Annual Development & Training Event 2015 CIPFA NW AUDIT, RISK & GOVERNANCE GROUP Commercial Services Lynn Anders, Knowsley MBC

Commercial Services Current Environment and Context Legal Context Traded Services Full Costing Framework Principles for Trading Alternative Delivery Models Operating Commercially CIPFA NW Audit, Risk & Governance Group

Legal Context Localism Act – permissive and allows Councils to do anything the Council does ordinarily. Local Government Act 2003 introduce wide ranging powers to charge. Under this Act the Council can charge for any discretionary services including those provided on the basis of wellbeing power in the Local Government Act Charging is limited to cost recovery but the definition of cost is not always defined. Councils have the power to trade under the 2003 Act via a Company. This can include trading and making a profit from private sector. There are no tax avoidance issues as the Council’s trading company is subject to corporation tax. CIPFA NW Audit, Risk & Governance Group

Legal Context Capacity – Council cannot charge for what it has to do but can charge for activities that absorb capacity i.e. schools use out of term for foreign students. Local Authorities (Goods and Services Act) 1970 – Section 93 allows a Council to charge at full cost to anyone in terms of discretionary services. Section 95 allows the Council to trade for commercial purposes (and make a profit) with other public agencies CIPFA NW Audit, Risk & Governance Group

Traded Services Need to identify what services are being traded, typically – School Meals School/Building Cleaning Cleaning Leisure Services Grounds Maintenance Commercial & Clinical Waste Fleet Services including MoT’s Pest Control Bereavement Services Support Services – Audit, Finance, HR, Legal ***** Building Control, Planning & Licensing ******** CIPFA NW Audit, Risk & Governance Group

Full Costing Model Develop full cost framework Use costing framework to manage traded services Ensures Council wide costs are shared out in an appropriate way to traded activities Use the information to – Set charges Decide on whether to provide service or not Identify where Council is subsidising the service Determine how the cost compares to other service providers Statutory requirements CIPFA NW Audit, Risk & Governance Group

Full Costing Model Direct Expenditure Salaries of direct staff Running Costs Operational Overheads Senior Managers Head of Service Office Consumables Council Support Services Chief Executive IT Building Costs Finance/HR/Business Support Exclude – Capital Charges Current Service Pension Costs Corporate and Democratic Costs CIPFA NW Audit, Risk & Governance Group

Full Costing Model Considerations – Basis for apportionment Cost Drivers – what drives costs Unit Costs – what is a unit?? Determine unit price Compare market price CIPFA NW Audit, Risk & Governance Group

Principles for Trading Consider the political arena and Member support to develop principles Take a strategic view in terms of traded activity It is possible to make a surplus if all attributable costs are covered Would the Council ever consider trading at a loss – is this acceptable? Strike a balance between full cost and competitive pricing Apply full cost model as a starting point to inform decisions on trading and pricing If you don’t cover the costs – why trade? CIPFA NW Audit, Risk & Governance Group

Principles for Trading The trading activity must – Be undertaken legally Not distract the Council from its statutory responsibilities and priorities Operate on a commercial basis, maximising profit/cost recovery Limit when cost recovery will not be achieved to certain circumstances e.g. Where the activity directly contributes to other outcomes or is preventative CIPFA NW Audit, Risk & Governance Group

Alternative Delivery Models CIPFA NW Audit, Risk & Governance Group Proscons Direct Trading/char ging Simplicity Direct Control Transparent No issues of profit Not for commercial purpose Financial Risk Conflict over use of resources S95 Company Can be commercial – private as well as public Separates commercial from public No limits on size of activity Loss of control, activity, culture change Issues around overheads Profit may be retained Lead in time Semi or independent vehicle Tax advantages ? Less Bureaucracy Access to revenue New organisation culture – Mutual Loss of control and assets? Loss of Accountability Not really trading Limited growth No profit distribution

Operating Commercially Have the right people with the right skills to undertake this work effectively Have the right resources and process in place to ensure its commercial activities reap the greatest benefit for the Council e.g. marketing Ensure that all staff involved in the delivery of commercial services are properly prepared and supporting in the competitive challenges they will face CIPFA NW Audit, Risk & Governance Group

Audit – Risk Areas Not compliant with legislation i.e. making profits trading with private sector Full costing model is not robust Not recovering all costs No principles agreed and lack of approval to trade at a “loss” Hidden subsidy Financial Risk/Exposure – reporting, monitoring, adjusting CIPFA NW Audit, Risk & Governance Group

QUESTIONS Lynn Anders Business Advisor Knowsley MBC CIPFA NW Audit, Risk & Governance Group