guidance) as well as organisation reviews covering broad commercial activity as well as the council’s role as company owner.

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usiness and service planning should be b used to drive the performance of commercial initiatives against agreed targets 29

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2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value

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» 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

t he performance of the council’s investments, in whatever form they are managed, should be part of the regular corporate reporting process at a summary level for political and officer leadership teams to understand the current position and any risks to the portfolio.

This could include data on the amount of interest payable and debt levels relative to the size of the council. overnance arrangements should recognise g the different roles that are adopted in managing commercial activity. This is particularly important where arms length companies are used and individuals who are involved in directing or managing those companies may need to be excluded from other activities, such as monitoring contract performance.

7 Commercial activity – addressing issues raised in reviews Endnotes

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t he Golden Triangle – a strong partnership between the three corporate statutory officers (head of paid service, chief finance officer and monitoring officer), with no one post holding all the power and influence anaging the potential risks of a culture m of “groupthink” where consensus may cause institutional blindness amongst members

wareness of biases amongst a political a and/or managerial leadership team, whether it is confirmation bias, affinity bias or optimism bias and teams taking active steps to reduce the risk of any of them

Ongoing management of commercial investments (directly managed) In terms of specific ongoing management of directly managed commercial investments, councils should ensure that the following are in place: `

c lear processes to regularly challenge the underlying assumptions and ongoing relevance of investments, taking account of factors such as changes to market conditions, council priorities, VfM, quality and performance of investments

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onitoring of investments following m a standard process and be undertaken regularly (at least on a quarterly basis) by those responsible. This should be via an internal investment board comprising elected members

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i n the case of substantial investment holdings, external experts in the market should be engaged and reliance placed on their advice to mitigate the council’s own risk, ensuring

Commercial leadership It is of particular importance to have strong and principled leadership to halt or decrease the risk of commercial investments not delivering the agreed outputs. Of particular importance are:

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and/or officers and being aware of the inherent risks around the same

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Contents

that holdings are in an appropriate mix for the prevailing conditions

1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding

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ffective management of financial issues e relating to investments including business planning, budget control, financial systems and financial monitoring and reporting

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r elevant training and support to officers and members to effectively plan and manage investments and borrowing

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clear consensus regarding risk appetite a for investments. Although risk is everyone’s responsibility, there should be a designated officer responsible for the council’s strategic approach to risk and ensuring compliance with its processes This would include ensuring that a holistic (or cumulative) view of risk is taken through corporate risk reporting.

This may require input from a number of senior officers and be reviewed holistically at a senior leadership team level to inform ongoing decisions. Conflict of interest needs to be prevented by separating oversight roles from those with responsibility for developing and pursuing the commercial activity

» 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes

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ngoing assessment of risks relating o to commercial activity, supported by processes to ensure that risks are managed as part of the council’s overall risk management approach, with appropriate escalation and reporting t he scale and financial value of the council’s investments along with the cumulative level of risk, should be proportionate to the size

and budget of the authority and reviewed regularly

Ongoing management of investments (via an arm’s length company) If commercial activity is taking place using a commercial or trading company, it will have a separate governance structure with agreed reporting/monitoring arrangements between it and the council.

In this case the governance will be separate from the day-to-day council reporting cycles and should reflect the risks and markets in which it is operating.

The relationship between council and companies needs to ensure that the council gets the necessary assurance that the company is meeting its objectives and that the council’s investment continues to represent the best approach to delivering the activity. This needs to be a transparent process and understandable

by Members and wider stakeholders.

This section describes some of the important aspects of a council’s role as a company shareholder (see LATCo Guidance): `

c ouncil officers and members should recognise that the creation of arms-length companies does not carry with it an abdication of responsibility, nor should they become too closely involved in the running of a council owned company 31

Contents 1 Introduction

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2 Overview 3 Developing a commercial strategy

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» 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk

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4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities

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6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

t he council as shareholder must have access to relevant operational information regarding the company. This may be via an “intelligent client” function or other route t he council as shareholder must have the means to oversee and challenge the board of the company, for example review the performance against objectives and the business plan. This may be via a shareholder committee n up-to-date shareholder’s agreement a should describe the powers of the board of the company and how and when the shareholder might influence those powers

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i ndividuals undertaking the shareholder role should be provided with suitable training and support commensurate with the role

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t o guard against risk of subsidy control, councils should have commercial agreements which set out any assistance provided to their

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t here should be clarity regarding the role of shareholder, with reserved matters (decisions that can only be made by the shareholder) clearly documented and updated as required, reflecting any changes made as the company has developed, in a shareholder’s agreement (or as set out in the company’s governing articles of association)

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Endnotes

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t here should be a clearly designated council shareholder role or function which is both understood and recognised by the council and the company

companies and the terms for that assistance, such as a loan or a parent guarantee `

here there is a service contract between w a council and its arm’s length company, contract management arrangements should be established and may include a joint liaison committee to review issues or may be operated through an “intelligent client” function

Council appointments to wholly or partly owned company boards Councils should carefully consider nominations to the board of which they are shareholders, taking account of: `

t he benefits of appointing independent directors to the entity

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t he need to avoid council members and officers also being appointed to senior positions in the company, if such an eventuality is likely to lead to a conflict of interest

Boards of wholly or partly owned council entities are often a mix of council officers, members, and independent directors. Board skills and expertise can be improved through the effective use of independent directors with both public sector and market specific experience. The UK Corporate Governance Code10 advises that at least half the board (excluding the chair) should be independent non-executives.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy

Appointments to the board should be subject to a formal, rigorous, and transparent selection procedure based on merit and published objective criteria.

» 3A Financing and funding

Directors of wholly or partly owned council entities must act in accordance with the seven Nolan Principles11 (see Figure 3).

» 3B Ongoing governance

Potential appointees to the board must complete declaration of interest forms

in addition to the forms completed for their role on the council.

Appointments to the board should relate to the relevant post or office of the council, not to a specific individual. It follows that, if a council appointed director ceases to be an employee or office holder of the council, then they should automatically no longer be able to hold board membership.

» 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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NOLAN PRINCIPLES 1

Selflessness

Take decisions solely in the public interest (may conflict with board members duties as directors to a company)

2

Integrity

Should not be under any financial or other obligation to outside organisations or individuals

3

Objectivity

Choices should always be based on merit

4

Accountability

Submission to public scrutiny and be held accountable for actions

5

Openness

Decisions should be made openly with reasons given

6

Honesty

Duty to declare any private interests in relation to public duties and actively take steps to resolve any interest that arises

7

Leadership

The above principles should be supported and promoted through example

Figure 3 – The seven Nolan Principles 33

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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— Commercial guidance and toolkit

The process for the appointment and renewal of directors should be set out in the articles of association, which should state those appointments which are wholly reserved to the council. For those appointments that are not reserved to the council, the company may establish a remuneration committee to make appointments and remuneration decisions where applicable and make recommendations to the council.

Appointments should be based on a review of the skills, qualifications, diversity, and other attributes required for the role, recognising that, compared to other incorporated entities, there is a smaller pool from which to draw. For example, there may be so few senior officers that a statutory officer may become a board director. If this is the case, they must be cognisant of their potential conflicts and address them as required. This could involve separation of oversight and delivery responsibilities to ensure separation of duty.

Where a board member is eligible for renewal and reappointment, this should be subject to considering their performance to date and skills, as well as the needs of the board.

Board composition and individual director performance should be reviewed periodically to ensure the effectiveness of individual contribution, and how effectively board members work together to achieve the objectives of the entity.

Addressing potential conflicts of interest in relation to commercial activity It is important that councils have clear and up-to-date policies and processes, including mandatory training for directors, to consistently manage actual or potential conflicts of interest in relation to their commercial activity, including a clear process for investigations and procedures for appropriate disciplinary actions in the event of breaches.

