By Joanne Pitt, CIPFA Local Government Policy Manager
It is no secret that there is a rising concern in government regarding the risks that council-owned companies can pose to the stability of a local authority. When talking about the rapid review of London Borough of Croydon, which included the challenges of their company Brick by Brick, Local Government Secretary Rt Hon Robert Jenrick said: "I will be monitoring progress closely and will not hesitate to take further action if necessary."
Croydon is not alone when it comes to risks being identified from the companies it owns. In May 2021, Grant Thornton's audit finding for Slough Borough Council concluded: "During the course of our review and challenge of the council's group consolidation process, it was identified that a substantial over accrual of anticipated profits from the council's interests. in Slough Urban Renewal in both 2017-18 and 2018-19, totalling £7.573m overstating general fund reserves of this amount in the 2018-19 accounts."
In both cases, the failing of the council owned company was one of the factors that resulted in the issuing of a S114 notice. This is the legal notice issued by the Finance Director (or officially S151 Officer) that there are not sufficient funds to balance the budget and that action must be taken.
Unfortunately, it is often failure that grabs the headlines meaning those well-run council owned companies that have functioned effectively, delivering results and good services, begin to be viewed through the same problematic lens.
ALMO's are an often-forgotten example of a 100% controlled company under the Local Government and Housing Act 1989 and have been in existence since April 2002 when the first eight ALMOS went live. These can be significant businesses. Derby Homes, one of those first eight to go live, has a turnover of around £46m a year and over 500 staff.
As part of the work that CIPFA is doing in preparation for our publication on council owned companies due at the end of the year, we are looking at what it takes to run a company well.
Questions that we will be asking include:
- What are the skills and capacity are needed within a local authority?
- What are the skills and capabilities needed in a new company?
- What should the decision-making process be before a new company is set up?
- What sort of individuals do you need on the Board of a new company?
- How can councils have oversight and assurance?
- What are the accounts going to look like?
- What sort of exit strategy do councils need?
Going forward, well-run companies have a part to play in the delivery of public sector services, but it is important to understand and be transparent about the risks they bring. Finance professionals have a duty to minimize those risks, not a duty to remove all risk.
One important step forward would be to have a clear national picture of the council owned companies that are currently in existence and to understand the full extent of the role played by the wide variety of companies in operation. It is difficult to identify how many companies a local authority owns and even then, many are dormant or have no material impact on the authority. Greater transparency at a national level around council owned companies that have a material impact on public finances would improve assurance.
As we gather further evidence for the publication, new ideas and thoughts will come to light. Currently, the overarching conclusion that I have come to is that while the focus is on those companies that have failed, the vast majority have delivered and continue to deliver well. Our responsibility is to understand why and amplify the lessons.