Appendix G: Answers to questions submitted by Unison.
1. The reason/need for procurement in the first place?
The Reshaping Services strategy provides a framework for the Council to work
within for the next three to five years. The programme is the Council’s proactive
response to central government’s austerity drive that has created a period of
unprecedented financial pressure in the public sector. The Council’s budget has
been under pressure for a number of years with £35million in savings identified
between 2010/11 and 2015/16. Further substantial savings have been identified as
being necessary in future years. Failure to deliver the required level of savings will
not be an option for the Council. According to many analysts the period of austerity is
likely to continue for councils and the public sector. It is clear that the scale of the
challenges to come will mean that “business as usual”, however well managed, will
not be enough.
2. Has the Council looked at a shared service mode?
The project team was tasked with assessing a number of alternative delivery models,
including:




Option 1: Internal Service Transformation
This would be achieved through a reconfiguration of the current structure and
processes to ensure the service is efficient to meet future financial demands.
Option 2: Collaboration
Collaboration would involve working with a public sector partner to deliver a
shared catering service. This would most likely be delivered with a
neighbouring authority such as Cardiff Council or Bridgend CBC.
Option 3: Outsourcing
Outsourcing to the private sector would involve contracting an external
provider for the required services.
Option 4: Arms-length company
This involves the creation of a separate legal entity that is either wholly or
partly owned by the local authority. This model would be achieved through the
creation of a co-operative/mutual or a local authority trading company. This
option will be based on a local authority trading company with a cooperative
ethos.
3. The procurement model (the vales favoured model is a co-op) why?
As discussed above, the project team was asked to assess a wide range of models.
A short list was created following assessment of the options appraisal. The preferred
model was then identified for consideration following assessment of the business
plans contained in Appendix B and Appendix C.
Appendix G: Answers to questions submitted by Unison.
4. What length of contract does the Council have with the Company?
It is anticipated that the Company would be created from 1st April 2019 with a view to
enter into a 3 year contract with the Council for the provision of the school meal
service. Individual contracts would also be created for those schools wishing to
utilise the service.
5. What assessment has the Council made of the company’s ability to
compete successfully against other contracts?
A number of commercial opportunities have been identified as part of the business
plan. Market testing has been completed and the anticipated income is considered
prudent. The proposals provide for a new post being created (Business Development
Officer) to develop full business cases and explore additional areas for external
trading.
6. Does the trading company’s business plan focus on winning work from
other public sector organisations, rather than trading in the wider
market?
The company’s growth strategy (contained in the business plan) is based on 4 key
areas:




Existing products, existing markets
Existing products, new markets
New products, existing markets
New products, new markets
The company would look to implement and exploit a range of commercial
opportunities, focusing both on increased income from public sector business as well
as to explore new income sources from private, third sector organisations and the
public.
7. Will the trading company be seeking to sell services to private
companies and the voluntary sector?
As highlighted above, the company would seek to explore a number of markets,
including private sector companies and the public.
Appendix G: Answers to questions submitted by Unison.
8. Will the trading company be seeking to sell service to members of the
public?
As highlighted above, the company would seek to explore a number of markets,
including private sector companies and the public.
9. What assessment has the Council made of the total value of support it
will give the company, including advice, staff support, intellectual
property, assets, use of premises and equipment, access to supplies?
As part of this project, the Council has assessed the cost of all support services to
ensure the company will be charged for all support provided. Full details can be
found in the budget section of the local authority trading company business plan
(Appendix C, pages 24-29).
10. What method has the Council used to ensure these are charged at
commercial rates?
As highlighted above, the Council has assessed the cost of all support services to
ensure the company will be charged the true cost of the support provided. The
method by which these charges have been calculated are as set out at Appendix C,
as per pages 27 & 28 of the business plan
11. Does the Council intend to give the company a start-up loan?
Please see the ‘Council Investment’ section of the business plan (Appendix C, pages
29-30). Please note, all investment would come from yearly savings and will not be
at an additional cost to the Council. No loan is envisaged at this time, because of the
investment which is being provided in the first three years.
12. If so, are the terms of the loan the going commercial rate?
N/A
13. What risk assessment has been made for the potential for the Council to
face challenges under completion law (state aid rules) in relation to its
planned support?
Appendix G: Answers to questions submitted by Unison.
External legal advice has been received on compliance with State Aid rules. This has
been taken into account in the development of the business plan.
14. A trading company will not be covered by the public sector equality duty
– will equality consideration be included as part of any contract or
service level agreement with the company?
The Council would be the sole shareholder of the Company and equality duties
would be enshrined in the company’s constitution. Equality duties would also form
part of the contract between the Council and the company.
15. How will the Council ensure that the trading company promotes
equality, tackles disadvantage and meets the diverse needs of the
community?
An equality impact assessment scoping exercise has been developed and will be
regularly reviewed throughout each stage of the project.