Additionally, councils should use internal audit functions to regularly review the governance arrangements relating to all their commercial investments to ensure that potential conflicts do not arise. If they do, the Monitoring Officer must be notified, who will decide how to address it. Councils should also ensure that they are fully benefiting from and learning the lessons from their external audit reviews.

Role of elected members in relation to scrutiny of commercial activity A key governance role should be undertaken by the council’s scrutiny function. The role includes: `

c hallenging the fundamental purpose of commercial activity, as the council has a coherent commercialisation strategy which articulates a common understanding of what the council is trying to achieve and how it is going about it 34

Contents 1 Introduction

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ringing to bear direct knowledge and b understanding of the needs of local people and meaningful, independent democratic oversight

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elping to test systems for commercial activity h to ensure that they are accountable and transparent, and intelligently involve local people (as well as involving scrutiny itself)

2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk

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ssessing the capability of the council a to succeed

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c onsidering whether the council is prioritising the best opportunities based on its objectives and priorities

4 Setting up a new commercial activity/ implementing change

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5 Undertaking reviews of commercial services and activities

xamining whether decision-making processes e are sufficiently agile to exploit opportunities

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6 Implementing commercial change and evaluating success

c onsidering whether broader governance systems are fit for purpose in the context of the council’s commercial activity

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c onsidering whether commercial ventures and investments are being established for the right reasons

7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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elping to ensure that the processes are h in place to review risks relating to commercial investments, tolerance for risk, ownership of risks and processes for managing risk

Whilst most scrutiny should be in public, there will be times for commercial reasons that this is not appropriate. The discussion concerning commercially sensitive information should be kept to a minimum to allow transparent decision-making to continue as far as possible.

Commercial decision making Some approaches for improving decision making in relation to commercial activity include: `

role for independent expert individuals a or panels to act as a “critical friend” in challenging and scrutinising key decisions (this could be compared to the role of Non-Executive Directors on company boards, where experts can bring an additional range of skills and external oversight not available from senior officers or Members)

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f acilitated workshops for key commercial decision makers which test scenarios

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rovision of training for officers and members p on decision-making considering the factors which contribute to poor decision making

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Corporate governance structures This guidance does not suggest a “one size fits all” commercial governance structure.

However, having a Commercial Board, supported by officers with commercial skills and oversight of a commercial strategy, commercial milestones, monitoring and decision making, reflects a good practice approach.

Figure 4 opposite illustrates some of the key features that such a board would exhibit.

In a cabinet structure it could act as a cabinet committee, reporting to cabinet on commercial activity and strategy. It could draw on the expertise of external experts and when required engage with key customers and suppliers.

Overall, it could be responsible for developing strategy and ensuring that commercial and trading activity is aligned with the strategy.

It may be supported by an officer board providing support and a coordinating role which in turn may have support from individual service/commercial leads.

FIRST LINE OF DEFENCE

Service delivery leads  Complete dashboards based on risks and

results and report to the board when required  Opportunity for communication to senior

management and members formally recorded SECOND LINE OF DEFENCE

Commercial Corporate Board (officer group)  Receive dash board information focusing

on red-flags  Spot check and lead on annual review including continue relevance in its delivery structure  Spot common issue and create solutions THIRD LINE OF DEFENCE

(Cabinet) Committee with responsibility for commercial strategy  Oversight and assurance – reporting to cabinet  Consider risk to the authority identified through

escalations  Setting and monitoring of targets and KPIs

of commercial and traded activities

Leads officers and customers attend when relevant

Endnotes How we can help Troubleshoot, understand risks, address poor performance LOCAL PARTNERSHIPS

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Informed by performance dashboards

Cabinet Committee and/or Commercial Corporate Board

Board escalate to cabinet committee or senior management

Figure 4 – Key features of a commercial board and support structure

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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3C DELIVERING SOCIAL VALUE THROUGH COMMERCIAL ACTIVITY The Public Services (Social Value) Act 2013 requires all public sector organisations and their contractors to consider how the services they commission and procure can improve the economic, social and environmental wellbeing of an area.

Even for commercial and trading entities there is rarely a purely financial return required by the authority: in addition to specifically specified social outcomes, there will be intrinsic value arising from investment in the local area.

When a non-financial benefit is proposed in a business case there must be a clear understanding of:

how what is being procured might improve the economic, social and environmental wellbeing of an area. Councils can have a significant impact as a major employer, and supplier and buyer of goods, works and services. Their reach and influence shapes the local area and actions can be felt at a regional and national level.

Maintaining a public sector ethos remains at the core of many local authority commercial models and the decision to operate commercially must consider social value as part of the options appraisal as it is a legal requirement. Areas to consider include: `

the impact on residents

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what the benefit is

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the impact on local businesses

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hat the benefit is costing in terms w of increased cost to the council/payment to a supplier

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the impact on employment/employees

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environmental impacts

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hat it is costing in terms of value/income w foregone (i.e. for a land sale or planning benefit)

While there is no single agreed definition of social value, the evaluation of non-financial measures is increasingly important for public sector organisations. The Public Services (Social Value) Act 2013 goes some way to formalise this through its requirement for councils to consider

The way that contracts are set up and services and goods are procured should be considered early in the business case development process to assess the positive and negative impacts that this proposal could have. This is covered in the LGA’s guidance.

Just as engaging with potential suppliers and customers is beneficial in optimising the financial elements of service delivery it will also be useful in maximising social value by 37

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy

increasing understanding of what the market is capable of delivering and how services may be used. Engaging early with stakeholders to assist in identifying the solution can be beneficial for all.

The LGA has published detailed guidance on social value and the preparation of social value statements. The guidance is available via this link Social value – achieving community benefits Local Government Association.

» 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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3D UNDERSTANDING RISK Introduction A commercial mindset in local government does not necessarily involve being less risk averse or having a greater risk appetite but is about appreciating and understanding risk better and ensuring that this informs decisions.

This feeds into the way that commercial activity is designed and managed, including scenario planning in relation to specific risks and developing exit strategies which describe what to do in the case of failure or poor performance.

Understanding risk in a commercial environment also involves understanding the markets in which councils operate and ensuring that the risk of overexposure to one market is avoided, for example, by keeping a diverse portfolio of investments with a balanced risk profile.

Many investments made by councils have been successful, generating a healthy return

on investment and delivering recognised benefits and positive outcomes. However, it is also widely recognised that some councils have run into difficulties and a small number of local authorities have exposed themselves to significant risk by not understanding the risk profile of certain investments, particularly in relation to newer and more dynamic areas of activity such as energy.

Types of risk Councils need be aware of different types of risk they are potentially exposed to through commercial activity. These include, but are not restricted to: `

F inancial exposure – this can include risk of claims for losses and damages from contract breach and negligence

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2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value

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Delivery risk – that the commercial service or activity may not be able to deliver the value, service or asset that the council has planned or invested in. If the activity involves a third party it may be that the third party may not deliver its side of any agreement

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Reputation risk – this is another area where a council involved in commercial activity could be vulnerable. Ethical, social and environmental issues can create challenges for councils if not handled carefully. For example, if a council focuses on a commercial driver, such as income or surplus, at the expense of an another policy area that the council is responsible for delivering or regulating.

Lack of transparency in decision making and reporting can delay the impact of reputational risk. However, in addition to highlighting poor governance lack of transparency is likely to increase long term negative impact of the risk occurring

» 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

inancial failure – evidence from the Office F of National Statistics (ONS)12 shows survival rate for businesses is just over 40%. In other words almost 60% of business start-ups closed within five years, illustrating that the chances of any commercial venture failing are high. Being a public sector owned business does not protect a business and public money invested in it from financial risk

Risk appetite Risk appetite is the cumulative level of the risk that the council is willing to take on.

Risk appetite should be formally agreed at the corporate level, taking into account corporate objectives, the views and experiences of senior politicians, officers and advisors as well as the experience and capability that the council has in managing and delivering projects or service change.. Because councils are dealing with public money, they must ensure that they fully understand risks, can manage or mitigate those risks, and have set aside a reasonable level of financial resources against risks they cannot manage.

