Solace Blog

Commercialisation - Headlines and Commitments

By Alix Bedford, Public Services Segment Manager, Zurich Municipal

‘Commercialisation’ can mean many different things to many different people, but a local authority chief executive once described it to me in pretty straightforward terms – “it’s about getting the most out of every pound”.

There’s nothing new in that, of course. Local authorities have always tried to make their money work harder, long before the current era of austerity. What has changed in recent years is the willingness of councils to explore commercial opportunities in order to achieve this objective.

Whenever the topic of commercialisation is discussed within local authorities, the focus tends to be on the financial and operational considerations. Do we have the right people, with the right skills, to compete in a commercial environment? What return would we get on our investments? What debt would we be taking on? Where does this commercial activity sit within our risk appetite?

What can sometimes be overlooked – or at least given a lower priority – are the ethical and social risks that come with commercial activity. 

Let’s take a current hot topic – local authorities’ burgeoning activity in the commercial property market. Last year, councils spent a record £1.8bn on commercial property. In 2014, the figure was just £93m.

What is your local authority ‘for’?

A House of Commons research paper, published earlier this year, picked out three key risks for local authorities when embarking on a commercial property-based revenue strategy: a downturn in the property market; insufficient commercial expertise to succeed; and the possibility of central government restrictions on their activity.

But what about the social and ethical risks? Investing in commercial property can change the public perception of what a local authority is for. One newspaper recently described a local authority that had acquired a large commercial site as having become a “property company with a sideline in providing local government services”.

As chief executives, you have a crucial role in ensuring your authorities give sufficient consideration to the potential social value of your commercial investments. If you are acquiring a shopping centre, for example, what is your plan for it? Is it just about getting rental income, or do you want to use part of the facility to provide public services, for example a library? Will you be using local labour or a national firm? Will your contractor be employing apprentices?

If you are using property investment companies to help guide your commercial decisions, it’s important to think carefully about whether or not you are emphasising the importance of social value. If you’re simply instructing them to maximise your return, then they may well advise that you should spread your risk by investing in commercial property outside your local authority boundaries. But is there much social value in that?

You could argue that there is, as long as those returns are poured back into essential services. But you still need to think about how clear the link is between your commercial activities and the way you deliver services. You cannot afford to let the narrative run away from you.

During my time as lead officer for risk management at a unitary authority, one of our councillors was asked during a radio interview about why the authority had allowed a social enterprise to take over its leisure services. They were able to explain that the savings would free up money to look after children in care, and therefore they could show the ethical and social value of the deal.

 Putting social value at the heart of procurement 

Social and ethical risks need just as much consideration when setting up a commercial entity, or procuring services from a third-party.

Do your governance frameworks for commercial activities focus only on the legal and financial implications? Some authorities – Lincolnshire County Council, for example – have added a clear ethical element to their governance frameworks.

Accountability is also a key consideration. When services are run in-house, there are clear lines of reporting up to council members and committees. However, with arms-length companies, or third-party providers, you need to think about how you are going to ensure that same democratic accountability to achieve value for each pound. 

While it might be unrealistic to expect commercial third parties to strictly observe the seven principles of public life – as holders of public office are expected to do – it is worth having a conversation about their organisational values, to see how well they align with your own. And if a third-party supplier is promising to deliver social value, for example by employing apprentices, how will you ensure they make good on that promise? What are your procedures for managing and monitoring suppliers? 

Chief executives must lead the way

 As chief executives, you need to be talking to those who are leading commercial activities within your authority, so you can be satisfied that ethical and social implications have been considered. Social value is something that should always be on your radar.

 On 18 October, I’ll be talking about some of these important issues at the Solace Summit, alongside Robert Weaver, Deputy Chief Executive of Tewkesbury Borough Council.