16. How will the Council ensure that the company is accountable to the
Council and that its objectives are aligned with Council policies?
Full governance arrangements are outlined in the local authority trading company
business plan (Appendix C, pages 30-35). This would include the creation of a
shareholder committee to represent the interests of the Council as the single
shareholder.
17. How would Council officers and elected members handle conflicts of
interest between their council role and their duty as company directors?
Before being appointed, all directors would be advised of their duties and
responsibilities to both to the Council and the company. Appropriate policies and
procedures would be adopted by the LATC to provide guidance in these areas for
directors. This arrangement would be similar to the way in which the Council
currently applies such policies and procedures across the council where the potential
for conflict of interest may exist.
Appendix G: Answers to questions submitted by Unison.
18. What safeguards could be put in place to prevent company directors
deciding to sell the company to private enterprise or a private equity
owner?
The Council would be the sole shareholder of the company and there would be
appropriate governance and monitoring arrangements via an Executive Shareholder
Committee to address this issue. The reinvestment of any surplus would be at the
heart of the company’s constitution and profits will not be distributed to
directors/shareholders.
19. Would the Council assume responsibility for any debts that the
company was unable to pay?
As the sole shareholder of the company, the Council would be responsible for any
losses incurred. A full financial appraisal has been developed to ensure the model is
financially viable.
20. What would the implications of the service users be if the company fails
and has to cease to trade?
Section 512 of the Education Act 1996 confers a duty on the Council to provide free
school meals. Therefore the Council will need to ensure continuation of the school
meal service in the event of the company failing.
21. Will the Council commit to bringing services in house if the company
fails?
A full business plan has been developed to ensure the success of the company and
a robust financial appraisal has been completed to ensure surpluses are generated.
As the single shareholder, the Council would need to assess all options in the event
of the failure of the company. As highlighted above, the Council has a duty under the
Education Act 1996 to provide the free school meal service so continuation of the
service is essential.
Appendix G: Answers to questions submitted by Unison.
DOC 2
1. Staff turnover business plan on the assumption that labour cost will fall
as TUPE transferred staff leave the company and can be replaced by
new staff on worse T&Cs. In reality and in the current labour market
there may not be as much turnover as you assumed, leaving costs
exceeding forecasts.
The financial appraisal for the local authority trading company (Appendix C, pages
24-29) is based on the current staffing level with estimated living wage increases.
There is no assumption of staff turnover and the company would not operate a two
tier workforce.
2. In Wales the two tier workforce code exists which means that councils
should contractually require the company to give new starters pay and
conditions no less favourable than transferred staff.
The local authority trading company business plan has not been based on operating
a two tier workforce and reflects the requirements of the Two Tier Workforce Code.
(Appendix C, Page 11)
3. Before embarking on a trading operation, a council must satisfy itself
that it has considered all the risks of such an undertaking. This includes
developing a full business case which covers projected financial
performance and risks. Any decision to proceed with a trading company
should be accompanied by a full business plan covering how the
company will operate.
The risks associated with the creation of the local authority trading company are
outlined in the business case. A full business plan for the local authority trading
company has also been developed (Appendix C).
4. The council must decide the company governance structure including
the composition of the board and how the council will be represented
usually through a mixture of councillors and officers. In Unisons
experience, councils often pay consultants to advise on business cases
and business plans. There have been many instances where consultants
projections of future revenue and trading opportunities have proved
wildly optimistic.
Appendix G: Answers to questions submitted by Unison.
Paragraph 32 of the business case outlines that the Board of Directors could include
Council Officers, Elected Members, Staff Members and Headteachers.
Recommendation 5 proposes that Cabinet will receive a further report outlining the
full governance arrangements for the company. External consultants have not been
utilised for the development of the business case and business plans.
5. If the council operated a Teckal company for a period of time and then
decides it should become an employee owned mutual or coop it will
need to sell the company to the employees and at this point any
contracts it has with the Teckal company will need to be re-tendered, as
the Teckal exemption would no longer apply once the ownership and
control change. Once again there is no guarantee that the newly formed
co-op or mutual would succeed in winning the contract.
The local authority trading company business plan (Appendix C) is based on trading
income remaining within the Teckal exemption. An employee owned mutual or cooperative is not currently being considered as part of this proposal.
6. Has the council considered the alternative of using its powers to charge
for services this would have several advantages over setting up a
company. These would include savings on set up and administrative
costs and exemption from tax and VAT. Furthermore, councils can
borrow at commercial rates. A council owned company seeking to make
profits from trading with the public could put the council at risk of
reputational damage.
The business case compares the local authority trading company against a full
internal service transformation. The internal service transformation business case
(Appendix B) outlines the commercial opportunities that are available to the service,
including extension of the internal buffet and vending services. The Local Authorities
(Goods and Services) Act 1970 enables Council’s to provide services to other
councils and to other public bodies but not to the private sector or the public in
general.