When considering commercial opportunities, it is important to understand the type of activity that is being considered. This helps to determine the level of risk associated with the venture and whether this is a good fit with the council’s “appetite” for such an arrangement.

In order to reduce risk relating to commercial activities, it is strongly recommended that all activities are subject to appropriate due diligence and independent review and scrutiny.

For lower risk activities this could involve internal risk workshops but for high risk activities, a commercial board (if in existence) could be used as the forum for identifying acceptable levels of risk, taking advice from relevant

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk

experts. The importance of such activity becomes more important as councils move into medium and high-level risk profiles.

Councils should only contemplate activity with a high-level risk profile in the most exceptional circumstances, where the investment is very modest, and losses would not have an impact on the council’s financial position.

Commercial trading The widely recognised Ansoff Growth Matrix diagram (see Figure 5 below) categorises the main options that are open to councils in terms

4 Setting up a new commercial activity/ implementing change

PRODUCT

5 Undertaking reviews of commercial services and activities

Present

Future

How we can help

MARKET

Endnotes

Present

6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

of commercial trading of products, or more likely services. This type of categorisation helps to both understand and determine the level of return that a council should expect to receive from active participation in such an activity if they decide to proceed. This needs to be balanced against the level of risk of proceeding with the development of new markets and/or products. This type of matrix can be used to describe the overall commercial strategy that the council is adopting and the type of activity that it considers appropriate or the risk of an individual activity.

Future

Market penetration

Product development

Selling more of the same to existing consumers

Selling new products to existing customers

LOWER RISK

Market development

Diversification

Selling existing products to new types of consumer

Selling new products to new consumer

MEDIUM RISK

MEDIUM RISK

HIGHEST RISK

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Figure 5 – Ansoff Growth Matrix

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding » 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

The Ansoff Growth Matrix can be used to help define an authority’s appetite for risk across a programme or to measure the risk attached to a commercial opportunity being considered.

Having identified the risk level for the project the council can then consider whether it is a level of risk that the council thinks is appropriate.

the council relying to a greater extent on a noncore skill set or entering a market, supply chain or delivery approach which it understands less and does not represent its business as usual.

This does not mean that the opportunity should be ignored but does suggest the requirement for additional capability, monitoring and oversight (and potentially other mitigation).

Service based risk analysis

Sector guidance on risk relating to commercial investments

There are some service areas for which local authorities have to consider additional or different risk issues to those being delivered by private sector commercial organisations. Local authorities are responsible for delivering many statutory services to broad groups of residents as well as to specific and vulnerable residents.

Commercial activities often cross these boundaries and therefore it is useful for changes to these services to be tested. The principle is that the more a change affects a high profile or vulnerable customer group in a statutory area the higher the potential risk is to the authority.

Balancing risk with growth appetite There is a need for balance when considering a council’s ambition for commercial growth against risk to the service and/or council. In many circumstances the greatest opportunities for generating a surplus or profit will also carry with them the greatest risk. This may relate to

Good risk management is key to compliance with the CIPFA Treasury Management Code13 and DLUHC’s Investment Guidance.

Councils are expected to carry out due diligence and use robust processes where financial and property investment are being used. Concerns about councils not fully understanding the risks they are exposing themselves to have been articulated by external bodies such as the National Audit Office (NAO).

Prudent risk mitigations for commercial activity include ensuring that experienced advisors with suitable professional indemnity cover are engaged to support investment decisions and that when operational, investment managers are engaged to maintain suitable oversight of the portfolio and be able to advise councils on appropriate action regarding acquisition, upgrades, and disposals.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy » 3A Financing and funding

As the guidance relating to commercial activity is open to a degree of interpretation, councils have adopted different approaches with some taking greater risk than others. However, all councils are bound by the Prudential Code (the Code) which requires that: `

local authority’s capital expenditure plans a and investment plans are affordable and proportionate

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ll external borrowing and other long-term a liabilities are within prudent and sustainable levels

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t he risks associated with investments for commercial purposes are proportionate to their financial capacity

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t reasury management decisions are taken in accordance with good professional practice

» 3B Ongoing governance » 3C Delivering social value » 3D Understanding risk 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

It is also important for councils to ensuring that Minimum Revenue Provision (MRP) is built into investment decisions when determining overall viability.

Unfavourable comparisons have been made between the rigour which underpins decisions relating to major investments in the private sector and those of the local government sector.

In particular, a number of reports and key stakeholders with whom Local Partnerships have engaged, have questioned whether the skills and experience exist within officer and member panels and committees to consistently make sound investment decisions.

Risk in relation to commercial activity relates to several thematic areas which include: `

r isk management itself – clarity concerning risk appetite, and understanding of risks relating to novel and complex investments

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t ransparency – both decision-makers and the public need to understand the true cost/benefits of commercial activity and this will be supported through transparency

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s kills gaps with councils not considering or being unable to provide the new capabilities which commercial activity necessitates. It has been noted that few officers have come from the commercial world and even those that do may not have experience of commercial activity at a similar scale

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s ome members’ and officers’ desire to implement “pet projects” which have not gone through all the necessary processes including a full business case and risk analysis

Areas of concern Auditors involved in auditing the sector have expressed the opinion that some councils do not fully understand the complexity of the markets into which they invest and that there can be a tendency to undertake insufficient due diligence before investments are approved.

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Contents 1 Introduction

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2 Overview 3 Developing a commercial strategy » 3A Financing and funding

xternal market conditions such as inflation, e interest rates and appetite for development in the construction sector. For example, in the current climate, construction partners are hesitant about embarking on projects because of the higher perceived risk associated with building works

» 3B Ongoing governance

Conclusion – key risk mitigations

» 3C Delivering social value

In order to mitigate risks related to commercial activity it is recommended that councils adopt the following practice:

» 3D Understanding risk

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4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

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How we can help

f or substantial investments, to appoint external experts with knowledge of the market in which they are engaged. Use their advice to help mitigate the council’s own risk

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evelop a clear corporate consensus d regarding risk appetite for different types of investment.

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i dentify a senior officer with oversight of risks. The person should be able

7 Commercial activity – addressing issues raised in reviews Endnotes

rovide relevant training and support p to officers and members to enable them to effectively plan and manage commercial activity

to provide a holistic view of risk offered by all commercial activity `

f requently review all risks relating to commercial activity, in the context of the council’s overall risk management approach, with appropriate escalation and reporting

`

t o ensure that the scale and financial value of the council’s investments is proportionate to the size and budget of the authority and reviewed regularly. The scale and nature of each review will need to reflect the level of risk, commercial performance but should be set out in the council’s commercial strategy

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t hat a strong governance framework is in place to ensure that the commercial activity’s risk is managed effectively. This should include appropriate member oversight and scrutiny

It is also important to have an up to date risk register which is actively monitored and clearly articulates the nature of risks across the organisation, including those relating to commercial activity, so that action may be taken at the earliest opportunity.

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Contents

Setting up a new commercial activity/ implementing change

1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change » 4A Developing the case for change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes

When considering new commercial activity, it is important to be clear what commercialism means for the organisation and ensure that there are suitable commercial building blocks in place i.e. a culture of commercialism and officers with relevant skills.

— Commercial guidance and toolkit

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i dentify how the approach aligns to the organisation’s corporate strategy and risk appetite

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etermine the scale of the opportunity d to understand what model may be the most appropriate e.g. if significant, a separate commercial company may be the best option

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e clear on what resource is available to b appraise, set up and operate the commercial venture, and what external advice will be needed

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ssess the opportunity through processes a such as a SWOT analysis to understand what the market competition is and if there is a gap in the market. The council may not wish to create competition for local private businesses

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c arry out an options appraisal to identify the preferred model against set criteria such as risk appetite, degree of control desired and

Commercialism is best achieved when: `

i t is part of the culture of the organisation in order to deliver best value

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t here is a corporate understanding of what it means and a commitment to succeed

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roles and responsibilities are clear

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the goals are realistic for the organisation

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t here is a strong governance framework in place

How we can help

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For new projects, the key steps to follow are:

New commercial ideas may come from any part of the organisation, or may be put forward by a third party for the council to consider.

