Delivering value for money
Keeping pace with local citizens' expectations is an uphill struggle when central funding is reducing.
Generating additional income is clearly one of the choices available to councils and other public sector partners. That is why it is important to consider all the options for trading and charging.
The income that is generated can be used to help hold down council tax and/or can be directed into frontline services.
Trading and charging for services have always been a feature of local government in this country (see Boxes 1 and 2).
Under the Local Authorities (Goods and Services) Act 1970 councils can trade with each other and with designated public bodies - there is a long list.
The Local Government Act 2003 added some new possibilities. The 2003 Act enables councils to trade on a commercial basis with the private sector through a company and it empowers councils to charge for discretionary services on a cost recovery basis.
The option of trading through a company is expressly about making a surplus. Profits go back to the council in the form of dividends and service charges - that is, charges for goods, services, premises and so on provided to the company by the council.
Originally, the trading company option was confined to councils in higher comprehensive performance assessment (CPA) categories. A series of amendments followed by a new Trading Order, in force since October 2009, changed that. It is now an option open to any council (apart from a parish council) or fire and rescue authority in England that approves a business case. Box 1 looks at legal and other issues involved,
Under the 2003 Act, councils can also charge individuals and private companies for discretionary services - that is, ones they have power to provide but are not obliged to provide by law.
Here the charges must be based on cost-recovery, but income from charging can still help with the council's financial position.
For example, overheads - including fixed costs like premises - can be spread over a broader range of activity, and vehicles, plant and equipment bought by the council to provide the discretionary service can be used by the council for other purposes too.
There are long-established powers for councils to trade.
Among the most important is the Local Authorities (Goods and Services) Act 1970. That Act authorises councils to enter into agreements with other local authorities and other designated public bodies, for the provision of goods, materials and administrative, professional and technical services, for the use of vehicles, plant and apparatus and associated staff, and for the carrying out of maintenance.
Payment terms are set out in an agreement. These are not limited to cost recovery.
The 1970 Act is the bedrock of trading within the public sector and there is substantial experience of its operation. But the Act is limited in scope. For example, it does not allow trading with the private sector or the public at large.
Other established trading powers include, for example, the Local Government (Miscellaneous Provisions) Act 1976 which enables councils to enter into agreements with anyone for the use of spare computer capacity.
The Local Government Act 2003 added new possibilities to trade with the private sector.
Under the 2003 Act the Government authorises trading by means of a trading order. In the first trading order, in 2004, only councils in higher CPA categories were permitted to trade with the private sector. That order was amended several times before being replaced entirely by the 2009 Trading Order - see further reading below.
The 2009 order permits all councils (apart from parish councils) and fire and rescue authorities (FRA) in England to trade or "to do for a commercial purpose", anything which they are authorised to do for the purpose of carrying on their ordinary functions. Under the 2003 Act, the power to trade must be exercised through a company.
The main effect is to enable councils to trade with the private sector for a profit - that is commercially. In other words, to enter into commercial contracts. The profits may then go back to the council through dividends or service charges. Councils can only trade in services that they are able to provide in the first place for the purpose of carrying on any of their ordinary functions, which includes the wellbeing power - and would include any future 'general competence' power.
Local authority trading companies can take a variety of forms, and this includes joint ventures with other public sector and or private and civil society partners, including social enterprises, as long as the company comes wihtin the Local Government and Housing Act 1989 (Part 5).
To exercise the power to trade, the council or FRA must first approve a business case ('a comprehensive statement') covering objectives and associated investment and other resources required, business risks with an indication of their significance, and the expected financial results and any other relevant outcomes expected.
They must also recover the costs of any accommodation, goods, services, staff and anything else they supply to the company under any agreement or arrangement.
Other important legal, commercial and financial considerations for councils or fire and rescue authorities setting up a trading company include company law issues, the cost of bidding for contracts, tax liability (corporation tax and VAT), EU procurement law and state aid rules and employment law (TUPE and pensions). There needs to be a business plan for the operation of the company.
There are specific powers to charge for services scattered throughout local government legislation. For example, the Local Government (Miscellaneous Provisions) Act 1976 permits charging for the use of recreational facilities.
The Local Government Act 2003 introduced a wide-ranging power to charge. The charging power is available to all 'best value authorities' and was not linked to an authority's comprehensive performance assessment (CPA).
Under the Act, councils can decide to charge for any discretionary service. That includes discretionary services provided on the basis of the wellbeing power in the Local Government Act 2000.
The Act does not apply to services which a local authority is mandated or has a duty to provide. Also, the recipient of the discretionary service must have agreed to its provision and to pay for it.
The 2003 Act power cannot be used where charging is prohibited or where another specific charging regime applies. Charging is limited to cost recovery. Local authorities wishing to engage in commercial activity with the private sector in their discretionary services will need to rely on other powers such as the trading powers under section 95 of the 2003 Act.
In 2003 the Office of the Deputy Prime Minister (as it then was) issued statutory guidance on how costs and charges should be established and that guidance remains in force.
10 May 2012