7. If the council intends to set up a commercial trading operation, it will
have to comply with the procurement regulations and put work out to
tender. There can be no guarantee that the proposed trading company
would win the work. Instead members may find themselves transferred
to a private contractor.
Appendix G: Answers to questions submitted by Unison.
The Local authority trading company business plan is based on external trading
remaining within the Teckal exemption. This will enable schools to directly award the
provision of school meals to the company. All schools will receive delegated budgets
from the provision of schools meals from 1st April 2017 resulting in all schools being
able to consider alternative options.
8. Where councils want to sell goods or services to other councils or
public bodies, they will only be dealing with each other and not seeking
to operate in a wider market. These are often referred to as shared
services or public-public partnerships. The partners can set up a Teckal
company but they do not have to. If they do not set up a company they
do not have to put the work out to competitive tender, are still able to
generate a profit and are not restricted to cost recovery as long as they
only trade with each other. They also avoid all the downsides and a
company such as VAT and corporation tax.
Collaboration with local authority partners was considered in the early stages of this
project and as one of the 5 potential delivery models. Cardiff City Council and
Bridgend CBC were invited to a working group to discuss collaboration.
Collaboration was assessed as part of the high level options appraisal and was
scored against the Reshaping Services critical success factors (paras 15-21).
9. Trading companies can and do get into financial difficulties. Therefore
councils should ensure that there is an exit strategy written into the
company’s constitution covering what will happen if the company
becomes insolvent.
The company’s constitution and articles of association will be developed between
April 2018 and April 2019, prior to the creation of the company. This will include the
exit strategy. (Para 81)
10. Most trading companies will have to pay corporation tax whereas inhouse trading or joint arrangements with other public bodies do not.
(There are a couple of exceptions for charitable bodies and limited
liability partnerships.)
Corporation tax has been considered as part of the business plan (Appendix C, page
28). The potential financial benefits of trading with the private sector and the general
public is considered to outweigh the potential costs of corporation tax.
Appendix G: Answers to questions submitted by Unison.
11. In additional they will be liable in their own right for VAT, will have to
pay national nondomestic rates and will be liable for any stamp duty and
land tax. All these tax effects add to the cost base of a company
compared to in-house service delivery.
Initial advice regarding VAT has been obtained and is outlined in the local authority
trading company business plan (Appendix C, page 29). VAT advisors would be
involved in the implementation of the model to ensure full compliance.
12. Most company structures will involve limiting the liability of the
company directors. Councils may be under no obligations to meet the
company’s debts and liabilities should it get into trouble, but political
and service delivery considerations may mean they choose to.
A full business plan has been developed to ensure the success of the company and
a robust financial appraisal has been completed to ensure surpluses are generated.
As the single shareholder, the Council would be ultimately responsible for the
company’s debts and liabilities. (Para 81)
13. Does the business plan stack up?
There have been a number of examples of trading companies failing to
achieve the revenue and business turnover projections upon which they
were sold to councillors. This illustrated the tendency to talk up
additional revenue streams and play down the additional costs to the
council associated with setting up a trading company.
Common areas of additional cost pressure for the council include,
consultancy fees, legal costs, procurement/tendering costs and contract
monitoring costs. Additional costs for the company include corporation
tax, VAT, stamp duty, land tax, costs of bidding for work, marketing
costs, charges from the council in respect of support, assets, supplies,
higher borrowing costs and transaction costs.
A robust financial appraisal has been completed and income estimates are
considered prudent. Additional costs have been included in the financial appraisal,
outlined in Appendix C, pages 24-29. The integrity of the business plan will be a key
consideration of Cabinet, Learning and Culture Scrutiny Committee and Corporate
Performance and Resources Scrutiny Committee. This will also be considered as
part of the consultation and engagement process.
Appendix G: Answers to questions submitted by Unison.
14. Testing out assumptions, in many business cases Unison has seen,
there are a whole set of assumptions which amount to little more than
guess work. Here are some of the areas where, if one or more
assumption is wide of the mark, it can make a huge difference to
whether the proposed company a) looks viable b) looks more
advantageous than an in house solution.
Overheads – councils often underestimate overheads because they are
not charging all the councils input back to the company.
Supply chain – councils sometimes claim that a company can make
savings by sourcing its own supply chain. This lacks credibility because
of the purchasing power that a council has across its services.
Access to capital councils - often believe they can assist the trading
company with this but they do not always take account of State Aide
rule. Some councils make unrealistic assumptions about how the
company could raise capital in today’s financial market a company’s
borrowing cost will be far higher than those of the council itself.
As discussed above, a robust financial appraisal has been completed and income
estimates are considered prudent. Work has been completed to ensure corporate
recharges reflect the costs of the level of work undertaken. Additional costs have
also been factored in for additional services required by the company (Appendix C,
pages 24-29). External legal advice has also been considered regarding State Aid to
ensure compliance.
15. Case Studies
The issues raised in these case studies have been considered as part of the
development of the business case and business plans.