Whatever the route, the idea should be appraised for suitability,

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Contents

the requirement for revenue generation, This should be drawn from the commercial strategy, which should set out the objectives for commercial activity and align to the council’s overarching plans. This may need to happen in stages as the business case is developed and further information is available

1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

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» 4 A Developing the case for change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

evelop a business case for the preferred d option including detailed financial modelling for the projected period

`

t ake through the formal decision-making process, culminating in sign-off by Cabinet

`

s et up the new activity including putting in place adequate governance arrangements

The extent of the set-up will depend on the scale of the proposed activity. Minor changes e.g. expanding an existing service will require less than something more large scale such as an arm’s length company for a major investment which would require significant due diligence.

However, any changes will need to go through the appropriate governance processes.

Making the case for any change is explained in more detail in section 4A Developing the case for change.

7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

4A DEVELOPING THE CASE FOR CHANGE Overview The expected value for money of a proposed venture or initiative must be tested before public resources are invested into it. This is achieved by subjecting it to a business case process, through appropriate governance, and there is guidance available on what that process

involves and how a business case should be developed, built around HM Treasury’s Green Book13. The Green Book is the definitive reference for how an investment decision should be appraised and it requires examination of five inter-linked, elements:

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

45

Contents 1 Introduction 2 Overview

Element

Key considerations

Strategic

How the proposals provide business synergy and strategic fit with local objectives. The case should be built upon a robust and evidenced need for the investment with a rationale for the intervention.

3 Developing a commercial strategy

Key questions to cover include:

4 Setting up a new commercial activity/ implementing change

Q

hat are the desired outcomes and objectives and how do these fit W with and contribute to the overall strategy of the council i.e. the council plan, MTFS and commercial strategy? This should include consideration of any dependencies with other projects, programmes or initiatives

Q

hat are the compelling reasons for the investment and what should W be achieved?

Q

Which options are to be considered?

Q

hat is the appetite for change within the service, councillors and W senior management?

» 4 A Developing the case for change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Economic

This is at the heart of the business case as it is where the options for investment are set out and a preferred proposition identified i.e. the one that is assessed as most likely to deliver the best return for the public, taking into account wider social and environmental effects.

It is important to consider several options, including the “do nothing” option, not just the preferred one first envisaged. The option appraisal process should involve key stakeholders and be measured against The exercise should also act as a prompt for thinking about how the performance monitoring and evaluation will be conducted, once implementation has taken place.

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Having credible data is essential and this will follow on from the work undertaken in gaining an understanding of the opportunity see section 6 Implementing commercial change and evaluating success. When the options appraisal is complete and a preferred option is chosen, this must be approved by member to take forward to enable a business case to be developed.

46

Contents 1 Introduction 2 Overview

Element

Key considerations

Commercial

This demonstrates that the option emerging from the Economic Case as the favoured one to progress will result in a viable proposition, with understanding of the risks and challenges.

3 Developing a commercial strategy

It should consider as applicable:

4 Setting up a new commercial activity/ implementing change

`

t he competitive landscape and the positioning of the proposal within that landscape

» 4 A Developing the case for change

`

5 Undertaking reviews of commercial services and activities

hat the impact will be on the local and wider operating environment w and market

`

the delivery model and corporate structuring

`

what the legal considerations are, relating to the change

`

here appropriate, how the new approach will enable the maximisation w of possible commercial and grant funded income streams

`

hat professional technical advice such as is required and been w taken, for example in respect of tax or staffing issues, including TUPE arrangements, union negotiations and pension changes

6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Financial

This concentrates on affordability and so will assess the capital and revenue implications and stress-test the additional income or savings required to achieve the necessary payback. It should take account of set up costs and any consequential impacts on the wider cost base of the organisation such as the demands on the corporate centre. It will need to confirm the source of any financing requirements and consider the points set out in section 3A Funding and finance. It will also consider the impact of cumulative risk on the council, balanced against community benefit.

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— Commercial guidance and toolkit

47

Contents 1 Introduction 2 Overview

Element

Key considerations

Management

This documents how the preferred option will be delivered and is likely to consider:

3 Developing a commercial strategy

Q

4 Setting up a new commercial activity/ implementing change

hat are the key risks and how they will be managed, reduced W and mitigated?

Q

» 4 A Developing the case for change

re there any service implications and what will be the impact A on users and staff?

Q

5 Undertaking reviews of commercial services and activities

as a stakeholder engagement plan been documented to ensure H smooth ongoing engagement, where necessary?

Q

hat are the capabilities of existing staff to oversee and manage W the proposition?

Q

Does the council have the capacity to manage the project?

Q

Will there be any future training and recruitment requirements?

Q

hat are the decision making and governance routes, both W for the initial decision and for ongoing review and oversight?

6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

The extent of work involved in considering the above considerations in the business case is a question of proportionality.

Proportionality For large scale propositions requiring a significant investment and being implemented at a corporate or cross service level, it is likely that the full three stage business case process will be required by the authority.14

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

For smaller changes or opportunities, the scale of the business case justification must be proportionate to the scale of the investment,

commercial opportunity and risk. In turn this should relate to the data to be used and the level of testing within the business case. This should be set out in the commercial strategy or other document that sets out what level of information is needed. It will also be informed by what is in its constitution. Any decision required to be taken by members will need an options appraisal or initial business case to be presented to them. In some councils these decisions will be delegated to senior officers also with decision routes requiring formal documentation to inform the decision.

48

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change » 4 A Developing the case for change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Tool 7 Developing evaluation criteria to test options, a link to which is provided below, may be used to assess the level of significance of the commercial project and thus the level of resources that should be committed to the business case process. A judgement should be made regarding what degree of assessment is required within an individual council’s own governance and assurance framework, including reference to the constitution.

The link below can be used to score potential commercial initiatives to determine the level of risk entailed and the level of justification that will be required to enable the project to proceed.

The levels of scoring can be adapted to reflect the nature of the proposition or the specific financial regulations of the council.

How we can help

Download Tool 7 – Developing evaluation criteria to test options

Developing evaluation criteria to be used to test service change – appraisal Tool 7

• Are there any Pass / Fail items that will • Agreement need to be conside on a detailed red before detailed scoring matrix • Agreement and narrative scoring takes on the weightin – to accomp place? g of each sub-crit • Would it be eria – to be agreed any the evaluation appropriate to consider differen prior to the primary made? t options for differen evaluation t parts of the Outcome require service area being d: How will the considered – appropriate decision be how will this decision level of senior made and what officer and/or level of sign be political leaders off will this require hip? ? How will this Suggested Pass/Fa be reported to the ils: Version No: 1.0 •

Issue date: 23 December 2023 • •

Strategic Fit – meets the council’s corpora Compromises te priorities – the council’s PASS/FAIL ability to deliver its statutory functions – PASS/F AIL TEMPLATE

3. CRITERIA Category

Strategic

People

Reputational

— Commercial guidance and toolkit

`

level of investment required

`

likely timescale

`

political importance

`

stakeholder assessment

`

supplier complexity

`

xperience of the authority in delivering e similar projects

`

delivery confidence

The end result is a total score identifying whether the change is of low, medium or high significance. As noted earlier, the decision on how a score will relate to a business case process is a matter for individual authorities.

