Public private partnerships (PPPs) have been a significant aspect of public sector infrastructure development in the UK for more than 20 years. Designed to leverage the flexible delivery models and economies of scale of the private sector to the benefit of the public sector, they have sometimes earned a chequered reputation in the public consciousness, as well as polarising political opinion.
Since 2011, PPPs have developed further, starting when the Localism Act gave what is known as the “power of general competence” to councils in England and Wales. Changes brought about by the Localism Act mean that it has become increasingly common for Local Authorities to establish independent corporate entities to achieve a range of strategic aims and/or to generate much-needed income streams to fund other public services.
UK Boards and Local Authorities
A study by independent, not-for-profit think tank Localis concluded that, by 2020, it is likely that every local authority will be operating some kind of trading company and found that more than half are already in partnership with a private sector organisation. Eight out of 10 councils said that they would have to cut public services and raise taxes if they didn’t employ entrepreneurial activities. This burgeoning “public private” sector brings with it a new generation of boards charged with delivering value to serve the public interest.
Fundamentally, the board of a local authority company has the same responsibility as any board: to ensure that the organisation successfully creates value for its shareholders, with strong governance oversight and an appropriate attitude to risk. However, they experience some specific challenges in ensuring that the discharge of their fiduciary duties is free from conflict of interest, transparent and fully publicly accountable.
In addition to their personal and commercial interests, directors are frequently appointees nominated by local democratic bodies and can be either an employee of that organisation or an elected public official appointed to represent that organisation on the new board. In this sense, the director is wearing multiple hats, with responsibility to their employer or to their electorate added to the other interests that must be balanced.
Rob Hann, author of “Local Authority Companies and Partnerships,” notes that: “The governance structure of a company is also very different from the governance structure of a local authority, yet individuals appointed to run a new company are frequently drawn from the local authority. This creates the potential for conflicts of interest to arise. The authority should be focused on considering whether there are likely to be problems having individuals who hold dual roles (e.g., a director of Newco who is also a chief officer or leading councillor). How can these interests be properly split and managed?”
Political Affiliations and Tensions
It is essential that when acting as a director on a local authority-owned company board, a member who has been appointed by a political group does not allow their party affiliation and agenda to supersede the interests of the company. Directors have a duty to ensure that their contribution to debate on key decisions is grounded in seeking to make decisions in the best interest of the company, and remains as politically neutral as possible. Board meeting minutes should accurately reflect the substance of debate on decisions so that there can be no challenge on the grounds of political partiality.
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Frequently, local government authority boards will count more than one elected representative among their membership, and these may well be from different political groups. While there are often disagreements in any board – indeed, multiple viewpoints are one of the positive values of the board system – it is less common for members’ political views to be so prominently known. Board members from opposing parties need to ensure that they can work well together as a cross-party team to advance the aims of the local authority company.
Shared Resources – Ensuring Separation of Systems
A common feature of a newly formed local authority company is the secondment of staff and systems to assist with administration. As new companies can take up to two years to get fully up and running, it is common that, although the company is a separate legal entity, it may draw on some of the resources of the shareholder for operational support. To avoid potential conflict and uncertainty over the administrative impact of these arrangements, it is important that these services are accounted for and sufficiently insulated from the main activities of the local authority.
At the outset, the companies tend to be minimally staffed and staff members can have primary duties outside the scope of the company. This can exert pressure on individuals preparing board materials. Board communications must be secure and kept separate from general local authority business. Many local authorities operate a hard copy system of briefing papers that derives from legacy public sector practices, but in this case, as a new company is formed, utilising an electronic board management system is very useful in ensuring the separation and security of confidential communications.
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