Income generation for local authorities
Tiffany Cloynes considers the strategies local authorities can use to find all possible resources to help them deliver services effectively
There are a range of ways in which local authorities can use their legal powers to generate income. Three ways with significant potential to bring in income are charging for discretionary services, trading commercially, and generating income from assets.Charging for discretionary services
In order to exploit all possible opportunities for income generation, local authorities need to make sure they have considered whether it may be appropriate to charge for any and all of the discretionary services that they provide or could provide.
Section 93 of the Local Government Act 2003 gives local authorities the power to charge for services that they have a power but not a duty to provide. This is a relatively straightforward power to exercise as it does not require the creation of new entities. The level of income is restricted to the amount it costs to provide the services.
Although this means local authorities cannot use the power to make a profit, it is important for them to be aware that they are not constrained in how they calculate costs but can include the full cost of all aspects of service provision. Therefore, they can take the opportunity to invest in the infrastructure for services and recover the costs through charging. The power provides for differential charging, so local authorities can use it to bring in income from those who it believes are in the best position to pay.
If local authorities have something to sell and consider they can compete with other businesses, there are trading powers available to them. If a local authority in England undertakes activities relating to its functions, section 95 of the 2003 Act and the Local Government (Best Value Authorities) (Power to Trade) (England) Order 2009, which was made under section 95, allow it to consider for a commercial purpose anything which it has the power to do for the purpose of carrying on any of its ordinary functions.
However, that power must be exercised through a company. Before exercising the trading power, a local authority must prepare and approve a business case setting out:
The business objectives;
The investment and any other resources required to achieve the objectives;
The risks the business might face;
The financial results of the business; and
Any other relevant outcomes.
If the authority provides any resources to the company, such as accommodation, staff, or services, it must recover the costs of these. Thus, while the powers provide useful scope for authorities to exploit commercial opportunities, there are strict requirements affecting their use, and local authorities need to ensure they comply with these before they start to trade and when they are trading.
If a local authority in England wishes to do things for a commercial purpose unrelated to its functions, it can use the general power of competence in section 1 of the Localism Act 2011. This gives it power to do anything that individuals generally may do, but section 4 of that Act requires that the use of the power for commercial purposes must be done through a company. Local authorities in Wales do not yet have a general power of competence but a consultation by the Welsh government suggests that one may be introduced in the future.
A local authority using the general power of competence is not subject to the same obligations as under section 95 of the 2003 Act and the 2009 order to approve a business case and to recover the costs of resources provided to a trading company. Nevertheless, it would be sensible for a local authority to do so, in order to satisfy itself that there is a business case for proceeding with the company and to show that its involvement with the company is reasonable.
The definition of ‘company’ is slightly different for the purposes of section 95 of the 2003 Act and section 4 of the 2011 Act, but both expect companies to be as defined in the Companies Act 2006 or registered societies. They do not make provision for other types of organisations that local authorities have established in the past, such as limited liability partnerships. If local authorities decide to establish new entities for trading purposes, they should ensure they are aware of the restrictions on the type of entity that they can use.
Use of assets
It is important for local authorities to use assets, such as property, efficiently to enable them to provide services effectively. These assets may also have good income generation potential, in turn providing additional resources to help deliver services.
One obvious way for local authorities to raise income from their properties is to ensure that they achieve the best financial position when they dispose of them. The arrangements a local authority makes to dispose of particular land will depend on the power it uses and any obligations relating to this.
Section 123 of the Local Government Act 1972 gives a local authority power to dispose of land it holds. A local authority using this power must obtain the best consideration that can reasonably be achieved unless the disposal is for a short tenancy or it has the consent of the secretary of state or, in Wales, the Welsh ministers. There have been occasions when local authorities have tried to balance this duty against their wish to pursue particular objectives, but case law has made it clear that the assessment of best consideration must relate to things that have an economic value.
The secretary of state and the Welsh ministers have issued general consents which allow local authorities to use the power to dispose of land for less than best consideration if the local authority considers the disposal is likely to contribute to the promotion or improvement of the economic, social, or environmental well-being of the area, and the extent of the undervalue is no more than £2m.
Disposal of land held for particular purposes – for example housing – will involve the use of different powers and particular types of land may be subject to particular obligations relating to matters such as consultation and advertising. All of these details may have an impact on a local authority’s disposal of land but its objective should be to achieve the best financial return it can.
One particular way for authorities to exploit their assets is to become involved in a local authority asset-backed vehicle. This involves a local authority and a private sector partner establishing a corporate entity into which the authority transfers land and the private sector body invests funds to match the local authority’s contribution.
Both parties contribute skills and capacity which enable the vehicle to develop projects. The parties would usually agree a business plan to set out the objectives and outcomes which they expect the vehicle’s projects to deliver. They would also need to agree budgets and procedures for approving projects.
Examples of the types of project developed by local authority asset-backed vehicles include projects for residential and commercial development and projects to develop civic buildings. Since the vehicles have both land and funding, they are in a good position to drive development in their areas. The local authority’s share in the vehicle means that it can share in any profits made, which it can use for the purposes of the vehicle or for other purposes.
Participation in an asset-backed vehicle can help an authority to rationalise and make the most effective use of its property estate, while also providing potential for new income generation. It is important that local authorities considering involvement in such vehicles take account of the need to act within their powers when doing so and to comply with their statutory obligations.
For example, they need to be satisfied that decisions to participate in particular local authority asset-backed vehicles are reasonable exercises of their powers. When disposing of land to these vehicles, they need to comply with any obligations applicable to the exercise of any relevant land disposal power, as previously considered.
Income generation strategy
Local authorities have a need to generate income to help them meet the needs of the people they serve and have considerable scope to do so. It is important that they identify and make appropriate use of the income generation opportunities available to them.
An important step towards this is the development of an income generation strategy. The details of a particular local authority’s strategy will be specific to that authority but all strategies should at least do the following:
- Identify all potential options for income generation. This should include assessing the opportunities for charging, commercial trading, and the potential from the local authority’s properties;
Evaluate the potential for income generation from particular activities, compared with the potential risks; and
Develop a business case, business plan, and implementation plan for any proposed income generation activities.
Producing and implementing an effective strategy will be crucial to a local authority’s success at income generation.
Tiffany Cloynes is a partner and head of the public services group at Geldards in England