Assurance

Endnotes

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The scorecard covers a number of categories including:

Sub Criteria • Impact on current busines s needs • Ability to meet • Would remova future service needs l affect other aspects of wider • Capacity and capability council operatio of the council • The alignme ns which could to implement nt of the change not be mitigate the service d? against other • Assessment cultural and corpora changes required of roles it will te changes affect / impact • Likely effect on training and • Effect on staff development existing staff (skillsets) Ts and Cs and • Other personn ways of working • Likely impact el and staffing implications includin of resistance to change / industria g TUPE • Impact of l relations – impact option on externa of this on likely l views of the • Ability to commu success council (if any expected or could • Use of income nicate a clear rationale for be evidenced) the change / savings or demons • Scope for tration of other service improve clear benefits ment • Impact on customers and users

%/Weighting

[20%]

Figure 6, on the following page, illustrates the gateway process to be followed. As each gateway is approached, the level of detail required will need to be developed and this will vary between gateways. This should align to the decision-making process The early ones will require a strong strategic and economic case (considering in detail the options considered). The full case will require full consideration of a preferred option setting out in detail how it can be afforded and delivered.

[25%]

[15%]

Local Partners hips

2

49

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

GATE 1

EVALUATION

GATE 2

EVALUATION

GATE 3

EVALUATION

GATE 4

Pre business case and strategic outline case

Delivery.

Proceed.

Stop.

Outline business case

Delivery.

Proceed.

Stop.

Full business case

Delivery.

Proceed.

Stop.

Governance and delivery

Figure 6 – Illustration of business case journey

» 4 A Developing the case for change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes

Gate 1– pre-business case and strategic outline case There are various ways of identifying if a change or investment has sufficient merit to proceed to a business case. A light touch review may consider if the resources needed to construct a business case is worth pursuing. An early outline of the proposed change can provide a useful overview and summary.

Tools 5 and 6 contain a template which starts to collate the basic information required to start considering the potential justification for a commercial opportunity.

The template should draw on other data already generated as part of the process for planning the commercial opportunity. Whilst it does not require detailed financial modelling, whoever is promoting the change should be confident

How we can help

Download Tool 5 – Data book for service planning

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Download Tool 6 – Commercial project score card

[Service area] Data Book Tool 5

20 December 2023

Operating mo del Budget

1

Performance

2

Comparisons

3-5

SWOT

6-9 10

Commercial project Tool 6 – Score card

20 December 2023

Commercial

project score card

What is the expec ted cost of the 1 project?

How long is <£5k it expected to deliver this project? (mont hs) Has the deadl 1-3 ine been impos ed externally?

What level of No political and public attent is this projec ion t likely to attrac t?

What stakeh Low older involved in this categories will be project?

Single Which extern Service al suppliers will be involv this project? ed in Has this been None done before by the lead organisation?

Many Times How confident are we that we can deliver?

High

Score 8-15 Low(1)

localpartnerships.org .uk

2

3

£5k–£20k

£20k–£100k

4-9

10-12

4 £100k–£1m 12-18

Yes Ward Interest Multi-service and/or partners Once or Twice -

Score16-35 Medium(2)

Council Interest New Partners Yes, known supplier Not at the Same Time

National Interest Stakeholder opposition

5

Score

>£1m >18 Yes, with penalties -

-

Yes, new supplier

-

Never

Medium

Low Indicative Gover nance Score

Score 36 High(3) localpartnership

s.org.uk

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change » 4 A Developing the case for change

about the approximate overall investment required, the outcomes that are expected, the forecast financial return over a number of years along with conditions that must be met for the outcomes to be delivered.

`

k ey performance indicators that would measure success

`

economic case with options appraisal

`

outline impact assessment

This template may be used in a number of circumstances:

`

nancial modelling – investment, return, fi capital, revenue and borrowing

`

risk register with mitigations

`

utline resources needed for successful o delivery

`

5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

`

s the first stage in the preparation a of a simple business case

`

s part of the pre-business case development a process, where a full business case will be required.

Endnotes How we can help

t o enable the authority to compare different commercial opportunities that are all at the early stage of planning – perhaps feeding into a commercial opportunities log or strategy, where potential ideas are held pending assessment

Gate 2 – outline business case The purpose of an outline business case (OBC) is to identify a preferred option which demonstrates best value for money. The content should include: `

s trategic fit with local objectives, and national objectives if relevant

`

s upporting evidence why the change is needed

` LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

t he intended outcome and specially the commercial benefits including financial and non-financial benefits

Gate 3 – full business case The purpose of the full business case (FBC) is to revisit the case for change based on the OBC and take on-board any refinement based on the evaluation. The content should include: `

a revisit of the strategic and financial rationale

`

f ully costed model for the preferred option, with anticipated benefits realisation

`

ny market testing and outline of a procurement to establish investment

`

roject plan to support the management p case, including clarity on the assumptions made about timescales for delivery/benefits realisation. If timescale change and there is an impact on this, the matter is brought back before members

`

updated risk register

`

r esults, outputs and key performance indicators at can be measure of progress to success 51

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change » 4 A Developing the case for change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Gate 4 – governance and delivery The governance requirements will depend on the council’s scheme of delegation and definition of key decisions outlined in the constitution, including financial thresholds.

This could be a decision by a senior officer, cabinet member, full cabinet or committee depending on the value and impact of the change. The governance of the initial decision at each stage of the business case should be clearly set out and how delivery will be governed. The information should be part of the case presented for members to make a decision. It might be the case that the financial risk is low but the reputational risk is high with high level of negative impact. If that is the case the senior officer would need to consult with the relevant cabinet member or committee chair to determine the appropriate decision route.

At each point in the process a decision may be taken to develop further, proceed or stop.

— Commercial guidance and toolkit

`

ho will carry out the scoring from within the w authority and how decisions will be made

`

re there any pass/fail items that will need a to be considered before detailed scoring takes place?

`

greement on a detailed scoring matrix and a narrative – to accompany the evaluation

`

greement on the weighting of each suba criteria – to be agreed prior to the primary evaluation

The evaluation criteria agreed prior to the outline business case can be reviewed and used to evaluate the FBC.

Evaluation Figure 6 above sets out the need for evaluation at each stage. The business case will enable an evaluation to take place at key stages, when further information is provided.

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delivered by a council company or external supplier. It provides prompts to scope out the level of intervention proposed and then sets out the methodology that will be used to evaluate options, including;

The link below provides a word template featuring guidance on how you could evaluate the options that you are considering in the circumstances of a service change, which could include new trading services or services to be

Download Tool 7 – Developing evaluation criteria to test options

Developing evaluation criteria to be used to test service change – appraisal Tool 7

• Are there any Pass / Fail items that will • Agreement need to be conside on a detailed red before detailed scoring matrix • Agreement and narrative scoring takes on the weightin – to accomp place? g of each sub-crit • Would it be eria – to be agreed any the evaluation appropriate to consider differen prior to the primary made? t options for differen evaluation t parts of the Outcome require service area being d: How will the considered – appropriate decision be how will this decision level of senior made and what officer and/or level of sign be political leaders off will this require hip? ? How will this Suggested Pass/Fa be reported to the ils: Version No: 1.0 •

Issue date: 23 December 2023 • •

Strategic Fit – meets the council’s corpora Compromises te priorities – the council’s PASS/FAIL ability to deliver its statutory functions – PASS/F AIL TEMPLATE

3. CRITERIA Category

Strategic

People

Reputational

Sub Criteria • Impact on current busines s needs • Ability to meet • Would remova future service needs l affect other aspects of wider • Capacity and capability council operatio of the council • The alignme ns which could to implement nt of the change not be mitigate the service d? against other • Assessment cultural and corpora changes required of roles it will te changes affect / impact • Likely effect on training and • Effect on staff development existing staff (skillsets) Ts and Cs and • Other personn ways of working • Likely impact el and staffing implications includin of resistance to change / industria g TUPE • Impact of l relations – impact option on externa of this on likely l views of the • Ability to commu success council (if any expected or could • Use of income nicate a clear rationale for be evidenced) the change / savings or demons • Scope for tration of other service improve clear benefits ment • Impact on customers and users

%/Weighting

[20%]

[25%]

[15%]

Local Partners hips

2

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change » 4 A Developing the case for change 5 Undertaking reviews of commercial services and activities

It is important to be able to measure performance accurately. In addition to comparing back to the business case and the benefits realisation it intended, councils should consider adopting a balanced scorecard when assessing commercial activities. The key elements of the balanced scorecard may include: `

inancial perspective – are financial targets F being met? If not, does there appear to be a route to an improved position

`

ustomer perspective – are customers C satisfied with the service they are receiving?

