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Alternative delivery models, a path to reduced pay

Updated: Oct 4, 2019

Public Finance - News & Insight for Public Finance Professionals published HERE, "Tips for setting up a public services trading company". I am compelled to respond. 

In my work for UNISON, I am often introduced to the future entrepreneurs, who claim they are able to make a silk purse out of a sow's ear. These "wealth creators, aka Local Authority Trading Companies" - are able to do wonderous things, once they are freed from the beaurocracy of local government decision making. They wave documents prepared from the same narrow consultant gene pool, demonstrating with fairy dust ink, how much money these new trading vehicles can make, just by being allowed to flourish on HMS Teckal Exemption. Unfortunately, trading is limited to 20% of turn-over and they can find themselves in hot water, if they exceed this limit. Of course, there are the "nicer" privatisers who propose public service mutuals, such as co-operatives, social enterprises and mutuals. They are not bound by the 20% Teckal limit, as they are private companies which could just potentially exist for as little as three years, before getting swallowed-up by the private sector big boys, circling in the procurement waters. This is because such entities are incubated for three years before going to full open market tender, as required under European Union procurement regulations. Once created, they are no longer part of the council and the council does not own them.

The premise of the austerity narrative, that is cuts, cuts and more cuts, is indeed a major contributing factor. Conservative governments since Thatcher have been about reducing the power of the state, at whatever cost. This is not new. Public Finance does address some of the common issues arising when local authorities go down the commercial route, except one: the erosion of staff terms and conditions as the main driver for reducing costs. British people tend to like honesty. It would be so much better if a council was honest and came clean about the real reason for an alternative delivery model, namely the reduction of the cost of staffing, instead of dressing-up the delivery model as somehow the cure to the austerity narrative. Which it is not.

So here is UNISION's top tips for councils to provide some useful direction:

1. Consider what the desired outcome is before creating the model to achieve it. Consultants are often at fault here. They copy and paste the model to deliver a cheaper service without first looking at the local economy and the organisations/council's long term goals. What is a council hoping to achieve and how does this fit into the medium term financial strategy?

2. Once the outcome is established, analyse and test to see if the outputs can be delivered within existing council services and/or whether they can be changed to do so.

3. Measure and evaluate the subsidy a council service receives from central support services. Support services such as ICT, HR, payroll and treasury management are central services that the whole council benefits from. If pieces of the council fall off the accounts, then these central costs will increase.

4. Understand the costs. Pensions and redundancy liabilities should be factored into the setup costs of a new company. If the council retains or subsidises the liabilities, the costs of them do not magically disappear from the budget book. The other - usually ignored factor - is the cost to the local economy. Many staff - usually the lowest paid - live in the area they work. If they have reduced spending power, i.e. if their wages are cut, the local shop, small business and the night time economy can all be affected. This ultimately has medium to long term costs to council income. Remember, at the time of writing, councils are seeing their Revenue Support Grant (RSG) reduced to record low levels. 

5. Consider the skills of your in-house quality assurance team, i.e. contract management. A local authority trading company is a separate entity and is governed by company law. The council will need to scrutinise carefully to ensure that any savings projected, are actually realised. This is, in itself, is a cost. Then, is your councillor scrutiny function resourced sufficiently to give adequate critical examination of the new company?

6. Market testing. If a local authority intends to trade, soft market testing is not enough. A council will need to understand what they have to sell or trade. Financial forecasts in this area are ultimately meaningless without robust analysis of what income the new company could generate.

7. Understand the human cost. The biggest cost to any company is its staff. Is your local authority one of the biggest employers in your local area? If it is, how does reducing wages affect the market? Does it reduce the "market rate" of other players in the market, thereby driving down wages, especially for the lowest paid parts of your local workforce, usually women? Does this undermine your corporate and political goals of reducing inequality, especially in terms of gender? Is secondment not a less risky strategy?

8. Work with your trade unions. UNISON will always have a view. This view is governed by our policy making and democractic structures. However, by involving UNISON - and the other trade unions - from the start, you will enable plans and alternatives to be suggested and evidenced together, which may achieve a better outcome than first imagined.

9. Do you really need a consultant? In my experience, recommendations and information from many consultants cost a lot of money that your trade unions and staff are able to give you for free. All you need do is ask.

10. Are you aware of the law? I do not just mean EU procurement regulations - obviously Brexit brings with it uncertainty about procurement law in the future - but the Equalities Act and the many pieces of legislation that allow councils the freedom to generate income themselves without the need for a separate company.

Early engagement with your local unions can often bring positive benefits. Why not give them a chance before calling in the consultants, who often understand little about your needs compared to your hard working staff who the job, day-in-day-out?

Paul Be,, UNISON National Officer


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