`

I nternal business processes perspective – are the council’s ways of working as efficient and agile as they can be? Can this be measured?

`

rganisational capacity perspective – O is the organisation learning and growing?

Are staff acquiring new skills for their own development?

6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Investigating commercial opportunities

Stakehold

Tool 4 – Stakeholder assessment

er Assessme

nt

Stakeholders stakeholder are parties with an interest in assessment an organi hold an interes is a way of sation, projec understandin t or initiativ is not a one-of t, along with a review g the needs e. The of f exercise and expec as the power moving the stakeh tations of older Power and those who and influen Influence ce may chang to the desired positio n. This e over time.

Low to High

Keep satisfi ed Engage and consult

Influence of power

Download Tool 4 – Stakeholder assessment

Monitor Keep inform ed

Plot the position of the stakeholder

Download Tool 8 – Case for change template

Starting to develop a case for change Tool 8 – Outline change template – Gate 1

Project [no.]

Score What is the expected cost of the project?

How long is it expected to deliver project from this start point? (months) What level of political and public attention is this project likely to attract?

Negative effects characteristics? on protected What stakehol der categorie involved in s will be this project?

Which external in this project? suppliers will be involved Has this been done before organisation? in the How confiden t are we that deliver? we can

Interest power and

Version No: 1.0 Issue date: 23 December 2023

Stakeholder

Position from

Choose an Choose an Choose an Choose an

item.

item.

item.

item.

influence – low to

Score8-15 Low high

Version No: 1.0 Issue date: 23 December 2023

Action Strate gy

Position to

Choose an Choose an Choose an Choose an

item.

item.

What action

needed

When

Owner

item.

item.

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

: [title]

Project Descr iption:

Key result s (check the most releva nt result)

Outcomes

☐Quick win generating additional ☐Service income improvement creating user ☐Income generation benefit for the service ☐Savings for the counc il ☐Support longer-term service design

Project Profil

e and Risk

1

2

<£5k

£5k–£20k

1-3 Nonsignifican None Single Service

4-9 t

Ward interest Some but mitigated Multi-service and/or partners

None Frequently High

Occasion

Score Card 3

£20k–£100k 10-12 Council / City interest Limited New Partners known supplier

ally

-

Score 16-35 Medium

4

-

5

>18

5

National Interest

3

High in all categorie s Opposition from all stakeholders New supplier Never

Indicative

Score

>£1m

12-18

Not at the

same scale Medium

5

£100k–£1m

Regional interest High in some categorie s Opposition From some stakeholders -

Low Governance

Score 36+ High

1 4

5 3 3

Score

29

The traded opportunity customer opportunity): (new market, new product, extend • range of produc t; profile of Cashable (additional income, reduce • d cost): Non-cashab le (meeting advantage the counc il’s objectives to residents, social care including • benefit to and welfar other service e, climate emergency): s; Include financ ial modelling ☐Estimates where availab le: ☐Actuals ☐Further modelling required Local Partne rships

Local Partne rships 2 1

53

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

Undertaking commercial reviews of services and activities

5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

This section concentrates on income generating services provided in house, as opposed to council owned companies (common examples of such commercial services would be leisure services, car parking and building control). These services will be income-generating to the extent that they will need to cover costs.

It is essential that reviews are regularly undertaken to ensure they remain efficient and that the council understands the true cost of the service as well as the real income generated. In the event that any service starts to show the opportunity for profit, an alternative delivery model will need to be considered and an options appraisal carried out, followed by a business case if appropriate. By commercial review we mean a review of service costs and income, confirmation that the service continues to deliver the objectives of the council and that the service delivery model remains appropriate.

Guidance on council owned companies and their use is available in Local Partnerships LATCo Guidance.

Importance of service planning Know your service Annual service planning is a way of reviewing and capturing key elements of the business and operating models, recognising change and considering how to respond to it. It is also a tool to communicate to the team their part in service delivery, linked to their own performance plans and their contribution to the wider council ambitions.

Whilst the service plan will provide the foundation for understanding a service and recognising the drivers for change, there are particular elements to consider for commercial services where you are trying to cover services costs with income or other quantifiable benefits.

54

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

This may seem obvious but agreeing on the purpose of the service or a particular function is important. This includes what the service is trying to achieve through operation of a commercial element – is it purely financial or is there added benefit? There can be mixed outcomes which can often occur where there are statutory requirements with performance monitored and measured nationally. It is also important to consider if trading in the market would adversely affect local businesses.

Following clarification of purpose, the next stage is to review how the service operates, and specifically for a traded service, a key question is to what extent the operating model of the service supports a commercial approach and how this helps to deliver the council’s corporate priorities (these should have been set out in the relevant business case prepared when the decision was made to deliver the service

Download Tool 3 – Service planning workshop

Investigating commercial opportunities Tool 3 – Service planning workshop

Version No: 1.0 Issue date: 23 December 2023

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Workshop

agenda –

for services

with a signi

ficant trade

d element Introduction s § Purpo se of the worksh § Your name op / role § What you really like § What gets you frustraabout the service / what ted about The servic the service works well? e ? § Its purpos § Statuto e and outcomes ry and non-st § Contri bute to other atutory / tradeable § SWOT or service services / delivery (Strengths, links Weaknesses, Budget, perfor Opportunitie mance and s & Threat data s) § Budge t make up § Budge t status § What current data § What data would is telling us? be useful?

It’s place in delivering your counc § Extern il’s strate al custom gy and ers customer’s § Interna l customers requirement § Feedb s ack § Has the from customers – questionnair § Has the customer changed es, engag (oppor § PESTL market changed (oppor tunities + threats ement E – factors )? tunities + or politica environment l, environmentthreats)? al, social, Service chang technological , legal and e § Consid eration of existing propos § Oppor tunities for als / breaki § Oppor increased ng barrier tunities for income – s and blocke pricing; new cost § Invest to save opport reduction areas of work; rs unities etc.

Developing key ideas § Schem e § Advan / project profile tages and disadvantage § Financ ial profiles s / risks impac § Succe t assess ss measu ment res Confirm next steps

in a commercial way). Questions to consider include the capacity and capability of the relevant team and market analysis to understand the extent of the opportunity. As part of this review there is a need to focus on the impact and interdependencies on other services – for example – the service might be generating an income but creating an added cost to another part of the council.

This is a link to a suggested workshop agenda – for the discussion of potential commercial/trading opportunities relating to a service area, when considering new opportunities. The workshop attendees would include the service head and others with a broad understanding of how the current service operates as well as knowledge regarding the local and wider environment, such as members of the senior leadership team. The agenda would cover: `

current operating model

`

budget and performance data

`

c ontribution to corporate strategy and objectives

`

opportunities

`

developing key ideas/next steps

Local Partne rships

1

55

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

Useful data that may be relevant in reviewing commercialised services

`

conomic data e.g. business trends, e local and national economics

Understanding the service through data is important: data should be analysed regularly through performance reporting, benchmarking and monitoring. Whilst tracking over time can provide value in understand history and trajectory, it is the triangulation of information which can provide valuable insight.

`

l inkages performance in expenditure and income, including customer trends

`

ependencies impacts where performance d in other parts of the council or public services as an impact on the service

`

ational benchmarking with like services n and councils

When using and collecting data there are some key questions to address: Q

7 Commercial activity – addressing issues raised in reviews Endnotes

onsider the time and resource to find, C collect and analyse information – how valuable is the data being collected what value will that bring to future to decision making?

Q

I s this the right data and is it helping to assess the service and inform decisions?

Q

I s the data source accurate or based on assumptions? Is the input into data correct?

Q

ow can data be matched together to create H different view points, test assumptions and consider theories?

How we can help

The range of data to consider may include: `

` LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

k ey performance indicators tracked overtime containing service deliverables, including quality and quantitative information emographic data to understand impact d on services – including ward information, population changes, geographic information

Soft data: `

approach taken by other local authorities

`

c osts comparison with other local authorities where there is like for like offers

`

rivate sector comparisons on provision p and cost (though difficult to obtain)

Range of financial information: `

ctual spend next to budget, tracked a over time

`

i ncome tracked over time into different component parts

`

split between internal and external income

`

ratio between income and expenditure

`

ricing for component part – review p is one element is subsidising other

`

nit costs to support full cost recovery u (see below)

`

nit costs compared to statutory fees u to show level of requirement subsidy 56

Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

Full cost recovery vs customer affordability The common approach to financial management in local government is based on the income and expenditure to run that service. That makes sense, until trying to establish full cost recovery of a traded service. While traded services provided within the council may not make a profit, councils are entitled to allocate reasonable overheads to the service and reflect that in prices.

For the charge of a traded service to be viable it needs to be pitched at the market

7 Commercial activity – addressing issues raised in reviews

and be affordable to customers, otherwise the services won’t be purchased or the customer will go elsewhere. It could be the case that the council cannot compete on cost and therefore it is unwise to go ahead with that proposal.

Understanding the unit cost will help the council understand if the service is being subsidised – and therefore inform a decision to continue with that subsidy based on the wider value the service brings or to revise the cost model.

The figure shows an example breakdown of unit costs e.g. time spent by individual employees.

Borrowing

Endnotes

Travel/transport

How we can help

Premises Overheads

UNIT COSTS

Corporate costs such as HR, IT, information governance, members services, management…

Supplies/services Equipment, materials, postage, lease costs, marketing, consumables…

Employees Salaries, pensions, pension deficit, NI, agency staff, training and development…

LOCAL PARTNERSHIPS

— Commercial guidance and toolkit

Figure 7 – Unit cost composition

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

Full cost recovery for services is the ideal for a traded service with potential surplus supporting the revenue position of the council.

Some fees are set nationally (planning fees, registration of births and deaths) yet do not cover the cost of delivery but without the resources allocated to them will see a dip in performance.

Therefore focusing on the bottom line is not straightforward in local government and a choice will need to be made by the council regarding what its priorities are: In particular the balance between quality of services and maximising income or surplus.

Is value for money being achieved?

Value for money is an essential factor in running local government services. It is defined as the relationship between economy, efficiency and effectiveness. There is a value for money conclusion made by auditors as part of the statutory audit.

An assessment of value for money will consider whether the rewards justify the cost, recovered either through income generation or in non-financial benefit for the community.

Introducing commerciality into the provision of a service can mean that it becomes more efficient, providing more for less cost or greater income justifying an increased cost. The organisation will need to determine to what extent the effort and additional investment is appropriate give the likely rewards. This will need to be monitored on an ongoing basis in a way similar to other council investments. Identifying real costs using the type of data set out above will be important in this process.

If a business case is produced for a new commercial activity, the value for money aspect will be determined through the development of the economic case. This section sets out the potential options and for the preferred option articulates the social, environmental and economic costs of a project over the period of intended operation in order to determine the value for money and return on investment.

The return on investment will be an important metric. If agreed targets are not met this will be a clear justification for reviewing the service’s business case.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

Implementing commercial change and evaluating success

5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

This section describes some of the high level considerations for councils when implementing and evaluating the success of commercial initiatives. The overall approach to evaluating success should be considered early on in the process – the approach will need to be developed as the opportunities are taken forward, culminating in a detailed evaluation methodology to be set out in any business case or other approval process.

This is set out in section 4 Setting up a new commercial activity/implementing change.

Ongoing challenge

underlying assumptions and ongoing relevance of investments, taking account of factors such as changes to market conditions, council priorities, VfM, quality and performance of investments.

Mitigating risks A robust, tested and evaluated business case will address areas of risk that could affect the deliverability of a project. However, beyond a perfectly formed business case there are a number of risks to be considered which can be mitigated to a degree but will likely arise during implementation of commercial projects and will need addressing. The risks include:

Once implemented, there should be clear processes in place to regularly challenge the

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Contents 1 Introduction

Constraints

Motivations and appetite for change

Organisational change

External factors

Financial costs of delivery escalate

The delivery team not on board with the changes

Key personal changes and inability to recruit

New suppliers entering the market

Time pressures means delay in achieving the results

Wider parts of the organisation negatively affected

Administration changes leading to different policy direction

Changes in the economy affect traded service and council budgets

The scope needs to change based on circumstances

Users and customers not recognising the benefits

Shift in priorities such as needing to address emergency situations

Global factors having an effect on services

2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

A more detail explanation covering of risks is included in section 3D Understanding risk.

In order to mitigate implementation risks it is recommended that the following approaches are adopted in relationship to the commercial activity:

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r elevant training and support is provided to officers and members in order to effectively plan and manage investments and borrowing

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i n the case of substantial investment holdings, external experts in the market are engaged.

Their advice should be used to mitigate the council’s own risk

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t hat within the council there is a clear consensus regarding risk appetite for investments

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t hat there should be ongoing assessment of risks relating to commercial activity, supported by processes to ensure that risks are managed as part of the council’s overall risk management approach, with appropriate escalation and reporting

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t hat the scale and financial value of the council’s investments should be proportionate to the size and budget of the authority and reviewed regularly

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success

Performance monitoring and measurement Any monitoring of performance should be set against the key performance indicators outlined in the business case (see section 4A Developing the case for change) with the aim of measuring progress, success and results.

For commercial initiatives key areas to evaluate may include: `

dded surplus – balanced against income a and expenditure

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ther cashable benefits that can be o demonstrated, including cost of avoidance (for example where the benefit of providing a commercial activity at a loss may deliver a considerable saving for a related service)

7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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s econdary benefits to the organisation including for a better service for the user/ customer, reputational benefit, demand

Examples of means of sharing success

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management in high cost services such as social care `

s ocial value benefits that provide improvements for residents

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c ustomer satisfaction to support returning customers, aiding the long term benefit of the commercial element

These are all issues that will also need to be considered in the development of the business case relating to the activity.

Whilst evaluation takes investment, it can prove invaluable in terms of: `

romoting the service and increase p commercial opportunity

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motivating officers

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shared learning across the public sector

Local awareness campaigns

Briefing notes to councillors and MPs

Case studies on innovative approaches

Promotion by partner organisation

Shared information with other local authorities

Local, regional and national awards

Features and articles in specialist publications

Networks through national organisations

Social media communication

Internal newsletters

Website profile

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Local Partnerships’ recent engagement on a range of local government commercial projects has demonstrated that performance management and monitoring is an area which councils often struggle with in part due to skills gaps and recruitment challenges. We have also observed that performance data relating commercial projects can be opaque and overly detailed. In order for councils to successfully monitor their investments and projects in the medium to long term, it is important to invest in a suitably resourced monitoring and oversight function with officers who have the ability to properly scrutinise and members who receive transparent information in a legible format.

Endnotes

In their performance management of commercial initiatives it is recommended that councils undertake the following activities:

How we can help

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evelop a standardised performance d framework to oversee and manage all the council’s commercial investments

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onitor investments by following a standard m and regular process (at least on a quarterly basis. This could be an internal investment board comprising elected members

The approach to review and monitoring needs to reflect the market in which the activity sits and the speed that decisions on the activity may need to be made `

i mplement transparent and accessible dashboards which focus on a small number of key metrics (such as warning signs which indicate risk relating a commercial investment e.g. high debt levels compared to asset levels). The dashboards may need to consider data such as inflation measures, metrics affecting the market or customers as well as interest rates affecting specific borrowing

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roduce performance dashboards which p are reviewed on a regular basis at relevant meetings and boards

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i mplement effective management of financial issues relating to investments including business planning, budget control, financial systems and financial monitoring and reporting

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nsure that business and service planning e are used as mechanisms to hold commercial services to account

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Evaluation Evaluation is required to consider if change and project implementation is on the right track and if the path needs to be altered. The approach to evaluation should reflect the objectives and performance measures contained in the business case that will have been approved by the council.

This link provides an evaluation template which can be used to monitor and evaluate a commercial activity or service over time.

Download Tool 10 – Evaluation and monitoring score card

Evaluation and monitoring Tool 10 – Score card

20 December 2023

Title of Projec

t

Outline:

insert proposals for reference

Directorate

Lead Officer Time scale

Outcome:

Key indicators Cashable: Non-cashable:

Inputs required:

Target

Other: Estimated costs Expenditure Investment Income Total surplus

Risk scorecard Year 1 £’000

Year 2 £’000

Year 3 £’000

Total £’000

Risk Investm ent value at risk

High

Medium

Low

Challenge to achieve Profile impact ing on reputation

The template incorporates the original rationale for developing a business case. This can be used as the baseline to identify what was originally expected of the commercial activity and performance against those expectations.

Endnotes How we can help

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change

Commercial activity – addressing issues raised in reviews

5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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Commercial activity should be kept under review. The timing of reviews should relate to the level of risk of the activity to the council and the nature of the market the council is operating in. Significant changes in things such as interest rates (as experience between 2022 and 2023) would justify weekly monitoring and frequent in year reviews, if a council was involved with direct housing development.

Reviews are not just required because the business case or starting point for approving the activity was wrong. The landscape within which a council operates will change and it may be that initial assumptions need to be reviewed. Changes could include falling demand for a particular service, or the expertise to provide the service no longer being available.

The governance framework and contractual provisions are the mechanisms for ensuring that issues are addressed at the earliest opportunity when the landscape changes.

The resilience required needs to be built into the operating model governance arrangements and reporting requirements set out and supported in the business case.

The rationale for having a company or carrying out a particular commercial activity may also change over time, or there may be a change of leadership with different ideas.

It may become apparent that officers and members are not sufficiently skilled in the appropriate areas to be able to ensure the commercial activity is a success. The shareholder role for a company is critical to ensure that the authority exercises appropriate oversight. Recruiting suitably experienced individuals, both within the authority and to council owned companies, is essential.

As stated earlier, the market in which the authority, or its arm’s length company, is operating in may change and adversely impact the ability to remain competitive. It is important

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes How we can help

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to ensure that suitably skilled individuals with market knowledge are available externally or within the council to ensure that this is identified and addressed as quickly as possible.

There may also be a lack of financial oversight and understanding of the commercial activity.

It is essential that the S151 Officer is kept informed of it and able to provide challenge where necessary as there are severe ramifications for the authority if unexpected financing is needed to keep a company afloat.

Drifting away from the agreed business plan may result in financial pressures not originally anticipated. To avoid conflict of interest the commercial oversight and delivery roles need to be separated and carefully managed.

Having a clear exit strategy is key to ensuring that this can happen when the time is right.

For example, a regeneration programme may be complete, no longer requiring the special purpose vehicle for which it was set up. If the commercial activity is not working any longer, action should be taken as quickly as possible to avoid any serious issues. A strong governance framework will capture any such issues as they arise. For example, in the case of an arm’s length company, the shareholder committee (which is responsible for strategic oversight) should be identifying if a company is regularly requesting additional funds to keep operating.

Whilst a council will want to support a failing company in its ownership, it also has a duty to

spend public funds wisely. Those responsible for the commercial activities should be held to account through the relevant governance framework. The resources dedicated to reviewing activity should be proportionate to the scale of the commercial activity.

This may lead to an activity ceasing completely or being delivered by an alternative means, for example in-sourcing or outsourcing. However, simply transferring a service in itself will not fix a problem and could even make it worse.

To ensure that the most appropriate alternative model is chosen, an options appraisal and business case is required to justify any new approach, to be approved at the appropriate decision making level – most likely involving Members.

Factors to take into account in considering a change to an existing commercial activity include the costs of transfer, personnel risk relating to the need to make staff redundant or employ under different terms and conditions.

All risks relating to these matters will need to be assessed and determined if there is sufficient appetite to proceed.

One potential outcome of a review is that the council should significantly change how it delivers the activity which may involve it closing a company or withdrawing from the activity.

Section 7 identifies the characteristics that may be present to lead to this conclusion.

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Contents 1 Introduction 2 Overview 3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews

Endnotes Examples of trading commercial ventures would include leisure, commercial waste, market housing development while examples of non-trading commercial ventures would largely be regeneration related but also include income generating infrastructure such as car parks for which specific legislation exists over the use of surplus revenue.

1

Costs directly attributable to bringing an asset into working condition for its intended use are examples of oneoff, upfront costs that are capital such as site preparation and clearance costs, installation costs, acquisition costs, professional fees. One-off costs that are not capital include training staff to use a new asset or site security during construction for example.

2

The CFR is the amount of capital spending that has not yet been financed by capital receipts, capital grants or contributions from revenue income.

3

The PWLB is operated by the UK Debt Management Office (DMO) on behalf of HM Treasury. It oversees the National Loan Fund which is capitalised through the issue of gilt edged securities. The cost of borrowing from the PWLB is based on current gilt prices plus a margin.

4

Endnotes Endnotes

Local authorities are required by regulations to have regard to the Prudential Code when carrying out their duties in England and Wales under Part 1 of the Local Government Act 2003 (2003 Act) and by regulations 2 and 24 of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 No 3146 as amended.

How we can help

6

5

MRP is the charge made to revenue to provide for the paying off of the principal sum of the borrowing undertaken.

7

As defined in The Local Authorities (Capital Finance and Accounting) (England) Regulations 2003.

8

The Prudential Code for Capital Finance in Local Authorities 2021.

9

dmo.gov.uk/media/ellnoeko/pwlb-lending-guidance-15-june-2023.pdf

10

The Seven Principles of Public Life – “Nolan Principles”.

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The UK Corporate Governance Code, Financial Reporting Council, July 2018 frc.org.uk/ getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

ons.gov.uk/businessindustryandtrade/changestobusiness/businessbirthsdeathsandsurvivalrates

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The Prudential Code for Capital Finance in Local Authorities 2021.

14

gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent The International Building Better Business Cases Programme has developed some guidance on this.

They advocate that investments involving £2m or more of public investment should be taken through the full, three stage business case process.

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Contents 1 Introduction 2 Overview

How we can help

3 Developing a commercial strategy 4 Setting up a new commercial activity/ implementing change 5 Undertaking reviews of commercial services and activities 6 Implementing commercial change and evaluating success 7 Commercial activity – addressing issues raised in reviews Endnotes

Local Partnerships would be happy to discuss your council’s commercial activity and how we may be able to help develop and deliver your commercial strategy, please contact:

Simon Bandy Senior Strategy Director – Commercial 07917 202 318 I simon.bandy@localpartnerships.gov.uk

David Crowe Senior Strategy Director – Commercial 07795 418 305 I david.crowe@localpartnerships.gov.uk

How we can help

Vivien Holland Director – Commercial 07789 356 842 I vivien.holland@localpartnerships.gov.uk

Disclaimer This report has been produced and published in good faith

by Local Partnerships and Local Partnerships shall not incur any liability for any action or omission arising out of any reliance being placed on the report (including any information it contains) by any organisation or other person. Any organisation or other person in receipt of this report should take their own legal, financial and/or other relevant professional advice when considering what action (if any) to take in respect of any associated initiative, proposal or other arrangement, or before placing any reliance on the report (including any information it contains).

Copyright © Local Partnerships LLP 2023

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Local Partnerships 18 Smith Square, London SW1P 3HZ 020 4526 8474 I LPenquiries@localpartnerships.gov.uk

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